The year very
literally began with a prime example of this irresponsibility. In the early hours of January 1st the fools
in Washington finally passed the “American Taxpayer Relief Act of 2012”, which made
permanent the various “Bush tax cuts” and the dreaded Alternative Minimum Tax
(AMT) “patch”, temporarily
extended the other “extenders”, the American Opportunity Credit for qualified
tuition and other post-secondary education expenses and the enhanced provisions
of the Child Tax Credit and the Earned Income Credit, but not the expired 2%
reduction of the employee’s share of Social Security Tax withholding and
corresponding reduction in the Self-Employment Tax, brought
back the PEP and Pease AGI-based reduction of personal exemptions and itemized
deductions, and created
a new top “regular” and capital gain tax rate.
Perhaps tied
for the top tax story of the year (with the death of DOMA, which I will discuss
later) is the David-versus-Goliath victory of three independent tax return
preparers who felt the cost of the IRS mandatory RTRP tax preparer regulation
regime, especially the annual CPE requirement, was “prohibitive” for their
small practices and joined with the Institute for Justice to challenge the
licensing program in federal court in Loving v IRS.
On January 18th
Judge James Boasberg of the U.S. District Court for the District of Columbia pleasantly
surprised all of us in the tax preparation industry by deciding for the
plaintiffs in Loving v IRS and shutting down the mandatory regulation regime. The Court ruled that the IRS did not have the
legal authority to regulate tax return preparers. The Service could continue to require tax
preparers to register and receive a PTIN (Preparer Tax Identification Number)
but it could no longer require preparers to complete a competency test or maintain
CPE to be able to prepare tax returns for compensation. The IRS requested a stay of the injunction
pending appeal, but the Court just said no.
I did not
find the CPE requirement “prohibitive” (extensive CPE in taxation is truly a
necessary business expense for all serious tax preparers), but agreed with the
IFJ that the IRS did not have the authority to regulate all paid preparers in
this way. FYI, I was referenced in a
footnote to the brief opposing the IRS request for a stay of the injunction submitted
by the Institute for Justice.
The IRS
appealed the decision, and on September 24th a three-judge panel of
the U.S. Court of Appeals for the District of Columbia heard oral arguments
from Dan Alban of the Institute for Justice and the IRS. After the hearing Dan Alban told me that the
judges “seemed rather skeptical of the
IRS’s arguments and generally receptive to our position. They seemed focused on the meaning of the
statutory language, and also noted the significance of the long period of time
(130 years) that it had taken for the IRS to suddenly ‘find’ this new power in
the statute (31 U.S.C. 330).”
As of this
writing a decision on the appeal has not been issued, but just about everyone
in the industry, and the press, agrees that the IRS did poorly in presenting
its case and believes that the Court will deny the appeal and uphold the
original decision, putting the final nail in the coffin of the mandatory RTRP
program.
The Court
said the IRS could continue to offer the RTRP credential on a voluntary basis,
and I have suggested, in a TAXPRO TODAY editorial and a letter to the new IRS
Commissioner, that the Service do just that with a two-tiered program that
includes the existing Enrolled Agent designation, with EA replaced by a better
name.
As a result
of the last minute legislation the 2013 tax filing season got off to a late
start for many tax preparers. The IRS
announced that it would not be able to begin processing either paper or
electronically filed 2012 tax returns until January 30th. And returns with certain forms and schedules,
including those involving depreciation and amortization, education and energy
credits, and passive losses, would not be able to be processed until late
February or early March.
There were
additional delays during the season for some returns claiming an education
credit on Form 8863. Tax refunds for
about 600,000 taxpayers who used fast-food tax preparation chains, like Henry
and Richard, to prepare their returns were delayed due to a “software glitch”. Just one more reason not to use fast-food
chains to prepare your returns.
But,
because for me the tax filing season does not officially begin until February 1st,
and I do not, and never will, use flawed and expensive tax preparation
software, I experienced no delays in starting the tax season on time.
This was
the first tax season in my new home in a new state. I lost only a handful of clients because of
the move, which is ok as I am trying to “thin the herd” anyway.
2013 was
the second year that brokerage houses and mutual fund companies had to report
cost basis information for certain investment sales on Form 1099-B, and
preparers and taxpayers had to enter investment sale transactions on as many as
three separate Form 8949s, carrying over the totals to Schedule D. While there was inconsistent treatment of
2011 Form 1099-B reporting among the various houses, resulting in extra work,
things were better, and reporting was more consistent and easier to follow, on
2012 statements.
The only
new wrinkle to 2012 returns was the added “due diligence” requirements for tax
professionals who prepare returns claiming the Earned Income Credit. I had announced that I would not prepare any
2012 returns that included a claim for the EIC - but I ended up breaking this
promise. All but one of the very, very
few 2012 returns with EIC that I did prepare involved clients (all long-time)
without children. The one that did involve
a dependent child was a single mother whose returns I have been preparing since
before the child was born. How could I
tell her I would not be doing her return this year? The child involved was in college, so my “due
diligence” consisted of looking at the Form 1098-T.
2013 marked
the 100th birthday of the federal income tax. February 3, 1913 was the 100th anniversary of
the ratification of the 16th Amendment — the one saying "The Congress shall have power to lay and
collect taxes on incomes, from whatever source derived, without apportionment
among the several states, and without regard to any census or enumeration." And Congress passed the Revenue Act of 1913
on October 3, 1913, which created the first permanent federal income tax.
The IRS was
plagued with several scandals in 2013.
It started with a seemingly endless string of IRS training and
motivational videos based on TV shows (Star Trek, Gilligan’s Island, The Apprentice,
Mad Men) that were clearly a waste of government funds.
It was also
discovered that the IRS had targeted political groups applying for tax-exempt
status for closer scrutiny based on their names or political themes. The FBI began
investigating the IRS's actions as part of a criminal probe ordered by the US
Attorney General, which led to both political and public condemnation of the
agency and triggered further investigations.
Initial
reports had described the targeting as almost exclusively aimed at conservative
groups with terms such as "Tea Party" in their names, but further
investigation revealed that certain terms and themes in the applications of
liberal-leaning groups and the Occupy movement had also triggered additional
scrutiny.
As a result
of the scandals Steven T. Miller, Acting IRS Commissioner resigned and Joseph
H. Grant, commissioner of the Tax Exempt and Government Entities Division, and
Lois Lerner, the Internal Revenue Service official at the center of the
scandal, elected early retirement.
In August
BO nominated John Koskinen, former chairman and CEO of Freddie Mac, as the next
Commissioner of the Internal Revenue Service and he was just recently approved
by the Senate. My only concern is that
he is “a 74-year-old multimillionaire”. I would have liked a younger, and less
wealthy, person in the job.
Democrat Max
Baucus and Republican Dave Camp, chairmen of the Senate and House tax writing
committees, called for serious and substantial tax reform legislation in 2013 and
spent the summer touring the country to promote the need for tax reform. However nothing was accomplished. The US Tax Code remains a mucking fess. Camp did tell reporters earlier this month that
work on reform legislation would continue in 2014, but I am, to say the least,
skeptical that anything of substance will be accomplished next year.
FYI,
Baucus
has announced he's not running for re-election in 2014, and was just
nominated by BO as Ambassador to China so he may be leaving Congress
sooner. While Camp has no
plans of leaving Congress any time soon, his chairmanship of the House
Ways and
Means Committee has a term limit, and he'll only hold the position
through
2014.
As
mentioned earlier, perhaps the top tax story of 2013 was the death of DOMA (the
1996 Defense of Marriage Act). On June
26th the US Supreme Court declared that the Defense of Marriage Act was
unconstitutional and that the federal government has no right to deny benefits
to same-sex individuals who have married in a state that has legalized same-sex
marriage.
Fellow tax
blogger Kelly Phillips Erb (aka TaxGirl) explained in her initial post on the
decision that “it wasn’t so much about
the individual rights of folks to marry but the rights of states to write their
own laws defining marriage”. The decision
did not say that same-sex marriages should be legal, or that same-sex couples
have a legal right to marry. It merely
said a same-sex couple that a state has legally joined together in matrimony
will be recognized as being married by the federal government.
In
response, the IRS ruled that a same-sex couple legally married in a state that
recognizes same-sex marriages will be treated as married for federal tax
purposes. The ruling applies regardless
of whether the couple lives in a state that recognizes same-sex marriage or one
that does not. The "state of
celebration" determines the federal tax treatment and not the state of
residence. Legally married same-sex
couples can move freely throughout the US, from state to state, and their
federal filing status will not change.
From a tax
standpoint, same-sex couples who were legally married in a state that
recognizes and permits same-sex marriages must file their federal income tax
return(s) as either Married Filing Jointly or Married Filing Separately from
now on. This is true regardless of their
state of residence. How the couple will
file their state income tax return(s) depends on the laws of their state of
residence. Legally married same-sex couples were given
the option to amend previously filed prior-year open federal returns (2010,
2011, and 2012) to file as married.
The theme
of American politics continues to be “clowns to the left of me, jokers to the
right”. Nothing of consequence was
accomplished during 2013. Congress passed
the fewest number of new laws in 66 years, only about 60. They did, however, manage to pass a bill “To specify the size of the precious-metal
blanks that will be used in the production of the National Baseball Hall of
Fame commemorative coins."
Thank God the Democrats and Republicans could come together to
accomplish that!
During 2013
the members of Congress from both parties did time and again prove themselves
to be self-absorbed idiots incapable of independent thought. However it was the Republican Party
leadership’s pandering to the fanatical Tea Party and religious right that literally
shut down the government for over two weeks in October.
As a result
of the shutdown the IRS announced that, once again, it will not be able to
begin processing 2013 tax returns until January 31, 2014, because it needs “time to get things right with our
programming, testing and systems validation”. Once again this delay will not affect me at
all.
The year
ended without an extension of the usual “extenders” that expired on December
31, 2013. These include –
·
the $250
above-the-line deduction for qualified expenses of K-12 educators,
·
the
above-the-line deduction for up to $2,000 or $4,000 of qualified tuition and
fees,
·
the
itemized deduction for mortgage insurance premiums,
·
the
option to claim an itemized deduction for state and local general sales taxes
instead of state and local income taxes,
·
the $500
lifetime maximum credit for
qualified energy efficient improvements to a taxpayer's principal residence,
·
the
ability to make a direct tax-free transfer from an IRA to a charity and apply
this as a Required Minimum Distribution, and
·
the
exclusion from income of the discharge of qualified principal residence debt.
Whether
or not these items will be on the 2014 Form 1040 will not be decided until 2014
(let’s hope early in the year and not December).
So there
you have it – the year 2013 in taxes.
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