Income tax work?

[Black Bart]

That thread on preparer licensing touched on the possibility of a national sales tax replacing the income tax. While some posters feel that accountants and tax practitioners would not be seriously harmed, I disagree and would like to know what percentage of our practices consists of income tax preparation.

[Gretel]

I tend to disagree also but I also don't think it is very likely to happen.

1040 taxes made up about 50% of my income but this will change to 80% due to decrease in work for a major client.

[newbie]

HRB will never let it happen!

[Uncle Sam]

Income Tax Work

The income tax has been around since 1913.

There have been 75 years worth of changes to it.

As a former sales tax auditor - I can tell you that the sales tax is the most arbitrary tax in terms of an auditing perspective - in being able to FAIRLY administrate the tax - than any other tax I've known.

I doubt that a national sales tax will ever come to fruition without extensive planning on the part of both the Federal AND state governments.

With income tax - you're dealing with items either being taxable or deductible and variation of treatment of those items.

Sales tax is a much more complex to control - as to what circumstances items are and aren't taxable.

[Corduroy Frog]

This Could Happen

That thread on preparer licensing touched on the possibility of a national sales tax replacing the income tax.

And this recession may just be the fuse to set it off.

I believe the sales tax opponents won the last round (in 2003) in the Supreme Court, but I don't think the war is over. Amazon.com has nexus in only one state, and internet sales are increasing nationwide. The loss in sales tax revenue is huge. Usually the powerful and influential interests eventually get their way.

Amazon.com and other internet sellers will eventually (maybe sooner than we think) have to collect sales tax. The overwhelming number of internet sellers are not equipped to administer sales tax collections.

So, enter the federal government with a brilliant idea. All sellers selling to out-of-state customers where no nexus or collection machinery exists will be forced to pay into a national clearinghouse. Let's say 7% for purposes of discussion.

The Federal government will then disseminate the collections to the state of destination, and keep maybe 1% for themselves.

Will it happen this way? Maybe not. But revenue-starved states have been cleaning their plates for a shot at the feast - an internet sales tax. Don't think it won't eventually happen.

[travis bickle]

HRB will be

HRB will never let it happen!

among the first to support "licensing".

HRB wants to see the closure of storefront operations where the preparer(s) is/are clearly inept -- please note, I am NOT talking about anyone on this board, rather, we "know" the type of preparer I am discussing.

HRB already has an extensive training program to train their employees, this IRS "licensing" would dovetail nicely with HRB.

[David1980]

"wants to see the closure of storefront operations where the preparer(s) is/are clearly inept" but wouldn't that even describe the current state of many HRB stores themselves? I will give them that they have a much better training program setup for their employees than the other storefront businesses do. I know HRB preparers who continue to take classes during the off season, and they have a lot of variety of classes. The course materials I've seen look great. But the first year preparer at an HRB hasn't been though all those classes. It would be easier for HRB to get them upto that point than some other storefront businesses for sure.

[newbie]

100% Agreed

among the first to support "licensing".

HRB wants to see the closure of storefront operations where the preparer(s) is/are clearly inept -- please note, I am NOT talking about anyone on this board, rather, we "know" the type of preparer I am discussing.

HRB already has an extensive training program to train their employees, this IRS "licensing" would dovetail nicely with HRB.

I meant HRB will never let the National Sales Tax replace the income tax as we know it.

[Jiggers]

National Sales Tax?

Not in our lifetime.

Sounds simple, but it isn't.

There would be a larger cash underground than there is now.

Would livestock commission companies have to collect the sales tax on all sales?

Would farmers have to collect the sales tax on all private sales to individiuals: cattle, hay, etc.?

Would contractors collect the sales tax on all their fees for remodeling, repairs, etc. I doubt if they report their total income now. Especially those that do it on the side.

[DaveO]

About seven years ago the state decided to extend sales tax to contractor services. Of course they made a complete mess of it and went back the next year to “fine tune” the program and again the next year and the year after that until they had made sweeping changes to the sales tax structure in each of five consecutive years.

Then, after intense lobbying pressure, they pulled the tax off contractor labor completely. Since that happen, they have ruthlessly audited contractors under the rules for each of those five years. Forcing them to cough up actual invoices for each job with details of services provided and materials used and to document the tax paid on supplies and equipment.

Many small contractors simply went “off the books” the first year and are not part of the group being hammered by these audits since there is no record of them being a contractor. So the lesson learned here is to ignore the law completely instead of trying to comply and having your head handed to you in a sales tax audit.

In one of the audits I’m working the state is trying to use the wording in proposed regulations to collect tax from five years ago. Unlike the IRS there is no clear cut appeals route and there is no tax court to resolve these issues or set precedent. I’ll take an IRS audit any day where the auditor focuses on a few issues usually in a single year instead of a sales tax audit covering every transaction over a 5 year period.

I see a national sales tax being every bit as messy to comply with and to enforce. IMHO a sales tax should only be collected when tangible personal property changes hands and should never be levied on intangible property or labor.

[Roberts]

JMO but a sales tax would only be ADDED to an income tax.

[BHoffman]

Don't think it's going anywhere.

If you want encourage a behavior, subsidize it.

If you want to discourage a behavior, tax it.

Do we think our government is going to give up that kind of social control?

[Black Bart]

Income tax poll

Don't think it's going anywhere.

Looks like about 3/4 are in the 80-100% income tax group. That's kind of what I expected, so a national sales tax would wipe out a lot of traffic. Question is, would sales tax-related forms and write-up work make up the difference? Erchess and kaimana felt like it would and I hope they're right if it ever comes to it.

I agree with you and the others that it's not likely to happen...but...who knows? Guess we'll deal with it if and when it arrives.

[erchess]

Here's The Way I envision it

There are no more checks, credit cards, bills or coins. Every person both natural and not has at least one electronic card and a machine that reads the cards of others who wish to give them money. Literally every time money changes hands including borrowing, charitable donations payments of fines and giving money to a bank or a broker, getting paid from a job or self employment activity or getting invested money back with gain or loss the same flat percentages of the money in or out of anyone's account go to the Feds and to their domiciliary State and Local Governments or perhaps to the State and Local Governments where the transaction takes place.

If there is a desire to be "progressive" we could give everyone an annual account credit equal to the tax paid by someone at the highest income level that for a family of four is considered poverty level. To be even more progressive everyone could get a credit equal to a percentage of their spending but the lower the spending the higher the percentage with a range of say 90% to 1%...

There are two reasons why this unlikely scenario would be a gold mine for anyone in our business.

People are going to want to access their sales tax accounts and make sure that only what should have been taken was taken. For a good number of years the process will be as fraught with errors as billing for cellular service is now.

There are going to have to be rules either attempting to outlaw barter or attempting to collect tax on barter. Everyone will have to file an annual statement of how much they bartered even if they say they did none and there will be attempts by the government to allege that these reports are incorrect. Because of the sheer volume of such attempts there will be a need for more people who can represent these taxpayers than the total number of Circular 230 Professionals today. Therefore anyone who can study for and pass one section of the EA Exam will be able to pass the exam required. They may even grandfather in current EAs along with the CPAs and Tax Attorneys.

All this aside, I am in complete agreement with those who do not expect anything like this to happen and with those who assume that IF an NST is put in there will be some transactions that are not supposed to be taxed at all and varying rates for the transactions that are taxed. The latter sorts of provisions would actually sweeten the deal for us because there would be more to argue with the taxing agencies about.

[DaveO]

That's a rather grim world you see there erchess, one envisioned by Orwell no less. One thing I can see is some very complex audit work as a result of a NST. For those willing to move to the dark side and live in the belly of the beast there will be amble opportunity.