Private Tax Collection: Will Congress Ever Learn?

The use of private collection agencies to collect delinquent taxes has been tried by the federal government several times. Up to this point, all of the attempts have been failures. So why does Senator Charles E. Schumer (D-NY) want to use them again? Could he be politically motivated?

Senator Schumer has had a provision inserted into the tax extenders bill that will require the IRS to contract with four private collection agencies to collect delinquent income taxes. Did I mention that two of those agencies are located in Senator Schumer’s congressional district?

As I mentioned, we’ve been down this path before. The first attempt to collect delinquent taxes by someone other than the IRS was in 1872 when Congress authorized contracts between private citizens and the U.S. Treasury Department to collect delinquent taxes. The collectors were entitled to retain 50% of the amount they collected. The process lost money and generated so many complaints that it resulted in the resignation of William Adams Richardson, Secretary of the Treasury.

Two other uses of private collection agencies were made in 1996 —1997 and 2006 — 2009. Both lost money and resulted in numerous consumer complaints. In one instance, private tax collection agencies collected approximately $98 million in delinquent taxes but it cost the Treasury over $110 million to administer the program. The Treasury Department also estimated that one of the programs would raise more than $1 billion in revenue, however the program ended up losing money.

Based on past experiences with private tax collectors you’d think that Congress would have learned its lesson. Private tax collection services don’t work. In addition to being money-losing operations there are other reasons not to hire private debt collectors.

Private debt collectors—

• have little incentive to keep taxpayer data confidential,
• are often heavy handed in dealing with taxpayers,
• are not inclined to offer payment options,
• usually cost more than the taxes they collect, and
• have no incentive to help the taxpayer correct simple errors.

My Solution

I have a better solution that doesn’t require the services of a private debt collector. Why not just collect the $3.3 billion in back taxes owed by current and retired employees of the federal government? (http://money.cnn.com/2014/05/23/pf/taxes/federal-workers-delinquent-taxes/) After all, the IRS knows where they work, so why not set up an affordable payment plan and deduct it from their paychecks each pay period?

What do you think?

AICPA Expresses Strong Concern over IRS Program

The Internal Revenue Service (IRS) just couldn’t wait for Congress to pass legislation giving them the authority to regulate unregistered paid tax return preparers.  So, on June 26, 2014 the IRS announced a “voluntary” Annual Filing Season Program (AFSP) outlining the new program that focuses on continuing education and filing season readiness for unregistered paid tax return preparers.

The AFSP program will allow unenrolled return preparers to obtain a record of completion when they voluntarily complete a required amount of continuing professional education, including courses in basic tax filing issues and updates, ethics, as well as other federal tax law matters.

According to IRS Commissioner John Koskinen, “This voluntary program will be a step to help protect taxpayers during the 2015 filing season.” However, not everyone agrees with the commissioner.  In fact, the AICPA calls the program unlawful and improper.

The following are excerpts from the AICPA’s letter to IRS Commissioner Koskinen explaining the basis for their concern:

I.                 The IRS must identify a statutory basis for any regulatory approach it creates.

·       No statutory authority, including 26 U.S.C. § 7803, authorizes the proposed program.

·       If the IRS cannot identify a clear, specific statutory basis for its action, then under the Administrative Procedures Act (APA) it may not act.

II.              A purportedly “voluntary” program would be an end-run around Loving vs. IRS.

·       The proposed program would also undermine the legal rationale given by the court in striking down the tax return preparer regulations.

·       The “voluntary” program would undermine the important concerns underlying Loving.

III.            The IRS must comply with procedural requirements.

·       The IRS must comply with the APA’s Notice and Comment procedures.

·       The IRS must comply with the Paperwork Reduction Act and with Executive Order 12,866 (Regulatory Planning and Review).

IV.             The proposal is arbitrary and capricious.

·       A voluntary program would not address the problem of unethical or fraudulent tax return preparers.

·       A voluntary program could give rise to confusion among consumers.

·       The IRS has not sufficiently considered alternative methods of ensuring that tax return preparers are qualified and competent.

For a complete copy of the AICPA’s 14 page letter go to the following website: http://www.aicpa.org/Advocacy/Tax/DownloadableDocuments/AICPA-Letter-to-Comm-Koskinen-June-24-2014.pdf .

I think the IRS is trying to do the right thing, but I believe that they are going about it in the wrong way. I agree with the AICPA that any approach the IRS takes must be supported by a strong legal basis and sound policy. To acquire that legal basis will require congressional intervention; however, Congress probably won’t act until after the next elections.

What do you think?

Corrupted Communication

Did you know that our communication skills are being corrupted? No, it’s not some foreign government; it’s our teenage children and our education system.

Verbal Communications

We are slowly losing our ability to communicate without the assistance of an electronic device. I was out to dinner recently and noticed two young couples sitting at a table near me with their heads bowed. At first I thought they were saying grace until I noticed that each one of them was using cell phones. There was only limited verbal conversation during the meal.

Or maybe you have seen the commercial where the grandmother gives her grandson a graduation gift? He is standing no more than a couple of feet directly in front of her and he texts her “Thank You” rather than simply saying thank you verbally.

Verbal communication is not the only communication being impacted by the technology revolution.

Written Communications

Written communications are also being attacked. Our society is quickly losing its ability to communicate via cursive writing. For the most part an elementary student today probably can’t write in cursive, much less read it. However, sit one in front of a computer and he is a whiz. More than 40 states no longer require public schools to teach cursive reading and writing but they do emphasize computer skills since this is how tests are administered.

This was brought to light in the murder trial of George Zimmerman. When witness Rachel Jeantel was asked to read a letter in court, she responded, “I don’t read cursive.” She was unable to read the letter because she had never been taught cursive reading and writing.

Texting is replacing the spoken word, and abbreviations are replacing the written word. When my granddaughter sends me a text, I usually have to ask her to decipher the abbreviations sprinkled among the English words. I know a few abbreviations like OMG and LOL, but there are literally hundreds of others.

Before you answer my question at the end of the blog, here are some things you might want to consider:

•         A recent study showed that many people with cell phones prefer texting over a phone call. This creates a communication divide between the talkers and the texters.
•         Americans ages 18 to 29 receive an average of 88 text messages per day, compared to only 17 phone calls.
•         The number of text messages sent each month has sky rocketed from 14 billion in 2000 to 188 billion in 2010, according to a Pew Institute survey.
•         The Financial Industry Regulatory Authority (FINRA), for the most part, requires a cursive signature on financial documents and will not accept printed signatures.
•         Cursive writing is usually faster and more efficient than printed writing.
•         The need to teach both print and cursive writing has been questioned by the teaching community.
•         Very few adults use cursive as their day-to-day writing.
•         Most of our communication is done by keyboard or printing.
•         Experts say that cursive handwriting training for young children may help develop hand-eye coordination, refine motor skills, and other brain memory functions.

Is cursive reading and writing needed in today’s world where smart phones, iPads, and laptops rule the communications world?  Are your communication skills being corrupted? What do you think?

Bitcoin: The New Electronic Money?

Direct TV and Dish TV have just recently announced that they will begin accepting Bitcoins as payment for their TV subscriptions. So just exactly what is a Bitcoin?

Bitcoin is a relatively new electronic payments system described as a decentralized peer-to-peer system. Unlike other electronic payment systems, such as PayPal, it also has its own currency — a virtual denomination also known as Bitcoins. Bitcoins are known by various names including virtual currency, electronic money, or crypto-currency.

The Bitcoin system is driven by a concept called block chain, a public record of all transactions carried out within the Bitcoin network. The transactions are recorded in a public record that is collectively maintained by everyone who uses the currency.

Bitcoins are stored in a digital wallet when they are received. The wallet can be cloud-based or on a local system to maximize security.

For a more detailed discussion of Bitcoin go to: https://bitcoin.org/en/faq

Who created Bitcoin?  A person calling himself Satoshi Nakamoto, published the rules to the Bitcoin portal in 2008. The network was launched in 2009; however, no one really knows the true identity of Nakamoto.

How to create (earn) Bitcoins. According to Wikipedia, “Bitcoins are created as a reward for payment processing work in which users who offer their computing power, verify and record payments into a public ledger. Called mining, individuals engage in the activity in exchange for transaction fees and newly minted Bitcoins.

Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. The ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady.”

Bitcoins can also be obtained in exchange for products, services, or other currencies.

Pros and Cons.

Pros

•         No charge when making payments in Bitcoins, either locally or internationally.
•         Eliminates credit card fees for processing transactions.
•         Difficult for anyone to make fraudulent payments using bitcoins.
•         Has its own currency and is not controlled by any central authority.

Cons

•         Has a volatile valuation. The price of a single Bitcoin has ranged from$13 to $1,000.
•         Exchanges are a tempting target for hackers.
•         Can be lost, or destroyed.
•         Lacks consumer protection.

Audit considerations. From an audit perspective, Bitcoins are basically the same as any other foreign currency. However, teams auditing clients with Bitcoins should include an IT specialist to verify the Bitcoin balances. Verification should include traditional confirmation letters to third-party wallet holders and verifying balances from the block chain.

Once the amount of Bitcoins at the balance sheet date has been determined, the auditor needs to verify that the amount is properly translated into the company’s reporting currency in accordance with FASB ASC-830-20-25. The currency translation from Bitcoins to dollars is accounted for through an adjusting entry that includes the gains and losses reflecting changes in the exchange rate between Bitcoins and dollars. The same translation calculation must be made for receivables and payables that the company expects to settle in bitcoins.

The future.  No one knows exactly what will come of the Bitcoin system but it is probably not going to disappear any time soon. However, there is no doubt that it will have a far-reaching impact on how money is dealt with online.

What do you think?

Regulating Tax Return Preparers: The Saga Continues

The IRS has opted not to petition the Supreme Court appealing various rulings striking down its efforts to require mandatory testing and continuing professional education for unlicensed tax preparers (Loving vs IRS). There is still a strong sentiment, however, for mandatory testing and continuing education as noted in the hearing describe below.

The Senate Finance Committee recently held a hearing on how to deal with incompetent and unethical tax return preparers. The committee heard testimony from numerous interested parties, each expressing their recommended solution to the problem. Following is a synopsis of the various recommendations:

• The IRS offered a volunteer form of certification.

• The Obama Administration’s 2015 budget includes a proposal to explicitly authorize the IRS to regulate all paid tax preparers.

• Loving vs IRS was successful in preventing the IRS from regulating paid tax preparers by requiring them to pass a competency test and take CPE.

• National Taxpayer Advocate Nina Olson supports requiring competency exams for tax preparers.

• Committee Chairman, Ron Wyden- (D-Ore,) touted his state’s tax preparer licensing standards.

• Janis Sallsbury, Chair of the Oregon Board of Tax Practitioners recommended that “Congress emulate Oregon’s regulation of tax return preparers and provide the IRS with the authority to require individuals to demonstrate minimum competency in tax return preparation, either by passage of a state board examination or by an IRS examination and to impose continuing education requirements after passing the examination.”

• Chi Chi Wu, a staff attorney for the National Consumer Law Center stated that the NCLC was in favor of the state licensing approach and they have developed a model act that states could use to implement such laws.

• Dan Alban, Attorney for the Institute for Justice who successfully sued the IRS in the Loving vs. IRS case, disagreed with the need to give the IRS the authority to re-impose the tax preparer licensing requirements. He recommended a voluntary certification program that would allow both consumers and preparers to decide if they value certification.

• John Barrick, an associate professor of accounting at Brigham Young University and a CPA, testified that return preparer regulation should be allowed if the costs do not outweigh the benefits.

The majority of the participants supported some form of mandatory competency testing for unlicensed tax preparers. It is interesting to note that Alban and the IRS both recommended voluntary certification. The majority of participants, however, supported mandatory testing for unlicensed tax preparers. 

Should all unlicensed paid tax return preparers be required to pass a competency exam and to take CPE, or are there other ways to ensure that preparers are competent to practice?

What do you think?

How We Learn

Gerald Celente, author of the 1997 book Trends 2000, predicted that interactive, online leaning would revolutionize education and training. He also predicted that, “in the 21^st century, online learning would constitute 50% of all learning, education, and training.” He was right on both accounts.

The standard for training accountants has long been in the form of an information transfer with an instructor standing in front of an audience lecturing on a specific topic. However the traditional lecture is not the only way to learn.

In certain ways, online learning can be better than classroom learning because participants can:

•          Learn during their peak learning times.
•          Learn at their own speed.
•          Focus on specific content areas.
•          Test themselves daily.

Online learning can also be better for businesses than traditional training methods because technology can:

• Drive down costs.
• Deliver information more quickly.

Studies show that how an individual learns is usually determined by the method of learning they experienced in school and growing up, which to a certain extent, is determined by when they were born and how much access to technology they had.

There are three groups of learners most affected by the advances in technology:

                                            Born between

          Baby Boomers            1946 and 1964

          Generation X               1965 and 1980

          Millennials (Gen Y)       1980 and 2000

I am part of the Baby Boomer generation, and I learned primarily through lecture, reading, taking notes, and class participation. My learning was not impacted as significantly by technology since I grew up before computers and the Internet were an integral part of everyday life. As you might expect, I prefer live instructor-led training.

Jonathan Krafchick pointed out in an Accounting Today article (The Way We Learn Now), that younger generations “have all experienced shifts in technology in very different ways and the reaction of each generation has been just as different... Gen Xers adopted technology as it matured and tend to view it as an optional and preferred convenience, whereas, Millennials view technology as a standard and, good or bad, the primary means of connection.”  

When online learning is combined with more interactive instructor-led training, it will easily outperform the one-size-fits-all, traditional delivery method.

Kraftcheck summed it up well by recommending that, “When teaching just one generation, simply speak to your audience the way they tend to understand: lecture for Boomers, case studies for an audience of Xers, and interactive discussion with the Gen Ys.”

As predicted, the Internet has changed the preferred method of learning from the traditional lecture method to online learning. For course designers, the challenge for meeting professionals’ training needs will be to design programs that can appeal to all the different learning styles and methods of all adult learners.

What do you think?

Regulating Tax Return Preparers

Do you realize that hairdressers are more heavily regulated than a mom and pop tax shop who offers to prepare your tax return? There is even reported to be a Laundromat in the Bronx offering tax prep services.

In most states, anyone can set up shop and offer tax preparation services without needing to demonstrate any level of competency.  Currently, only three states (California, Maryland, and Oregon) have laws addressing the necessary qualifications to prepare federal or state income tax returns.

Shouldn’t you look for a well-qualified individual to prepare your taxes? After all, you are legally responsible for the information in your tax return whether you pay someone else to prepare it or not.

The Internal Revenue Service tried to regulate unregistered tax preparers but has been temporarily stopped as the result of U.S. District Judge James E. Boasberg’s ruling in favor of three independent tax preparers. The judge found the IRS had exceeded its statutory authority in imposing requirements for mandatory testing and continuing education for tax return preparers. Congress is considering giving the IRS that authority.

Not everyone is waiting on the IRS.  The state of New York, Department of Taxation and Finance, proposed amendments to its Personal Income Tax Regulations and Procedural Regulations to regulate New York tax return preparers. The proposed rules would add requirements imposing minimum standards on who can become a tax return preparer, instituting a continuing education requirement, and requiring a competency exam, all similar to the IRS‘s Registered Tax Return Preparer  (RTRP) program.

To further muddy the water, the new Commissioner of the IRS, John Koskinen, has come out in favor of a volunteer tax preparer certification. This is basically the RTRP approach only on a volunteer basis rather than a mandatory requirement.

Three approaches to regulating tax preparers have been offered:

1.     Wait until Congress gives the IRS authority to regulate tax preparers.
2.     Implement tax preparer regulations by state governments.
3.     Adopt a volunteer certification program.

Only time will tell which of these options will win. Which one do you think should be used?