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.

The IRS annually publishes their list of the “Dirty Dozen” Tax Scams, alerting taxpayers to the most recent and widely-used scams involving taxes and the IRS.  The list for 2010 is out, and it contains some new scams, as well as some from prior years.

Unfortunately, tax preparer fraud is at the top of the list.  As an ethical, competent preparer I take great offense at those who act in a unethical manner in this regard.  Anyone who prepares your return for a fee must sign the return as a paid preparer.  Some unethical preparers will negotiate a reduced fee if they agree not to sign as a paid preparer.  If someone else prepares your return and does not sign it, and there is an error or you get audited, you are on your own as there is no evidence there was a paid preparer.  Another red flag are preparers who advertises they can you a higher refund than anyone else.  This is illegal and unethical.  Choose your preparer carefully.  It is good to obtain the services of a CPA or an Enrolled Agent.  Both of these groups are held to high ethical standards.

Another IRS hot button is hiding income offshore.  Attempting to evade U. S. income tax by hiding income in offshore banks, brokerage accounts, or through façade entities is illegal.  Frequently associated with this scam are the use of debit and credit cards, wire transfers, and other fund-transfer methods.  If an offshore investment that avoids U. S. taxes seems too good to be true, you should walk away.

Phishing is alive and well on the Internet in regard to IRS scams.  Be aware that the IRS does not communicate with taxpayers via e-mail, Facebook,  Twitter, phones, or faxes.  If you receive an e-mail supposedly from the IRS, telling you that you have a refund coming, forward the email to phishing@irs.gov.

Filing phony substitute W-2’s via Form 4852 is another common scam.  This is done to reduce taxable income to zero and obtain a larger refund.  A related scam is reporting non-taxable Social Security benefits with exaggerated withholding amounts.  Just be aware that it is illegal to file false information regarding an IRS document and the IRS is likely to detect the false filing.

Another on the IRS dirty dozen is the abuse of not-for profit organizations.  There are numerous instances of taxpayers making contributions of property to legitimate charitable organizations but listing a grossly overstated value for the contribution or reporting it as donated to multiple organizations.  Be aware that certain contributions must be backed up with a qualified appraisal.  A variation on this scam involved the donation of the asset to an organization and the organization selling it back to the donor at a much lower price.

Fuel tax scams is another item on the IRS list.  When you purchase fuel such as gasoline for non-highway use, you are entitled to a credit for the taxes paid on that fuel.  The IRS has apparently seen a significant increase in claims for this credit, often from taxpayers whose occupation would not lend itself to non-highway use of fuel.

These are only a few of the “dirty dozen.”  For a complete list, go to www.irs.gov and type in “Dirty Dozen 2010.”  If you suspect fraudulent tax activity you may report it to the IRS using Form 3949-A, Information Referral.  Whistleblowers may provide allegations of fraud to the IRS on Form 211 and may be eligible for a reward.

In short, be aware that anything that sounds too good to be true, or talks about “insider secrets” to beat the IRS are most likely to be fraudulent schemes.   If you are presented with such an opportunity, do not act on it immediately.  Think on it, investigate it, go to a respected tax advisor for an opinion.  There are legitimate ways to reduce taxes and there are the short cut methods.  The short cuts usually lead down a wrong path.

The IRS recently announced new requirements for paid tax return preparers.  As it currently stands anyone can hang out his or her shingle, proclaiming themselves to be tax return preparers.  Although these actions are commendable, there is doubt about their effectiveness at combating the problem of incompetent and unethical tax return preparers.

The IRS plans to implement several steps designed to improve tax return preparation.  The first step is to require all paid tax return preparers to register with the IRS and obtain a preparer tax identification number.

Secondly, the IRS is going to require competency tests for all paid preparers except attorneys, certified public accountants, and enrolled agents who are active and in good standing with their respective licensing agencies.   Related to this requirement is a series of competency tests for all paid tax preparers except those in the previously mentioned groups.  I have a problem with the exclusion of attorneys and CPA’s.  Enrolled agents already have a continuing education requirement in tax, so that exclusion seems valid.  However, as an attorney or CPA, there are no requirements for competency in the tax area to maintain a license.  There are many practicing attorneys and CPA’s who know little or nothing about the tax law – their practice is in other areas.  It appears that there will be a series of examinations to “certify” preparers for different types of returns, although this is not certain at this point.

Treasury Department Circular 230 is the document that prescribes ethical standards for tax return preparers.  It currently applies only to attorneys, CPAs, and enrolled agents who practice before the IRS.  Practicing before the IRS generally gives the preparer the right to represent clients in an IRS hearing.    Under the new proposals, Circular 230 will apply to all paid preparers.

Again, I see a problem with this.  Suppose an unethical preparer tells his client that he will take a reduced fee and not sign the return.  Since most taxpayers are unable to deduct the fee for tax return preparation, some will be inclined to accept such an offer.  There are an estimated 700,000 paid preparers who do not sign the return as paid preparers.  These provisions, while bringing them under the ethical rules of Circular 230 will do nothing to compel them to sign the return.  The existing penalty is $50 for each violation.  Is bringing them under the rules of Circular 230 going to make them sign the return?  I have my doubts.

A problem I see with registration and education requirements is that those who operate “in the shadows” will stay there.  What about these proposals will compel them to become registered, obtain continuing education, and abide by the rules of Circular 230?

These steps will be implemented over a period of time.

In a series of related efforts, the IRS is going take immediate action to step up oversight of preparers.  This includes sending letters to 10,000 preparers who prepare large number of returns, urging them to be “vigilant” in areas where errors are frequently found.  Additionally, a number of preparers will receive visits from IRS agents to “discuss their obligations and responsibilities to prepare accurate tax returns.”  An additional initiative involved wider use of investigative tools including visits to preparers by IRS agents posing as taxpayers.   I see these efforts as intrusive to ethical, competent preparers while not reaching the vast number of unethical preparers who don’t sign the returns.

It is estimated that 70-80 percent of taxpayers hire someone to prepare their income tax return.  This is a choice that should be made carefully, and not just based on the company having someone standing on the street corner with a sign and an Uncle Sam outfit, urging you to use their services.  Some tips to selecting an honest, professional preparer include:

Be wary of those who claim they can obtain larger refunds than others.  That’s unethical to begin with and indicates they may take unethical liberties to obtain a large refund.  It is acceptable to state that “no one can obtain a larger refund for you.”

• Avoid preparers who base their fees on a percentage of the refund.  More unethical conduct.
• Use a reputable preparer who signs the return and gives you a copy.  Both are required.
• Consider whether the individual or firm will be around in November to answer questions about the return.
• Check credentials.  Only attorneys, CPA’s and enrolled agents can represent taxpayers before the IRS in all matters.  Other may only represent taxpayers for audits of returns they actually prepared.  And if they didn’t sign it, you’re on your own.
• Find out if the preparer is affiliated with professional organizations that provide continuing education and other support in tax matters.  Does the organization have a code of ethics?

The amount of income taxes you pay annually is usually one of the largest, if not the largest, financial transactions you will have in a given year.  Make sure that the person you entrust with this task is someone in whom you can place your confidence.

Mandatory e-filing of your 1040 in on the horizon.  The recently enacted “Worker, Homeownership, and Business Assistance Act of 2009” requires that any individual return filed by most preparers must be submitted via e-file.   This is to be effective for 2010 returns, which will be filed beginning in 2011.  If you prepare your own return, there is no current requirement that it be submitted by e-file.

Specifically the legislation states that “any individual income tax return prepared by a tax return preparer be filed on magnetic media” if two requirements are met.  Magnetic media includes e-filing and is the type of submission contemplated by this legislation.    The first requirement is that the preparer reasonably expects to file more than ten returns in a given calendar year.  With such a low threshold, this obviously includes most legitimate paid preparers.

However, it is the second requirement that is somewhat ambiguous.  It states that the return in question must be e-filed if prepared and filed by the preparer.  Taking this language at face value, a preparer can prepare a paper return for a client, give the return to the client, and the client mails the return to the IRS. The preparer has prepared the return, but it has been filed by the taxpayer.  Based on the language, one would think this really doesn’t change anything, as clients who want to file a paper return simply must file it themselves.  This does not seem to be the intent of the legislation, so I anticipate that the Treasury Department will issues regulations defining the filing of a return for purposes of this legislation.

There is no doubt that e-filing of returns going to be a larger part of your future.  According to the IRS, they can process an e-filed return for about three dollars less than it costs to process a paper return.   Taxpayers who are due refunds are more likely to e-file, as it allows them go get their refund within a couple of weeks when utilizing direct deposit (another Treasury money-saver).  But in requiring return to be e-filed, the Treasury Department is shifting its costs to the taxpayer, requiring them to bear the cost of e-filing the return.    Should e-filing of all returns be mandatory, the taxpayer would likely incur additional costs for preparation of the return if they are currently filing a self-prepared return.  If they still opt to prepare their return, they would likely incur a fee for e-filing.  Spreading the e-file requirement to all types of returns could also adversely affect small preparers who prepare only a limited number of returns for entities other than individuals.

Another adverse impact of the current legislation would likely be to drive small preparers underground.  Those preparers who do not have e-file capability could simply not sign the return as a paid preparer and allow taxpayers to file the return as if they had prepared it themselves.  This would add to the existing estimated 700,000 preparers who illegally prepare returns, but do not sign as paid preparers.  This illegal preparation industry harms taxpayers, as the taxpayer cannot argue that their preparer prepared an incorrect return if it is not signed by the preparer.  Should the taxpayer wish to sue the preparer, there are no grounds for suit, as there is no evidence linking the preparer to the return.

Despite any semantic problems with the current legislation, there is little doubt that e-filing for the future will be on the rise.  The IRS can process a return at less cost, the incidence of errors is decreased, and processing time for the returns is less.  On the other side of the coin, however, e-filing can create a logistical burden for taxpayers with no internet access if they prepare their own return.   Secondly, additional cost is likely to be incurred by some taxpayers who do not already utilize the e-file process.  Third, when taxpayers owe, there is likely to be some confusion in coordinating the filing of the return and the payment of the amount due.  Finally, rather than bother with e-filing a return, some taxpayers may simply opt to drop out of the system and not file returns at all.

Welcome to The TaxDoc Spot.  Thank you for visiting my blog. I hope you will find information here that is useful to you.  Feedback is welcome.

Right now this is a work in progress, so there is not much to see.  Come back, as we will be enhancing the blog to provide more for you.

John Stancil, CPA

The TaxDoc