NJ TAX PRACTICE BLOG

The Fall 2005 issue of the NJ Division of Taxation's STATE TAX NEWS is now available to download at http://www.state.nj.us/treasury/taxation/pdf/pubs/stn/fall05.pdf

The recommendations of the President's Advisory Panel replace the current Earned Income Credit with a Work Credit which, like the EIC, is a refundable credit. Here is my 2 cents on the EIC and refundable credits.

As an individual taxpayer and a long-time tax professional interested in fair tax administration, while I do believe that the tax code can be used to encourage and facilitate such positive things as savings and investment, economic growth and charitable contributions, I do not believe that the tax code should be used to "redistribute" income or as a form of welfare. I do not believe in refundable tax credits.

Let us "call a spade a spade". The Earned Income Credit, especially its refundable feature, is a welfare program. I do believe I read somewhere that in terms of dollars it is the biggest federal welfare program in existence today. It is, for the most part, just another form of Aid to Families with Dependent Children.

I am not against tax relief for the working poor. I would support a form of earned income credit, or some other method, that could be used to zero out the tax liability of low-income workers. I am also not against the concept of providing aid to families with dependent children, or other types of welfare programs for the working poor. I just believe the two concepts should not be combined in the tax code.

The EIC does not provide the safeguards and checks and balances required in other federal and state welfare programs and necessary for responsible fiscal management. As a result, it is perhaps the most abused provision of the tax code. Studies have suggested that close to 30% of all EIC claims are erroneous.

I am sure we have all had EIC clients who we learned after-the-fact, or strongly suspected, had sufficient unreported income to make them ineligible for the credit. Hasn't each of us, at one time or another, had as a client the single parent with a part-time W-2 that also had an unreported, and unknown to us, side-line cash business cleaning homes and apartments? Of the Schedule C client who reported just enough income to max-out his or her Earned Income Credit?

As tax professionals we have enough to worry about just getting all the necessary information from our clients without the added burden of having to determine if a person qualifies for federal welfare.

The federal government should do whatever it can to encourage the poor to work, to reward them for doing so, and to provide financial assistance to the working poor, but it should not use the tax code to do so.

The recently released report of the President's Advisory Panel on Federal Tax Reform greatly simplifies the current tax code, replacing the current 75-line Form 1040, with 52 supporting schedules, forms and worksheets, with a 32-line Form 1040-SIMPLE with only 10 supportive items.

As a tax professional I am not worried about how these proposals would affect my business. I do not believe that the Panel's recommendations would put us out of business, or even reduce the net income of the average tax professional. I actually welcome many of the changes.

If I were to spend each day during the tax season preparing only 1040A forms I guarantee that I would bill more fees, spend less money, reduce my liability, and have less headaches to deal with after tax-time. While I obviously charge a higher fee for more complicated returns, I make less profit per hour on these returns. I truly believe the new 1040-SIMPLE would increase both my efficiency and my bottom line.

In its report, the Panel often mentions that complicated rules force taxpayers to use paid preparers, and the simplification they propose would permit more taxpayers to be able to prepare their own returns.

While the proposals would make the tax return easier to prepare, I do not see my clients leaving en mass to do their own returns. A majority of my current clients are capable of preparing their own tax returns under current law. They come to me because they do not want to be bothered with the task of doing it themselves. Because my fees are reasonable, it is easier, and more cost and time effective, to have me do it. Plus they want to be sure they do not miss anything.

Even if the rules are greatly simplified, it is a proven fact that any change in the tax code will increase business. And while the proposals include a great deal of simplification, there will still remain enough complexity in certain areas to keep us busy.

The only sectors of the tax preparation community whose income could be adversely affected by this simplification are CPAs and commercial preparation firms like Henry and Richard, whose fees in most cases are extremely excessive. The average tax preparer will not be hurt, and will probably be helped, if the Panel's recommendations become law.

By the way, if you don't want to tackle the 270+ pages of the President's Advisory Panel on Federal Tax Reform report, you can view the CCH "Cliff Notes" version at http://tax.cchgroup.com/tax-briefings/2005-Tax-Reform.pdf.

The textbook and materials from the New York State NATP chapter's New York State Update Seminar are available for $46.00, which includes shipping and sales tax.

You can order by phone (607-772-2000), fax (607-723-1022), or by sending a check payable to NY NATP to 1129 Front Street, Binghamton, New York 13905.

I apologize for the lack of postings lately. I have been busy with other websites in my "online empire", there hasn't been much to report, and I have not received any comments, suggestions or questions from the Tax Practitioner Community to which to respond.

I have added a new page to the NJ TAX PRACTITIONER NETWORK site - TAX PRACTITIONER RESOURCES - which provides links to books, publications, products and services that are helpful to tax professionals. Check it out.

You can download a copy of the 273-page report of the President's Advisory Panel on Federal Tax Reform at http://www.taxpolicycenter.org/newsevents/trp_recommendations.pdf.

The Tax Foundation has prepared a comprehensive analysis of the recommendations. To read the analysis go to http://www.taxfoundation.org/publications/show/1155.html.