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?

State Governments to Regulate Unlicensed Tax Preparers

According to governmental regulators, tax return preparation problems are more likely to occur among small mom-and-pop tax return firms. In November 2013, The National Consumer Law Center, a consumer-advocacy group, reported on examples of unlicensed tax preparer problems and called for states to enact their own rules. The Internal Revenue Service’s attempt to regulate these unlicensed tax preparers was blocked by a law suit filed by a libertarian group opposing the federal regulations. (RTRP Rules Challenged) The Obama administration has appealed the ruling and a decision is expected in the near future. In addition, legislation has been introduced in Congress that would give the IRS the authority to impose regulations on unlicensed tax return preparers.

New York is now the fourth state to pass regulations governing unlicensed tax return preparers, joining the states of California, Oregon, and Maryland. New York will require independent preparers to pass a competency test and take continuing education classes before being allowed to prepare income tax returns for the public.

Among the new rules, New York preparers cannot charge “an unconscionable fee” and must adhere to “best practices” according to the New York Department of Taxation and Finance site. The state’s new rules became effective December 11, 2013 and carry possible criminal penalties.

New York taxpayers will eventually be able to look up tax preparers on the department’s web site to see if they are complying with the rules. A spokesperson for the department indicates that they will be investigating complaints, assessing penalties and seeking criminal prosecution.

What do you think? Should the states or the federal government be the authority to regulate unlicensed tax preparers? 

SEC Releases Proposed Rules on Crowdfunding for Security Offerings

The Jumpstart Our Business Startups Act (the JOBS Act) was signed into law in April 2012, and it created a new Section 4(6) of the Securities Act of 1933. This new section exempts crowdfunding security offerings from Securities Exchange Act of 1934 (the Exchange Act) registration and its periodic reporting requirements. The JOBS Act directed the SEC to adopt rules to implement various provisions of the crowdfunding security exemption.

On October 23, 2013, the SEC voted unanimously to release its proposed rules for the crowdfunding security exemption of the JOBS Act (Proposed Rulemaking Release No. 33-9470). The proposed rules appeared in the Federal Register on November 5, 2013, and the comment period runs through February 3, 2014.

Certified public accountants may be interested in these proposed rules if they have clients who desire to sell securities to investors through crowdfunding. In addition, some clients may be interested in purchasing securities that are offered by companies via crowdfunding.

Since the proposed rules are over 500 pages long, today I will only provide background information regarding the crowdfunding securities exemption and mention what entities do not qualify for the exemption and what limitations are placed on investors under the JOBS Act and the proposed rules.

Background

Crowdfunding is a method to raise money using the Internet and serves as an alternative source of capital to support a wide range of ideas and ventures, including charities, civic projects, creative projects, disaster relief, inventions development, and scientific research. When individuals or entities raise funds through crowdfunding, they typically seek small individual contributions from a large number of people. The crowdfunding campaign generally has a targeted amount to be raised and an identified use for those funds. Individuals interested in the campaign may share information about the endeavor with each other and use the information to decide whether or not to fund the campaign.

Crowdfunding has been used to fund, for example, artistic endeavors, such as films and music recordings, where contributions or donations are rewarded with a token of value related to the project. For example, a person contributing to a film's production budget is rewarded with tickets to view the film and is identified in the film's credits. A number of entities operate websites that facilitate crowdfunding, with some websites specializing in certain industries, such as music and the arts. Some of the more popular crowdfunding sites include Kickstarter, Indiegogo, Crowdfunder, RocketHub, Crowdrise, and appbackr.

The idea behind the crowdfunding security exemption in the JOBS Act is to allow private companies to raise relatively small amounts of capital from a large number of investors without having to register the securities issued with the SEC or under state blue sky laws. The proposal would let businesses use the Internet, mobile technology, and social media to raise up to $1 million a year from investors via crowdfunding. Under the JOBS Act, the SEC is required to adjust the $1 million dollar amount every five years to reflect changes in the Consumer Price Index.

Under the proposed rules, the crowdfunding security exemption would not be available to any of the following:

• Foreign issuers
• Issuers already subject to the periodic reporting requirements of the Exchange Act
• Investment companies
• Issuers not having a specific business plan or having indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies
• Issuers that have sold securities in reliance of the crowdfunding exemption during the previous two years but have not filed with the SEC and have not provided to investors the annual reports required by the crowdfunding regulation
• Issuers that are otherwise disqualified because they are associated with felons or other “bad actors”

Limitations for Investors

The original petition to create a crowdfunding securities exemption was submitted to the SEC in 2010 prior to the JOBS Act. Under the terms outlined in the petition, investors would have been allowed the opportunity to help entrepreneurs raise capital by creating an exemption from the federal filing requirements as long as the investors did not invest more than $100 per security offering. Although this petition did not succeed, it did spark an interest in the subject that was realized in the JOBS Act.

Under the JOBS Act and the proposed rules, individual investors who wish to invest in crowdfunded investments would be permitted to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.

Investors with annual income or net worth that is more than $100,000 would be allowed to invest up to 10% of their annual income or net worth, whichever is greater but with an annual cap of $100,000.

Investors would not be able to resell the securities for one year.

Investors have an unconditional right to cancel an investment commitment within 48 hours after making it. However, a cancellation during the final 48 hours of the crowdfunded offering is only permitted if there is a material change to the offering terms or to other information provided by the issuer with respect to the offering.

The annual income and net worth limitations have made the maximum allowable investments under the JOBS Act much higher than the cap of $100 per offering that was in the original petition. Perhaps Congress equates success with converting a simple idea to something much more complex? The increase in the investment amount has substantially increased the possible risk to investors. Given that the mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation, this might explain the length of the proposed rules.

In my next blog, we will look at the use of intermediaries and the reporting and disclosure requirements associated with securities offered through crowdfunding.

Valuing and Accounting for In-kind Gifts

With the end of the year rapidly approaching and the holiday season close at hand, you may be thinking about how to get rid of clothes you haven’t worn in several years or that extra piece of furniture you no longer need. Your first thought is probably to give it to a charitable organization.

Have you ever wondered how a nonprofit organization accounts for noncash assets or in-kind gifts? Or maybe you are the accountant for a charity; trying to be sure you have properly accounted for and reported the in-kind gifts your organization received.

Nonprofit organizations receive varied donations from the public, including donations of cash and noncash assets. The accounting recognition and measurement requirements related to noncash contributions are generally the same as those for cash contributions. That is, they are measured at fair value and recognized as contributions when received by the nonprofit organization. There are however, accounting issues specific to certain types of noncash contributions including in-kind gifts. I will try to answer some questions about defining, recognizing, tracking, and finding help for valuing in-kind gifts.

What are in-kind gifts?

Donations such as thrift-store inventory, contributed advertising; and marketing media; donated items sold for fund-raising purposes; gifts of long-lived assets; and vehicles received in connection with vehicle donation programs are examples of in-kind gifts. In-kind gifts include contributions of tangible and intangible personal property. Tangible in-kind gifts include contributions of items such as clothing, furniture, equipment, inventory, pharmaceuticals, and supplies. Intangible in-kind gifts include contributions of items such as advertising, other services that aren’t considered personal services, patents, royalties, and copyrights.

When is an in-kind gift NOT an in-kind gift?

Even if the organization has decided to accept gifts-in kind, it may not be the recipient of a contribution. Sometimes, donated materials or supplies are passed from one organization to another at the request of the donor. If a donor doesn’t give the nonprofit organization the discretion to choose who will get the donated items, the nonprofit organization serves only as an agent, and the donated materials aren’t reported as contributions revenue when received. Likewise, when the nonprofit organization distributes the donated materials or supplies to the ultimate beneficiary, the transfer isn’t reported as a contribution made.

Do in-kind gifts have to be tracked?

Although it can be challenging to track and value in-kind gifts, the difficulty in doing so isn’t an acceptable reason for not recognizing them. FASB ASC 958-605-30-11 states that in-kind gifts that can be used or sold should be measured at fair value. Thus, it isn’t appropriate to state in the notes to the financial statements that the value of noncash contributions isn’t reflected in the financial statements because it is impracticable (or difficult) to estimate the value. It also isn’t appropriate to state that in-kind gifts aren’t recognized because there is no objective means of valuing them. A good faith attempt to determine value results in better information in financial statements about an organization’s level of contributions and programs than no value at all.

Where can I find help valuing in-kind gifts?

Locating resources to assist organizations in valuing in-kind gifts, other than property, isn’t always easy. Authoritative literature provides only broad, general guidance, and many organizations struggle to find useful guidelines to help value donated assets. Four resources providing guidance on valuing various types of in-kind-gifts are as follows:

·       Online prices.

·       Salvation Army’s Donation Valuation Guide.

·       TurboTax® Its Deductible® Software or Book Edition

·       IRS Publication 561, Determining the Value of Donated Property.

View related Checkpoint Learning online CPE courses and webinars

Health Care Reform Raises Rates and Reduces Exemptions

Effective for 2013, new rules have increased taxes or reduced exemptions on higher earning taxpayers, making effective year-end tax planning even more important.

Under the Affordable Care Act there is a higher payroll tax and surtax on unearned income of higher-income individuals. Under the American Taxpayer Relief Act of 2012 higher tax rates apply to ordinary income, capital gains and dividends, while at the same time limitations are imposed on the use of the personal exemption and itemized deductions.

For tax years beginning after Dec. 31, 2012, the following new rules apply:

• Increased payroll tax.  A new 0.9% hospital insurance tax (FICA payroll tax) applies to wages received in excess of $250,000 for joint returns; $125,000 for married filing separate; and $200,000 for all other taxpayers. The additional 0.9% tax also applies to self-employment income that meets or exceeds the above thresholds.
• Surtax on unearned income. An unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over $250,000 for a joint return or surviving spouse, $125,000 for married filing separate, and $200,000 for all others.
• Higher individual income tax rates. The income tax rates for most individuals stay the same as in 2012. However, a new 39.6% rate applies for 2013 income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately.
• Increased capital gain and dividend tax rates. The top 2013 tax rate for capital gains and dividends rises to 20% for taxpayers with incomes exceeding $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately.
• Personal exemption phase out. There is a personal exemption phase out  for 2013 with a beginning threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. Under the phase out, the total amount of exemptions that can be claimed by a taxpayer is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the above threshold.
• Limited itemized deductions for high earners. There is a limit on itemized deductions for 2013 for earners with a threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. Thus, the itemized deductions of taxpayers subject to this limitation will be reduced by 3% of the amount by which their adjusted gross income exceeds the threshold amount. The reduction will not exceed 80% of otherwise allowable itemized deductions..

Year-end tax planning may be especially productive this year because timely action by the taxpayer could secure significant tax breaks.

What do you think?

View related Checkpoint Learning online CPE courses and webinars