October 26, 2008

“A Capital View”

I congratulate the newly-installed officers of the New York State Society of Enrolled Agents, especially incoming president Vicki McGinn for inviting me to come here and talk to you about NAEA’s advocacy efforts. I am pleased to take this opportunity to share with you what’s going on in DC and what’s going on in Albany, and then I will be happy to take questions.

As the Senior Director of Government Relations I am charged with advocating for enrolled agents, which essentially means representing EA interests to Capitol Hill and IRS. When advocating for an entire group, it can be challenging to determine just precisely what is indeed in the individual members’ best interest. While enrolled agents as individuals can be colorful characters, as a group, fortunately, they tend to share most concerns.

In conducting NAEA’s advocacy efforts, I am fortunate to have a standing committee of enrolled agents—the government relations committee, ably chaired by former NYSSEA president Frank Degen—as a constant companion in interpreting the tax code and in letting me (and others in Washington) know how people in the “real world” behave.

I am asked for EA input on a variety of topics. Within the past several months, IRS has reached out and asked about:

  • a proposal to institute a criminal background check for EAs, enrolled actuaries, and ERPAs;
  • a query from IRS’ Office of Burden Reduction on letters and CP notices (namely, which are most confusing/poorly worded);
  • proposed educational and soft notices targeting new EITC paid preparers.

Further, NAEA is also consulted by federal oversight agencies—most recently a GAO discussion of the mortgage interest deduction [tax gap audit]. I hosted the auditors at NAEA’s office for a conference call. I must admit to smiling when the auditors left looking more than a little shell-shocked, but certainly wiser.

Vicki asked me to touch on happenings on the Hill…I’ll break this down into two categories: what the Hill did to us and how NAEA tried to influence the Hill.

Our primary legislative objective has been and continues to be regulation of return preparers [aside on nomenclature—regulation v. registration]. Enrolled agents hold a strong consensus on this issue, and since last I spoke before NYSSEA, NAEA has reached a high water mark in its advocacy. In addition to a Senate bill (S. 1219, sponsored by Senator Bingaman of NM), we now also have a House bill! Rep. Becerra (D-CA) introduced his bill—(HR 5716)—this spring. As with the Senate bill, the GR team at NAEA also worked with the tax staff drafting HR 5716.

While the bills are not identical, each of them contains the four points essential for EA support:. [pay attention; you’ll be quizzed at the end of the evening…]

  1. First, and most importantly, tax preparers must be tested. If you cannot pass an exam testing basic knowledge of tax returns, you should not be allowed to do it for a living. Don’t worry. All Circular 230 practitioners will be exempt from this requirement.
  2. Second, preparers must complete continuing education.
  3. Third, the IRS’s Office of Professional Responsibility must be responsible for oversight of all preparers, including administering exams, reviewing applications, processing renewals, enforcing discipline, etc.
  4. Fourth, IRS must be required to promote the regulation, and what it means, to the general public…

Now unless you’ve been living under a rock for some period of time, you’re aware that this is an election year. On top of that, we have three senators running on the two major tickets. This state of affairs, for a variety of reasons, has sucked all the oxygen out of the Capitol and caused an already quarrelsome Congress to be even more disagreeable than usual. As a result, we did not see a lot of tax legislation move in 2008. Return preparer regulation is among the proposals left behind. While this is unfortunate, we have fallen back and are strategizing our approach to the next Congress, where we expect both chambers to reintroduce our bill and where we expect to grow support in the form of cosponsors.

But what did happen on the tax front? In a nutshell [and chronologically], three things:
HEROs—HR 6081 [March], the Heroes Earnings and Assistance Relief Act of 2008 included many popular tax breaks for military service members and veterans. Among other provisions, the bill included:

  • a provision waiving the 10% IRA withdrawal penalty for those called up to active duty;
  • death gratuity payments to be rolled over into Roth IRAs or Education Savings Accounts; and,
  • treatment of combat pay as earned income for purposes of the EITC;

Among the pay-fors:

  • a revision of tax rules on expatriation; and ,
  • an increase in the general failure to file penalty (if the return is 60 days late, to the lesser of $135 or 100% of the bal due).

Housing—HR 3221, [late July] the Housing and Economic Recovery Act of 2008, which many believe is the most significant housing legislation in a generation, overhauled Fannie Mae and Freddie Mac oversight and is expected to stabilize the nation’s housing market.
The law includes a sizable tax title, including:

  • a first-time homebuyer credit of up to $7,500 (though beware as the small print says this credit is actually an interest free loan that must be repaid to IRS in even installments over 15 years), [phases out on AGIs exceeding $75k (single) and $150 (MFJ)];
  • • an additional standard deduction for property taxes for non-itemizers (for one year, limited to $500/$1,000 depending on filing status),
  • • a provision that allows hurricane Wilma, Katrina, and Rita victims who took casualty loss deductions for residential damages and later received casualty-loss grants to file amended returns.

The revenue offsets:

  • partially denying excludable gains from the sale of certain residences (e.g., rental properties and vacation homes) that are sold after being converted into primary residences; and,
  • a requirement for information reporting on credit card and third party payment transactions. [What precisely IRS is going to do with this data is unknown, but the reporting is expected to help the agency address the tax gap to the tune of nine-and-a-half billion dollars over 10 years. In any event, your clients will want to know that this information reporting is required of third-party payment processors (not the business itself) for merchants with annual sales over $20k or an annual volume exceeding 200 transactions].

AMT/extenders—HR 1424, [early October] the Emergency Economic Stabilization Act of 2008, on top of providing some $700B to provide liquidity to the financial system also included the AMT patch and tax extender language. The tax extender package is quite extensive and MERCIFULLY extends nearly all of the temporary provisions through the end of 2009. It includes:

  • ISO relief;
  • the state and local tax deduction for itemizers;
  • the qualified tuition deduction; the additional standard deduction for property taxes;
  • the R&D credit; and,
  • the shortened cost recovery period for qualified leasehold, restaurant, and retail improvements.

In addition, the law contains a slew of energy provisions, including:

  • a plug-in electric vehicle credit; and,
  • a limited fringe benefit for bicycle commuters.

And, in a non-trivial change for you, the disclosure standard for a preparer reverts from ‘more likely than not’ to ‘substantial authority.’

And what about offsets? While most of the bill was not paid for (a bone of contention between the two chambers when trying to pass this tax legislation in stand-alone fashion), it does include a provision requiring brokers to report the basis on stock sales. This provision has been kicking around for some period of time, has been included in the President’s budget proposals and its inclusion in this tax bill is unsurprising.

Turning away from federal government relations, I want to mention how the landscape looks in New York, where the following three items are of interest:

  • Amnesty—New York state budget will drive much of what happens in the near term. The state has instituted a Voluntary Disclosure Program, which will allow taxpayers to self disclose underreporting and avoid all penalties (civil and criminal).
  • Consumer protection—NY S. 2970 requires unenrolled tax preparers to provide customers with a ‘consumer bill of rights regarding tax preparers’ and otherwise regulates RALs.
  • Return preparer regulation—an Assemblyman from the Bronx introduced a bill (S. 701) that would have required the registration of paid tax return preparers. It excluded Circular 230 practitioners as well as volunteers. While it required minimum education requirements to register, as well as annual CE requirements, it did not test for initial competency. This bill landed in the House Ways & Means Committee, where absolutely no action was taken.

I encourage you to get involved in state government advocacy, because state legislators and regulators are so much more accessible than federal policy makers. If you ever have the opportunity to meet your state representative, offer your services and advice on tax issues if he or she ever needs it…

Before I wrap up, I wanted to give you an update on the work done by NAEA’s political action committee, NAEA PAC, which individual members of NYSSEA have a history of generously supporting. We began our third PAC year in April, and have since raised two-thirds of our goal from 186 members. The PAC Steering Committee, with the help of the board and state affiliate leaders, has undertaken a great effort to expand PAC participation and to its credit has set a “stretch” goal for this PAC year. The issues we’re working on, after all, affect all enrolled agents.

The PAC is a useful supplement to our government relations activities, because it gives us the ability to show members of Congress how serious we are about our priorities. It’s sort of like extra credit. We don’t have to help out our friends in Congress with campaign contributions. But when we do, it lets them know how important their work is to us. It shows them how dedicated we are to advancing our agenda. It lets them know that I—Washington lobbyist—really do represent you—enrolled agents.

In addition to discussing activity in DC and Albany as well as the PAC, I wanted to ask one favor of you before I close, I would like to enlist your assistance in just one area. I have begun to hear about a variety of IRS enforcement actions, many focused around correspondence audits and substantiation of deductions (for instance, charitable contributions). I am eager—as is my new assistant, James Kuhl—to hear of any and all developments in IRS enforcement. Such information helps me in my ongoing conversations with IRS and with the Hill. Please do not hesitate to pick up the phone or to drop me e-mail if you are seeing anything that looks at all out of the ordinary.

Ladies and gentlemen, it is always a pleasure to come up to Albany, where I consistently learn how little I know about taxes! Thank you for your attention this evening, for being such a gracious and fun bunch of people, and for making me feel at home.