An Enrolled Agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.

What does the term “Enrolled Agent” mean?

“Enrolled” means to be licensed to practice by the federal government, and “Agent” means authorized to appear in the place of the taxpayer at the IRS.  Only Enrolled Agents, attorneys, and CPAs may represent taxpayers before the IRS.  The Enrolled Agent profession dates back to 1884 when, after questionable claims had been presented for Civil War losses, Congress acted to regulate persons who represented citizens in their dealings with the U.S. Treasury Department.

How does one become an Enrolled Agent?

The license is earned in one of two ways, by passing a comprehensive examination which covers all aspects of the tax code, or having worked at the IRS for five years in a position which regularly interpreted and applied the tax code and its regulations.  All candidates are subjected to a rigorous background check conducted by the IRS.

How can Enrolled Agent help me?

Enrolled Agents advise, represent, and prepare tax returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements.  Enrolled Agents’ expertise in the continually changing field of taxation enables them to effectively represent taxpayers audited by the IRS.

Privilege and the Enrolled Agent

The IRS Restructuring and Reform Act of 1998 allow federally authorized practitioners (those bound by the Department of Treasury’s Circular 230 regulations) a limited client privilege.  This privilege allows confidentiality between the taxpayer and the Enrolled Agent under certain conditions.  The privilege applies to situations in which the taxpayer is being represented in cases involving audits and collection matters.  It is not applicable to the preparation and filing of a tax return.  This privilege does not apply to state tax matters, although a number of states have an accountant-client privilege.

Are Enrolled Agents required to take continuing professional education?

In addition to the stringent testing and application process, the IRS requires Enrolled Agents to complete 72 hours of continuing professional education, reported every three years, to maintain their Enrolled Agent status.  NAEA members are obligated to complete 90 hours per three year reporting period.  Because of the knowledge necessary to become an Enrolled Agent and the requirements to maintain the license, there are only about 46,000 practicing Enrolled Agents.

What are the differences between Enrolled Agents and other tax professionals?

Only Enrolled Agents are required to demonstrate to the IRS their competence in matters of taxation before they may represent a taxpayer before the IRS.  Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all Enrolled Agents specialize in taxation.  Enrolled Agents are the only taxpayer representatives who receive their right to practice from the U.S. government (CPAs and attorneys are licensed by the states).

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

Thanks to Colonial Tax for their timely information.

For $100 I will review and repair (if necessary) your QuickBooks file and make sure it is ready to send to your tax accountant or upload to TurboTax.

As a special bonus, if you choose Precisely right bookkeeping as your tax preparation service $50 will be deducted from the price of your tax return.

Special Offer for QuickBooks users

Ahh! Good question!

And, I have a good answer:   Because your total business deduction may just be greater $$$ than using the standard IRS mileage rate; especially if you’ve had car repairs or have recently purchased a new vehicle for business purposes.

The bistaxadvisor.com website has a great example:  Susan is a self employed interior designer. She started her business January 1, 2010 and began using her 2007 Toyota for business purposes at the same time. Her total mileage at year end was 10,000 miles, of which 8,000 miles were for business (8,000 /10,000=80%). Susan charged all her car expenses to one credit card (good tax tip!), so she knows exactly what they were; they add up to a total of $5,775, including depreciation expense. Susan also keeps a mileage log. To calculate her business car deduction using the Actual Expense Method, Susan calculates:

Total Actual Car Expenses x 80% = $5,775 x .80 = $4,620

Susan is curious what figure she would get if she used the standard IRS mileage rate instead of the standard IRS mileage deduction:

Total business miles x 2010 IRS Mileage Rate =   8,000 x .50 = $4,000

Because Susan had kept good records and had included all her actual expense receipts, her car deduction is higher by $600 using actual car expenses. She is in the 27% tax bracket and pays self employment tax (15.3%). This means that her tax savings using the actual expense method vs. using the standard IRS mileage rate is approximately $250.

If you’re in the Lacey/Olympia/Tumwater area and need a mileage log, please let me know and I will send you one free of charge. They’re great quality, preprinted booklets and fit just right in the center console of your car.

Best wishes for the greatest New Year!

OLYMPIA – Gov. Chris Gregoire’s unemployment tax and workers’ compensation reform bills from last legislative session continue to help businesses through a down economy by causing next year’s unemployment tax rates to drop and keeping workers’ compensation rates flat into 2012.

Eighty-eight percent of Washington’s businesses will pay a lower unemployment tax rate in 2012 than they pay today. This decrease will save businesses an estimated $207 million in 2012 – in addition to $300 million in 2011 savings. Overall workers’ compensation insurance rates will not increase, which will save businesses an estimated $150 million in 2012.

When Gregoire signed her unemployment tax reform bill in February 2011, the Employment Security Division estimated that businesses would save more than $300 million in 2011. Today, it was clear that her reform’s effectiveness far surpassed initial expectations:
• Updated estimates indicate that businesses will save more than $500 million in the two-year period — $300 million in 2011 and $207 million in 2012.
• 88 percent of Washington’s employers will pay lower unemployment tax rates in 2012 than what they pay now.
• The overall average unemployment tax rate will drop by 13 percent.
• For the 77,338 employers that have had no layoffs in the past four years, the tax rate will plummet by 71 percent.

Certain payments for goods and services paid by credit card or third party merchants will now be reported to the IRS via the form 1099-K. They are very similar to the form 1099-INT used by banks to report interest and the form 1099-DIV used by banks to report dividends.

The 1099-K will be required for “reportable payment transactions.” A reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. Taxpayers who have a credit card merchant account, PayPal, Amazon Seller account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider at the end of the year.

By Patrick Temple-West

(Reuters) – The Internal Revenue Service issued new rules to clarify the difference between a business expense that is a repair and tax-deductible and one that is an improvement but not deductible right away.

Most of the new rules, which touch on everything from the repair of plane engine to a retailer’s new roof, take effect on January 1. An ordinary business repair of an asset is generally tax deductible. An improvement is usually classified as a capital expenditure and not immediately deductible.

The 255 pages of new regulations, published in the federal register on Tuesday, are temporary, meaning the IRS can edit the rules if sufficiently persuaded by the business community. Earlier this year the IRS issued asset rules specifically for the telecommunications and electricity industries.

For years, businesses have relied on case law to determine the difference between a business expense and a capital expenditure. Courts have kept their rulings case-specific in the debate on repairs versus capital improvements.

“For a long period of time, this has been an area of disagreement between taxpayers and the IRS,” said Michelle Koroghlanian, technical manager for the American Institute of Certified Public Accountants.

With limited guidelines in this accounting area, companies often wrote their own procedures and then battled with the IRS when the agency raised objections.

In 2005, FedEx Corp successfully challenged the IRS over its accounting procedures for aircraft engines when they are removed from a plane for repairs. The U.S. Court of Appeals for the Sixth Circuit affirmed that FedEx could deduct the engine repair costs and the package-delivery company was awarded a $66.5 million tax refund.

CLAMOR FOR CHANGES

The IRS first proposed asset accounting rules in August 2006, but businesses clamored for changes, and in March 2008 the IRS reissued proposed regulations. Those rules are now withdrawn.

The new rules may mean big changes when accounting for improvements to nonresidential building property, said Eric Lucas, a principal at KPMG LLP and a former Treasury Department tax counsel who helped draft the 2008 asset rules.

The 2008 proposed rules, which never went into effect, “were more favorable to taxpayers for building property” as businesses had more flexibility to report an improvement, such as a new roof, as a current-repair deduction, Lucas said.

The new rule for property improvements is “one of the more significant changes” from current accounting policy and could be troublesome for businesses that took “an aggressive view” in deducting repairs, he said.

The building-improvement accounting rules will specifically affect the retail sector, which “has been very interested, in particular with store remodel costs,” Lucas said.

The IRS is also expected soon to release procedures to businesses so that they can ease into the new accounting requirements from their current practices.

An IRS spokesperson on Tuesday declined to provide a time frame for when the transition guidance might be released.

(Reporting by Patrick Temple-West; Editing by Howard Goller and Steve Orlofsky)

The typical small business examination (or audit, which are interchangeable terms), begins with a letter from the IRS advising the business that it is being audited by the IRS. The letter will provide the IRS tax form and the period of the audit. The letter asks the taxpayer to call the IRS to make an appointment for the audit. When the taxpayer or the tax representative calls to get more details, the auditor will ask if the business is using any electronic accounting software. If the answer is “QuickBooks,” then the first IDR (Information Document Request) includes the request of a backup copy of the QuickBooks data file, and the user name and password to open the file.

If the QuickBooks data file is provided to the IRS, it is important that it is trimmed to only provide information for the period of the audit. That is generally a calendar year, but for the IRS, the date range should cover 14 months, providing the IRS with the ability to test cutoffs at the year ends. If you are using a version of QuickBooks other than Accountant or Enterprise 2012, you’ll only be able to trim the older dated transactions in the data file. For example, if the period of audit is for the 2009 tax year, then older versions of QuickBooks can only remove transactions older than 2009. However, a data management professional is capable of trimming both ends of a QuickBooks file. This is an alternative way to trim the file. It is generally quick and relatively inexpensive to have the trimming done.

In 2010, the IRS asked for the QuickBooks files and generally would then produce only the schedules to support the audited items noted in the IDRs. For example, a business may have to provide support for cost of goods sold, travel and contract labor. The IRS would get the QuickBooks data file from the taxpayer, take it back to the IRS office and have a “trained” IRS employee prepare three schedules that could be uploaded into the IRS standard workpapers. That was it.

Since the middle of 2011, the IRS began requesting the data file to do some analytical review. The IRS wants to evaluate the internal control of the small business by reviewing the audit trail report, and look for who made changes to transactions and when. The IRS introduced the concept of looking for “metadata” within the data file, or additional information about the transactions. There are tax practitioners who are not convinced that the IRS needs to have the complete data file. The IRS audit is generally limited in scope, only requesting certain line items of information. The complete QuickBooks data file turns the audit into a full scope audit, where all transactions and activity of the business can be seen.

At Precisely Right Bookkeeping, I can prepare Detailed Transaction Reports that include who the last user was to make a change in the transaction and when the change was made. Such a schedule is the bulk of the information that an Audit Trail Report provides, which is the report that the IRS calls out as a key report for its audit review procedures.

It is important to remember that the acquisition of the QuickBooks data file does not complete the audit. It is only a part of the audit. The taxpayer will still have to provide support in the form of original documents, such as supplier invoices and cancelled checks. Although the IRS states that it is attempting to evaluate internal control for a small business, it is doubtful that there is any material change in the manner in which the IRS will perform an audit engagement. For a small business, it is assumed by many accountants that there is little internal control due to the nature of small business. The owner makes the invoices, deposits cash in the bank and writes out the checks. Where is the internal control?

The IRS does not seem to address the issue of different ways in which QuickBooks can be deployed in relation to income tax preparation. A small business may use QuickBooks for everything and have a solid data file. This is the best case for the IRS, as it fits their model.

The small business may have a data file that is not well groomed. At Precisely Right Bookkeeping I can take a copy of it and make a wide variety of journal entries, as needed, to get the file into shape so a tax return can be prepared. The result may be that there is little or no audit trail due to journal entries containing summary postings. In this case, getting a series of detailed schedules may be more efficient for the IRS auditor to work with than trying to understand a poorly maintained QuickBooks file.

There are many accounting firms that have established firm procedures to only use the firm’s accounting software to prepare tax returns. The client’s software, which may or may not include QuickBooks, provides a trial balance. This is entered either manually or electronically into the firm’s accounting software. The client’s data file is reviewed and the accounting firm makes adjusting journal entries as needed. When completed, the firm uses the final working trial balance from their computer program to prepare the small business tax return.

At Precisely Right Bookkeeping, I understand the ongoing and changing requirements of the IRS to best serve my clients. If you’re not sure that your system would survive an audit, or, if you have made the wise decision and opted to hire someone to help with your bookkeeping, please contact me so that I can help you! Cynthia Hancock 360-584-6820

The typical small business examination (or audit, which are interchangeable terms), begins with a letter from the IRS advising the business that it is being audited by the IRS. The letter will provide the IRS tax form and the period of the audit. The letter asks the taxpayer to call the IRS to make an appointment for the audit. When the taxpayer or the tax representative calls to get more details, the auditor will ask if the business is using any electronic accounting software. If the answer is “QuickBooks,” then the first IDR (Information Document Request) includes the request of a backup copy of the QuickBooks data file, and the user name and password to open the file.

If the QuickBooks data file is provided to the IRS, it is important that it is trimmed to only provide information for the period of the audit. That is generally a calendar year, but for the IRS, the date range should cover 14 months, providing the IRS with the ability to test cutoffs at the year ends.

If you are using a version of QuickBooks other than Accountant or Enterprise 2012, you’ll only be able to trim the older dated transactions in the data file. For example, if the period of audit is for the 2009 tax year, then older versions of QuickBooks can only remove transactions older than 2009. However, a data management professional is capable of trimming both ends of a QuickBooks file. This is an alternative way to trim the file. It is generally quick and relatively inexpensive to have the trimming done.

In 2010, the IRS asked for the QuickBooks files and generally would then produce only the schedules to support the audited items noted in the IDRs. For example, a business may have to provide support for cost of goods sold, travel and contract labor. The IRS would get the QuickBooks data file from the taxpayer, take it back to the IRS office and have a “trained” IRS employee prepare three schedules that could be uploaded into the IRS standard workpapers. That was it.

Since the middle of 2011, the IRS began requesting the data file to do some analytical review. The IRS wants to evaluate the internal control of the small business by reviewing the audit trail report, and look for who made changes to transactions and when. The IRS introduced the concept of looking for “metadata” within the data file, or additional information about the transactions. There are tax practitioners who are not convinced that the IRS needs to have the complete data file. The IRS audit is generally limited in scope, only requesting certain line items of information. The complete QuickBooks data file turns the audit into a full scope audit, where all transactions and activity of the business can be seen.

At Precisely Right Bookkeeping, I can prepare Detailed Transaction Reports that include who the last user was to make a change in the transaction and when the change was made. Such a schedule is the bulk of the information that an Audit Trail Report provides, which is the report that the IRS calls out as a key report for its audit review procedures.

It is important to remember that the acquisition of the QuickBooks data file does not complete the audit. It is only a part of the audit. The taxpayer will still have to provide support in the form of original documents, such as supplier invoices and cancelled checks. Although the IRS states that it is attempting to evaluate internal control for a small business, it is doubtful that there is any material change in the manner in which the IRS will perform an audit engagement. For a small business, it is assumed by many accountants that there is little internal control due to the nature of small business. The owner makes the invoices, deposits cash in the bank and writes out the checks. Where is the internal control?

The IRS does not seem to address the issue of different ways in which QuickBooks can be deployed in relation to income tax preparation.  A small business may use QuickBooks for everything and have a solid data file. This is the best case for the IRS, as it fits their model.

The small business may have a data file that is not well groomed. At Precisely Right Bookkeeping I can take a copy of it and make a wide variety of journal entries, as needed, to get the file into shape so a tax return can be prepared. The result may be that there is little or no audit trail due to journal entries containing summary postings. In this case, getting a series of detailed schedules may be more efficient for the IRS auditor to work with than trying to understand a poorly maintained QuickBooks file.

There are many accounting firms that have established firm procedures to only use the firm’s accounting software to prepare tax returns. The client’s software, which may or may not include QuickBooks, provides a trial balance. This is entered either manually or electronically into the firm’s accounting software. The client’s data file is reviewed and the accounting firm makes adjusting journal entries as needed. When completed, the firm uses the final working trial balance from their computer program to prepare the small business tax return.

At Precisely Right Bookkeeping, I understand the ongoing and changing requirements of the IRS to best serve my clients. If you’re not sure that your system would survive an audit, or, if you have made the wise decision and opted to hire someone to help with your bookkeeping, please contact me so that I can help you! 

Cynthia Hancock 360-584-6820

WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.
Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.