A Day in the Life

“Your client is here,” the receptionist says to me.

She’s a new client. I go up to greet her – let’s call her, oh, I don’t know, how about Felicia? She’s sitting in a chair up front, nervously pecking on her iPhone, a purse and a folder crammed with documents in her lap. She’s probably about forty, short hair, birdlike with a bundle of barely contained energy about her thin frame. I have a momentary bad feeling, but my gut’s been wrong before. I introduce myself and lead her back to my cubicle to do her tax returns.

“So how did 2018 treat you?” I ask as she sits down, one of my standard intro questions for a client, new or returning.

Felicia shrugs and emits what I think is a chuckle. “I have freedom now. I quit my job.”

Doesn’t sound like she voluntarily opted for freedom, but it’s hard to tell. After a few more questions she tells me she’s sick of commuting into the city every day. She also tells me that she never filed last year’s taxes either.

While chit chatting I remove all the documents from the folder she’s handed to me and separate them. About an equal number of 2018 and 2017 docs. A W-2 for each year. A 1099-G – unemployment – for 2017. No 1095s, which indicate health care coverage. My stomach dips a bit; this could be trouble. 2018 is the last year not having adequate health insurance might possibly impact your taxes. I get her driver’s license and start logging her into the software as a new client. Turns out she has two children and wants to claim Head of Household. HOH status is a new item on the Due Diligence checklist I have to run with just about every tax return. Which means the IRS will be examining Head of Household returns with a finer-than-usual fine-tooth comb this year.

“So, are you divorced?” I ask. As a tax preparer you have to ask probing and sometimes uncomfortable questions.

Felicia hems and haws a bit. “He’s in another state. I’ve always been claiming the children; it’s just the way we do it.”

Okay, fine. I’m not required to audit my clients. But I will put that in the Due Diligence notes in case it comes back to bite me in the off-season. Besides, if he’s in another state and they haven’t resided together for the past six months, tax law can consider her “unmarried.”

Then the bottom falls out, as I kinda knew it would at some point. I decide to do 2018 first, and the first thing I see on her W-2 is that no federal tax has been withheld. She made $80,000 during the course of the year, and no federal tax has been withheld. Zero. Right there and then I know she’s going to owe, and with her touting her new-found “freedom”, I know this encounter is not going to end pleasantly.

I point out the lack of withholding to her, and she is, naturally, baffled. Most people never ever look at their check during the course of the year. This is something I, for the life of me, cannot fathom. I can understand not filling out a W-4 correctly. The W-4 tells your company’s payroll provider how much tax to withhold on a federal and state level, and that form can be downright damn confusing. But to never look at your paycheck to see that not a single dollar of federal tax has been withheld, well, that puzzles me.

I explain that two things could have happened. One, the payroll company issuing the W-2 could have made a mistake (unlikely). Or, two, when she started the job, she indicated EXEMPT on her federal W-4 by mistake, so no federal tax was withheld (likely).

We waste fifteen minutes while she contacts her HR department and the person on the other end looks up her record and states that on October such-and-such of 2017 she checked the EXEMPT button in her payroll portal. While she’s doing this I look over her 2017 W-2 and silently breathe a sigh of relief: she had federal tax withheld for that year.

So Felicia’s not happy. I take her at her word that the children are under the father’s insurance – and again take notes in Due Diligence. To add to the indignity, she worked in New York and lives in New Jersey, so that will necessitate two state returns, and extra $50 charge. But I’m not even thinking of the fees for the tax prep yet. Once everything’s in for 2018 it looks like Felicia will owe $4200 to the IRS, $160 to New Jersey, and $45 to New York.

She is not doing a good job of fighting back tears.

But I try to brighten up her day. “Okay,” I say in a calm, reassuring voice. “Let’s take a look at 2017. Your situation was very different – maybe we can get some money back for you that can offset 2018.”

Felicia looks up, not convinced. I begin to input her 2017 docs and a new picture emerges. For one, she only made $18,000 in her New York job. Then, there was about $15,000 in unemployment. Both the W-2 and the 1099-G had federal taxes withheld, very good. Plus, she qualifies for EIC. EIC is Earned Income Credit, and it’s basically a money transfer procedure where people on the low-end of the income spectrum receive a refundable tax credit. “Refundable” means that, even if her tax liability goes down to zero, she can still “get back” additional money. Money for doing nothing except being a low earner. And because she has two children, two dependents, and she meets other criteria, she’ll get more.

Turns out that when I’m all finished, she is getting back a little over $4000 federal, and more than enough from the states to cover what she owes in 2018.

However, there are some other issues we now have to face.

The 2017 returns, with which she’ll use the refunds to pay for the 2018 tax liabilities, will have to be paper-filed. That could add several weeks or even months before she receives a check in the mail, as 2017 returns are generally processed after 2018 returns, and those with EIC and HOH status are vetted a little longer and under a stronger magnifying glass. If she gets her money by October I’d be amazed.

She seems to realize this, too, and wants to file an extension for 2018. But that really doesn’t make sense. She’ll still get a small penalty for not paying her liability, extension or no. So I want her to e-file 2018 and mail in the 2017 returns right away. The IRS is somewhat sympathetic – believe it or not – to those with a big, unexpected tax bill. All she needs to do is reach out to them and set up a payment plan. I can give her the number to call and even the page on their website which has all the details.

But I’m most concerned about the tax prep bill. I know she can’t pay. I don’t know how she’ll react.

It turns out she reacts in the worst way possible.

My company has a fairly rigid fee system set up. It’s based on the complexity of the return, starting from simple income for a single person (just a W-2), and the more items there are – dependents, home ownership, investment expense, education credits, small business – the higher the standard fee becomes. Each state is a fixed fee. But every year it changes. In 2017, fees were based on forms needed to file the return. For 2017, Felicia had a W-2 but also a 1099-G. There are forms to be filled out and included for the Child Tax Credit and for the Earned Income Credit. So it adds up more than the 2018 return.

The bill to complete her 2017 Federal, NJ, and NY tax returns is $450.

Her mouth drops in shock. “How can that be?” she exclaims.

Then she drops the dreaded, “They told me over the phone it would be no more than $250!”

Now the entire encounter, going on an hour now, has officially entered the I-DON’T-GET-PAID-ENOUGH-TO-HANDLE-THIS phase. The least popular part of my job is haggling over price. In fact, it’s hardly ever done. The company gives me little leeway regarding fees. A new client can get a $25 off coupon, but I don’t even mention that as I have a hunch it will only add fuel to the fire. I have a couple hundred dollars of discretionary discounting I can use, but I generally save that for family and friends.

“Who told you that?”

“Whoever I spoke to on the phone. I didn’t get a name.”

Ah. Naturally.

Without telling her, I realize that the fees to do the 2018 returns will be around $300. Not bad, comparatively speaking, but if I bring it up right now she’ll flip out.

“Okay,” I say, keeping my voice calm and hoping to keep her calm too. “Let me call my manager and see what we can do.” The dreaded LET-ME-CALL-MY-MANAGER phase. But it does relieve me of the responsibility for this. He’s actually a very good guy; wants to do the best by the client, yet has no problem letting the irrational ones walk.

I move to another cubicle and call him up. It takes a few minutes to get him on the phone as he’s at another branch. When he does get on I run down the scenario with him as quickly as possible. We chuckle at the “whoever I spoke to on the phone” part – he hears that line at least once a week. Like doctors or auto mechanics, we don’t diagnose problems over the phone – let alone quote prices.

After batting some ideas back and forth, he decides on this: We’ll only charge her for the federal returns and give her the state returns for free. This may cause an issue with 2018, as current-tax-year returns are all supposed to be e-filed, but we’ll deal with issue if and when it becomes one. Just the federals will bring the whole thing down to $500 from $750. Which will match the phantom $250 quote she got, assuming she’s not going to try to parlay two tax years into that figure.

I spend ten minutes explaining the arrangement in detail to her. This entails giving her the 2018 fees, which then engenders a five minute conversation on the different philosophy in pricing. I realize that the more time I spend discussing our pricing policies, the more I come off as a used car salesman in her eyes. I have to keep in mind that she is dealing with a bad personal situation, mistakes of her own making, so I try not to take it personally.

Then, the crowning moment, which I knew was coming all along:

“Can we take the fees out at the $4000 refund? I heard you guys can do that.”

Normally we can take our fees out of a client’s refund for a small bank fee of $30. That’s because a different bank is actually a middle man in this transaction, paying us our fees while working itself to take the fees paid to us out of the client’s refund. But the client doesn’t see it that way. She sees it as another way our hands are in her pocketbook.

The problem is she isn’t getting a refund on her 2018 return – only on her 2017 return, which will be paper-filed (i.e., mailed in) and not e-filed. I’m not sure the system will enable us to take fees out of a prior-year return. In fact, I’m fairly certain it won’t, but I make a show of telling her that I have to speak with the boss again (ugh) to see if it can be done.

After another fifteen minutes at another cubicle on the phone, after my manager consults one of the leads at the other branch, the answer comes back: No, it can’t be done.

“She doesn’t have any money; she doesn’t even have a job … what can I tell her?” I ask him.

His reply: “She has to give us something. We’re not in the charity business.”

I sigh in resignation, and head back to my cubicle. Felicia is bunched up in her chair, sniffling. I tell her the bad news, that our fees – reduced to $500 for two years’ worth of returns, six total – cannot be taken out of her 2017 refund.

Then poor crying Felicia instantaneously goes hostile on me. “This place is a joke! I can’t believe you quote prices over the phone and then don’t stick by them! What type of business do you people run?” and on and on and on, raising her voice higher and higher. I apologize, but after a while I let my eyes glaze over. She ends with, “I can’t just pay $500 out of my pocket! I’m not going to file then!”

“Okay,” I say. “Not a problem.”

She glares at me in disbelief. “I’m leaving!” she announces at a way-too-loud volume, and storms out past several other tax preparers with several other clients, and out the front door into the afternoon sun.

I rub my eyes. Two hours down the drain, and I made no money.

A day in the life …

Bitcoin

Way back in December, on a whim, I listened to two one-hour podcasts on Bitcoin, figuring it might come into play for the upcoming tax season. Turns out I was right, but way overestimated the impact. My three-man office does about 900 returns by April 15, and it so happened that one, and only one, person had investment income from bitcoin.

How does the IRS handle it? Just like any other type of investment income. For now.

Below is a pretty good introduction to Bitcoin. I’ve listened to it over the past three days during my morning walks. They say the best indicator of how well you know a subject is if you can teach it. Well, I certainly can’t teach you bitcoin; maybe, just maybe, I can pass a multiple-choice exam on it. But it is fascinating, and the 25-minute video will fill you in on the gist of the cryptocurrency:

I have two big questions, though. First, when they say that bitcoin is trading at 1 Bitcoin = $8,126.44 (as it is now as I’m writing this), is that “trade” something that happens within the bitcoin realm or on some market exchange outside it? Within the blockchain, or between a bunch of Wall Street firms trading pieces of paper. And if the “trade” transaction is within the blockchain, how is the value to the dollar determined?

Second, as per the video, when you have two blockchains to evaluate, the rule of thumb is to always treat the longer chain, the one that’s had the most work done to it, as the valid one. So what then happens in this situation:

Chain 1 has 10,000 transactions and ends with A, B, C, D, and E.

Chain 2 has those same 10,000 transactions but ends with X, Y, and Z.

You’d treat Chain 1 as the valid blockchain. (Remember, a blockchain is a public, online ledger.) What then happens to transactions X, Y, and Z? How do they make their way onto the valid ledger? 

Or am I missing the boat completely here regarding the mining process? (“Mining” is simply bitcoinspeak for adding transactions to the blockchain, which must be done with some heavy duty computer processing power since it involves cryptography and algorithms ranging up to 2^256 power.)

The quest for knowledge continues …

The Starter Wage

I’m just gonna float this on out. Haven’t heard it out there in that Matrix-like level of reality known as the Mainstream Media. Or any media, for that matter. If it’s been addressed or proposed somewhere by someone else some time ago and it’s flown straight by me, forgive my lapse of attention.

Anyway, I was thinking about all this “raise-the-minimum-wage-to-$15-an-hour” nonsense and came up with an idea. Now, please don’t get offended, but it seems to me that logical, rational thinking people can understand that when costs go up, demand goes down. The more expensive something is, the fewer people will want to pay for it. Labor is a cost to business. When government mandates a minimum cost and then raises it, businesses will look for other means to fulfill the demand they once had for that labor when that labor was at a lower cost. Such as automation, as we’re seeing some fast food restaurants experiment with.

Common sense. Or, better yet, self-interest. It has nothing to do with “fairness”, if one defines “fairness” as equality of results. A market of buyers and sellers all looking out for their own self-interests yields an efficient marketplace. “Efficiency” as defined as equality of opportunity. Yet a third of the general public out there won’t understand that line of reasoning and another third will actively endorse and promote contrary ideas. So, thus, we have the government interfering in the marketplace in the holy name of Fairness.

Now, if – and it’s a huuuuuuuge if – IF government absolutely must get involved in the private sector by mandating a minimum wage, a minimum cost of labor, fine and good. Continue as planned, amateur Keynesians, and keep marching toward utopia and try not to get too many people unemployed, or at least blame business for acting in their own self-interest for increased-minimum-wage-related unemployment.

But I have two young daughters. One will be looking for work in two or three years. Part-time, first-time, summer job type work. In order to have her find a job (mostly for the experience), since no employer will pay an inexperienced teen $15/hour, why not create a new category of employee: the starter worker, with a starter worker wage.

We can even capitalize the words in the title. The Starter Worker, with the Starter Worker Wage. We can also super-complicate it, over-define and over-regulate it as government is wont to do. We can set limits, such as: the Starter Worker must be currently attending a secondary school full-time. Or the Starter Worker must not work more than 500 hours a year. Or the Starter Worker must be under the age of 18 by December 31st of the current year. You know, give businesses a lot of tracking busywork to do since government is generously allowing them to hire an inexperienced kid living with mom and dad at $8 an hour.

The Starter Worker Wage.

Has it been proposed, and I missed it? If it hasn’t, why not?

Signed,

Hopper

Armchair Economist

A Taxing Experience

But also an enjoyable and rewarding one.

A little over a year ago, pondering what the hell I could do to earn some money without getting laid off every two or three years, I walked into my local tax office. Way back in ’15, the lady who regularly did our tax returns noted my interest in the software she used and what qualified for a deduction or credit, why certain deductions or credits phased out, and how I could better adjust my family finances tax-wise. She said, “Why don’t you consider going on this side of the desk,” referring to her chair and implying that I might find doing other people’s taxes fulfilling.

The idea intrigued me but I let it lay dormant until necessity demanded otherwise.

I signed up for a course on the federal income tax in the Fall, attended the dozen or so classes, passed the mid-term and the final (90 percent and 98 percent), and aced the interview with the company’s district manager for a part-time evening position. December was hectic with classes on the company’s products and the selling of them thereof, as well as a pair of advanced classes. I did a lot of virtual learning online in my basement while the family enjoyed traditional Christmas-season festivities.

They started me early January in one of the higher-earning offices in our district. Thus, a lot of highly experienced tax preparers operated there, a dozen older men and women with 15, 20, even 30 years’ experience, client bases in the multiple-hundreds, and not a heck of a lot of incentive to mentor a newbie. In fact, there was none. I spent my evenings working on case studies and learning the appointment software. I became quickly discouraged and stopped showing up for two consecutive Mondays. No one noticed.

I did my first return three weeks later. A blue-collar dad brought his blue-collar son in for the youngster’s first tax return. Simple and straightforward. Yet it took me close to an hour. I was uncertain in responding to their questions. I did not know how to move from screen to screen with the software. I didn’t know how to assemble the return once everything was printed out. I didn’t know how to take payment. I sweated it out but survived. Then, nothing again for ten days.

Another office had an unexpected emergency opening, so they moved me there. I had three clients in three days. Then, the lead there started giving me more complicated returns to work on. These were drop-offs of previous years’ returns where we’d search for either higher refunds or lower liabilities via overlooked or incorrect deductions and credits. There were only five of us at this office, so I also got a lot of walk-ins.

I soon decided that instead of mere survival, my personal goal would be 26 clients and $5,000 worth of business. 26 was the number of clients one of the guys I worked with managed to attain his rookie year, five years ago. $5,000 just seemed a nice even target. To my surprise, I finished tax season with 44 clients and $8,464 business.  And as you might have guessed, the business is definitely exponential, culminating the week leading up to April 18. I did about 25 clients in the eleven weeks leading up to April, and 19 in the 16 days I worked in April. The last two nights I had three clients each night.

Turns out I really enjoyed the experience. I was kinda sad to leave the office Tuesday night. I said to one of my co-workers, “Once I actually figured out what I was doing [computer-wise and technique-wise, not tax-wise], I actually got excited to sit with a new client.”

Next season I go on commission instead of straight salary. That’ll be the test whether I stick with this. The pay plan is a bit complicated. It’s based on your skill level; we range from levels 1-6. I was a 1 for this first year, though I did some returns that probably fell in the 2 or 3 category. Skill level depends on your tax education level, i.e., the courses you’ve taken and passed in the off-season. That determines how much you’re paid per return plus the percentage of what a client is charged (which is based on the forms used, not on the refund received or client’s income level). And you get a few dollars for every product you sell and there’s a good survey bonus of some sort.

Goal next year is 75-80 clients (based on a 75 percent retention rate plus new clients from a retiring tax pro there plus walk-ins) and $20,000 brought in.

We’ll see ….

Introduction to a Mathematical Analysis of Tax Preparation

Warning: This post is not for the faint of heart. Or for 99.873% of mankind. Nor is it for anyone driving, operating heavy machinery, or in need of their mental faculties within the next hour.

Last night a young woman came in to get her taxes done. At first, it seemed simple. Just her, no dependents, two W-2s, no other income. Then it got more complicated. Seems that for the first six weeks of 2016, she lived and worked in New York, out in Long Island. Then she got a job over here in Jersey, in her chosen field, so she moved mid-February and began her new work. So though her federal is not affected and remains a 1040EZ, she now has to file a New York non-resident return as well as a New Jersey return, and both prorated for the amount of time she spent living and working in each.

It became a little embarrassing because I couldn’t find where to establish her residency dates in New York via the software we use. Plus the fact that a New York return contains two dozen forms doesn’t help. The clock was ticking and I was, in all honesty, getting a little frazzled (it was only my second New York return of the season, so I’m far from comfortable with them). I asked her if I could work on the returns over the next couple of days since she has until April 18 anyway. She said yes.

This morning I got to thinking about all this as I was shampooing and shaving in the shower. Doing a tax return is like solving a jigsaw puzzle. The more complicated the return, the more numerous the pieces and the more exotic the picture. The more returns you do, the more familiar these jigsaw puzzles become, and solving them almost becomes second nature. So I asked myself, how many patterns of returns are there? How many set types of a return? In the case above, my client had the return type of [Federal 1040EZ + NJ resident + NY nonresident + zero adjustments / credits / deductions].

At first I guessed 50, but then, recalling the class on finite math I took in 1989 which covered permutations and combinatorics, I realized it had to be much more.

Rinsing out conditioner, I mentally made a very rough list that determines the option for most major variables when doing a tax return:

Type of Federal return (1040, 1040A, 1040EZ) = 3

NJ resident vs NJ nonresident = 2

NY resident vs NY nonresident or no NY = 3

Has child / child dependent care credits Y/N = 2

Has capital gains/losses Y/N = 2

Has substantial interest income Y/N = 2

Has retirement income Y/N = 2

Has education adjustments/credits Y/N = 2

Has health care penalties/PTC adjustments Y/N = 2

Has other deductions or credits Y/N = 2

Has anything out of the blue Y/N (such as another State) = 2

Multiplying everything out, we have

3 x 2 x 3 x 2 x 2 x 2 x 2 x 2 x 2 x 2 x 2 =

3^2 x 2^9 =

9 x 512 = 4,608

Or 4,608 different sets/patterns of returns.

But that’s somewhat of an overestimate. In fact, if you are on a 1040EZ, you most likely do not have all the credits and deductions and alternative income listed. So if we just calculate the 1040EZ permutations with the state return(s), if any, and add that to the 1040/1040A option combined with all the permutations of the credits, deductions, etc., we get something like:

3 x 2^10 + (1 x 2 x 3) =

3 x 1024 + 6 =

3072 + 6 = 3,078

3,078 different sets of sets/patterns of returns.

Even that overstates the number of sets though, because some of those credits/deductions/etc. merely involve clicking a YES or NO button in our software, while others involving inputting a completely new form or forms. So each would have to be weighted somehow in some way, in terms of effort needed, as well as typical frequency of occurrence.

Out of fear of driving you comatose, I shall not do that. But my very inexperienced gut tells me that the result of this further weighting will yield an approximate number of

150 different sets of sets/patterns of returns.

Me, I’ve only done around 15, or 10% of the jigsaw puzzles.

Full proficiency expected sometime the beginning of February 2018.

Training

Ah, posting is sparse here because I’m in the final countdown with my tax training. In order to start preparing tax returns for the 2017 season (which technically begins January 23, 2017, though I will start work three weeks earlier), I have to complete:

32 hours of “Sales and Service” online / virtual training.

4 hours of “Tax Update,” also online, which details changes in the tax code affecting 2016 returns.

8 hours of “Sales and Service” training over 3 classes featuring role playing, group discussions, etc.

6 hours of Advanced Tax course material, consisting of two classes.

Last night was my final class of the five required, so all I have left is the virtual training. As far as that goes, I’m 11 hours in. All this has to be done by December 31, so I have ten days to do 25 hours of learning.  

Factoring in Little One’s band concert tonight (she’s first chair clarinet), last-minute gift buying, Christmas Eve with the family, Christmas Day with friends, and action-packed year-end tasks at work, it should be doable, but tight. Thank God my new job (now almost seven months in) gives me Friday the 23rd and Monday the 26th off. I’ll spend four or five hours each day in the basement in my little office staring at my laptop with headphones on. Oh, and that reminds me, have to stop in at the office I’ll be working in to see if my business cards arrived.

Much to do, much to do …

So, apologies, but posting has been scarce here for legitimate (read = $$$) reasons.

1040

When I was born the 1040 form for filing an individual income tax return sported 54 lines over its two pages and the instruction booklet paired with it was 20 pages long.  By 2015, the form grew to 79 lines over two pages, and its accompanying instructions expanded to 105 pages in length.

Interesting.

Especially when you consider that when the 1040 was first introduced, in 1913 with the passing of the 16th Amendment, it boasted 31 lines over three pages, with a single additional page for instructions. After specific exemptions were taken, a tax rate of 1 percent applied to those making over (in 2015 dollars) $72,000. Higher earners making over (approximately, in 2015 dollars) $400,000 paid an additional 1 percent in tax.

The 1040 form and instruction booklet plus common attachments used to be mailed to every taxpayer every year, a policy only recently discontinued in 2009.

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This message brought to you by the weird dude poring over a blank 1040 form and saying, “Gee, I wonder …”