If I had $1 for every time someone has asked me “How do I report someone who is cheating on their taxes?” I would probably be a rich man.  The IRS does have an established procedure for reporting tax evaders and there can be handsome rewards for turning in a tax cheat.  That’s the good news.  The bad news is that it is a very painstaking process, your chances of getting a reward from the IRS are slim, and it takes a very long time for a case to be resolved – typically six to seven years.

There are actually two different programs for whistleblowers.  The large awards program is for cases involving more than $2 million in taxes.  The reward can be up to 30% of the taxes, penalties and interest.  The actual amount of the award is at the discretion of the IRS.  This law has been on the books since 2006, and the IRS just announced its first award under this program.  The amount of the award is $4.5 million paid to a former in-house accountant for a large financial services firm.  Since this law was enacted the IRS has had 1,328 qualified submissions involving almost 10,000 taxpayers.

The small awards program is for cases involving less than $2 million in taxes, and is up to 15% of the penalties and taxes but not interest.  This program has been in existence as a part of the False Claim Act of 1863.  The IRS accepted 7,600 new claims in fiscal year 2010, the highest total since 2006.  Obviously, far more claims in both categories are submitted, but only a few are qualified under IRS guidelines.

In order to report a claim, you must complete Form 211, Application for Award for Original Information.  The IRS wants a timely, well-developed claim.  Merely reporting that Joe Smith must be cheating on his taxes because he buys an expensive new car or operates a cash business will not be sufficient.  The form asks for facts, including supporting information; how you learned about the claim, and the amount the taxpayer is owed.  No matter how strong a case you think you may have, don’t spend the money yet.  Attorneys who handles such cases agree there is no such thing as a slam dunk case.

Additionally, the IRS typically avoids two types of cases – those involving churches or non-profit organizations because of the IRS reluctance to pursue them; and those involving money laundering or organized crime, for fear of physical harm.

A very big caution is that there is no legal protection for whistleblowers.  Although the IRS will not reveal you identity, you should be careful about who you tell about the case.

And yes, if you receive an award, it is taxable.  The IRS will withhold up to 28% of the award to pay the taxes on your new-found income.

There is seemingly no end to calls for tax reform in the United States.  This is not without cause, as the current income tax system could be considered as broken.  The Internal Revenue Code is over 71,000 pages long, or over 24 megabytes.  There are over 800 IRS forms.  The tax industry is one roughly the size of Wal-Mart in terms of revenues.  Some have called for simplification of the code, others trumpet a value added tax (VAT).  Still others have called for a national sales tax.  One recent proposal that has been introduced in Congress is the Fair Tax.

The basic component of the Fair Tax is a national sales tax, calling for a rate of 23%.  The proposal taxes some items that are not presently subject to sales taxes.  The Fair Tax would tax purchases of new homes, rent, food, medications, doctor bills, interest on loans, utilities, gasoline, and legal fees.  One’s first reaction to this is that the Fair Tax would be an extreme burden on those in the lower income brackets with taxes paid on virtually every consumer purchase.  Proponents claim this is not true.  Here is where the innovative aspect of the Fair Tax comes into play.

All valid Social Security cardholders who are United States residents would receive a monthly check from the government, referred to as a “prebate.” This prebate is touted as being roughly equivalent to the amount of Fair Tax paid on essential goods and services.  For example, a single adult with no dependents would get a monthly check of $208.  A couple with two dependent children would receive $559.  This feature removes the Fair Tax from the realm of flat taxes, as it becomes a progressive tax with higher income citizens paying a higher percentage of their income in taxes.

The Fair Tax would completely abolish the federal income tax for individuals and corporations.  In addition, estate, gift, Social Security, and Medicare taxes would also be eliminated.  Of course, with no income tax, the IRS would also be abolished.  Social security and Medicare programs would be unaffected, just financed in another manner.

According to the proponents of the Fair Tax, it is revenue neutral, meaning that it would collect the same amount of tax as is currently being collected.  There are those who disagree with this, saying that a rate of 30-34% would be necessary to make it truly revenue neutral.  In all likelihood, the truth lies somewhere in between.  One factor that must be considered is that the Fair Tax would probably reduce the tax gap, as opportunities to evade the Fair Tax would probably be fewer than under the present system.  However, one should not discount the fact that with a sales tax of 23 -34% there will be a strong incentive for a black market to develop in which people attempt to evade paying the tax.  So the tax gap would remain, but hopefully it would be less.

The Fair Tax would be transparent, meaning that people would realize the extent of their tax burden rather than having it “obscured” as under the current system.  There would be no loopholes, special exemptions, payroll taxes, embedded costs, or other factors that contribute to hide the true amount of our tax burden.

Sounds pretty good, so far.  However, the Fair Tax has some other negatives associated with it.  First among these is that the price of new goods and services would increase. A $150,000 house becomes a $195,000 house.  Gasoline would increase $1 per gallon at present prices.  Proponents argue that prices would not really increase, just the visible cost would change.  Another thought is that since companies are not paying income, payroll, or other taxes, they would lower the price of their goods.  Nonetheless, prices are likely to increase.  This “sticker shock” of higher prices could have a negative effect on the economy.

Critical to the success of the Fair Tax is the repeal of the Sixteenth Amendment.  Unless this occurs, there is nothing to stop a future Congress from reinstating the income tax in some form, leaving us with the Fair Tax and an income tax.  Having both would be a disaster to our economic freedom.

Another negative factor is that people who have paid into social security or other savings plans would be taxed on these funds when they purchase goods and services after already paying income tax under the current system.

Some have observed that it would give the government the power to discourage the purchase of certain goods or services by raising the rate on that product.  For example, if the government determined that tobacco products were undesirable, they could be subject to a higher rate to discourage consumption.

There are both positive and negative aspects of the Fair Tax proposal.  As with any change in our tax system, there will be elements of unfairness.  Such a change will also create displacements, as much of the present tax industry would cease to exist.  There is no doubt that our tax system needs reforming.  Is this the best way to go about it?  I think not.  I still favor an income tax. To tax individuals and companies on their earnings seems more equitable than taxing consumption.

Over the years, there has been an ongoing debate about the replacing the complex income tax system in the United States with a flat tax.  In essence, a true flat tax subjects all income to a single rate.  Most frequently, proponents have cited a 17 percent rate as revenue neutral.  A true flat tax would mean that all income, regardless of source, would be taxed at 17 percent.  However, few people support a true flat tax, and with good cause.  Currently, some types of income are not subject to taxation.  There are good reasons for these exclusions and these exclusions should probably continue.  Others realize the inequitable nature of taxing the first dollar of income at the same rate at the millionth dollar.

A number of countries, most notably many of the Soviet-bloc countries have adopted a flat tax, including Russia.  Most of these nations have experienced economic growth and lower unemployment since the adoption of the flat tax.  However, detractors point out that there is not necessarily a relationship between the flat tax and economic growth.

Pros of a Flat Tax

1. Simplicity.  Computation of the tax is straightforward, easy to understand, and easy to report.  Most flat tax proposals exclude taxes on interest, dividends, and other business tax at the individual level.  It would eliminate estate taxes, capital gain taxes, and tax from international sources of income.  Any it could even  be withheld as a payroll deduction with nothing to file.
2. Time savings.  It is estimated that the average American spends 26 hours on their taxes each year.  The flat tax would free up this time for other pursuits.
3. Dollar Savings.  One estimate is that it costs taxpayers $163 billion annually to comply with the tax laws.

Cons of a Flat Tax

1. It would put me out of work.  My accounting practice is almost exclusively devoted to tax issues and much of my teaching and research is focused on taxation.  However, it goes beyond me.  The tax industry is huge.  In addition to the amounts cited above that taxpayers spend to comply with tax laws, vast amounts are spent on software, continuing education, enforcement, and other tax-related areas.  The size of the income tax preparation industry is roughly equal to the annual revenues of Wal-Mart.  This would be a huge economic displacement.

1. Opponents argue that the flat tax penalizes the low-income segment of the population.  And a true flat tax does, as those in lower income brackets spend a higher percentage of their income on necessities than those in higher income levels.  Therefore, they are paying a higher percentage of their income in taxes.

The remedy for this inequity is to exempt a certain amount from taxation.  A lump sum in the neighborhood of $20-25,000 has been suggested.  In other words, the tax would only apply to income above that level.  Two problems arise with this remedy.  First, you no long have a flat tax, you have a zero bracket plus a 17 percent (or whatever rate is determined).  Secondly, when a lump sum is exempt from tax, it will require that the applicable rate above that minimum amount must be higher to generate sufficient revenues.

Why it Will Not Happen

It is my opinion that we will not see a flat tax in the United States.  First, as already mentioned, once a minimum income threshold is established, you no longer have a flat tax.  I simply cannot see Congress enacting legislation that taxes the first dollar of income for all citizens.

Secondly, Congress simply cannot let well-enough alone.  Let me paint a scenario.  Americans finally get fed up with our tax system and vote in a majority of Senators and Representatives who pledge to implement a flat tax.  True to their word (remember this is just a fictional scenario) the pass a true flat tax.  Now what happens?  We need to stimulate the housing market, so let’s add an exemption for mortgage interest.  We need to make higher education affordable for all, so why don’t we enact some education credits.  Wait just a minute!  It is not fair that a family with four children get the same exemption amount as a married couple.  Let’s add exemptions for dependents.  The flat tax, if implemented, would erode over time.  It is the nature of our political process in the United States.

No doubt the flat tax will continue to be debated and it is even possible that some form of a flat tax will someday be implemented.  I would much prefer that we move to a simpler tax system with fewer deductions, credits, and types of taxable income.  The simplification would likely take on elements of a flat tax.  But I don’t foresee that we will ever have a true flat tax in the United States.  At least not for long.

The value-added tax (VAT) has been adopted by every developed country and most developing countries in the world.  There is, however, one exception –The United States.  That may be changing as there is currently discussion regarding its adoption in the U. S.

The value-added tax is a tax on goods and services and is collected at every step in the production chain.  This is unlike the sales tax, which is paid only on retail sales.  In a sense it is similar to sales taxes that are currently in place in 45 states as it is a consumption tax. VAT rates, obviously, vary from country, but in a survey of OECD countries, the rate varies from a low of five percent to a high of 24.5 percent.

How the VAT Works

As an example, assume that a 10% VAT is in place.  The VAT will be added at each step in the production process.  It starts when a manufacturer purchases raw materials and other items for $100.  The 10% tax will be added so the purchase costs the manufacturer $110.  Ten dollars is remitted to the government.

In the next step of the process the manufacturer completes its products and sells them to a retailer for $250.  Again, the 10% VAT is added, bringing the amount of the transaction to $275.  In this case, however, the manufacturer has already paid $10 in VAT, so the company takes a deduction for amounts already paid.  Fifteen dollars ($25 – 10) will be remitted to the government by the manufacturer.

When the consumer purchases these items for $600, the VAT is added, bringing the cost to the consumer to $660.  The retailer remits $35 ($60- 25) to the government.  In the end, the entire tax is borne by the ultimate consumer.

There can be exceptions, deductions, and credits granted for certain types of products and services.  As more exceptions are created, the system becomes less efficient and the amount of revenues raised decreases.  One needs only to look at the current complexity of the income tax system to realize how these complicate the system.  Most states have hundreds of exceptions in their sales tax systems, creating distortions.

Advantages

First, the VAT is an efficient way to raise revenue.  It is a broad-based tax, and somewhat self-enforcing.  Businesses at any stage in the production chain can take a deduction for taxes paid only if they can show that their seller paid the tax before them.  Thus businesses encourage each other to comply.

Related to this is a second advantage.  Because the tax is collected at various stages in the production process, the government does not lose a large amount of tax revenue when a single business evades the tax.

Third, the VAT is considered less of a drag on the economy than income taxes.  It has been shown that consumption taxes (such as the VAT or sales taxes) do not discourage savings as does the income tax.  As consumers save more, capital becomes available to business for additional investment and expansion.

Disadvantages

Some parties decry the fact that a VAT is a money machine, enabling additional government spending.  Although this is a factor to consider, this argument is refuted by Bruce Bartlett (The VAT and the Money-Machine Argument) on two points.  He first states that, contrary to popular belief, the trend in VAT rates is not upward.  Many countries have never raised the rate from inception.  Some have even lowered the initial VAT rate.  His second point notes that higher taxes are anti-inflationary and reduce purchasing power.  As purchasing power is reduced, consumers spend less and fewer taxes are collected.  According to Bartlett, the money machine scenario just does not hold true.

A second issue with the VAT is that it is a regressive tax.  Those in the lower income levels are disproportionately affected by such a tax.  Two ways have been suggested to overcome this factor.  First, similar to the situation with sales taxes, some goods can be exempted from the tax.  Groceries, medications, and children’s clothing are three frequently-mentioned exceptions that could be made.  A problem with this approach is that it gives companies an incentive to mislabel the products they sell in order to avoid the tax.  An additional problem lies in the definition of an exempted product.  For example, where is the distinction between groceries and food prepared in a restaurant?  Many supermarkets offer, in addition to groceries, deli services with prepared food.  Others even have sit-down areas where the food can be consumed.  There is no bright line distinguishing one from the other.

A second approach to overcoming the regressive nature of a VAT is to implement it in conjunction with an overhaul of the income tax, making the income tax more progressive.  Lower rates for lower income levels and higher rates for those in the upper income brackets would counteract some of the burden on the lower-income population.

A third problem with the VAT is how to tax services.  How much value is added in the preparation of a tax return or in financial planning?  One solution is to exempt such services, while another solution would define the value added would be determined.

Summary

There are hurdles to overcome before the VAT is implemented in the United States.  The federal government is currently running large deficits and this tax presents an untapped (for the federal government) revenue source.  This reason alone is sufficient to not dismiss the prospect of a VAT being implemented in the United States.  A second factor is that the United States is in the distinct minority in terms of nations that have a value-added tax.

Ideally, implementation of a VAT in the United States would be revenue-neutral.  Introducing a value-added tax, accompanied by a revamping of the income tax code, would seem to be the most palatable approach.  This revision of the income tax code should be coupled with lower overall rates with the result that the tax burden is not increased significantly on any one population segment.

What is in store for the income tax preparation business in the near future?  I don’t have an answer, but I do know that things will not be the same.

Refund anticipation loans (RAL) are short-term loans made by tax preparers to allow taxpayers to receive their refunds immediately.  In the past, these were very popular with certain segments of the population.  Unfortunately, they were very expensive, carrying annual percentage rates of up to 500%.  With the increase in e-filing of returns and direct deposit, the number of RALs has declined in recent years.

Last October, the IRS announced that it would no longer provide tax preparers with a “debt indicator.”  This indicator was an alert that notified a preparer if a taxpayer had an existing IRS obligation to which the refund would be diverted.  Without this debt indicator, RALs became more risky as there was no longer certainty about receipt of the refund, and was probably the last nail in the RAL coffin.

By 2011, there was only one remaining RAL lender, Republic Bank and Trust of Kentucky.  The FDIC has issued a notice to Republic, ordering them to cease and desist from making RALs, citing widespread legal violations.  Additionally, H & R Block did not offer RALs in 2011.

The second-largest tax preparation firm, Jackson-Hewitt, did offer RALs in 2011, but ran into financial difficulty and was forced to declare bankruptcy in May, 2011.  The primary factor in the bankruptcy was its failure to secure funding for its refund anticipation loans.  It is anticipated that Jackson-Hewitt will continue to operate but without the use of RALs.

It would appear that the RAL is now a thing of the past, a fact that consumer groups will applaud.

As to the future of Jackson-Hewitt, one can only speculate.    A number of Jackson-Hewitt franchisees have been the subject of fraud investigations in recent years.  Both Hewitt and H & R Block have recently experienced declining revenues.

In the software side of income tax preparation, the acquisition of TaxACT by H & R Block has been blocked by the Department of Justice.  The DOJ cited concerns about consolidation in the industry as Block and TaxACT are second and third behind TurboTax in the tax software preparation industry.  Even with the merger, Block would still trail TurboTax by a wide margin.

Another factor in the tax preparation business is tax preparer regulation.  We are in the first year of increased regulation of tax return preparers.  There are predictions of a shake-out in the industry, with many smaller firms ceasing to do business.  I believe there will be fewer preparers, leaving taxpayers with the option of self-preparation or turning to a registered tax preparer.  As the IRS increases the amount of the standard deduction, many taxpayers who no longer find it beneficial to itemize will go the do-it-yourself route.  However, as the tax code becomes even more complex with credits, new deductions, and increasingly complex taxpayer financial situations, finding a competent preparer may be a challenge for the taxpayer who does not choose to go it alone.

On June 1, 2011, the IRS issued the final regulations on the paid preparer regulation.  Although there are no surprises, the regulations adopt the term “registered tax return preparer” for those meeting the IRS guidelines.  Additionally, the regulations state that individuals who represent themselves as registered tax return preparers in any paid advertising involving print, television or radio to include in any such display or broadcast the statement “The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.”

The continuing education component of tax preparer registration has been delayed until at least September 30, 2011.  The IRS will require education providers to obtain a qualified education provider number, but will not preapprove courses.  No date has been set for the competency testing to begin.

One of the goals of the IRS tax preparer registration effort is to weed out unethical preparers.  Judging from the number of cases, they may be succeeding.  “The Tax Lady,” Roni Deutch has had her assets frozen and is the subject of a $34 million lawsuit by the California Attorney General, accusing her of swindling clients.  A Texas attorney has been barred from practice before the IRS for failure to file his own returns.  A Pennsylvania tax preparer was charged with fraud amounting to $11 million.  These are only tips of the iceberg.

Identity theft scams abound in relation to tax refunds.  According to the IRS, they have detected this year more than 117,000 identity theft returns with refunds in excess of $582 million .  Improper earned income tax credit payments in 2010 were $16.9 million, up 37.6 percent from the prior year.  An estimated $513 million in improper first time homebuyer credits have been issued.

Bottom line, fraud is rampant.  This can only mean increased scrutiny of returns, preparers, and documentation required.  So, I don’t know what the future holds for income tax preparation.  I do know it holds change.

Over the past several years, our tax code has seen hundreds, if not thousands of changes. Many of these “changes” are commonly referred to as “extenders” as the extend tax cuts that are already in place and have expired or are about to expire.  The year 2010 was no exception with the late-December passage of the 2010 Tax Relief Act. 

This act, when viewed in the light of recent Congressional action in the tax area, create cause for concern.  These provisions are primarily designed to encourage economic activity. However, by waiting until the last minute each year or skipping a year and passing them retroactively does not allow for efficient planning on the part of American business.  How can a business or individual plan for the future when a major annual expense is unknown and largely unknowable.

 This does not lend itself to an efficient tax system.   Clint Stretch, a tax expert at Delotte Tax LLP has stated that “It gives it a lot of dignity to call it a system.”  While I am not calling for massive tax reform (that is for another day), the American government needs to get its act together regarding our federal tax system.  It gets more and more complex each year, with hundreds of changes that must be dealt with.  It leaves professional preparers scrambling to learn the new tax law.  Businesses and individuals are in a state of uncertainty, seeking to learn how the latest laws impact them.  Tax software vendors and writers of tax guides must work overtime to deal with the changes.  It is safe to say that the complexity tax code (call it a system if you wish) has increased geometrically and such complexity has not been necessary.

 Regarding the complexity of the system, I have two observations.  I have been a paid preparer for over 35 years.  Obviously, when I began, returns were all done by hand. With the advent of the computer we have seen a corresponding increase in the complexity of the tax code.  If I had to prepare taxes by hand today, I would not be in the business.  I believe that the computer has been a factor in the complexity of our tax code.

 Secondly, for most of those 35-plus years, I have pretty much completed my tax work by April 15.  I have had a few clients who sought extensions, but not on a regular basis.  You might say that I trained them well.  But in the last few years, I have observed that “tax season” does not end on April 15, but goes until October 15.  More and more taxpayers are extending their return due dates.  The federal government has no incentive to have people file early despite what the IRS may say.  Since most taxpayers receive refunds, the longer they wait to file, the longer the government can hold onto that money.

 I wish I could conclude this by giving you my solution to this problem, but I do not have one.  The IRS has recently enacted paid tax preparer regulations which require your preparer to be registered with the IRS; to pass a competency test (unless exempt due to the holder of certain certifications such as CPA or enrolled agent), and to engage in continuing education.  Most return preparers worth their salt already take more continuing education that the IRS requires.  This is supposed to improve the preparation of income tax returns and increase revenues for the federal government.  This is supposed to happen as unqualified/unethical preparers are eliminated from the scene. These efforts do nothing to reduce the complexity of the system but will probably increase the cost of having a return prepared by a professional as it increases our costs of doing business and creates a smaller pool of qualified preparers.   The IRS or Congress can tweak the system but until a new mindset is present on Capitol Hill, I fear we are in for more of the same.

A gentlemen by the name of Bob Ericson is a now-retired IRS employee who had the responsibility of speaking at the IRS Nationwide Tax Forums each year on the topic of “Overview of Tax Law Changes.”  He confessed that he once had a dream that a year would come and he would have nothing to say because there were no changes.  Then he woke up and realized, “it WAS a dream.”

If you are a victim of identity theft, one area of your life that may be affected is your tax accounts with the Internal Revenue Service.  Someone may file a tax return using your social security number.  If this occurs, the IRS is likely to reject your legitimate return as they already have one using that social security number.  This may also prevent you from filing electronically.

A second situation occurs when you receive a notice from the IRS that you have unreported wage income from an employer you don’t know.  It is likely that an undocumented worker has used your social security number to obtain employment and used your social security number.

If you are the victim of tax-related identity theft you should respond immediately to any notice received from the IRS, explaining why you feel you are a victim.  If you believe you may be at risk because your personal information has been compromised you should file a police report with local law enforcement.  In addition you should phone the IRS Identity Protection Specialized Unit at 800-908-4490.  You should also contact your financial institutions.  Finally, contact credit bureaus to place a fraud alert on and get copies of your credit reports.

In addition to identity theft, you may also be a victim of online tax related fraud.  You should know that the IRS does not initiate taxpayer communications through e-mail nor do they request detailed personal information through e-mail   I hate to disappoint you but that e-mail message you got last week stating you have an $853.69 refund with the IRS is a fraud.   Avoid opening attachments on any such e-mail messages and forward the message to phishing@irs.gov.

A significant source of internet tax-related fraud originates with e-file phishing sites.  These appear to be legitimate online sites for self-preparing and e-filing your tax return.  They are often advertised through commercial pay-per-click sites.  These returns are usually submitted through valid Electronic Return Originators, so your return does get properly filed.  However, before filing your return these sites capture your tax information and reroute your refund to the phisher’s bank account.  You don’t know anything is wrong until you don’t receive your refund and check with the IRS only to find out it was sent several weeks ago.

For the latest information on tax related identity theft you can go to www.irs.gov and search on “identity theft.”  Taxpayer security has always been a hallmark of the IRS and they are on the forefront of combatting tax related identity theft.  But the bottom line is that you need to be proactive about protecting yourself.  Don’t give out your personal information indiscriminately and know who you are dealing with – online or face-to-face.

This blog posting has nothing to do with taxes.  However, I recently took a 10-day trip to Ghana to help distribute insecticide-treated mosquito nets for the prevention of malaria.  I felt this might be of interest to some of my readers.  I beg your indulgence for the off-topic posting.

I was a member of the His Nets team that recently went to Ghana to distribute nets.  To quote Charles Dickens, “it was the best of times, it was the worst of times.”  To see the joy on the faces of the mothers who received a net and received a new lease on life for their children is a memory that will be etched on my mind for the rest of my life.  But alongside that image is the bitter disappointment on the faces of those who were not able to receive a net.  We gave out 2,000 nets; I wish we had 10,000.  It is better to do some good than to do nothing at all.  James 4:17 states “Anyone, then, who knows the good he ought to do and doesn’t do it, sins.”  Giving out 2,000 nets is good we ought to do.

This trip to Ghana for me was about people and faces.  As mentioned the joy on the faces of those receiving nets was indescribable.  Our Ghanaian friend, Pastor Timothy brought the reality of malaria home, stating that he gets it a couple of times a year.  In Ghana, as in other parts of Africa, it is not a question of “will you get malaria?” but “will you die from malaria?”  Expectant mothers and young children are most susceptible to the ravages of this disease.  So giving nets to mothers is giving them and their children a chance to live.  Can they be faulted for aggressively trying to get one of these precious items?  In the same situation, what would you do?  Conversely, the disappointment on the faces of those who did not get nets is haunting.  A chance for life snatched away because of a limited number of nets.

I think also of the face of Francis, one of our drivers.  Francis is a tall, imposing man and was our enforcer.  If problems arose, Francis would take care of them.  But Francis has a big, soft heart.  Daily, we would be traveling to a site and would see an expectant mother walking along the road.  Francis would stop the caravan, jump out of his truck and find a net, giving it to the new mother.  The smile on his face after these events said it all.

Then there was the face of Rita, one of our team members. Rita is a school teacher and we had the opportunity to visit a local elementary school.  It was more than she could bear.  “They have nothing,” she cried.  Yet, they seemed happy.  The children would frequently ask us to take their picture, then crowd around the camera to see their faces. Yet when the mask of childhood joy would slip away, we could see a longing for something more.  Perhaps at that young age they realized the harm that could befall them from malaria and were hoping that what we were bringing would help them.

Pastor Timothy arranged the distribution locations for us.  Timothy is a tireless servant of God, planting churches in the Volta region of Ghana.  You could see etched on his face the concern he felt for the souls of his countrymen.  Yet he knew we were about the Father’s business and he never flagged in zeal.  His wife, Faustina, supports him and assists his ministry.  She was always up early, fixing our breakfast, arranging other meals.  She made shirts and dresses as gifts for each team member.  Yet her face was always serene and composed.  This despite the fact that one of her children, little Onesimus, was in the local hospital battling malaria – the very disease we were there to fight. His quiet sadness at the hospital is another image that I will not forget.

And there is the face of  T Thomas, His Nets founder and executive director.  We know of his zeal for His Nets and for missions.  But to see him in Ghana, telling the people about God, malaria, and mosquito nets is to see passion in action.

I committed to go on this distribution, figuratively kicking and screaming.  My wife and T were both encouraging me to go.  But my face was not set toward Ghana.  I said, “Why do they need me there?  They can distribute 2,000 nets without me.  And I could take the money I would spend and buy a bunch of nets.”  As I sought the face of God on this matter, he made it very clear to me that I was to go.  I did not really understand why, but who am I to argue with God?  After being there, I have a much deeper realization of the importance of the task that His Nets has undertaken.  I may or may not go on future distributions, but I will set my face to raise more funds so more lives can be saved with mosquito nets.

A $6 contribution will buy one net. www.hisnets.org

Having just attended the IRS Nationwide Tax Forum in Atlanta, I picked up a great deal of information, some of which will be the subject of future blog posts.  However, I am going to devote this space today to some observations and quick comments from the Forum.  It was apparent, from observation, that tax return preparers are not happy with changes that the IRS is bringing forth and with the increased complexity of the tax code.  In one session dealing with the tax implication of the recently-enacted health reform legislation, those in attendance burst out with shouts of “repeal it,” “don’t bother issuing regulations, it will be repealed before you get them issued,”  and other comments.

Mandatory E-filing As most of my readers know, in 2011, it has been legislated that all returns filed by a paid tax preparer must be e-filed.  However, the IRS has modified that requirement slightly.  In 2011, any preparer who expects to prepare 100 or more returns must submit the returns via e-file.  In 2012, that requirement tightens up so that any paid preparer who expects to prepare 10 or more must e-file.  The original legislation stated that the returns filed by the preparer must be e-filed.  The IRS has interpreted this so that filing equals preparation.

However, the IRS has created an opt-out provision.  Any taxpayer who does not want his or her return e-filed can inform the preparer that they choose to opt-out of having the return submitted via e-file.  This is a matter between the preparer and the taxpayer, the IRS does not plan to issue a form on which a taxpayer can opt out.  However, my advice is that all preparers should get a signed statement from the taxpayer, indicating the desire to opt out.  This will protect the preparer in the event the IRS inquires as to why the preparer is not e-filing certain returns.

Emphasis on Enforcement I cannot tell you how many times I heard the word “enforcement” uttered by IRS personnel at the Forum.  However, I can tell you that I heard “service” mentioned once.  With the large budget deficits, and pressure to reduce the tax gap, the IRS is on a major enforcement initiative.  Wherever the IRS perceives that there are significant uncollected tax dollars, there is likely to be an increased emphasis on collection in that area.  Having said that, I do not recommend that taxpayers avoid taking legitimate deductions in the hope of avoiding an IRS investigation.  Take any deduction you are entitled to.  But the critical factor is to maintain good records of all expenditures and receipts so you can successfully defend yourself against an IRS audit.

Internet Fraud The IRS is taking steps to reduce fraud via the internet.  You should know that the IRS does not contact taxpayers via e-mail and does not ask that personal information be entered on their internet website.  Additionally, there are websites out there that will allow you to prepare your taxes online, submit them by e-file, and have your refund direct deposited to your account.  These unscrupulous websites, however, change your bank account number before the return is filed, so that your refund goes to them.  Know who you use to prepare and file your taxes.

Paid Preparer Registration The IRS is registering paid preparers.  Starting in the Fall, any preparer must obtain a preparer taxpayer identification number (PTIN).  If a preparer already has a PTIN, they must re-register, but can keep the same number.  Registration will require a fee, currently estimated by the IRS to be between $75 and $300 every three years.  This is not a popular topic with preparers.  In one session I attended, those in attendance booed the IRS representative when she was discussing this topic.  In addition, registration will require preparers who are not CPA, Attorneys, or Enrolled Agents to pass a test and take continuing education in order to maintain their registration.

Many changes are coming in the area of taxation, and they are coming soon.  From the standpoint of a preparer, there is much to be done in order to stay current on the latest from the IRS.  For the taxpayer, you should carefully select who you choose to prepare your taxes.

Earlier this year the IRS announced plans for registration of paid tax return preparers.  Currently, anyone who wishes to prepare tax returns for a fee can do so with no registration, education, or competency requirements.  However, the vast majority of paid preparers are qualified, competent professionals.    Many are CPAs, Enrolled Agents, or attorneys.  Many additional preparers have no professional certifications, but are still competent preparers.

The current plan for registration of preparers has four components: 1) Registration, 2) Competency Testing, 3) Continuing Education, and 4) Ethical Standards.  Let’s look briefly at each of these.

Registration. Any preparer who signs as a paid preparer will be required to register with the IRS and pay an annual fee.  Registration would be good for three years.  It is anticipated that preparers will be registered and in possession of a Preparer Tax Identification Number (PTIN) by January 1, 2011.

Competency Testing.  Preparers will be required to pass a competency test.  Initially, there will be two levels of testing – Wage and non-business Form 1040 series and Wage and Small Business Form 1040 series.  Additional competency testing is contemplated.  Preparers would initially have three years to meet the competency requirements.  There is no grandfathering of existing preparers but attorneys, certified public accountants, or enrolled agents who are active and in good standing with their respective licensing agencies are exempt from testing.

Continuing Education. Paid preparers will be required to complete 15 hours of continuing education annually including three hours of federal tax law updates and two hours of tax ethics.  Attorneys and CPAs are exempt from this requirement.  Enrolled Agents already have a more rigorous CPE requirement.

Ethics. All tax return preparers would be subject to Treasury Department Circular 230.

In my opinion, the IRS has an agenda beyond preparer registration and competency.  In a recent statement before the New York State Bar Association Tax Section, IRS Commissioner Doug Shulman made the following statement:

“I believe that at the end of the day, taxpayers and tax authorities pretty much want the same thing out of the tax system. They want certainty regarding a taxpayer’s tax obligations sooner rather than later. They want consistent treatment across taxpayers. They want an efficient use of government and taxpayer resources by focusing on the issues and taxpayers that pose the greatest risk. And that’s all about working smarter.

Working smarter also includes maximizing the use of our resources, while leveraging other players in the tax system to help us ensure compliance with the law.”

Let’s take a look at that statement, particularly the second paragraph.  The IRS wants to “leverage other players in the tax system.”  Your tax return preparer represents you.  He or she is paid by you to help you pay the minimum amount of tax that you legally owe.  Your preparer may not report “errors” on your present or prior returns to the IRS.”  Your preparer is your advocate with the IRS.  But the IRS apparently wants to change this.

In financial circles “leverage” includes the use of borrowed funds to increase an investor’s return on his investment.  The IRS wants to increase their return on dollars spent by leveraging “other players in the tax system.”  Obviously, these “other players” are not IRS employees.  The IRS is seeking, in essence, to have the paid tax professional to do their work without being employed by the IRS.  They want to use preparers as their surrogates in helping increase tax compliance.  Not only are preparers not paid by the IRS, they must pay a registration fee for the privilege of being a registered preparer.  I guess that’s how the IRS works smarter.

The IRS proposal is not about increasing tax preparer competency. If competency were the objective, why are experienced, competent but uncertified preparers not being grandfathered in?

Addionally, this proposal does nothing to address the issue of unethical preparers who prepare the return for a fee, but do not sign the return.  Their line often goes something like this: “Due to the limitations in the tax law you can’t deduct my fee.  So, I will charge you an amount less than my full fee, and I will not sign the return.”  If you fall for this, you are on thin ice.  If there is a problem with your return in the future, you cannot turn to that preparer as there is no record that he prepared it.

Despite the best efforts of the IRS, these procedures do not fully address the problem of incompetent or unethical tax return preparers.  It is estimated that there are approximately one million or more paid tax return preparers.  One thing the IRS registration would do is provide a data base of registered preparers that taxpayers can search in order to find a preparer in their area.  It has been my experience that people often have difficulty finding qualified people to prepare their returns at a reasonable rate.  They do not want to go to large CPA firms, and they do not want to frequent the store-front operations.  I have experienced contacts from people around the world, seeking tax return help.

There are still a number of unanswered questions in this area of tax preparer registration.  How will this affect store-front operations?  Will the requirements be strengthened?  What levels of competency will eventually be tested?  All we know for certain at this point is that registration is coming.  It will affect preparers and taxpayers.