Tax Return Preparation

Temporarily necessitated by the Civil War, federal income tax did not become a permanent fixture in the United States until February 1913, when it was ratified as the Sixteenth Amendment to the Constitution. Subsequent revenue acts were codified in 1939 and again in 1954 as the Internal Revenue Code, which was recodified in 1986 after passage of the 1986 Tax Reform Act. 

The 1913 income tax produced a degree of chaos because of the haste with which it was introduced and the lack of guidance offered to those preparing returns. As late as 1939, less than 6 percent of the population was affected by federal tax. By the end of World War II, more than three-quarters of the population were subject to federal tax. This major increase in scope set the stage for tax return preparation services to assume a heightened importance and presence. In a fairly short period of time, a service industry of rapidly growing dimension took shape. 

Traditionally, tax returns have been filed through U.S. postal mail. Indeed, as midnight draws near on April 15, post offices are congested with long lines of last-minute filers rushing to mail their returns before the tax deadline. A paper tax return received by the IRS through the mail is processed through what the IRS calls “pipe-line processing.” Once received, the return must go through sorting, batching, numbering, coding, data entry, error resolution, and storage. The entire process can take between six to eight weeks to complete. Not until this process is completed can a return be processed for refund. During peak filing periods, refunds can take as long as eight weeks to be returned to the taxpayer. While paper filing is still common today, the age of computers has introduced electronic filing of tax returns. 

Championed by the IRS, the trend toward electronic filing is growing. Electronic filing reduces the amount of time it takes for a taxpayer to receive a federal tax refund and provides a greater guarantee to the taxpayer that the return is mathematically correct. An electronically filed return eliminates the initial steps of “pipeline processing.” Electronic filing uses automation to replace most of the manual steps needed to process paper returns, resulting in faster and more accurate processing. Tax preparers who are registered with the IRS as Electronic Filing Originators (EFOs) can file returns electronically to the IRS for a fee—typically $15 to $25. Using this method, a refund takes about three weeks to be returned; refunds may be received sooner if a taxpayer chooses to have the refund deposited directly into a savings or checking account. 

An eligible electronic filing customer may also apply for a refund anticipation loan (RAL). Within one week after the date of filing, the filer receives a check in the amount of the loan, less the bank’s transaction fee and any tax return preparation fee. The IRS then directly deposits the filer’s actual federal income tax refund into a designated account at the bank in order for the loan to be repaid. The bank charges interest on the loan. 

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Introduction 

This category covers establishments that primarily provide tax return preparation services without also providing accounting, auditing, or bookkeeping services. Establishments engaged in providing income tax return preparation services that also provide accounting, auditing, or bookkeeping services are classified in SIC 8721: Accounting, Auditing, and Bookkeeping Services. 

Industry Snapshot 

Tax return preparation services primarily operate during the first four months of the calendar year, since April 15 is the standard due date for federal tax return filings. According to a survey conducted by Tiburon Strategic Advisors, along with several other research and survey groups, in 2002 there were 450,000 certified public accountants (CPAs) in the United States, as well as 40,000 enrolled agents (EAs). Of these, nearly all EAs and 170,000 CPAs were in private practice, with tax planning and tax return preparation as the primary revenue source. 

Organization and Structure 

According to Tax Return Preparer’s Liability, a number of Internal Revenue Service (IRS) regulations govern the preparation of tax returns that must be followed by members of this industry. All tax preparers are required to sign their clients’ returns and provide additional identifying information, including the names of all persons assisting sufficiently in return preparation to qualify as preparers themselves. Because the IRS might contest only a portion of a complex return, it requires exact identification of the preparers responsible for each portion. In addition to furnishing clients with copies of their returns, preparers are required to keep copies on file for subsequent inspection. They are not, however, allowed to disclose personal information kept on file to other parties. 

Preparers are penalized for negotiating the amount of a refund on a return or for accepting a refund as payment. This regulation arose because of unscrupulous preparers who had accepted refund checks as their preparation fees and then, without the clients’ knowledge, increased the amount of the refund and pocketed the extra income. This form of abuse cheated customers and put these tax payers at risk of IRS penalty. 

Any falsification of the tax amount owed or to be refunded is unacceptable, although tax return preparation services are not expected to make independent verification of the truth of a client’s claims. Preparers are, however, expected to raise questions about uncertainties or apparent irregularities and cannot ignore a suspected mistake or falsehood. 

False reporting and knowingly understating a client’s true tax liability can result in penalties by the IRS. The government, however, assumes innocence in the case of certain errors, such as clerical or mathematical mistakes. The incorrect handling of elements of tax law does not incur penalty if the IRS judges those elements sufficiently technical or uncommon as to excuse the preparer.

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By: Lukas Wade  

According to federal laws governing taxation, any person, receiving an income in one form or the other, need to pay income taxes to the government annually. But, the job of preparing tax returns, the calculations and the many tax forms involved, constitute one of the harrowing experiences being an honest tax payer. To make matters worse, the complexity of calculations increases with the income. That is, more the income, more complex will be associated tax calculations and also the number of tax forms involved. This article focuses on the last of the facts mentioned, the tax forms, especially 1040ez, 1040a, and 1040.

The first step in the run-up to tax return submission is selecting the right form. The basic of the tax forms is the 1040 ? also 1040ez and 1040a ? which has to be appropriately filled by every person filing tax returns in any case. It is meant for all kinds of income, over $100,000 annually, and also for itemizing deductions when not opting for standard deductions. 1040ez, again a basic tax form, on the other hand is meant for people who are single or when married, jointly. The conditions governing the 1040ez form are, the tax payees must not have any dependents, not blind, age less than 65, and have an annual earned income (taxable) less than $100,000 with an earned interest not more than $1,500, and have non-itemized deductions. Finally, the form 1040a is for those who have an income less than $100,000 annually, but with itemized deductions.

The stickiest part with tax preparation in fact is the right selection of the tax forms. Boy! It can be really confusing. To make matters worse, most of the people, they start thinking about tax returns only in the 13th hour, all warnings and ads by the tax department not withstanding. Some even end up paying the fine for delayed tax returns. But, none of these last minute heroic acts is ever going to give any respite to the person as far as the ordeal waiting for them is concerned, if not compounding it further. Here, one simply cannot afford to go wrong in the selection of tax forms and filling it. An error anywhere ? in the type of form (1040ez or 1040a or 1040) or the data incorporated - could lead to other complexities such as an unprecedented delay in tax refunds or even a fresh request to pay the income taxes from the tax department to clear the confusion.

Hence, considering such possibilities, it is advisable that if anyone is confused regarding the tax forms to use or with tax calculations, don?t hesitate to consult a tax specialist. They could help you with the tax calculations and the selection of the right form and documents (of course, they?ll take a pay for the service). On a general perspective, however, it is only advantageous to remain educated about taxation?s various dimensions and requirements. A professional could extend the much needed assistance, but it is always on a safer side for the individual himself/herself to be aware of the basic rules regarding taxation. Let?s not take everything for granted!

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By Daniel Thomas 

Published: June 29 2007 17:38 | Last updated: June 29 2007 17:38 

More than £300m of reclaimed tax revenue could be distributed to shareholders of investment companies following a European court ruling this week.  On Thursday, the European Court of Justice ruled that closed ended investment trusts should have the same tax rules on their management fees as unit trusts and open ended investment company, which have been VAT exempt since 1990.  The decision is expected to save the £88.6bn investment trust sector around £40m per year in VAT fees. Up to £300m of VAT levied since 1990 could be clawed back. 

This, says Daniel Godfrey, chief executive of the Association of Investment Companies (AIC), could result in a 0.5 per cent increase in the value of the net asset value on average across the sector, although in practice some trusts will receive nothing and some more than 1 per cent.  It depends, Godfrey says, how long the companies have been established, their relative size over that time and whether performance fees were involved, which will also now be VAT exempt.  Godfrey adds the bigger benefits will accrue from the £40m per year that investment companies could save on management fees. He says this could be worth as much as an extra £1bn to the industry over time, resulting in a potential 1.5 per cent boost to net asset value of companies across the sector.  Godfrey expects some funds to pay the reclaimed funds as special dividends if the money is treated as income. Otherwise, the money will add to the net asset value of the company. 

The European court ruling cements the fees advantages that closed-ended vehicles such as investment trusts have over open-ended rivals, which normally charge more for their management services regardless of VAT.  But tax experts have warned that it could take years for the money to trickle through, and the decision could lead to huge disputes between the companies and their managers.  Investment trusts would need to reclaim their VAT from the managers, who would then claim the money back from the government.  Charles Cade, head of research at Winterflood Investment, says management groups could lose out as they have been offsetting VAT on their own expenses against the VAT on their fees and so this money may not be readily available. 

Cade says the degree to which managers could lose depends on how much of administration is outsourced, but he puts a rough estimate of the cost per year to managers of £10m-£15m.  Efforts to reclaim the money for trusts would be hampered, he adds, if the management of the trust has changed in that time.  Godfrey says there will need to be negotiation between the investment company boards and their managers about how best to reclaim the money owed by the government.  The government still has the option of referring the ruling to the VAT tribunal. 

One potential incentive for the government to block the ruling is the wider effect it might have on other pooled investment vehicles, such as non-insurance pension funds, which also pay VAT on their management fees.  Taxation lawyers argue the basis of the AIC case – that rival pooled investment vehicles should compete without any taxation handicaps – could be used elsewhere in the investment industry.  “It could well apply to pension funds,” says Simon Tyler, senior pensions associate at Pincent Masons. “There is no reason why pensions can’t run the same argument as investment trust companies and claim back third party management fees.”  If pension funds do decide to argue on the same basis then the government could face potential claims for billions of pounds of tax. It is likely that further litigation would be required to prove this case, however, which could take many more years. 

The case was initially lodged by the AIC and JPMorgan Claverhouse Investment Trust in 2004, and was referred to the European court in 2005.  Copyright The Financial Times Limited 2007 http://www.ft.com/ 

 

 

Boat/US Magazine 

by Ryck Lydecker 

Jump-starting the 2005 boating season with a bang, the state of New Jersey pumped $2.5 million into a model program that will improve access to the water, beef up safety on the water and rehab channels under the water. This triple-play approach to boating improvement was made possible by I Boat NJ, a grant program paid for by New Jersey boaters themselves through boat registration fees. 

Developed over several years as a joint effort by the boating industry and the state Dept. of Transportation, I Boat NJ granted funds to 18 projects all around the Garden State on April 1. The projects range from launching ramp rehab and marina reconstruction to reuse of dredged material to boater education. 

“It’s a great start but our state’s boating infrastructure has been neglected for so long that we’ll be playing catch-up for quite some time,” reports Melissa Danko, executive director of the Marine Trades Association of New Jersey. That’s the organization of boat dealerships, marinas, equipment retailers and related businesses that orchestrated the legislative campaign in 2002 that turned a lemon of a boating bill into lemonade for boaters. 

Squeeze Play 

“Our governor at the time, James McGreevey, proposed doubling the registration fees for recreational boats,” Danko says. “Well, we weren’t going to let that happen without a fight, unless, of course, we could get that money put back into boating. 

“New Jersey, with over 200,000 registered boats, ranked 20th in the nation but not one nickel that boaters were paying–not registration fees, not sales taxes, not state gasoline taxes–was going into boating at the time,” says Danko. “It all went into the General Fund and we couldn’t tell how it was being used,” she notes. 

Danko says the plan to double the fees, which then ranged from $6 for boats under 16 feet to $125 for boats 65 feet or longer, ostensibly would have been used for boating programs, but there was no guarantee that the money would actually be spent on boating. A cash-strapped state government could try to divert the money at any time. 

Unlike broad-based taxes that are intended to support public services, the association argued, fees like boat registrations should be designated for a purpose related to the source of the money. That’s the position they started hammering home once a bill to increase the fees was introduced, and their rationale found supporters in both the state Senate and General Assembly. 

Working with the association, state Sen. James Cafiero sponsored an amendment that directed the increased fees to the Dept. of Transportation’s Maritime Industry Fund. With the assistance of boating allies in the General Assembly, the amendment passed. 

“This was the result of a major lobbying effort by boaters and the boating industry but without that amendment, none of the fee increase–about $2.5 million this year–would have gone back into boating,” Danko reported. “Presenting a unified position to the legislature was the key.” 

Bills seldom pass without some form of compromise and this was no exception. 

“The new law went into effect in 2003 and we agreed to a phase-in over three years while we developed a program to put that money to work,” Danko explains. “The first year, 50% of the new revenue went to the fund and last year the percentage increased to 75%. This year, and from here on, 100% of the registration fee increase goes back into boating.” 

With that dedicated source of money, the I Boat NJ grant program is expected to average $2.5 million annually. But, Danko says, that’s not nearly enough and the association has to find new money to keep up with boating infrastructure demands. 

Pay at the Pump 

“Using federal gasoline taxes paid by boaters and anglers to fund a national boating and fishing program is a tried-and-true source of funding,” says BoatU.S. Vice President Michael G. Sciulla who has spent the last 20 years helping create the Wallop-Breaux Trust Fund which now directs $500 million to the states for their boating and fishing programs. “It’s a classic user-pay, user-benefit program,” says Sciulla. 

There is now talk in Trenton of raising the state gas tax to fund long-suffering transportation needs. New Jersey’s largest newspaper, The Star-Ledger, is calling for the legislature to face up to the problem and increase the gas tax, now. Last year New Jersey’s governor called for a hike in the state’s 10.5-cent per gallon tax, one of the lowest in the country. 

“This may offer an opportunity for New Jersey boaters to put to good use millions of dollars in boating gas taxes that are now going to build and repair highways,” Sciulla says, pointing out that 30 states now return a portion of their state gas tax to boating, ranging from .05% to over 1%. In New Jersey’s case, that could pump much needed money into boating. 

New Jersey boaters who wish to be kept abreast of this issue should contact GovAffairs@BoatUS.com and put “NJ” in the subject line. 

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