Paid preparers beware ... THE IRS WANTS YOU! The control of preparers is now the name of the game. Reduction of fraud and improvement of efficiency are the goals of the IRS, and their means include • Mandatory registration - even for CPAs and those who already have a PTIN • Mandatory e-file - for those who will prepare 100 or more returns We'll give you more details in this newsletter, but be aware that the IRS approval process is slow for both programs. You must take action now if you want to prepare returns for pay as soon as the tax season starts in 2011. We'll also tell you in this newsletter how recent tax law changes will affect the IRS forms and how you will prepare returns in 2011. And if you'll be using a new computer next year, be sure to see our tips for full compatibility with Tax Preparer.

Tax law changes ... many proposals, few successes

Although several tax bills have been introduced in the House and the Senate in 2010, few bills have been signed into law. Even bills that weren't expected to be controversial failed to pass … namely the "extenders bills" that would renew popular tax breaks that expired at the end of 2009. The expired breaks include raised AMT exemptions, above-the-line deductions for college tuition and teachers' supplies, itemized deductions for sales taxes, increased standard deduction for real estate taxes, R&D tax credit for businesses, and accelerated depreciation for farmers. As a result, many tax forms are in limbo as the IRS issues drafts based on the expiration of the breaks while most pundits believe that an "extenders bill" will pass by year-end (after the November elections). In addition, a bill with other breaks for small businesses could well be revived after the elections, which would include breaks in depreciation, capital gains, and business credits. These year-end tax bills will once again send the IRS scrambling to revise their forms in time for the tax season … an all-too-familiar situation in recent years.

Nevertheless, a couple of significant tax bills that affect returns for 2010 have been signed into law:

• Hiring Incentives to Restore Employment (HIRE) Act. Signed into law on March 18, this bill includes
  • New credits for hiring new employees and keeping them. For new hires that were formerly unemployed, the bill exempts the employer from paying its share of social security taxes from February 4, 2010 through December 31, 2010, which can result in a savings as high as $6,621 for each qualified employee. And for such new hires that are retained for at least 52 weeks, an additional credit up to $1,000 is provided.
  • Extension of ceiling on section 179 depreciation. The $250,000 ceiling was set to drop to $125,000 for tax year 2010, but the bill extends it for another year.
• Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010. Signed into law on March 23 and March 30, respectively, these two bills combined form the massive health care bill. While most provisions of the bill don't start taking effect until 2013 or later, there are a couple that will affect returns for 2010:
  • A small employer tax credit. Qualified small employers qualify for a tax credit as high as 35% of their cost for health care. "Small" in this context means no more than 25 employees. Employers with no more than 10 employees and average wages no more than $25,000 get the full credit. The credit is phased out as average wages approach $50,000 and the number of employees approaches 25.
  • A sweetening of the adoption credit. The adoption credit is turned into a refundable credit and the exemption level is raised to $13,170 (up from $12,150 for 2009). Moreover, the credit, which was set to expire at the end of 2010, is extended to the end of 2011.

Significant changes from prior laws

Even though the changes from new tax bills are few (affecting only a few credit forms and the depreciation form), there are enough changes from previous legislation to cause many more forms to change. Based on the advance drafts we've already seen from the IRS, the tax bills that have been signed into law, and the year-end tax bills we anticipate with near certainty, here are a few things you can expect in the new forms:

• Form 1040. Indexing with inflation is nominal for 2010 because the inflation rate on which it is based is a mere 0.18%. As a result, amounts in IRS worksheets, EIC tables, and tax tables are changed very little. However, the IRS's advance draft of the form reveals a number of significant changes:
  • The first $2,400 of unemployment compensation received is no longer excluded from income, as seen in the new wording at line 19.
  • While lines 23 (for educator expenses) and 34 (for tuition and fees) might be expected to be dropped, since the underlying deductions expired at the end of 2009, the IRS has retained these lines and changed their wording to "RESERVED." The IRS evidently anticipates, as we do, that a year-end "extenders bill" will reinstate these deductions retroactively.
  • Line 40b, used to indicate an increased standard deduction from Schedule L, has been removed because the underlying increase expired at the end of 2009. However, the real estate tax part of the increase could be revived by a year-end "extenders bill."
  • The computation of exemptions at line 42 is straightforward for the first time in years. Their phase-out at high income no longer applies and there are no extra exemptions for housing disaster victims. Exemptions are now just $3,650 times the number on line 6d.
  • The adoption credit has moved from line 52 to line 71b because it is now a refundable credit.
  • The signature area for paid preparers at the bottom of page 2 has changed. There is now a place to print or type the preparer's name, and the ID number is now labeled only "PTIN" rather than "Preparer's SSN or PTIN" in recognition of the fact that all paid preparers must now register and have a PTIN (as explained later).
• Schedule A. The deduction for state and local sales tax is removed from the schedule at line 5, but it could be reinstated by a year-end extenders bill. The phaseout at high income is removed at line 29 because it no longer applies.
• Form 6251. The IRS's advance draft reflects greatly reduced exemptions, but a retroactive AMT patch is expected by year-end to restore the high exemptions that have existed in recent years.
• Form 8863. The Hope Credit has been removed from the form, now fully phased out and replaced by the American Opportunity Credit, which includes a refundable component.

Mandatory registration for all

The first phase of the IRS's tighter controls on preparers will be in full force by 2011. All paid preparers must register with the IRS and get (or renew) a Preparer Tax ID Number (PTIN) for use on returns they prepare during 2011. This requirement applies to CPAs, attorneys, and enrolled agents … not just unenrolled preparers, and there is a $64.25 registration fee per year. Even preparers in your office who do not sign a return but "prepare substantially all the return" will have to register and get their own PTINs! The IRS is currently putting the new registration system in place, and expects to start accepting applications by the end of September. You will not be able to apply for a PTIN before that because the IRS has suspended the processing of PTIN applications until then. Once the new registration is in place, all PTIN applications and renewals will be a part of the mandatory registration process.

Subsequent phases of the tighter controls include competency testing and continuing education requirements for unenrolled preparers. However, the phase-in is so slow that the test needn't be passed until the end of 2013 (and you can take the test any number of times as long as you pay the testing fee each time), and the continuing education only applies after you pass. Furthermore, unlike the registration requirement, the competency testing and continuing education requirements do not apply to CPAs, attorneys, and enrolled agents, who are already subject to similar requirements through their own organizations.

More information on ordering

See separate chart for other details. The Order Form refers to a separate chart for details on what’s included at each level of Tax Preparer. You can see the latest version of this chart on-line at www.howardsoft.com/compare.htm to help you decide what to order.