While the IRS has significantly eased the rules governing the use and disclosure of client return information by tax return preparers (see accompanying article), at the same time it has unveiled a new plan to toughen overall regulation of the tax return preparer community.

Culminating the Tax Return Preparer Review begun last spring, the IRS has unveiled plans for new rules that will require registration by all paid preparers, impose new competency testing and continuing education requirements, and step up IRS enforcement of preparer standards. [IRS Return Preparer Review, Dec. 2009] According to a posting on the IRS’s web site, the current target date for an on-line registration system is September 1, 2010, with all preparers required to be registered by January 1, 2011. Competency testing will not begin until after registration is fully implemented.

Registration

Under current rules, tax return preparers are required to sign the returns they prepare and enter an identifying number, which may be either a Social Security number or a preparer identification number (PTIN) issued by the IRS. Under the new regime, the IRS will require all individuals who are required to sign a federal tax return as a paid tax return preparer to register and obtain a PTIN. The PTIN will be the exclusive number used to identify any tax return preparer submitting returns to the IRS. Return preparers will be required to renew their registration every three years and to pay a fee for registration. Tax return preparers also will be subject to a tax compliance check at the time of each renewal to ensure that they have filed their own returns and paid the taxes due.

Competency

The IRS will establish competency testing for tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents. There will be no “grandfathering” from the competency testing requirement based on past tax return preparation experience. Moreover, although the IRS is not currently proposing testing for attorneys, CPAs or enrolled agents, it plans to assess the quality of return preparation by those individuals to determine whether competency testing should be expanded in the future. According to the IRS web site, competency testing will not be required (at least initially) for licensed or registered public accountants in states where those individuals have the same rights and privileges as CPAs. » Read more: The New System of Tax Return Order by IRS

A new federal law may have a big impact on the state income tax bills of clients who are married to members of the Armed Services. Under the new law, these clients may be able to avoid paying income taxes in the state they are currently living in.

As a general rule, under most state laws, an individual who spends more than 180 to 183 days in a state is deemed to be a resident of that state. However, a member of the U.S. Armed Services (a “servicemember” in the language of the bill) does not automatically become a resident of the state where he or she is stationed.

Instead, the servicemember can remain a resident of his or her home state. This means the servicemember can continue to vote in the home state and be treated as a resident for other purposes.

Significantly, it also means that the servicemember’s military income is not subject to tax in the state where he or she is stationed. The Servicemembers Civil Relief Act specifically provides that compensation of a servicemember for military service shall not be deemed to be income for services performed or from sources within a tax jurisdiction of the United States if the servicemember is not a resident or domiciliary of the jurisdiction in which the servicemember is serving in compliance with military orders.

A new law that was enacted late last year extends similar relief to the spouses of servicemembers. The Military Spouses Civil Relief Act (P.L. 111-97) provides that a military spouse won’t be treated as having lost residence in one state or acquired residence in second state solely because he or she moves to the second state to accompany a servicemember spouse to a new duty station. Moreover, the law says that a military spouse’s earned income can’t be taxed by a state if the military spouse is living and working in the state solely to be with the servicemember spouse. Instead, the military spouse remains a resident of his or her original state for tax purposes. » Read more: Tax Relief for Militaries

There are numerous considerations in determining the type of entity to be used when starting a new business. The form or structure chosen will determine a number of the business’s features, such as the taxability of the business and its owners, control, legal liability, transferability, as well as countless other aspects. No form is perfect, and the decision usually comes down to weighing the advantages and disadvantages of each type of entity and then making an informed decision.

The five primary types of entity available for conducting a business include Sole Proprietorship, C corporation, S corporation, Partnership and Limited Liability Company (“LLC”). The following is a brief overview of each of these business structures:

Sole Proprietorship – A Sole Proprietorship is easily formed merely by opening a bank account. Some states or local authorities may also require some type of registration or license, depending on the nature of the business. As a result of the ease of formation, most legal and other professional fees associated with the creation of a new business can be avoided. Control of the business rests with the sole owner. Because of the structure, capitalization is limited to the assets and borrowing potential of the sole owner. The owner of the Sole Proprietorship has unlimited personal liability. In many instances, some of the risk can be mitigated by insurance. Since the results of operations are reported directly on the owner’s individual income tax return, there is only one level of taxation. Although payroll tax filings for the earnings of the owner are avoided, the results of operations are subject to self-employment tax. This form of business also has no continuity of existence beyond the life of the sole owner. Because of its ease of form and operation and limited flexibility, the Sole Proprietorship may be perfect for a new entity before it really takes off. At that time, it might be necessary to consider one of the other, more sophisticated forms for doing business discussed below. » Read more: Suitable Form of Your Business

Last year’s so-called “Great Recession” wreaked havoc on a number of economic fronts and its effects are still being felt today during tax time.

Here’s the situation, as reported by the WCF Courier and summarized here for your convenience: Last year, people had jobs and income but not all of them had sufficient taxes taken out of their paychecks. This year, some of those people don’t have jobs. The problem? They earned taxable income but now have no income to pay their back taxes.

That’s a difficult situation to be in. On the one hand, I understand the desire that these taxpayers had initially to avoid the constant pay-reducing reminder of income tax by delaying their tax payments. On the other hand, it is a bit like gambling in the sense that they are accepting the risk that they will have an income to pay the tax debt at a later time.

What’s the solution? Unless we reduce or eliminate the excessive taxation of American taxpayers, I don’t see an easy solution. And I’m not about to say “well, they should have…” because should-haves don’t solve the problem right now.

Their best option is to file their income tax and pay what they can, even if they can’t pay it all. As the article correctly points out, the penalty for not filing is greater than the penalty for filing and not paying. So it always “pays” to file your tax return, even if you can’t pay.

The next thing they should do immediately after filing? Contact a licensed tax attorney. It is my belief that tax attorneys are the one group of tax professionals best trained to assist you. I believe they’re more aggressive in representing you than a CPA or accountant would be. Tax attorneys aren’t afraid to look at different options which might help you.

Tax attorneys aggressively go to bat for taxpayers who are staring at the open hand of the “tax man” and wondering how they will fill it. We use 100% legal tax resolution strategies, tried and perfected over the years, to help people in difficult tax situations.

No tax case is hopeless, and of course the options will vary from case to case.

Don’t hestitate to give us a call if you want to discuss your case.

The Internal Revenue Service is a big organization full of people. Imperfect people. And, although they hold tax payers to a high standard, they themselves need to be held to an equally high standard of ethical responsibility when it comes to our taxes.

Recently, I came across this article from SFGate about an IRS tax officer who crossed the line. You can read the full article here but I’ll summarize it for you and give you some of my own thoughts:

Summary: “IRS Officer Indicted…”

Mary Claybrooks worked as a revenue officer at the Walnut Creek IRS office in California. In her role as a revenue officer, she would work with people who were behind on their taxes. So far, so good; that is what she is supposed to do. But here’s the problem: In advising them on how to get caught up in their taxes, she sent them to a specific mortgage refinancing company for which she was paid a “finder’s fee” or commission for the lead. Over a period of 6 years, from 2002 to 2008, she sent at least 2 people to the company (she was charged with 3 counts of acts affecting a personal financial interest. She earned at least $20,000 for the effort). » Read more: IRS Officer and a Conflict of Interet