Thursday, January 27, 2011

Preparing for a Preparer

       With April 15th just around the corner, everyone should be thinking about getting their documents together and getting ready to file.  As stated in our previous blogs, most individuals and businesses choose to hire a return preparer to complete their IRS filings.  Remember- just because you do not personally prepare your return does not mean you are not responsible for the information on it.  To diminish the possibility of errors and audits, taxpayers need to be mindful in selecting a return preparer.  Here are a few pointers from the IRS when selecting an individual or firm: 

      1.          Check the person’s qualifications.  Ask if the preparer is affiliated with a professional organization that provides its members continuing education classes and a code of ethics.  Membership in such an organization forces the individual to comply with certain rules and holds them to a higher standard than Joe Schmo, whose personal code of ethics may not measure up.
      2.         Check on the preparer’s history.  Check with the Better Business Bureau and state boards of accountancy or state bar associations to check licensure status and disciplinary filings.  If you are checking out an “enrolled agent,” you can look them up with help from the IRS Office of Professional Responsibility.
      3.         Find out about their service fees.  Avoid preparers who base their fee on the percentage of your tax refund.  Also be weary of individuals who claim they can obtain larger refunds than others.
      4.        Make sure the tax preparer is accessible.  You may need to contact the preparer after the return is filed in case an issue arises or you are audited.
      5.        Provide all records and receipts needed to prepare your return.  Most, if not all reputable preparers will request to see all receipts and documents and will ask questions in order to determine your income, eligibility for deductions, and tax liability.
      6.       Never sign a blank return.  Enough said.  Don’t do it.
      7.       Review the entire return before signing.  Your signature swears under penalty of perjury that you believe the information is accurate and correct.  So make sure you understand the information and ask questions if need be.
      8.       Make sure the preparer signs the form and includes their PTIN.  A paid preparer must include this information on your return.  Also make sure you receive a copy. 

Following these tips will ensure you find a return preparer you are comfortable with and confident in.  

Tuesday, January 18, 2011

Welcome to the Working World, Doc: Residents Experience the Fun of FICA

            Earlier this week, the Supreme Court unanimously decided that medical residents are not “students” and are instead “workers” for purposes of determining whether the institutions they work for should pay Social Security and Medicare taxes. 

            Mayo Foundation for Medical Education & Research v. United States focused on the Federal Insurance Contributions Act (FICA) exemption for students who work for the educational institutions in which they are enrolled.  In December of 2004, the U.S. Department of the Treasury declared that medical residents did not qualify for this exemption and should instead be treated as employees for FICA purposes due to the full-time nature of their job.  The Mayo Clinic, along with other institutions who employ medical residents, began paying their share of FICA taxes in 2005, but later separately sued the federal government for a refund.  They argued that medical residents are students because their employment is educational in nature.  The institutions won on the district court level but the decision eventually was overturned on appeal.

            Chief Justice John Roberts’ opinion declared that the Treasury Department did not err in concluding that medical residents who work long hours and resemble career employees in other ways are the types of employees that Congress planned to participate in the Social Security system.  Residents in the Mayo Clinic’s residency program examine and diagnose patients, prescribe medication, recommend treatment plans, and perform certain procedures under the supervision of more senior residents and attending physicians.  In 2005, the Clinic’s residents received annual stipends ranging between $40K and $56K, and were also given health insurance, malpractice insurance, and paid vacation.  While residents are required to attend weekly lectures and take written exams, the bulk of their 50 to 80 hour work week is spent attending to patients.  The Court rejected the Clinic’s contention that the IRS should apply a case-by-case inquiry into the activities that each resident undertakes each day in order to evaluate whether the exemption should apply. 

            While the Court’s decision has a large impact on the medical community, the decision also impacts the way accountants and other tax professionals read the Internal Revenue Code.  For many years, Courts and practitioners were conflicted on the amount of deference to give tax regulations, revenue rulings, and other published agency guidance.  The history of opinions coming out of the U.S. Tax Court even shows it often granted more weight to opinions of the district courts and the Court of Federal Claims rather than to treasury regulations.  However, with the ruling in Mayo Foundation, the proper weight to give agency guidance is settled with the Court clearly holding that the Chevron doctrine applies to all statutes, including those found in the Internal Revenue Code. 

            In Chevron, U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984), the Courts set a two-step method for interpreting statutes subject to regulatory interpretation: 

               1.   Is the statute ambiguous?  If not, proceed no further and decide the case based solely on the statutory language.
               2.   If the statute is ambiguous, is the agency interpretation reasonable?  If so, the courts should defer to the agency interpretation. 

For some reason, many tax lawyers and even judges did not acknowledge that Chevron applied to tax regulations.  However, the Court’s ruling could mean bad news for taxpayers; the history of Chevron shows that its citation almost always strengthens the administrative agency’s (here, the Internal Revenue Service) case. 

            While the long term effects of the implementation of the Chevron doctrine to tax may not be known, Mayo Foundation will most certainly have an immediate impact on medical students and the hospitals who employ them.  

Friday, January 7, 2011

Clear as Mud: Americans Spend 6.1 Billion Hours Attempting to Comply with the Tax Code

            This week, the National Taxpayer Advocate Nina Olson released her annual report to Congress detailing the major issues taxpayers face in complying with Internal Revenue laws.  Among them:  Filing taxes takes too long, costs too much money, and is extremely overwhelming for taxpayers.  Ms. Olson’s report analyzed IRS data to conclude that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements, exhausting valuable time better spent elsewhere.  Another major issue: the use of tax liens.  The number of liens filed by the IRS has increased 550% over the last decade, which causes significant consequences for consumers.  Tax liens are reported on credit reports making some taxpayers unable to obtain a mortgage, lease, car insurance, or credit card.  Liens may even affect employment prospects. 

            Ms. Olson’s analysis also found that the tax code has grown to over 3.8 million words as of February 1, 2010, compared to the 1.4 million words reported in 2001.  The increasing complexity of the tax code has also forced more Americans to seek out CPAs, enrolled agents, and software programs such as TurboTax.  According to a recent IRS study, the median individual taxpayer spent $258 in 2007 for tax prep compared to $220 spent in 2000.  This cost increases exponentially when tax returns contain errors due to the complexities and are audited, forcing individuals to again seek out professional assistance. 

            Ms. Olson’s entire report to Congress may be found at