VITA Preparing Tax Returns

Maybe you have never heard of the Volunteer Income Tax Assistance (VITA) program. This program "provides no-cost Federal tax return preparation and electronic filing to underserved segments of individual taxpayers, including low- to moderate-income, elderly, disabled, and limited-English-proficient taxpayers."

Kudos to the IRS for not only having this program, but regularly checking up on the quality of the program. Without measuring how well something is working it is almost impossible to improve it. The IRS does this by sending "secret shoppers" to the VITA centers to have tax returns prepared. Then the accuracy of those returns are checked.

And the VITA program needs a lot of improvements! Testing the system in 2013 (tax year 2012) showed that the VITA program managed to file 51% of the returns correctly. Of course that means that 49% were wrong! Most organizations would not survive if they messed up half of everything they try.

Recognize that the preparers VITA utilizes do have training. Also these tax returns are not particularly difficult ones. (The rules of the program limit those who can use the program.) But even then half the time they cannot get it correct.

As a professional practitioner, I am always amazed at how many people think we should be able to whip out a tax return quickly and charge very little. What about the hours and hours of study and preparation time? Seems people do not understand. Even for a return that does not include a lot of other issues, someone must determine that those other issues do not apply. So they must be considered.

As for the VITA program, they are improving - slowly. In 2012 their accuracy rate was only 49% - less than half prepared correctly.

Next I'll hear the demands for a simpler tax system. That always sounds simple until you start pealing that onion. There are a lot of reasons we have the complexity that we do. But that's for another day.

If you want to read the full report see http://www.treasury.gov/tigta/auditreports/2013reports/201340110fr.html.

Forgiveness on Foreclosure

Beginning in 2008 the housing market in the US took a major hit, and along with it many homeowners started getting in trouble with their mortgages. In additional to losing their homes, many found that they were also getting hit with an ugly tax bill. From a tax perspective, there is no difference between a foreclosure and a short-sale - there is debt forgiveness (i.e., the unpaid mortgage) and that is generally taxable.

Congress stepped in and created a short-term provision in the tax code to provide relief. What many people missed (or try to ignore) is that this provision only applies to "acquisition debt" or the money borrowed to buy, build, or substantially improve your primary residence.

Refinancing that loan does not impact this to the extent of the previous mortgage amount. For example, assume you purchased that new home and borrowed $200,000 at the time. You have made payments on the mortgage and paid it down a small amount. Interest rates drop, and so you decide to refinance your mortgage. At the time you still owe $185,000 on the loan. Your new mortgage is $190,000 with the extra $5,000 used to pay the expense of the refinance (e.g., title fees, appraisal, etc.). Now your mortgage is $190,000, but your acquisition debt is only $185,000.

The key news on this is that the short-term provision that Congress created is due to expire on December 31, 2013. After this date there will no longer be this relief.

There are other issues that can affect the taxability of this debt relief. One of those is whether or not the loan, as taken out, was recourse or non-recourse. (Unfortunately lending institutions rarely use tax terms in their loan documentation so this is not usually clearly stated.) A qualified tax practitioner should be able to explore other options or a combination of options to see if any relief is available through other channels.