SaraEA

I too have been confused by the different meanings of "passive income." The definition for the passive activity loss rules is different than for investment income or foreign tax credit, for example. For the passive activity loss rules, only rental income and income from activities in which the taxpayer does not materially participate are considered passive income. Investment income, like from a hedge fund or PTP, is portfolio income, not passive income for this purpose. For the net investment income rules, just about any income not derived from a trade or business is counted. Thus mutual fund income, not passive for passive activity loss rules, is counted as investment income, as is rental income even if the taxpayer materially participates (exception for RE professionals). Read every question on the input screen carefully. The same income has to be classified twice, once for the passivity activity loss rules and again for the net investment income rules, and the class can very well be different. Can anyone say the tax code needs reforming?

Christian, "instantaneous matching of taxpayer records" means name, Soc Sec number, and birthdate, which are instantaneously matched with Soc Sec records. That's why you get such quick rejects when someone else has already claimed a child or filed a return for the same taxpayer. At least IRS does prevent taxpayers from filing twice. Matching with income reporting is done way after tax season ends. The last IRS commissioner was on a mission to get "real-time" matching, but he and Lois Lerner have both retired. And Jack is right, the focus on "light speed" refunds has made all the fraud possible. The IRS began to advertise quicker refunds in an effort to get people to efile. Well, efile has caught on, and the agency is way ahead of its goals for percent of individual returns efiled (still have a way to go for entities). They don't have to convince anyone to efile any more. So move up the date for payer reporting to Jan 31 or Feb 15 and don't issue any refunds until March or April so the numbers can be matched. How hard is that? Politically it may be too hard. The people who get the big refunds file early, need their money NOW, and are most likely to get refundable credits. It would sound awful if Senator or Rep. So and So approved delaying poor people their refunds, even if many of these people never vote. And of course the law would have to be changed so the IRS doesn't have to pay interest on refunds paid more than 60 days after a claim is filed. Someone is power has to muster the courage to just do it. Their defense that it will prevent billions of dollars in fraudulent refunds might just catch on with the electorate.

Uncle Sam, you are so right that now we have to be conscious of so many things it makes me wish our fancy software was more like Block's: It forced you to ask questions and enter answers (was your student ever convicted of drug charges? Did you pay anyone over $600 and issue a 1099?) Fancy software assumes the preparer knows what s/he is doing and doesn't force it. Maybe it should because we can't keep all this in our heads anymore. I do warn everyone not to automatically enter "no" to foreign accounts or trusts. ASK THE CLIENT. Banks are being forced not just by the IRS but by the tax authorities in many nations to hand over their client lists. (Other nations are just as unhappy as the US that their citizens are hiding money in offshore accounts.) It isn't pretty if the client gets reported before they self-report. I just finished almost 2 months of work as a Kovel accountant for a long-time client with several foreign accounts he never mentioned to us. The income he never reported was less than a month's pay for this guy who makes $3M a year. Our fee was $19k, who knows what his tax attorney is charging, and he'll pay about $900k to the IRS IF he's accepted into the voluntary program (almost twice that if not). You're right, they don't want to pay for us knowing to ask the necessary questions. But it sure beats paying for the consequences.... As for the ACA, when are we supposed to learn about that? We just finished the Sept 15 entity deadline and are now facing the October 15 individual. After that it's assessor's reports due Nov 1. And then of course the rest of our CPEs have to be taken, useless because Congress won't have passed any tax bills or extenders until they recover from the Nov elections (read: Dec 31). And we're still digesting the new repair/supplies regs and brushing up on our Form 3115 skills. Yet we have to know all about health care before clients start coming in the door. This tax season ain't gonna be pretty.

I am definitely suggesting that the client contact the compliance dept, and if that doesn't work the state regulators. You need more info from the client: What is his age? How much money did he have and what percent did he invest in the annuity? What was the annuity invested in? If having this data doesn't help you understand if the guy was fleeced, call a trusted broker or perhaps someone at another firm where the client has an account. (That's who helped me help a client. He was appalled at what the advisor did to our mutual client and guided me through the complaint process.) If you find the client was 80 years old and had $200k to invest, he should have been put into something that carried little or no risk. (Insurance companies got into huge trouble putting old people into inappropriate investments. The stock market crash in 2008 hurt so many folks because they were invested in vehicles they had no business being in, and that time frame coincides with the year your client took that huge loss.) If the guy was 40 or 50 and had $500k in investable cash, you probably won't have a case. It's worth finding out.

David, this client should contact the company that sold him this losing annuity and ask for the compliance department. Any person who loses $199k was likely suckered. Was he put into something too risky for his age and amount of assets he could afford to lose? Sure they'll say he signed everything but that doesn't mean he understood everything. Insurance brokers do not like complaints filed with the compliance dept. If he gets no where there, next step is the state agency that regulates insurance companies. Just the threat of going to the regulators might convince the compliance folks to be compliant. We had an elderly client who came in with a fistful of 1099s one year. Turns out her annuity salesman was cashing out her annuity every MONTH and buying her a new one. His commissions soared while her wealth vanished. We ourselves turned this one over to the state insurance commissioner. We had several clients who lost big sums with a financial advisor who was playing games with their investments, cashing in certain bonds of the type that are supposed to be held to maturity and incurring huge penalties for early exit, then buying the same thing all over again. This was a bank brokerage arm, and the compliance dept at first made a low-ball offer at restitution, the client said no, and they made him whole. Another is still waiting for a decision (the bank's president is involved in reviewing his case). I have a dozen clients investing with this jerk, but I noticed that since those episodes their yearly statements show no more hanky panky. An honor for me was that an advisor at a different bank who helped me with one of these people who also had an account with him has sent me several really good clients because he learned during the ordeal that I too care about my clients. Annuities got a really bad name during the time frame your client lost all this money because of the salespeople selling inappropriate contracts. Call them out.

I read the same thing in today's online Journal of Accountancy (or whatever it's called). The issues are things like building components (like when you get a new roof you have to do something on the books with the old one, even if you bought the building with a roof and never separated it for depreciation purposes). The one that will likely affect most business clients is the ability to expense as supplies things that cost up to $500 ($5k if the taxpayer has certified financial statements--only those with gov't contracts are likely to have those). Some of the changes fall under automatic change of accounting methods, others will require the 3115. What confuses me is the difference between the old and new rules. It appears that some of the treatments we always used now have to be elected. How many of us actually depreciated a $50 calculator or $100 coffee pot? And I always added a new roof as a new asset and never touched the value of the original building. One thing that will help a lot is being able to expense "smallwares," like dishes and pots for restaurants, storage containers and baking sheets for bakeries, etc. I think this falls under the automatic elections, but I could be wrong. Let's hope our professional associations have lots of courses available before the upcoming season. Of course, we're already looking for ACA courses to familiarize ourselves with the new forms. This is going to be quite a season!

The hype about the amount of foot traffic and "core customers" was exactly what Block used a number of years ago to try to get preparers to sign up to work in Walmart kiosks. They used the additional enticement that this profile also fit Walmart employees, and each store had lots of those. Well, it didn't work out too well for them and after a few years they chose not to renew the contract. I think the only reason they stayed as long as they did was to keep the competition out. They then advertised these locations to franchisees with the same hype about number and type of customers going to the store each day. Without RALs, there is no reason for EITC/ACTC clients to pay $400 for tax prep when they won't get their money any faster than if they DIY or use a free clinic. Family Dollar's offer sound like a way for corporate to make money off unsuspecting entrepreneurs.

The TIGTA does good, thorough work and I always learn from reading their reports. The problem is all their solutions (improve computer systems, reduce backlogs, train employees and managers in this or that, ask congress for authority to do this or that) take money. The IRS does a heck of a job with the resources it has, but how are can they be expected to do more and do better with less people and less funds? It's like telling someone who can't afford textbooks to do better in school, or a debtor to make more money so they can get out of the hole. Duh.....

According to Circular 230, preparers aren't supposed to consider the chance of audit, or chance of winning in audit, in their decision to take one position or another. That decision is supposed to be based on substantial authority (Code, Regs, etc.). I don't think anyone on this board would allow a client to frivolously claim transportation expenses without good reason. Those clients in sales, or who have bona fide home offices, most likely. Those who live in RI and work in New York City, unlikely. Isn't that what we're really talking about here?

After spending much of my professional career in academia, I too realized that the ease of email (and today, texting) made students too lazy to find their own answers. Why look up a reference or address or review your own notes when you can ask someone else in seconds? I would get emails from students at my own and other universities saying "I'm doing a paper on XXX" and hope you can point me in the right direction for sources. I learned the names of libraries at every major university and told them to go there! When I opened my email when I got to work in the morning I'd often find some sent at midnight with some question, and then I'd have another at 2AM wondering why I hadn't responded. Technology is an amazing tool that can give students access to a universe of information that was unheard of in my undergraduate and graduate days. But has it made them less reliant on their own abilities to figure things out?

kc, RALS are gone. Bank regulators don't allow any banks to offer them anymore because of the risks to their financial stability. (We all know what happened to banks with too many shoddy mortgages during the housing meltdown. They had to raise their standards or be shut down by the feds because they didn't meet capitalization ratios The RAL banks were in the same boat because they made money by making risky loans.) As far as I know no tax prep firms offered RALs last year. I wonder if HRB and Liberty know what they're getting into. Many small business owners know their trade well but haven't a clue about the money side. You get a bag full of unidentified receipts, or nothing but bank statements leaving you to figure out what the payment to "Acme renewals" is for. They receive and pay a lot of cash. They drop off their info for sales tax or payroll reports the day before they're due. We already refer EITC clients to Block. If the chains start offering accounting, I can think of at least two dozen clients we'd love to send their way.

But why would anyone sign as a PAID preparer when they aren't being paid to complete the return? You don't need IRS guidance for that--the signature section specifically says "Paid preparer use only." There was a lively discussion on another blog a few months ago about how to get delinquent clients to pay up. Several posters threatened to write to the IRS to request that their name be removed as a paid preparer. Most said the clients immediately paid.

Bob might want to block out the paid preparer info on his personal return or that of family members or others he does for free. Can you add a new preparer to the software slot who is named "personal return" or "not completed by a paid preparer"? That's what we do in UltraTax.

Jack, the UPS breach did not involve SS numbers (UPS stores would have no reason to collect them). Stolen data included customer names, addresses, phone numbers, and for some debit/credit card info and email addresses. The worst that can happen is that you'll get an email from me saying I lost my wallet in Lebanon and need a quick loan to get home. I'm not planning any overseas trips, so if you get such an email just delete it. I would be alarmed if I had used a debit card at a UPS store. Thieves can empty your account before you know you were a victim of a breach. Anywhere it is best to use cash or a real credit card (Visa, Mastercard) where you can dispute any unauthorized charges. I personally am using much more cash these days and trying to use the debit card only at the bank ATM (where everything is on camera). I confess, though, that it's so much easier to use debit when you dash into Target or the grocery store and have no idea how much you'll spend so don't have the cash on you. I hate to use an actual credit card in these places because I dislike putting everyday expenses on credit. I guess I'll have to break that habit, because real credit cards have much more protection. Sure, if there are fraudulent debit card transactions the bank will eventually reimburse your account, but you lose access to your cash until that happens.

Another thing that goes against this taxpayer is the IRS's refusal to allow deductions for things that could have been reimbursed (or in this case, not paid in the first place). If insurance will cover damage but you don't apply because you think your rates will go up, no deduction. Or if your employer will reimburse mileage but you're too lazy to keep records, no deduction. Or if you're self-employed and could be on your working spouse's health insurance but decide to keep your own, no SE health insurance deduction. There's a pattern here. So in addition to the fact that commuting expenses are never deductible, the IRS's refusal to allow deductions for things you didn't have to pay is another solid argument against even attempting to write this off.

An LLC is a disregarded entity for tax purposes, so there will be no K-1. The income earned in the US will go on the NR but income taxes will be paid to the US, depending on the treaty. His home country should give him credit for the taxes paid here, again depending on the treaty.

Unless you file, the IRS doesn't know it's the taxpayer's primary residence and qualifies for the exclusion. Kind of like when someone sells $100k stock at a loss. The IRS computers assume it's all income unless a Sch D shows otherwise.

A related question: Does anyone know of software that will calculate interest on unpaid taxes that are years overdue? I usually don't calculate it if it's more than a year or two and tell the client the IRS will send them a bill so just pay it. I just finished 8 years of amendments for a taxpayer in the Offshore voluntary Disclosure Program (and least we hope he was accepted--haven't heard yet). Part of the requirement is to pay all taxes and interest with the submission. The interest rates change monthly, and I have no desire or perhaps the expertise to calculate interest from April 2005 to now, from April 2006, etc. I'm ready to tell the client to send the IRS an extra $50k and let them figure it out. The client did hire an attorney to handle the OVDP, so I'm hoping they will do the calculations. But the attorney in turn hired us under a Kovel agreement (first I've ever had), so I'm fearful they might expect me to do the math.

Send self-prepared clients to H&R Block. Years ago when I worked there we would efile self-prepared returns for $100 (may be more now). Preparers got an incentive payment if they were able to convert the taxpayer to a Block client (by pointing out things they missed, etc.). They have a fee schedule in place for self-prepareds, trained preparers, and tons of E&O insurance. We're now starting to send EITC clients to Block (unless it's a long-term client who just had a rotten year). Their preparers, even the newbies, are well-trained in EITC, due diligence, record keeping, etc. It's not worth the risk for us to do them. And anyone who needs their return(s) done like yesterday gets sent there as well. They have enough staffing to churn out 7 years of unfiled returns by next week during the height of tax season. I know this sounds weird since so many in the profession love to bash Block and point out all the errors they've seen on HRB prepared returns. But they do have excellent training and many competent, experienced people (and lots of E&O). We advise the people we send there to ask for an EA or Senior Tax Advisor (if that's what they still call them) so they are sure to get a knowledgeable person. Unfortunately they have too many new preparers who are allowed to returns they can't do that gives the chain a bad rap. When you think about it, they are well-situated to take the clients we don't want or don't have time for, and it's better to refer the taxpayer to someone else than to send them away with no clue as to how they can get the help they need.

kc, sounds like you've been listening to too many commercials: "The IRS has the power to take your home, your business, your bank account, attach your wages. Call us and we'll settle for pennies on the dollar." Sure the IRS has the power to do these things, but they rarely do. The only time I've ever seen them close a business was for egregious violations of trust funds. They only do this so the rest of taxpayers don't have to make good when an owner fails to turn over employees' withholding and FICA taxes. They'll only take a house if it's worth their while (house is worth $250, mortgage is $200, IRS won't do it because after they pay all the filing and sales fees there won't be enough left to pay for their trouble). I've only seen them attach wages and bank accounts after taxpayers have ignored years of letters. The average taxpayer likely doesn't know this, which is why the pennies on the dollar places stay in business. So yes, taxpayers are likely more afraid of the IRS than they need to be. In reality, only nonprofits really need to worry....

Two more calls today from those who heard from the "IRS," including one of our staff. He wasn't home but they left a threatening message on his machine. These crooks are really busy, which hopefully means they'll leave enough of a trail that they can be caught.

In a little over two weeks we have had six clients call us because they received calls from the "IRS." In each case they were told they owed money and would be arrested if they did not pay that day. They were instructed to purchase prepaid debit cards and to give the caller the card number when he called back. Amounts were between $3500 and 8500. Return calls to the number on the caller ID didn't go through. Almost all these clients were frantic. One even sent spouse to bank to withdraw the cash. Another blamed us for doing his taxes wrong. Only one, an attorney, realized it might be a scam and called to confirm that suspicion. I am now getting worried about the clients who may have gotten this call and didn't talk to us before they paid. Anyone else have clients who were targeted by this scam? Those of you who have websites or blogs or send client newsletters will do your clients a service by mentioning this scam. (Details are on the IRS website).

We have candy dishes, one in the receptionist area and another on the way to the staff offices, filled mostly with hard candies but some chocolate. I would say 90% of clients stop at one or the other (or both). People are not shy about digging around either to find their favorite root beer or caramel or whatever. It makes a lot of people happy and doesn't cost much. We have a flat screen in the waiting area, which not only gives clients something to do while they wait but keeps their kids occupied while parents go in to get their returns done. One year we had a small, very friendly dog who was our greeter. Every time the door opened he ran over with tail wagging, and he sat in every lap offered to him. Some clients even brought him in to the tax desk with them because they loved him so much. He wasn't here this year, and a heck of a lot of people asked for him. A lap cat might be a good substitute.

Phil, I think we all understand that you are trying to get some numbers that can help you decide compensation or whatever. We also understand that this is a common approach among large businesses. The key word here is "large." Walmart and Home Depot need to work with numbers like you are seeking, because over huge data sets trends and meaningful means can be discerned. Block sure does it. Maybe a better place to post your question is on an HRB message board. People who work there are very conscious of the number of returns they have prepared in how many hours. (In my years at Block, I found them to collect so much data and analyze it to death a million ways that it no longer meant anything. Does it really help to know how many clients either completed their return or walked out between 10 and 11AM on Thursdays in each district in the region? Data mining can be helpful or overwhelming if attempted to the extreme.) I am an employee at a CPA firm, and I have no idea how many 1040s I prepared this season (with all the extensions, I'm not done yet). I get paid a nice hourly wage. I also do a lot of work my colleagues and the owner do not care and/or know how to do. For example, I do most of the research and all the legal research (Code, Regs, court cases, etc.). I do the returns with 12 rentals or 18 partners. The boss and I share those with 10 K1s from PTPs, but I get the ones with 12 brokerage accounts. I also get those clients with complex returns who actually want explanations for every number on the return. None of this means I can do these returns better or faster than anyone else, but just that I will do them with care and patience. My boss just thinks it's a better use of his time to pay me to do this exacting work than do it himself. (Right now I'm working on amending 8 years of returns for a client in the voluntary foreign account disclosure program and just completed THIRTY TWO Forms 5471.) So how much should I get paid?

I agree with Jack and KC. Tax returns and taxpayers are too varied to come up with an average time or cost. You can have two clients with Sch Cs, one with all receipts neatly summarized, another with a shopping bag full of every piece of mail that looks financial he got all year, including birthday cards and the life insurance bill he threw in the bag instead of paid. Of course you charge the shopping bag guy a lot more because it takes so long to organize his mess. You still end up with two Sch Cs, so an average makes no sense. Then there are the clients you have to chase for missing info. Some of these people are missing half their tax data, and they piecemeal it to you so you never know where you are in the return. Others are missing something simple like their car taxes and get the number to you the next day (or two months later). The preparer not only has to input the data but be thorough enough to know what's not there and communicate with the client. Takes time, but again the fees will reflect that. At the chains the model is pretty much to get every client in and out in an hour or less. I wonder how often things like car taxes are ignored because the client doesn't have them with him or her and no one wants to put a return on hold. In a professional practice, it can take a whole season to determine how much an employee brings in per hour. Some days I put more returns on hold than I complete--looks like I didn't cover my pay. Then one day a dozen clients provide that last bit of info and I collect thousands. Again, averages don't work. Perhaps instead of calculating ratios and averages, you should offer a reasonable hourly rate. If you only have a only few employees it won't take long to see who is earning their keep and who is texting all day. Remember too that experience with each client's quirks will help to speed things up in the future. I have a couple of shopping bag clients who used to take me hours to sort and categorize. Now that I know them and what to expect in those bags, I can separate the wheat from the chaff in no time.