Taxable Fringe Benefits: President Obama, Congress, & Employer Paid Vacations

We can all use a vacation once in a while; some more than others. However, I would venture to guess your employer does not pay for your plane tickets, hotel, meals, etc. regardless of how great an employee you are. If you are self-employed and take a legitimate business trip, your business still has to document to show support for your claim. Often though, we read news President Obama, First Lady Michelle, and/or their two daughters are taking extremely lavish vacations costing millions in US taxpayer dollars while bringing along an unnecessary entourage of assistants and friends. After all, “We The People” is the President and First Lady’s employer, and they admit as much by dutifully listing “US President” and “US First Lady” as their respective occupations on their Federal Income Tax Return. Should the US taxpayer handle the entire cost of their personal vacations as well?

There is NO debate the First Family most certainly deserve Secret Service protection everywhere they go, under all circumstances. It should be and is paid by taxpayers, plain and simple. They also deserve innumerable other perks – specially-built limousines and chauffeurs, a personal chef and staff with meals – the list can go on. The Obama's are also provided many working-class type tax-free fringe benefits, such as health insurance, de minims items, and working condition fringe benefits. Wait a minute! “Working Condition Fringe Benefit” you say? Shouldn’t their vacations be considered tax-free under this section of tax code in their unique case? And not to just single out the President and First Family for this scrutiny, ALL members of the Senate and House, regardless of party affiliation should be under this microscope. So now let’s take a look what exactly constitutes a working condition fringe benefit, and see if it applies.

In the 2013 Internal Revenue Service Publication 15-B, Employer’s Tax Guide to Fringe Benefits, the Working Condition Benefits Exclusion “applies to property and services you provide to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of property or services as a business expense or depreciation expense if he or she had paid for it.” In addition, “The employee must meet any substantiation requirements that apply to the deduction.” The substantiation requirement would include such items to substantiate a deduction for an Unreimbursed Employee Expense, such as union dues, clothing, passports for a business trip, and others found in IRS Publication 529, Miscellaneous Deductions. Also found in Publication 529 is a list of Non-Deductible Expenses, which include health spa expenses, expenses to improve professional reputation, and travel expenses for another individual (entourage, family - you get the picture). So, unless it can be proven a personal vacation is provided for them to actually perform their respective jobs, it stands to reason any expense for assistants, friends, meals, entertainment, souvenirs, flight costs, or anything above Secret Service detail for a personal vacation should be either paid by the Presidential Family (or member of Congress), or listed on their return as a taxable fringe benefit.

The recent problems at the IRS seem to shed some light on exactly who is being scrutinized and when it’s chosen to look the other way, as well as the IRS failing its own substantiation requirements regarding parody videos and so-called “conferences.” I doubt anyone will ever audit a member of Congress or the President for these matters, but shouldn’t they be held to the same standards as those they are elected to represent?

Will the REAL Tax Prep Professional Please Stand Up?

The recent battle of national tax chain advertising has shed some long overdue light on tax preparation truths for the public to digest. In January 2013, U.S. District Judge Fernando J. Gaitan, Jr. of the Western District of Missouri, ruled against H&R Block’s request for a temporary restraining order and preliminary injunction against two TV commercials for Intuit’s TurboTax software. The off-season ‘plumber’ and ‘clothing store salesperson’ ads depict tax chain stores in the proper light, and are quite comical to watch.

H&R Block demanded the ads be taken off the air, however they were not found to be 'false' or 'deceptive'. H&R Block came back with their own ad of actually signing returns, which Intuit's TurboTax software program clearly can't do. Seems they were walking a thin advertising line a few years ago displaying a huge banner across their window asking, 'Turbo GPS Got You Lost?’

The publicity generated from these tax chains battling is opening the public's eyes to CPA tax preparation as the 'creme de la creme'. TurboTax's 2013 ads drive home the truth only CPA's, Tax Attorneys, or E.A’s can legally answer tax questions and give advice. What they are actually doing is shouting to the world CPA's are the real tax professionals, with the education and technical expertise to accurately complete tax returns.

Thanks to the tax chains, many previously uninformed taxpayers will now be making a wiser choice in tax preparation providers. After all, when you're trusting someone with your finances, shouldn't you expect the best?

CP2000 - A New Sports Car, with Tax?

A CP2000 sounds as if you could whip through curves while a bucket leather seat grips your body, holding steady as the second hand of a fine Swiss watch. But if you’ve ever received a CP2000, you know it’s no fun at all. The Internal Revenue Service will send a taxpayer this notice if they have underpaid (or altogether failed to pay) their tax liability, or has failed to report all their income as reported to the IRS through employers, banks, or other sources.

There are many reasons for discrepancies in reported income and tax liability, ranging from a simple typographical error to outright fraud. In some cases, the IRS has been the one to err. If a taxpayer just accepts the IRS amount, they could end up paying serious penalties and late charges when a little specialized knowledge could relieve the entire burden. If a taxpayer opted for preparation from a chain-oriented tax service and received this – or another of a myriad of notices – they might be forced to pay excessive fees for representation or even be left high and dry to deal with the IRS themselves.

As a Certified Public Accountant, I’m qualified to practice tax advocacy in front of the IRS. Even if you’ve had a chain store prepare your return, I can review your notice and tax return to determine the true discrepancy, if any. I can also go to bat for you by contacting the IRS to discuss the issue, find common ground, and reach a viable resolution. Tax advocacy takes a dedicated individual with the skills necessary to weave through the winding curves of tax regulation to achieve the best outcome for you, the client. So even if the IRS sends you the surprise gift of a new CP2000, you don’t have to crash and burn.

Registered Tax Return Preparers or a CPA: License to Thrive

This past Friday, January 18, independent tax return preparers were given a favorable ruling over the seemingly insurmountable Internal Revenue Service by a Federal District Court judge. He sided with the preparers that the IRS was not given authority by Congress to license tax return preparers, and by extension require them to be tested and attend continuing professional education (CPE) seminars or classes. Hooray for the tax return preparers?

In a way, yes. Those who have worked hard and choose to prepare taxes for extra income during the early part of every year, some even for 20, 30, or more years, were being targeted by the IRS in order to bring them under compliance while trying to eliminate fraudulent practices, returns, and refunds. I can see the Service’s position, in that reports of fraud and fraudulent returns have almost tripled since 2009 alone, according to this report from the Treasury Inspector General for Tax Administration. By some estimates close to $5 Billion per year is lost due to fraud. However, many preparers have already taken their 15 hours of CPE and passed the IRS-approved exam in order to have the Registered Tax Return Preparer (RTRP) credential. They spent their money and time to earn the credential, which due to this ruling now seems irrelevant. The ruling does not affect Tax Attorneys, Enrolled Agents, or Certified Public Accountants (like me, The Mobile CPA).

What is the difference between a Tax Return Preparer and the others? A Preparer cannot practice, or represent, a taxpayer or client before the IRS. Only licensed professionals may represent their clients, because we are subject to the guidelines of Circular 230. They also cannot provide tax advice beyond the scope of the return they are preparing. So, what is the solution? Well, in order to obtain my CPA license, I was required by the Pennsylvania State Board of Accountancy to earn 120 credits (now 150) at an accredited college, as well as gain experience of at least 3,200 hours under a CPA with various hours for Auditing, Taxes, Tax Research, Accounting, and other areas. All this in addition to passing the four parts of the exam, which each has about a 45% pass rate. I believe as many others do, that the solution lies with the State Boards of Accountancy to license RTRPs, and in turn will provide taxpayers with more confidence in their chosen Preparer as well as reduce fraud.

If you take your tax information to a kiosk in your local supermarket or mall, you might not be getting qualified advice or preparation. Not all of them are bad apples, but the person behind the desk usually does not have their personal assets or reputation on the line if they do not perform to the best of their ability with every client. My advice, as if you didn’t guess, is to have your return prepared by a Certified Public Accountant this year. Many times we’re far less expensive than the kiosk, where you’ll probably wait in line while the guy next to you eyes your social security number.

2013: A Tax-Paying Oddity

The “Fiscal Cliff” was narrowly averted, as the last act of the 112^th Congress was to approve a modern day HAL 9000, the American Taxpayer Relief Act of 2012. While it does not actually provide much relief, the 157 page House Resolution 8 (as amended by the Senate) does include a “patch” for the Alternative Minimum Tax, or AMT. Without this patch, 60 million taxpayers making $33,750 (single) and $45,000 (married filing joint) per year or more would have been subject to a massive tax hike. The new exemption amounts of $50,600 S/$78,750 MFJ create a haven for many, but if you reside in an area where the median income is higher than that, you can count on the AMT affecting you. Congress kicked the proverbial can down the road on this one for more than ten years now, as a new patch was needed each year because it was never indexed for inflation. That problem has now been fixed, as HR 8 also includes a permanent index for inflation. There is some discussion regarding elimination of the AMT as the 113^th Congress will more than likely attempt to tackle tax reform.

Every person will pay more in taxes for Social Security beginning this year as HR 8 does not extend the 2% reduction we have enjoyed since 2010. This means you will pay $1,000 more per year for every $50,000 of income, up to the $113,700 base. The Estate and Gift Tax Rate is set at a high 40% (with a $5 million exclusion), but considering the alternative 55% if the Act wasn’t passed, it’s a relief. Among many other provisions, the top capital gains rate is raised from 15% to 20% on those with incomes of $400,000 single/$425,000 head of household/$450,000 married filing joint. Everyone from there down to $72,500 MFJ/$36,750 S will stay at 15% maximum, and those below that keep their ZERO rate. It’s pretty sweet if you don’t make much money, but generally most singles making under $36K do not have much invested to produce major capital gains.

The American Taxpayer Relief Act of 2012 will certainly take some time to digest, as the IRS updates its software, publications, and forms to comply. There also still remains the possibility of delayed tax filing for many taxpayers until mid-February, as what happened in 2011. In all, the legislation is typical in that it has its good and bad points which will be meted out in the near future. Discuss your financial position with a Certified Public Accountant today, and identify any malfunctions and upgrades you should make.