New IRS law
November 23rd, 2009
November 16th, 2009
November 9th, 2009
November 2nd, 2009
October 26th, 2009
Most taxpayers are skeptical of the IRS. Although our tax system is voluntary, it is still a challenge to comply with the intricacies of the laws. Now Congress has passed a new law that will make it more expensive for many to file their returns, and will potentially create a conflict at the same time.
In an attempt to close the revenue gap created by out-of-control Congressional spending and the expense of the Iraq war, Congress placed a provision in this law that may cause serious problems for tax preparers and tax payers.
The law attempts to "deputize" more tax practitioners by holding them to a higher standard.
For years, tax preparers have faced possible penalties for signing questionable returns without disclosing the tax positions in question. However, the new law raises the standards considerably and boosts the penalties too. The new penalties are the greater of $1,000 or half the preparer's total fee. Willful or reckless conduct is much higher still.
Tax preparers can sign questionable returns if they file Form 8275, which discloses the questionable positions taken. Of course, taxpayers don't like this idea since it might raise "red flags" to the IRS.
Therefore, many tax preparers will either be researching the questionable tax position more thoroughly and charging clients more, or they may just opt out of preparing the return and send the client to another preparer. Each option is problematic.
You may be thinking "What's the fuss? Isn't the tax law black and white?" For the most part it is. However, there are many areas of tax law that require interpretation and judgment. Many parts of the Internal Revenue Code are unclear. Some parts only become certain as the tax courts rule on cases. Poorly worded tax legislation adds to the gray area.
Also, every tax court doesn't rule the same. One court may rule one way on a case and another may rule the opposite on a similar tax issue. Tax preparers have to live with massive ambiguities.
The problem is especially knotty when dealing with complex estate and gift tax cases. For example, family limited partnership are sometimes formed with the goal of transferring large estates to future heirs; the IRS nearly always challenges the application of the tax law in this way. The courts usually decide.
Many accountants claim the new law is unfair since it applies higher standards to return preparers than to tax payers. Preparers must disclose, while those who prepare their own returns might not.
Congress made the law effective as of May. The IRS recently said the new standards will apply to returns filed starting next year. This exempts 2006 returns, including those of tax payers who have filed extensions.
The bottom line is that if your tax return employs aggressive tax strategies, get ready for higher tax preparations fees. Most tax preparers will not risk signing off on returns with questionable positions without full disclosure or careful research. Either way, costs will likely be higher.
Notable Quote: "Did you ever notice that when you put the words 'The' and 'IRS' together, it spells 'THEIRS?'" -- Author Unknown
Tom Mills is a Registered Investment Advisor and Certified Financial Planner. If you have questions or topics, you may call or write him at 3358 Linda Mesa Way, Napa, CA 94558, 255-3721, fax 255-3939 or e-mail suntrm@aol.com.
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Voluntary??? wrote on Jul 21, 2007 12:45 PM: