In a previous post, Tax preparation: CPA Verses a DIY Software Program, we outlined why
taxpayers should choose a CPA over a DIY tax software. Recently Minnesota found extensive problems with TurboTax software that you can read about here. Now comes news about 600,000 customers of H&R Block who will have their tax refunds delayed because of a mistake made by H&R Block. You can read how upset their customers are by reading the comments on the H&R Facebook page.
Mandi Woodruff in her article, A Huge H&R Block Errror Could Delay 600,000 Tax Refunds, that was posted on Business Insider highlights the H&R Block mistake.
"In a mea culpa on its Facebook page Wednesday morning, the company said something went wrong with a specific tax form designated for students looking for tax credits."
Really H&R Block? A large company like yours whose core business is tax returns, a company that has a vast team of programmers, CPAs and tax experts on staff and you don't gt it right? Now 600,0000 tax payers are affected...
The author goes onto highlight how students looking to file FAFSA applications for college financial aid are affected:
"This could cause problems for students applying for federal student aid as well. They need tax return information for the FAFSA application."
What is different about a CPA verses H&R Block or another lower cost tax preparer?
Tax Knowledge
Earlier this year the IRS lost a court battle that would have required an estimated 600,000 to 700,000 tax preparers to pass a standardized test demonstrating a minimum level of competency.
That's correct - currently anybody can prepare taxes without taking a test and regardless of how little knowledge they have!
In fact H&R Block will hire individuals that have no experience but simply go through their tax preparation course which is less than 100 hours.
So sure you can pay under $100 and find a low cost tax provider, but be prepared - they may have very little or limited knowledge of the tax laws and tax code.
Compare that experience with the knowledge and training a CPA must have.
If you are filing anything more than a 1040EZ, then your tax return will start to get a little more complicated. Tax preparers that are required to meet the most stringent requirements and demonstrate the highest level of knowledge are CPAs. All CPAs must meet a minimum education level, have worked in the industry for several years and have passed an in-depth rigorous exam demonstrating comprehensive knowledge of the US tax code.
Additionally CPAs must follow stringent IRS guidelines (IRS circular 230), maintain a standard code of ethics and complete a minimum number of continuing education courses each year to maintain their license as a CPA.
Accuracy
Your tax return should be checked for accuracy, both in regards to what tax laws apply to your specific situation and calculation errors. The mistake made by H&R Block huge and affected 600,000 tax payers, that must now wait longer for their refund.
Every year the IRS receives large numbers of tax returns with calculation errors, missing information or incomplete returns. Errors cause returns to be rejected, delayed refunds, or notices from the IRS causing you to have to pay more in taxes or file an amended return.
Preparing a tax return yourself or by a low cost tax provider will not save you time or money if you have to correct the mistakes.
Availability
A reputable tax professional will be available year round and not just during tax season. What happens if you have a tax problem in July? has your tax preparer closed up shop for the year? Was it just a seasonal part time gig for that person and he is no longer employed with the company paying him?
You Have a Choice
Each year we see scams and fraud being committed by tax preparers, problems with DIY software programs and now a major mistake by H&R Block affecting 600,000 tax payers. In Minnesota, the state revenue agency stopped tax filers from using TurboTax for a period of time because of the inadequacies of the program.
This year more than ever you have choices. You can choose a software program and do it yourself, you can choose a low cost, box store such as H&R block or you can pay a little more and hire a professional CPA.
Thomson Reuters, our software provider, did this video a while ago for one of their software
products. After watching the video and thinking of the business owners that I've met with over the past years it made me wonder...Business owners don't really want to start a business so they can be an accountant or do bookkeeping - but assume those roles all too often.
Watch and enjoy the first few minutes of the video. Of course as an accounting firm we are probably much more amused by it.
Often times, in speaking with owners, they send mixed messages. They want to have a successful and thriving businsess that will not require 80 to 120 hours a week of their time but do not want to invest in financial accounting and bookkeeping support services that will help them achieve their goal.
The emergance of all the DIY shows and Intuit's messgae of "It's easy to setup and manage a business with QuickBooks" has connected with many business owners. Unfortunately, after buying the software trying to set it up (usually incorrectly), attempting to keep up to date with all the data entry, monthly reconciliations, and trying to produce meaningful financial reports, frustration sets in. Better yet they may have a spouse that works full time trying to manage QuickBooks.
Meanwhile valuable time is sepnt trying to learn the software along with how to do the bookkeeping and accounting. This is time that could be better spent focusing on developing the vision for your business and implementing your strategy to achieve the goals for your business. It is also meaningfull time better spent with your customers, growing your sales or with your family.
Are you sepnding too much time being an accountant or a bookkeeper and not managing and growing your business?
CPAs are valuable asset to both business decision makers and as a tax adviser for individuals. With an increasingly complex and confusing tax code isn't more important than ever to turn to a professional whose careers is centered around keeping up to date and understanding the tax code.
Additionally, CPAs are a valuable asset and trusted adviser to business owners as seen from the data in the infographic below. CPAs will:
- Take a large amount of financial data and organize it to generate meaningful financial reports
- Work with businesses to help them understand the meaning behind the financial reports and numbers
- Show businesses how the financial reports can be applied to highlight opportunities for improvements and areas that are functioning well
IRS Files Motion to Force Tax Preparer Compliance Before Appeal Can be Heard.
Update 1 on 1/25/2013
The IRS has filed a motion with the courts in an attempt to force tax preparers into compliance this tax season and before an appeal can be heard. David Fazio has published a good update that can be found by following this link: IRS Files Motion to Force Preparers back Into Compliance, Cites Guess Who?
After suffering it's defeat last week, the IRS filed a Motion to Suspend Injunction Pending an Appeal. David explains this in his article:
"Procedurally, appeals take awhile. And the IRS really, really wants the Court to set aside the injunction before tax season opens - in six days. So this motion is intended to void that injunction "temporarily" while the IRS works something else up. To win this kind of motion, the IRS has to prove a few things (taken from the Motion): (1) they have a reasonable likelihood of prevailing on appeal; (2) they will suffer irreparable harm if the injunction is not suspended; (3) the plaintiffs will not be harmed by the request; and (4) suspending the injunction will serve the public interest.
So basically, they have to say that they're pretty sure that they can win the appeal AND that in the meantime, neither the plaintiffs nor the public will be harmed."
Stay tuned for the outcome on the ruling of this Motion...In the meantime let us know if you think the IRS has the power to regulate an industry without authorization from Congress.
Original Article Posted on 1/24/2013
Last week, the IRS was dealt a big blow in their attempt to regulate tax preparers. Judge
James E. Boasberg, a US District Court Judge, ruled against the IRS and its program to force an estimated 600,000 to 700,000 tax preparers to pass a standardized test and demonstrate a minimum level of competency.
Exempted from the new IRS regulations were CPAs, Tax Attorneys and Enrolled Agents. These preparers are already regulated by Circular 230 (Regulations Governing Practice before the Internal Revenue Services).
The IRS attempted to use a law dating back to 1884. The 1884 law allows the IRS to regulate people presenting cases before the Department of Treasury (the IRS is part of the Department of Treasury).
The decision for Loving v. Internal Revenue Service came down to whether preparing taxes constituted "presenting a case" on behalf of the taxpayer before the Department of Treasury (IRS) IRS.
The Judge in his rulings noted: "Filing a tax return would never, in normal usage, be prescribed as 'presenting a case' he wrote "At the time of filing, a taxpayer has no dispute with the IRS; there is no case to present."
The program was launched by former IRS commissioner Douglas Shulman in his attempt to impose further regulations on the industry and to combat fraud. Rather than seeking change through proper congressional proceedings and passage of new legislation, he and the IRS attempted to circumvent the process. The court, in its ruling, disallowed them to use the existing law for a purpose it was never intended for.
The lead attorney for the plaintiffs, Dan Alban, after the ruling said "This was an unlawful power grab by one of the most powerful federal agencies and thankfully the court stopped the IRS dead in its tracks. The court ruled today that Congress never gave the IRS authority to licenses tax preparers, and the IRS can't give itself that power."
For obvious reason, one of the more disappointed parties was Turbo Tax. The spokesperson, Dan Maurer, a senior vice president and general manager of the consumer tax group said Intuit which makes Turbo tax was "disappointed" in the ruling.
Tax Software and do it yourself tax preparers were not part of the new regulations. Imposing additional regulation on tax preparers would most likely have decreased the number of tax preparers, weeding out additional competitors to Turbo Tax. The additional requirements could have also resulted in an increase in tax preparation fees, thus causing more individuals to consider preparing their own return.
Because of the court ruling, the IRS has temporarily suspended its plan to move forward with regulating tax preparers. At this time, the IRS has not stated how they will move forward or whether they will appeal this ruling.
With this ruling taxpayers, have very distinct and very different choices on how to complete their tax return, they can:
- Use a DIY software program and attempt to learn all the applicable taxes, tax codes and deductions that apply to their circumstances.
- Choose a low cost tax preparer that may have very little training or knowledge of the tax code and are not required to pass a standardized test or meet minimum requirements.
- Engage the services of a professional preparer such as a CPA.
CPAs must demonstrate a base line of knowledge through a Board Certified test, are governed by a set of regulations (circular 230) and participate in continuing education courses throughout the year. With about 70,000 plus pages of tax code, the tax code this year is more complex and more confusing than ever before in the history of the US. In a previous blog post we discuss he benefits of using the services a CPA verses other alternatives.
Comment below and let us know what you think. Should the IRS have circumvented Congress to impose additional regulatory requirements and standards on tax preparers?
To assist you this year we have put together the top 21 Tax changes for 2013 that you can download here.
Are you an owner of an S Corporation? If so, you may want to do a salary checkup and make sure your salary is reasonable and customary. Ealier this year the Eighth Circuit Court upheld a lower court's decision regarding the salary of the owner of an S Corporation.
In 2002 and 2003 the owner of the S Corporation paid himself a salary of $24,000 while taking distributions of $230,651 and $175,470 respectively. Based on an expert witness hired by the IRS, the IRS argued that the owner's salary was unreasonably low and that a reasonable salary for this owner was $91,044.
The benefit to an owner of an S corporation, for taking compensation as distributions rather than as W2 wages, is that they save themselves the Federal Insurance Contributions Act (FICA) taxes commonly known as Social Security and Medicare taxes.
The IRS argued the owner was underpaying himself by $67,044. Accordingly, based on the IRS' argument, these are wages that should have been subject to Social Security Taxes and Medicare Taxes.
Back in 2002 and 2003 the Social Security and Medicare taxes for an owner was set at a rate of 15.3% (7.65% owed as the employee and 7.65% owed as the employer). The total tax on the additional $67,044 in wages equals $10,258 per year ($67,044 multiplied by 15.3%). For the two years in question, the total additional Social Security & Medicare tax would have been $16,626.
The Eighth Court affirmed the lower courts decision and based on the owners work experience and knowledge, the $24,000 salary was unreasonably low.
Additional information about the court case and the IRS argument can be found here at the Journal of Accountancy's web site in an article published by Sally Schreiber.
It is important for an S Corporation owner to seek advice from a professional CPA to help him or her determine a reasonable salary for the purpose of payroll wages. If the IRS believes your W2 wages are too low you may be in the unenviable position of trying to defend it to the IRS. If you can't make a legal argument or justify your wages before the IRS (or courts) and the IRS determines they are too low, you will owe additional FICA taxes plus penalties and interest.
Businesses scored a big win yesterday as the Senate voted to repeal the 1099 reporting requirements that was part of the Healthcare bill. This requirement had been the topic of several blog articles that can be found here, here, here and here. In these blog articles, we highlighted the devastating impact and high costs that this requirement would have had on businesses. Fortunately, both parties realized this was a burdensome reporting requirements.
This provision was slipped into the Healthcare bill and required that businesses would have had to report all business transactions with any single person or business that totaled more than $600 in a calendar year. According to Kenneth Schortgen, JR in his article that appeared on examiner.com today, he highlights the cost to businesses: "The sheer cost of doing this, coupled with the cost many people would have incurred by hiring accounting help just to deal with this provision, could have burdened small businesses to the point that up to 40% would have had to close their doors, or layoff workers."
The bill must still pass the House and be signed into law. Few problems are anticpated with it passing the House and President Obama during the State of the Union address indicted hew was willing to compromise on the 1099 reporting requirement.
As lawmakers embark on their lame duck session, CPA firms, business owners and corporations are hopeful that Congress and the President are sincere in their desire to repeal the onerous, 1099 reporting requirements that was attached to the Healthcare reform legislation passed last March.
We have posted several articles that can be found here, here and here about this issue. In short, all consultants, sole proprietors, partnerships, S corporations, C corporations and farming businesses, will have to issue a 1099 for any vendor or individualthat they sepnd more than $600 with.
According to a Taxpayer Advocate Service (TAS) analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to this new reporting requirement. It would require a painter to issue a 1099 to Home Depot or Lowes, if he or she spends more than $600 on supplies with them for the year. This would be true for landscapper, to issue a 1099 to the gas station, he purchases gasoline from, or the consultant who spends more than $600 with Office Depot on office supplies.
If each business entity has to issue, on average, just twenty-five 1099s each year, more than 1 billion 1099s would be issued annually. A volume that would seem difficult for the IRS to even be capable of handling.
Max Baucus (D-Mont), Chairman of the Senate Finance Committee has stated that he would introduce legislation to repeal the expanded 1099 reporting requirments, that will start in 2012
In an article published by CNNMoney.com, Max Baucus is quoted: "I have heard small businesses loud and clear and I am responding to their concerns ," Baucus said in a prepared statement. "Small businesses are the backbone of our economy in my home state and across the country, and they need to focus on creating good-paying jobs -- not filing paperwork."
In addition to the new reporting requirements, the fines and penalties for incorrect and late filings of 1099s, w2s and other information returns, has also increased significantly.
If this reporting requirement stands, CPA firms envision, a major increase in work volume and increased cost, for the business owner, in order to stay compliant with this burdensome and onerous piece of legislation.
So, you started a business and bought a copy of QuickBooks. You are going to load up that bad boy on your computer, enter a few numbers and away you go. You're all set to keep detailed financial records. 
Who needs to spend a few hundred dollars a month for the services of a CPA. You're a do it yourselfer, you started your own business, so surely you can handle the minor administrative details related to managing the financial administration of your company.
A CPA is an important part of your management team and needs to be considered as such. He or she brings critical experience, knowledge and insight to help you run, manage and strategize your business.
CPAs spend hundreds of thousands of dollars investing in their education, years working and gaining experience and must pass an exam to demonstrate a base level of knowledge before they can practice as a CPA.
They typically deal with hundreds of clients a year and encounter thousands of unique situations. They understand the challenges a new business owner faces and how best to help that business owner.
A CPA can help the business owner:
Maintain accurate financial records. This is critical if you ever want to get a loan from a bank, attract investors or just have accurate financials available to help you make smart decisions in your business. It is not uncommon for us to take a look at a QuickBooks file from a business owner and find information missing or improperly coded, thus making the financials meaningless.
Assist with tax planning and preparation. One of the biggest challenges facing business owners, especially recently, is not knowing the tax consequences of making a profit, hiring employees, providing or not providing healthcare, as well as numerous other tax related questions a business owner must deal with on an on-going basis. A CPA is a key resource to help guide you through this maze.
Business guidance. A CPA has experience and knowledge in dealing with numerous businesses and countless unique situations a business owner may face. He or she can often provide perspective and advice on how to avoid mistakes and provide guidance on some best practices for business owners.
These are just a few areas that a CPA can assist and support you as you launch your business. If you are considering or have started a new business, visit our New Businesses resource web page.