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Thursday, July 24, 2014

IRS Voluntary Preparer Regulation System - Worthwhile? Legal?

This is a long post.  I'll summarize and make some comments about new program IRS released in late June called the Annual Filing Season Program. This is in response to the IRS loss in the Loving decision (see links below). I'm not convinced it will be worthwhile for the IRS.  Certainly, preparers who are the ones IRS is concerned about - who intentionally make errors or who are not sufficiently knowledgeable about tax rules to properly prepare returns, are unlikely to step forward to take the continuing education and a 100-question test.  Here goes ...

In April 2014, the IRS suggested to its registered CE providers that it was considering a voluntary certification program called an Annual Filing Season Certification (AFSC). It would involve completing 15 hours of CE annually through an IRS-approved CE provider. Unenrolled preparers would need to be sure the 15 hours included three hours of a filing season refresher course with a comprehension test. A “confidential” memo was sent to IRS CE providers with more details on 5/8/14 (and later). Details were apparently also shared with practitioner organizations because the AICPA and NAEA both submitted comments to the IRS expressing concerns with such a voluntary program and urging the IRS not to pursue it. Note: The program rolled out in June 2014 is slightly different than first described by the IRS in April 2014.  

The program, called the Annual Filing Season Program, was announced June 26, 2014 (IR-2014-75). Per the IRS release of 6/30/14: “Revenue Procedure 2014-42 provides guidance regarding a new, voluntary Annual Filing Season Program designed to encourage tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns.  In addition, this revenue procedure modifies and supersedes Revenue Procedure 81-38, 1981-2 C.B. 592, regarding limited practice before the IRS by individuals who are not attorneys, CPAs, or EAs.”

More - According to IRS Fact Sheet 2014-8 (June 2014), IR-2014-75 (6/26/14), website information and Rev. Proc. 2014-42, "the Annual Filing Season Program is a voluntary program designed to encourage tax return preparers to participate in continuing education (CE) courses." Unenrolled preparers who take the appropriate CE courses from IRS CE Providers and pass a 100-question test prepared by the CE provider, will receive "an Annual Filing Season Program – Record of Completion." The IRS believes that the certificate will be "recognizable record of completion that they can show to their clients."  

New Database - Along with the AFSP, the IRS will roll out a public, searchable and sortable database by January 2015. The database will include the name, city, state and zip code of preparers who either have the ROC, are enrolled or who meet the alternative requirements (see below).

How To Receive the AFSP-ROC - the unenrolled preparer must:

  •  Obtain 18 hours of CE from an IRS CE provider (6-hour Annual Federal Tax Refresher (AFTR) course on filing season issues and tax law updates, 10 hours federal tax topics and 2 hours ethics). The course must follow the IRS topic outline available at its website and include a 100-question exam prepared by the CE provider. Per the IRS test parameters, the exam must be 3 hours long, made up of multiple choice and T/F questions, and have a passing score of 70%. If the preparer does not pass, the CE provider can determine if the course must be retaken or just the test. The CE Provider only informs the IRS of preparers who take the requisite course and pass the exam. A list of all CE providers registered with the IRS and whether they offer the refresher course is available at the IRS website.

  • For 2014, the hours are prorated due to the late rollout of the program. For 2014, all that is needed is the 6-hour AFTR course, 3 hours of federal tax topics and 2 hours of ethics.

  • Alternatively, some unenrolled preparers will be able to obtain the ROC without taking the refresher course or passing the exam. Per the IRS:  "Some unenrolled preparers are exempt from the AFTR course requirement because of their completion of other recognized state or national competency tests. These exempt groups are still required to meet other program requirements, including 15 CE credits (10 Federal Tax Law, 3 Federal Tax Law Updates, and 2 Ethics)."Return preparers who can obtain the AFTR – Record of Completion without taking the AFTR course are:
·         Anyone who passed the Registered Tax Return Preparer test administered by the IRS between November 2011 and January 2013.

·         Established state-based return preparer program participants currently with testing requirements: Return preparers who are active members of the Oregon Board of Tax Practitioners and/or the California Tax Education Council.

·         SEE Part I Test-Passers: Tax practitioners who have passed the Special Enrollment Exam Part I within the past two years as of the first day of the upcoming filing season.

·         VITA volunteers: Quality reviewers and instructors with active PTINs.

·         Other accredited tax-focused credential-holders: The Accreditation Council for Accountancy and Taxation’s Accredited Business Accountant/Advisor (ABA) and Accredited Tax Preparer (ATP) programs."
The IRS does not charge for the certificate or listing in the database (apparently all paid for through the PTIN fees the IRS collects). Generally, the IRS-approved CE Providers do charge for their courses (they are charged a fee of $419 per year by the IRS, as in prior years).

The IRS can tell from CE Provider data input into the IRS website when a preparer has satisfied the requirements to get a certificate. For preparers meeting an alternative approach to obtain the ROC, the IRS will obtain data from its data (such as who passed the RTRP exam) or the state (such as California CTEC information). 

 "Solicitation restrictions. A tax return preparer who receives a Record of Completion may not use the term “certified,” “enrolled,” or “licensed” to describe this designation or in any way imply an employer/employee relationship with the IRS or make representations that the IRS has endorsed the tax return preparer. A tax return preparer who receives a Record of Completion for a calendar year may represent that the tax return preparer holds a valid Annual Filing Season Program Record of Completion for that calendar year and that he or she has complied with the IRS requirements for receiving the Record of Completion." [Rev. Proc. 2014-42]

Relevance of the ROC Beyond Listing in the IRS Public Database - Once the IRS knows a person is eligible for the ROC, it will send an email to the preparer with instructions on how to complete the process. The preparer will need to log into their PTIN account. One of the questions they will be asked by the IRS is whether they agree to be subject "to specific practice obligations outlined in Subpart B and section 10.51 of Treasury Department Circular No. 230." The preparer must also renew their PTIN. It can take up to 4 weeks for the IRS to issue the ROC and list the preparer in the database (Directory of Federal Tax Return Preparers with Credentials and Select Qualifications).

The preparer must complete their requirements for the ROC by the end of the year (for example, by 12/31/14 for the 2015 filing season ROC).

Beyond the 2015 Filing Season - "beginning in 2016, only AFSP participants who obtain a Record of Completion will have those limited representation rights before the IRS for clients whose returns they prepared and signed. PTIN holders without an AFSP - Record of Completion or without other professional credentials will not be able to represent clients before the IRS in any matters." Thus, if an unenrolled preparer does not have an ROC, they will only be able to prepare returns.

In addition, Rev. Proc. 2014-42 states that it modifies and supersedes Rev. Proc. 81-38 with respect to returns and refund claims prepared and signed after 2015. This also signifies that unenrolled preparers will have very limited rights (to only prepare returns). The purpose of Rev. Proc. 81-38 is "to prescribe the standards of conduct, the scope of authority, and the circumstances and conditions under which an individual preparer of tax returns may exercise, without enrollment, the privilege of limited practice as a taxpayer's representative before the Internal Revenue Service, pursuant to section 10.7(a)(7) of Treasury Department Circular No. 230, [1966-2 C.B. 1171] (31 CFR Part 10)."

Future Plans - the IRS states that its priority is a legislative change (to 31 USC 330) to require all paid preparers to meet testing and CE requirements. Per the IRS, "until legislation is enacted, we still have a responsibility to taxpayers and to our tax system to keep moving forward with our efforts to improve service to taxpayers."

More Details - see to IRS Fact Sheet 2014-8 (June 2014), IR-2014-75 (6/26/14), website information and Rev. Proc. 2014-42 for further details including who is ineligible for the ROC (such as someone disbarred from practice under Circular 230).  The revenue procedure is the binding, comprehensive guidance on the AFSP-ROC.

 Observations: This IRS program is more than just helping and encouraging unenrolled preparers to get some continuing education. The repeal of Rev. Proc. 81-38 after 2015 and the obligation of agreeing to be subject to Circular 230 to obtain an AFSP-ROC, seems to be an end-run around the Loving decision (No. 13-5061 (D.C. Cir. 2/11/14), aff’g No. 1:12-cv-00385 (D.D.C. 1/18/13)). (For more on the Loving decision, see Nellen, "Regulating all return preparers: Back to the drawing board," AICPA Tax Insider, 3/13/14.)  No where in all of the information released about the AFSP-ROC is the word "certificate" used. Likely, the IRS did not want to indicate in anyway that those with the ROC are "certified" in any way. Note that the IRS does not create or grade the 100-question test; that is handled by the CE provider.

Queries: Will many eligible preparers sign up for the refresher course, test and additional CE?  Is a listing in the database enough?  Apparently, the IRS will have a public awareness campaign on all of this. Will the public understand the differences among designations? Will this new voluntary program help improve compliance or will it only reach those who are already keeping up to date and operating such as to avoid penalties?

Reaction of Enrolled Practitioners (AICPA and NAEA)
  Initial reaction:

    1. Summary of the NAEA position was reporting in Accounting Today, 6/1/14, “NAEA ‘Troubled’ Over Certification Proposal,” by Stimpson. The NAEA also submitted testimony for the record for the April 8, 2014 Senate Finance Committee hearing on Protecting Taxpayers from Incompetent and Unethical Return Preparers. In this testimony, the NAEA stated: “In the interest of long run stability, NAEA believes taxpayers and the tax administration system are best protected by national standards for all paid return preparers and oversight of the entire community.”

    2. In a letter to the IRS dated 5/21/14, the AICPA stated: “As a practical matter, any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return preparers.  Finally, we are concerned that that the IRS is rapidly moving forward without widely disseminating the proposal or seeking public comments.” The AICPA also noted that the certification would create confusion in the marketplace. In addition, the AICPA noted that the IRS should move actively pursue the penalties it has authority to administer such as under Sections 6694 and 6695.

    3. On June 24, 2014, the AICPA sent a more comprehensive, 14-page letter from its top leadership to Commissioner Koskinen.  Per the AICPA: “We have repeatedly expressed to you and your colleagues that our members have very significant concerns regarding a voluntary certification program and urged the IRS to have a formal comment period to obtain and consider the public’s views prior to moving forward.” The AICPA laid out four key reasons why the IRS voluntary program should not be pursued.
                                                              i.      The IRS has no statutory authority to implement a voluntary registration program. It is not enough that there is no statute expressly prohibiting the program, there must be authority for it.

                                                            ii.      The program will be viewed as “an end-run” around the Loving decision where the court held the IRS has no authority to regulate all tax return preparers under 31 USC 330. The IRS notes that the IRS proposed program is voluntary rather than the mandatory one challenged in the Loving decision. “But in reality tax return preparers would face an overwhelming, compelled incentive to participate in the IRS’s credentialing program, meaning that the proposed program will be de facto mandatory. In the wake of Loving, that is impermissible.”

                                                          iii.      The IRS did not follow the Administrative Procedure Act (APA) in rolling out the new program. Per the AICPA, “because this program would be de facto mandatory, it is for practical purposes a binding rule that must be issued pursuant to notice and comment.” The AICPA also notes that approval of OMB is needed in order to gather personal information from preparers. “And because the proposed program is likely a “significant regulatory action,” the IRS will be required to comply with Executive Order 12,866” requiring a cost-benefit analysis.

                                                          iv.      The proposal “is arbitrary and capricious because it fails to address the problems presented by unethical tax return preparers who defraud their clients, runs counter to evidence presented to the IRS, and will create market confusion.”
AICPA Files Lawsuit Against IRS - On 7/15/14, the AICPA filed a lawsuit against the IRS in District Court in DC. The AICPA had sent letters to the IRS prior to the release of the voluntary registration system urging that they rethink the plan and get public input (see information above). When it was rolled out anyway, the AICPA filed the suit.  The AICPA press release announcing the suit states: "By implementing a purportedly “voluntary” program that is mandatory in effect, the rule is an end-run around Loving v. IRS, a federal court ruling which struck down the IRS’s earlier attempt to regulate tax return preparers. The IRS simply does not have the authority to proceed with the new rule. By doubling the number of categories of tax return preparers to eight, the rule will also confuse consumers. Worse yet, the new rule will do nothing to address the problem of unethical or fraudulent tax return preparers – which should be a top priority."

What do you think?  Will this system be worth the expense?  Will the IRS face the same issue it lost in the Loving decision (here, de facto regulation of all return preparers)?  What does the public think/want?

Saturday, July 19, 2014

Give it in writing

By "it" I mean tax advice given by tax practitioners to clients. That advice may pertain to a filing position, planning or an issue that arises in the context of an audit. The IRS/Treasury recently modified Circular 230 that provides rules governing those who practice before the IRS. One modification was to the rules on requirements for written advice (Section 10.37).

I've got a short article in the 7/17/14 AICPA Tax Insider on these changes and a reminder that CPAs (who are members of the AICPA) must also consider SSTS No. 7 on form and content of advice to taxpayers.  I offer several tips for practitioners.  Please take a look - whether you are a practitioner, client or other interested party.  Any suggestions for things to add to the tip list?














Sunday, July 13, 2014

Starbucks College Plan and Taxes

I'm intrigued by the recent announcement by Starbucks that they would provide tuition reimbursement for employees (working at least 20 hours per week) who are working on their undergraduate degree. There are a few rules, but it still seems to be a decent deal for the employees.  The courses must be taken online at Arizona State University. Freshman and sophomores get partial reimbursement and juniors and senior get full reimbursement. Apparently this is to encourage the students to complete their degree. And, of course, they need to be admitted to ASU.

The FAQs on the Starbucks website states that the student must also secure financing:


 "You will receive an automatic, upfront scholarship to cover part of your tuition costs. You never have to repay this scholarship. You will also submit a Free Application for Financial Aid (FAFSA), and may qualify for need-based financial aid through ASU, federal Pell Grants or other student aid. Your financial aid counselor will help you apply."

Another aspect that seems a bit confusing is FAQ 7:

"Each time you complete 21 credits, you are reimbursed for the full cost of the tuition and mandatory fees for those credits, as well as any other credits you earned that semester—provided you remain eligible for benefits, enrolled in classes and on track to graduation. Your reimbursements automatically appear in your paycheck— you don’t have to fill out additional forms or take extra steps to make it happen."

As Starbucks notes, college completion rates are quite low (under 50%) compared to how many students start college (about 70% of high school grads). Perhaps support from your employer will help.  But this will depend on the follow up Starbucks puts into this. For example, will shift scheduling consider when the employee has extra studying to do? Will they allow the student to log-on to the online courses at the workplace (free wifi!)?

What about the tax consequences? Among the numerous tax benefits for higher education is one for employer-provided educational assistance under IRC Section 127. The exclusion is a maximum of $5,250 per year and there must be a written plan (among a few other requirements).  (For a quick review of this, see page 64 of IRS Pub 970.)  It looks like that will cover about 10 units per year.  ASU has a nice tuition calculator on their website.

This won't help all students as some will likely prefer and do better in a face-to-face setting. But someone looking for some financial assistance with tuition and ok with all online, may seek out part-time work at Starbuck's.

Should there be a different tax break for this type of plan?  Or perhaps no tax break?  After all, if an employee gets $5,000 tuition paid for by their employer and it is subject to tax, that is still a better deal than having to come up with the entire $5,000 yourself.

What do you think?  How should the tax law fit into a plan for an employer to help an employee finish their undergrad degree?

Friday, July 11, 2014

Cash method for small businesses

From hearing video.

On July 10, 2014, the House Small Business Committee's Subcommittee on Economic Growth, Tax and Capital Access, held a hearing - Cash Accounting: A Simpler Method for Small Firms?  Congressman Tom Rice opened the hearing noting that he is a former tax attorney and CPA. The purpose of the hearing seems to be how use of the cash method for some businesses (such as small ones) can simplify tax compliance.  He did not mention Congressman Camp's proposal to deny use of the cash method for businesses with over $10 million of gross receipts (unless they are a sole proprietor or farming business) (see Camp's summary of the Tax Reform Act of 2014, page 87-88).

What did the subcommittee learn from the witnesses?
  • The cash method is simpler than accrual. It could be even simpler if reporting was based on more of a cash flow approach which would also allow for expensing of inventory, supplies and depreciable property (when paid in cash). Apparently non-depreciable property such as land would still be capitalized, so this proposal was not intended as also moving the tax system to more of a consumption tax. Basically, this could all be tracked via bank statements. The constructive receipt doctrine would be modified - report no income until received in cash, services or property in hand or in an account. This proposal, from Donald Williamson, Executive Director, of the Kogod Tax Center at American University in Washington, DC, would be for businesses with $10 million in gross receipts or less.
  • A CPA, testified on behalf of the South Carolina Farm Bureau and pointed out the importance of the cash method to farmers. The cash method "most accurately reflects the true financial picture of a farming operation." Volatility of profits was noted as an additional reason for allowing the cash method. The witness, Sarah Windham, noted that accrual accounting and a progressive system can cause a farmer to pay more in taxes over the long-term than would a different business with more even revenue over time.
  • Witness Terry Durkin, testifying on behalf of the National Association of Enrolled Agents, stated that requiring small businesses to use accrual accounting makes tax compliance more complex and restricts cash flow. Ms. Durkin suggested increasing 179 expensing to at least $250,000, not require small businesses to apply the Section 263A Unicap rules, allow use of the cash method even when a small business has inventory, allow expensing of leasehold improvements and start-up and organizational expenditures, and increase the $500 limit in the repair regulations. Ms. Durkin also quoted from President Bush's Advisory Panel on Federal Tax Reform report that allowing use of the cash method prevents small businesses from having to keep books just for tax purposes.
  • Witness representing the National Conference of CAP Practitioners reminded the subcommittee members that small businesses tend to think of their business operations in terms of cash in and cash out, with checkbooks and bank statements being the key records. The cash method also ties to how small business owners think about their personal tax returns.
It is not clear what the next step will be for the subcommittee.  They could certainly sponsor legislation to broaden use of the cash method today - even outside of tax reform. Today, a C corporation must use the accrual method if its average annual gross receipts over a three year period have ever exceeded $5 million unless they are a "qualified personal service corporation" (Section 448).  Other types of entities may use cash method even with inventory if their average annual gross receipts over the prior three year period are $1 million or less (Rev. Proc. 2001-10).  For some businesses outside of retail and manufacturing, might be able to continue to use cash method with average annual gross receipts over three years of $10 million or less, unless they are a C corporation with gross receipts over $5 million (Rev. Proc. 2002-28).

The prior paragraph highlights one simplification that would be helpful to many - standardize the rules for the size of gross receipts you need to be allowed to use the cash method.  I think $10 million, adjusted for inflation, is reasonable. That will allow most small businesses to use the easier cash method. Of course, they could use accrual if desired.  The Unicap exception should match the cash accounting rule.

The subcommittee seemed to steer clear of the big accounting method issue today that is raised by Congressman Camp's tax reform proposal (unless it came up in the questioning). Should a qualified personal service corporation with gross receipts over $5 million that today may use the cash method, lose that benefit once its gross receipts exceed $10 million?  Certainly, personal service businesses benefit from the cash method as most customers don't want to pay until well after the services are rendered. Thus, the service provider is disadvantaged having to report income and pay tax on income they have not yet received. But isn't this also true of other types of businesses, such as manufacturers?  Should all businesses be allowed to use a cash flow approach?  Probably not as that would allow for some tax planning by larger companies with the resources to do so.  Where to draw the line?

What do you think?

Sunday, July 6, 2014

Worker classification - Does Section 530 apply to the states?

IRS Publication 1976.
I'm pleased to offer a guest post today - from Dr. David Jenkins. He writes about a longstanding issue that Congress has let linger even though it is of growing importance. The broad issue is how to classify workers as either employees or independent contractors. The issue Dr. Jenkins addresses within this topic is "Section 530" that was part of the Revenue Act of 1978. Basically, Section 530 allows employers to misclassify workers if they meet a specified safe harbor. It also prohibits the IRS from issuing guidance on worker classification.  Section 530 adds some complexity, including how it applies to workers, state governments and outside of the employment tax arena.

Dr. Jenkins lays out an argument for Section 530 applying to states and also to the Affordable Care Act. Here is his summary of a longer paper (see link  to full paper at end).

Why Section 530 of the Revenue Act of 1978 Applies to the States

By David Randall Jenkins, Ph.D.*

Section 530 of the Revenue Act of 1978 may already apply to the states, the Affordable Care Act, and title 29 issues.  Don’t be surprised if state unemployment agencies and DOL are rabid in pursuing misclassification issues in your business or your clients’ businesses.  But don’t give up the section 530 issue when those agencies claim it is limited to subtitle C employment taxes.

The Department of Labor and the Internal Revenue Service entered into a Memorandum of Understanding (MOU) on September 19, 2011.  The next day, six states joined the MOU melee.  Now, a few years later, the tale of the tape is in. 

The Obama administration undertook a strategy to attack Section 530 of Revenue Act of 1978 by and through state unemployment agencies and a DOL attack which the executive branch ostensibly contends lies outside subtitle C.  The President’s section 530 animus can be traced back to his days in the senate, by and through failed legislation he proposed shortly before he occupied the White House.  The administration’s transparent goal is to reign in independent contractors to be covered as employees for Affordable Care Act purposes.

The Supreme Court’s Rowan decision may stand for the proposition Congress contextually qualified the subtitle C definition of employment and employee when it enacted section 530.  Because the independent contractor safe harbor provision is not part of the Internal Revenue Code, per se, it may also be held to contextually qualify similar definitions in U. S. Code provisions other than those contained in Title 26.  Moreover, longstanding dual federal-state taxing jurisprudence implicates contextually qualified subtitle C definitions extend to the states to ensure coterminous, uniform, and harmonious state enactments.  For these reasons, the federal employment tax safe haven already applies to the states.

It is interesting to note there are conflicts among the states in recognizing the safe harbor provision’s applicability to state employment acts.  For example, Indiana respects the coterminous, uniform, and harmonious requirement while Missouri does not.  However, H.R. 1642 has been passed by the Missouri house and is dawdling before the Missouri senate.  The provision will extend IRS section 530 determinations to matters before the Missouri employment agency.

It appears the Obama administration’s interference in the section 530 Congressional will to contextually qualify the unemployment tax definitional infrastructure implicates separated powers substantive due process.  The caldron is currently boiling.  Federal intervention looms on the horizon. 

My paper, “Why Section 530 of the Revenue Act of 1978 Applies to the States,” is available on my website at:  http://www.algorithm-llc.com/research-corner/ (scroll down near the bottom of that webpage).

 
*Dr. Jenkins has a Doctor of Philosophy in financial accounting and a Masters in Accounting with an emphasis in tax from the University of Arizona.  He has taught tax courses at both the graduate and undergraduate level.  He currently provides tax and business consulting services through his company, Algorithm LLC (algorithm-llc.com).
 
What do you think?