Corporate Transparency Act Ruled Unconstitutional

In this episode, Roger Harris is joined by special guest Blake Oliver to unpack some of the biggest tax stories making headlines. From a federal court ruling deeming a new business reporting law unconstitutional to the staggering estimates of tax evasion by the wealthy. They also dive into the IRS's foray into direct filing for simple returns, the potential role of AI in tax preparation, and how states rank in their tax climates for businesses.

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• (00:00) - Welcome To Federal Tax Updates
• (01:11) - Special Guest Blake Oliver Joins the Show
• (02:36) - Diving into the Controversial Federal Court Ruling on Company Reporting Law
• (05:39) - Exploring the Implications of the Unconstitutional Ruling for Small Businesses
• (18:54) - IRS's Efforts to Tackle Tax Evasion by Millionaires and Billionaires
• (29:49) - The IRS Direct File System: A Move Towards Free Tax Filing
• (30:36) - Exploring the IRS's New Tax Filing Program
• (31:19) - The Cloud Accounting Podcast Begins
• (31:36) - Potential Impact on Tax Preparers
• (33:10) - Limitations and Design of the New Tax Tool
• (34:50) - The Complex World of Business Returns
• (36:06) - AI's Role in Tax Preparation: Hopes and Hurdles
• (42:30) - IRS's Paperwork Problem and Electronic Filing
• (47:42) - State Business Tax Climate Index: The Best and Worst States
• (56:15) - Closing Thoughts and Future Discussions

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The full transcript for this episode is available by clicking on the Transcript tab at the top of this page

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Creators & Guests

Host

Roger Harris, EA

President at Padgett Business Services

Guest

Blake Oliver, CPA

Founder of Earmark CPE

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Hello, everybody. Welcome to another federal tax updates podcast. This is Roger Harris. And normally I'm joined by Annie Schwab. But as they say on TV, she's on special assignment for a couple of episodes. But we have a I'm really excited about our guest today. And it's the name that probably many of you have heard before, but I'm joined today by Blake Oliver, [00:00:30] uh, host of the accounting podcast and founder of earmark. So, Blake, first of all, thank you for joining us and letting Annie go on her special assignment.

Blake Oliver: Why thank you. Uh, it's tough shoes to fill. I know Annie, uh, does a lot for this show, so I'll do my best.

Roger Harris: Oh, you'll be fine. And I think we're. I think the idea was that, you know, there's always a lot going on during in the tax world. And then for people involved in the tax business, sometimes [00:01:00] they don't get a chance to follow it. So we're going to talk about some current events, some current things that are that are in the news that maybe you've heard about or maybe you haven't. And, uh, hopefully we'll find something that's new and, uh, informative to you. So, Blake, what do you want to start?

Blake Oliver: I'm very excited, Roger, because I my show, the Accounting Podcast, covers a roundup of news in accounting every week. Uh, and a lot of times, we don't get to the tax stuff. Right. So I've got this, [00:01:30] uh, long list of stories that I've brought that I can't wait to talk about with you. And the first one just broke on Friday. Uh, Kelly Phillips Erb wrote a story on Forbes, and the headline is federal court rules. New company reporting law is unconstitutional. And I feel like that, uh, that title, that headline doesn't quite do it justice, because the thing we've all been talking about for what feels like months now is this beneficial ownership information reporting with FinCEN. [00:02:00] And that is all in question here, right? Roger.

Roger Harris: Yeah. And, you know, there's still in my mind a lot of misunderstanding and lack of knowledge about the whole thing in the first place. And you might just skip over that headline because you didn't even know that we have beneficial ownership reporting to do, particularly if you're a small business owner, maybe more than a practitioner. But yeah, I got a call today from accounting today, and they said, what's your first comment? And I said, well, something that was confusing to begin with and people [00:02:30] were wrestling with just got more confusing because now we have a court and I think it was a court in Alabama. Uh, um, that just said it's unconstitutional. So I'm sure a lot of people are celebrating and they're thinking, wow, it's over. I don't have to deal with it. But as you know, Blake, it's never over till it's over.

Blake Oliver: No. And this decision is very different than, like, what you might expect, at least what I expected. It is a district court [00:03:00] in Alabama. And this court this the judge in this court, Lyles c Burke, ruled that the Corporate Transparency Act, which created this whole FinCEN reporting requirement, is unconstitutional. It exceeds the Constitution's limits on legislative branch and, uh, lacks a sufficient connection to any enumerated power to be a necessary or proper means of achieving Congress's policy goals. And he found that the CTA is [00:03:30] unconstitutional because it doesn't regulate commerce on its face, contain a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme, thus falling outside Congress's power to regulate noncommercial, intrastate activity. And there were a whole bunch of other arguments in this case as to why this thing was unconstitutional. But the judge decided to just decide the case on the first matter, whether or not Congress has [00:04:00] the authority under the Commerce Clause to do this. And, um, the other really interesting thing about it is that it's limited to just the plaintiff at this point, like the judge didn't say that, that like, nobody has to follow this requirement. He just said that the NSB you, which is the national small Business United group, and their plaintiff, Isaac Winkles, they're the only ones who don't have to, uh, report. [00:04:30] And that's like 63,000, you know, members or something like that. So it's very interesting. Like, I guess my first question to you is, you know, uh, what do you think of this decision? And then maybe we could go into, like, what does this mean for us in our clients?

Roger Harris: Yeah. As far as well, I'm not a lawyer. Um, so and certainly not a constitutional lawyer. So I don't know the merits of the case from a legal standpoint. Uh, obviously, [00:05:00] for a judge to to come with a ruling like this, there had to be something that, uh, concerned. Him or her. I think you can count on an appeal. So this isn't the last. Uh, thing that we'll hear about it. The question is now, does this encourage other people to to issue or have lawsuits in other courts, in other parts of the country because it was limited, though it's impractical to say, well, we'll exclude this small group of small businesses [00:05:30] and everybody else has to do it. So it's going to eventually settle out to everybody or nobody. But it's just it's just throwing the whole thing into turmoil.

Blake Oliver: So I'm here in Arizona. And so for me, this doesn't actually change anything with my businesses because the decision was limited to the plaintiffs in Alabama or actually not the plaintiffs in Alabama. This group, if you were a.

Roger Harris: Member of those groups.

Blake Oliver: Of the NBU or this one person, Isaac Winkles. [00:06:00] Um, so that's interesting, right? Like Treasury could just move forward and say, all right, fine. Nbu you don't have to report, but everybody else does. That would be a very funny situation. Yeah.

Roger Harris: They don't think everybody else will go to court with the same argument. And then they'll say, but you can't just let them, you know, if it works for them, it's got to work for me. So yeah. And I don't know, I read it and, you know, it sounded like it was the plaintiff. Then it sounded like the plaintiff was the organization. So it's every member, no matter where they are. So from a yeah, [00:06:30] potentially from a position of a firm who's going to offer this service, I guess you got to ask everybody that walks in, are you a member of this. Probably be great for membership for the organization. Right. I wonder if you join after the ruling if you're exempt or if you had to join before the ruling.

Blake Oliver: I was listening to Ed Zollars on his show and he was saying, it's not clear, right? Maybe that could be the case, because in other situations that has happened where if you join after the fact, you now are part of the group and it counts. So that'd be funny if you know, the NBU just [00:07:00] decided to offer membership, you know, maybe get a discounted membership, uh, in order to be part of this.

Roger Harris: But if they're any good at marketing, that's what they're doing right now. They're coming up with their marketing campaign for new members.

Blake Oliver: The thing that, um, is, you know, interesting to me about the decision and, you know, I'm just an armchair constitutional lawyer here. Roger, is that, uh, you know, I mean, I always have I did learn in my civics class about how, you know, the all the powers that are not explicitly given to Congress, the [00:07:30] federal government, are reserved for the states. Right. And, you know, that's why we have this interesting regime where corporations are set up at the state level, not at the federal level. Right. The federal government can only get involved if a corporation in a state is somehow crossing state lines. Right? Right. Doing business, the interstate.

Roger Harris: Commerce, the.

Blake Oliver: Interstate right interstate in between states. And so I when this original rule came out or this whole [00:08:00] reporting requirement came out with FinCEN, I thought to myself, I thought, this is odd, that the federal government can require my LLC in Arizona to give them information, when perhaps my LLC in Arizona has never done any interstate business or commerce. Yeah. And yeah, like it doesn't if I just do business here in Scottsdale where I live and I never touch any other state or anyone in any other state, [00:08:30] and I, I don't have online activities. Why should the feds get my beneficial ownership reporting? Able to.

Roger Harris: Regulate. Yeah. Yeah. I mean, they've tried to and they've been fairly successful in stretching interstate commerce to cover a lot of things that we wouldn't normally think we're dealing in other states. I know remember, one of the first things they did that caught a lot of people by surprise when it, um, was if you took a credit card, then your company that monitored the credit [00:09:00] card was somewhere else. So even though you weren't in any other state, didn't in your mind do business, and you were in interstate commerce because of taking credit cards. So they find very good ways to make us all be dealing with interstate commerce, even though, as you said, we're not. So I mean, yeah, there's so many legal questions in it, and it comes at a time when we were all still trying to figure out what role, if any. And in our audience. Accounting firms could play [00:09:30] in helping their clients even do this service. Um, I've had a lot of discussions with people on Capitol Hill. I'll tell you this. This is one of the most frustrating things I've ever had to deal with, because FinCEN is dealing with a group of businesses that they haven't typically dealt with, which is this small end 20 or fewer employees as the law, you know, states under 5 million in revenue. These are businesses that are typically exempted from things like this, but instead they're the target. And I don't [00:10:00] think FinCEN fully understands how that that group of businesses operates and where they go and where they get information. I mean, I had a congressional staffer tell me the other day, one of the big hang ups in the FinCEN is this idea that if your driver's license changes, you move, you get married, get divorced, whatever. You got 30 days to update your fencing report. And I said, that's just not practical. And who's going.

Blake Oliver: To remember to do that?

Roger Harris: Well, particularly when it expires [00:10:30] seven years from now. And, you know, and I was told, well, this isn't what I was told. Two things. One, I was told by a staffer, well, people have to take their credit card every time they go to the bank. I went, what bank do you bank with? I mean, no, they don't. I mean, not their credit card, their driver's license. So I said, no, they're not they're not taking their driver's license to the bank every time they go. Then I was told by a staffer at FinCEN, well, people are just going to have to learn to adjust. I thought, good luck.

Blake Oliver: Good luck with [00:11:00] that.

Roger Harris: This ain't going to work. If those are the if those are the mindsets that you had to come up with this. And then that's your attitude to how this is going to work because it's just not going to work that way.

Blake Oliver: Yeah. So I mean we all know compliance is going to be a disaster, right? There will be some who comply and there will be a lot who don't. And then the penalties are extreme for this group. Right. We've I've never seen penalties this extreme other than like the foreign reporting [00:11:30] requirements. Right. Um for small businesses. And so a lot of people are going to get really pissed off. And small business owners are very politically active. So yeah, you know, they're about to.

Roger Harris: Get more I think.

Blake Oliver: Right. So well, okay. To go back to this actual situation, what's going to happen next. There's going to be an appeal that's going to take time. Right? Right. So there's a question as to whether this will even get resolved by the time the deadline hits, which is the end of this year. [00:12:00] Right. For entities formed last year, last year or before that. Yeah.

Roger Harris: But for people formed now they're in a 90 day clock. Right. There's no way this is going to get resolved in 90 days.

Blake Oliver: So is the best practice then to simply suck it up and file and, and just do it because it's better than, you know, getting a fine later or being found non-compliant, even if the law eventually is unconstitutional [00:12:30] or changed, somehow changed.

Roger Harris: You know, that's the that's the problem we face right now. A lot of us are for businesses that were in business before the start of this year. The biggest advantage that we've had is we had time. We had till December 31st. So most of us have been advising our businesses to let's just wait. Let's hope that we get some change. No, none of us anticipated this, right. But that that in our discussions with FinCEN and others that we could get some tweaks, some modifications. You know, like a clarification. [00:13:00] You know, as you mentioned, the penalties are outlandish. They're $500 a day, up to $10,000 chance to be criminal. And when you raise that, you could.

Blake Oliver: Go to jail for not go to jail.

Roger Harris: For not filing a form. Forget that you're not money laundering, which is the intent of this. You know you can be in jail next to a murderer because you didn't file a form. Um, but, you know, they say, well, we're not after the honest people. We're just. Well, when does someone's neglect become willful?

Blake Oliver: Well, you know, just give me the money. [00:13:30] Ah, the money launderers really going to file these forms? Of course not. Right. So it's they're going to have a database of honest people, you know, that they're prospecting.

Roger Harris: That's when you talk to them and you say, this just isn't going to work in the real world, because, yeah, I can identify fairly straightforwardly if someone owns 25% or more of a company, which is one of the requirements. But then there's this discussion about they have substantial control over certain activities. So if someone comes in my office [00:14:00] and they go, well, I'm the hundred percent owner. And I ask them, well, is there anybody else that maybe could borrow money or fire you or something like that? If that's somebody else is a money launderer, they're not going to tell me that, right? You know, so what is my responsibility? How far do I have to go to ask so that you don't come after me when you find out that Juan Guzman, whatever the drug lord from. Sicko is, is, you know, running the business, you know? And you won't tell me that. [00:14:30] You just tell me. Don't worry. I'm not after the honest people. We'll put it in writing then at least. I'm sorry. I don't take that as as guidance.

Blake Oliver: Well, let's hope it gets resolved sooner rather than later. Um, the easy fix would be for Congress to change the law so that it doesn't apply to every LLC or every business entity, but only those that do interstate commerce. Yeah. The judge said in his decision that that would have been a good fix. So maybe they'll do that. Yeah.

Roger Harris: And there's some other tweaks. [00:15:00] I think I get the 30 day clock for major changes. Like if you bring in a new partner, that's probably going to alert you that something changed that we need to think about. So if you want to have 30 day change periods, make it for major things, and then take the something like an address change or a document change on a piece of it, make that an annual change that could be part of your normal filing. You know, you can tweak some things to to relieve some of the pressure that [00:15:30] we feel. But Congress, as you said, the judge gave Congress the blueprint to how to fix it.

Blake Oliver: Uh, I don't understand why they have this 30 day requirement anyway. Why why is an annual enough? Oh, because right.

Roger Harris: Here again, it's the belief that somehow filing all these forms, we're going to catch all the money launderers. So when you ask that question, they say, well, a lot can happen, you know, if you don't make them well. So a money launderer is going to say, oh, by the way, I got a new driver's license. So, you know, yeah, come on, [00:16:00] think about it. In the real world, as you said, we're going to have a lot of forms filed by a lot of honest people. Maybe what they're trying to do is then trap you because you didn't disclose somebody. So they got I don't know. Yeah. Someone told me Fincen's total employment is 342 people.

Blake Oliver: So a lot of people to I mean, it feels like it.

Roger Harris: Not to administer a form that impacts like 20 million businesses. I mean, the IRS, I.

Blake Oliver: Guess you're right. It's like the the same with the SBA, right? Like the SBA got had to do all [00:16:30] this work during Covid and they only had a few hundred people.

Roger Harris: How do you enforce it? I mean, you don't have auditors like the IRS does. Irs has more auditors in one city than you've got total employees, because that includes the janitors, the secretaries, everybody.

Blake Oliver: It's a really good question, Roger. How do you enforce it when you don't know what you don't know? Right, right. So if somebody doesn't file, how will the federal government ever know that that entity even exists?

Roger Harris: Well, and if they do file and leave off the money launderer, how are they if I can't, if they leave off, how are you going to find [00:17:00] out? Yeah. I mean, how are you going to for these again these things that aren't necessarily ownership. Yes. If I register my company and I tell you that Blake Oliver owns 100% of a company, then you know that. But if you don't have a really.

Blake Oliver: Good point, this is a really good point. Like the money launderer, the one that you want to know about is never on the business filings. No. So do you think that the business owner of record is really going to rat out that person?

Roger Harris: No, [00:17:30] no, not for long. Not from what little I know about the kind of people who launder money, they're probably not real happy if you write them out. So, yeah.

Blake Oliver: This is this is this is getting I feel after this conversation. Roger, I feel like this is more ridiculous than ever. And I feel like, um, before I get outraged, we should probably move on to other topics.

Roger Harris: Um, yeah. We could spend the whole hour on this. Yeah.

Blake Oliver: Different kind of outrage. This was on CNBC. The headline is tax evasion by millionaires and Billionaires tops 150 billion [00:18:00] a year, says IRS chief. Uh, Danny Wuerffel said that, yeah, millionaires and billionaires are evading $150 billion of taxes annually, and the IRS has initiated a comprehensive crackdown on wealthy individuals, partnerships and large corporations, funded in part by those billions of dollars that Congress appropriated. Um.

Roger Harris: The inflation.

Blake Oliver: $6 billion that has now been cut back. Right? Yeah. [00:18:30] Already. Um, despite a decrease in funding and resources over the years, the IRS has managed to collect over 480 million in unpaid taxes from 1600 millionaire taxpayers who owed at least a quarter million each in assessed taxes. They've also launched a program to audit private jet owners who might not be properly accounting for their trips or taxes. They're using public databases of private jet flights and analytics tools to identify tax returns with the highest likelihood of evasion, and they are also focusing [00:19:00] on limited partnerships with the large partnership compliance program. And they're using AI to understand how these partnerships are all interwoven together. So, Roger, what are your thoughts on these efforts by the IRS to tackle the tax gap with millionaires and billionaires?

Roger Harris: Well, part of it is something that at least politically, there's a lot of pressure for them to do, which is to collect the money from the higher income people when their [00:19:30] stats indicate that they've been spending more resources on the lower income people. So there's a certain level of fairness and political, uh, reality, I guess, to it. Um, I was on a call. I mean, some of this stuff is I don't have any problem with other than why haven't we already done this, one of the programs that they're getting ready to to start. In fact, I think they announced it on Thursday or Friday of last week is there is I don't have my notes in front of me as the exact number, [00:20:00] but there's hundreds of thousands of high income people for which the IRS has information about their earnings. In other words, they got w-2s. They got k-1s, though that's a little more iffy than than other things interest income, dividend income. They have never filed a tax return since 2017.

Blake Oliver: Yeah, that number is 125,000.

Roger Harris: Yeah. So now because of the funding, they can actually do something that I think a lot of us assumed they were doing anyhow. [00:20:30] Uh, yeah. So they will start sending notices to these people and saying, hey, we, you know, we got this W-2 for $1 million and we can't find that you filed a tax return. You know, you might want to think about filing and.

Blake Oliver: Why do they need more money to send letters? Like, I thought they sent these letters to everybody who didn't file.

Roger Harris: Yeah, well, they do in certain instances. We've probably all seen, you know, the notices when you leave something off of your tax return, you know, that you didn't know you had a different savings account [00:21:00] over here on the side and you had $100 in it. So yeah, that's a good. And that's, that was on the call that I was on. That was the question we asked to try to be as supportive of it is, how do we tell people that you haven't already been doing this when they're. We see clients in different income levels getting notices on a regular basis because they did file.

Blake Oliver: It's crazy, right? Like 25,000 of those letters went to people with an income over $1 million who [00:21:30] haven't filed returns since 2017. Right? Right. What year is it? I mean, how is it that the IRS hasn't come after those people? And it's seven years later? Yeah.

Roger Harris: I mean, I'm sure there's a better answer than I can give here because again, they can. It's almost as if you're punished by filing a tax return, because then they can match it against what you did, report to see what you missed. Whereas if you never filed the return they don't do anything. [00:22:00] Because I mean, I guess there's an assumption that there's something that they don't know that would have offset it. You know, it's a hard question to answer, but the answer we were given was that it was a resource question, you know? Right. Um, their computer systems, admittedly, are way behind.

Blake Oliver: I have a question for you, Roger. Maybe this is part of the answer as to why these people haven't filed. So the failure to file penalty is 5% every month of the owed amount, but it caps out at 25% of the tax bill. Right? Right. And [00:22:30] it doesn't go up after that. It just stops.

Roger Harris: Well I mean that penalty. But then, you know, I guess you could get into fraud and you know, failure to file could be criminal. You know, it would have to be.

Blake Oliver: Intentional, right? Yeah. They have to prove it's intentional. Right. So I mean, which rarely happens.

Roger Harris: Right. Because that's another.

Blake Oliver: Issue. Yeah, I remember I learned about that because of the whole Hunter Biden thing, right. Where like there was a case, uh, they had to decide whether or not they were going to charge him with, you know, intentionally not filing tax returns, which could which is criminal. Right. [00:23:00] Um, and they didn't, but so, so, so maybe this is the calculation these wealthy people are doing is they're saying, well, I don't like taxes. I don't like the government, I don't like the IRS. I'm just going to not file. I'm not going to say anything to anybody about it. I'm just going to pretend to forget. And the worst thing that happens is that I pay 125% of what I owed, and I do it eight years, ten years later.

Roger Harris: Then I've used that money for 8 or 10 years to do other things with. Right. That you don't know about that either because I didn't file for those [00:23:30] years either. Right. You know, you know, I've always been surprised. I mean, if you've been in this business long enough, you've had people walk in your office not millionaires per se, but people who said, I haven't filed in five years, six years.

Blake Oliver: I think I know people who haven't done that.

Roger Harris: And you sit there and you go, what do you not know? There was a tax system. Do you not know that we had to pay taxes every April 15th? I think the only thing that I can see is once you get by the first one and you don't do it, there seems to be this fear that starting makes it worse, that you'll [00:24:00] get caught. So you just keep waiting and waiting and waiting until some event triggers it. You try to borrow, borrow money to buy a house. And there's some truth.

Blake Oliver: To that, right, Roger? Like, because as soon as you get in the system, then you start getting all the notices and penalties and liens and.

Roger Harris: Well, evidently this group hadn't heard a word since 2017. So it's amazing. Now their their day of reckoning is evidently coming. And I think we all want others to pay their taxes. I mean, the whole tax system is based on the idea I'm going to pay mine, but I expect you to pay yours, [00:24:30] right?

Blake Oliver: That's why this this makes me angry. The fact that I have been filing my taxes mostly on time or close years close to it, you know, and I've, I've paid the interest when I had to. Right. Yeah. And and here we have these people, 125,000 people in this country who just haven't filed taxes for seven years or six years. And what's going to be interesting away with it.

Roger Harris: Are these people still alive? Have they moved to foreign you know, how how effective will this these notices when they go out in terms of [00:25:00] hitting where these people are and actually getting to the right people? And I ask a question on the call. I said, let's say that one of the spouses has all the income and the other spouse has no income will, you know, and again, admittedly, they haven't filed since 17. So assuming they were filing joint returns prior to the when they stopped, would you notify the other spouse that, hey, we think we've found your spouse over here that's not filing your tax returns? Because [00:25:30] as I jokingly said, I said sometimes an angry spouse is going to have more influence than the IRS or their tax preparer in getting them to come straight.

Blake Oliver: That's true. But that's true. But unless that you send it when my when my wife opens up the mail and I don't get to the IRS notice before she does. Yeah. Oh, I hear about it. Oh, I hear about it.

Roger Harris: But unless that other spouse had income and that didn't get reported, they won't even know that that letter went. They're only going to send it to the person who has unreported income. So [00:26:00] it's conceivable that the spouse who had no income won't even be aware that this is going on. Because, again, shockingly, I've always been amazed how little some people understand about their tax return. And particularly if you're not the breadwinner, you're not. The one that deals with it. I mean, I guess the other spouse just goes along their merry way thinking, well, everything must be okay and things could be terribly bad and you just don't know about it. So I mean, it's got, you know, I'm supportive of what they're doing because [00:26:30] I want them to make them pay their taxes because, as you said, you paid yours, I paid mine. These people made a lot of money. They should pay theirs. It's like everything kind of like going back to the, uh, beneficial owner. Is it going to be effective, or are we just going through a process to make us feel good?

Blake Oliver: Yeah, like you said, those letters might go out and get no responses. And if those people are dead or they've left the country.

Roger Harris: Or just.

Blake Oliver: Moved or just moved, and I mean.

Roger Harris: Seven years ago, I think forwarding of mail has stopped by now. So, you [00:27:00] know.

Blake Oliver: Yeah. And we're not sending out agents to track people down in person anymore.

Roger Harris: No, I mean, they've hired, you know, they're using some, uh, collection agencies to help collect some accounts, but I don't think that would be part of this because these people haven't filed. They don't even know that. They they really don't know if they owe any money. There's an assumption they do. They're using the collection people to go after where people have filed and not paid and, you know, they owe you money. But I don't know. It's going to be interesting. It's like everything it's probably going to be 3 or 4 years from now before we know if this was [00:27:30] good or not. It's hard to be critical of it. I mean, again, like I said, I want these people to pay their taxes. Yep. Uh, and I'm glad that the IRS is doing it. But I think the question is, why haven't this been going on for years?

Blake Oliver: It's it's like a million tax returns that we pros could have been doing too. Yeah. These people are stealing our work. They're by not filing, right.

Roger Harris: Stealing our work, not paying their taxes. And that ultimately is going to impact all of us.

Blake Oliver: Well, Roger, [00:28:00] let's stick with taxes and tax returns, but go to the opposite end of the income spectrum. Let's talk about the free tax system that the IRS has been building called IRS Direct File. File. Right. It has moved into the public test phase.

Roger Harris: Yep. Few states are being tested.

Blake Oliver: 12 states and I. Let's see. Am I in the states? Yes. Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, [00:28:30] Texas, Washington and Wyoming are all part of the dirty dozen first states that will be joining this that have joined this program. Um, so I guess the question is. When will it go live? Probably not this year. Well.

Roger Harris: It's live for those states. Certainly those states and those states. But yeah, this is their test to see. Again, this was something that Congress said do told them to go try to develop your own system. [00:29:00] So again, this lower income simple return person doesn't have to pay someone to to meet their obligations. Um, it's also partly in response and we may get around to talking about this. There's been some problems. There have been a free file alliance where some private sector companies were coming in and providing, uh, quote, free file. And it turned out it wasn't always free once you got into it. The government has accused these companies [00:29:30] of being a little misleading. So that led to where we are now for the government to create their own program, sort of like some foreign countries who basically do your tax return for you. I mean, you get a bill from them that says, this is what we know. If you agree with it, pay it or accept it. If not, you know, let us know. Um, we'll see. Now.

Blake Oliver: Should tax preparers be concerned about this program taking work away from us?

Roger Harris: I think again, [00:30:00] it's at least starting at the the simple low end of the spectrum for tax returns. But if that's where you get your clients from then sure. Now again, they've had the option to go through the Free the Alliance before this. So you've probably already seen what attrition you were going to see. This might make it a little bit greater. So a lot depends on who are your tax clients. I think the complex returns, I don't think if I remember what Congress said is you don't have to create a system [00:30:30] that everybody can file. But for this simple part of the, uh, community that can file simply, we want them to be able to go to the government and get their returns done without any of that. So it's going to depend on your, your client. And and I've always said this, someone told me this years ago, you know, we're a country of doers and delegators because a lot of times I just want to delegate it. Even though I could do it. I always use the example of everybody can cut their grass, [00:31:00] but a lot of people pay somebody to cut theirs. Mhm. So it's not that they couldn't do it. They choose not to. So there's always going to be people who will choose not to do their own taxes. But if we make a system, you know, but I think first of all, unless we simplify the tax system significantly. They're still going to be plenty of people who are going to go to a repair for us to survive. But if you're in that low end market, yeah, you're at risk.

Blake Oliver: I don't know all the details either, but there are a lot of limitations on [00:31:30] this tool. Yeah. Um, for instance, the zona in Arizona, you can't use it if you're filing, uh, married, filing separately. That's not even an option. Right? Right. Um, you have to do your Arizona return separately from your federal return in a different system, right?

Roger Harris: It won't do. The state returns.

Blake Oliver: I think it's fair to say it's really designed for those people with really simple situations. Like, all I got is a W-2 job, and I'm gonna take the standard deduction. Right. For those people, no, no, no credits. None of that stuff. [00:32:00] Right. Yeah.

Roger Harris: And I think that's reasonable. You know, if your life is that simple, you know, you shouldn't have to pay somebody. I mean, I guess if you walked into H&R Block or Jackson Hewitt or one of those, it probably cost you 2 or $300 to file a very simple return with two w-2s. And you know, I agree that there should be a spot, so we'll see where it goes. This is a test year. Um, it's going to be like anything. It's not going to be perfect and it's going to be extremely limited. But I don't particularly well, first [00:32:30] of all, I'm so old I'll they'll never get rid of the tax system before I retire. But, um, I'm not terribly worried that the system will become so easy that we won't be preparing tax returns. But there are some people out there who, you know, particularly if you're preying on that low income where they you charge them money to get their own refund in advance. And they could they don't look at it as a tax return. They look at it as a loan program through a tax system that they walk [00:33:00] into an office. But so we'll see.

Blake Oliver: Well, Roger, I tend to agree with you that the tax code is incredibly complicated and we all know this. Anyone who's interacted with it in any substantial way understands that it's really, really hard to build even software that can do it for you. Just look at TurboTax. They expanded into business returns last year, and my podcast co-host and I @DavidLeary we used it this year to do [00:33:30] a business return. We did our partnership LLC return where we are 5050. Yeah. In Business Assisted, which is basically like the TurboTax for personal but for business. Right. And my experience was this is not something that any typical business owner should be doing on their own, because it's this long list of questions with very few explanations as to how you should answer and big implications if you get it wrong. Yeah, and the support. [00:34:00] You know, they say there's an expert, right. But the expert really is more like tech support. We had a question about whether certain payments should be guaranteed payments, and the TurboTax expert gave us the wrong answer. So we would have gotten double taxed if we'd reported them that way. And luckily, I knew enough, you know, to know.

Roger Harris: That was meant.

Blake Oliver: Yeah, yeah. So the only thing I suppose that makes me think that more of that, you know, simple stuff might get automated. Is this potential for AI to do that? [00:34:30] Yeah. Yeah. Right. Um, we haven't seen it really yet. The, the, the tax companies TurboTax and H&R block are trying to integrate AI into their products, but with mixed success this year. I don't know if you've heard about any of these chat bots that people have been using in TurboTax. Roger.

Roger Harris: Uh, I've heard a lot about the AI chat boxes. I don't know if it's specifically those two, but yeah, well.

Blake Oliver: Have you tried have you tried using like ChatGPT and asking it tax questions?

Roger Harris: Yeah [00:35:00] I'm trying. Yeah, I've tried asking all kind of questions. And sometimes they get close and sometimes it's like I don't think that's close.

Blake Oliver: Well yeah, that's sort of the experience right now. Um into it and H&R block, they both have added chat bots into their 1040 products, and a reporter over at the Washington Post decided to test them out and see how accurate they are, and found that in the case of TurboTax, it got half the dozen or so questions wrong. So 50% error rate. [00:35:30] And with TurboTax, it was about 30%. So I don't know about you, Roger, but I think that's an unacceptably high error rate for answering tax questions.

Roger Harris: Yeah. I don't think that's you know, this isn't baseball or you know, where 300 is a good percentage. You know, um, you know, I think the thing I find interesting about AI in taxes or anything, but usually when I'm asked a question. Usually my answer causes additional questions afterwards, [00:36:00] and I haven't really seen. I good at engaging in a discussion where, you know, I ask it a question, it gives me an answer. But maybe that answer should have included three other questions. And then my answer. So it's that back and forth when you're in a tax world, because so much of its interpretation of facts and circumstances, it's not just the law.

Blake Oliver: Um, and it takes context, right. Like this is why when people go on to online forums [00:36:30] and ask tax questions, usually the first answer is, well, I can't answer your question without knowing a lot more about your situation. Exactly. And then these AI chat bots, they don't know how to ask those contextual questions. They just try to give you an answer with what you've given them. So that's the problem is, like a lot of times people don't even know how to structure the prompt to get the answer.

Roger Harris: Or worse, they don't know how to ask the question properly because a word here or there, a may, a shall or [00:37:00] should or could or you know, all those little things can send you down the wrong path, um, if you're not really listening and knowledgeable about the subject. So, I mean, AI is good. It's not great yet, you know, I'm sure it'll get better and maybe it can do more. But taxes to me is just it's a discussion. It's not a yes or no answer to questions. There's very few yes or no answers. I mean, I always used to tell people that somebody said, can I deduct my dog? [00:37:30] Well, you want to say no, but.

Blake Oliver: There's a situation where you could.

Roger Harris: Yeah, I mean, there may be a situation, you know, so I mean, it's the taxes are just when you hear the things black and white and gray, we're in the gray almost all the time and living in the gray. And I think AI works good if it's black and white.

Blake Oliver: So tax preparers don't have to worry about AI taking on their advisory role anytime soon. With error rates like that, I do think it'll come down a lot. Yeah, especially we'll.

Roger Harris: Get better.

Blake Oliver: Especially as LMS, [00:38:00] which is what these AIS are built on as they start to get trained specifically in tax. And I think there's a lot of potential for the tax software companies or the, you know, like Thomson Reuters, they have their database of tax knowledge. Right? Right. What do you call that? Uh, checkpoint.

Roger Harris: Checkpoint edge is their current subscription service for research. And they're building some of those capabilities. You know, they're getting better at how you search for answers.

Blake Oliver: So [00:38:30] for instance, instead of searching by keywords, now we can just say here's what I'm looking for. Right. And the AI can go find the relevant information and pull it for you, even if you didn't use the right keywords. Right? That is really powerful. Um, and I think the problem right now is that like ChatGPT, the public version, even the one you pay for, it's trained on the whole internet, so you don't know where it's been, right? You don't know if it's pulling some guy's blog post who doesn't know what he's talking about. You know, maybe, maybe it's got like a sovereign citizens [00:39:00] website in there. Yeah. And they're spouting false information about the tax code. So these these AIS need to be tuned up a little bit before they give you accurate answers.

Roger Harris: Yeah. I think the advice I'd give to anybody in our profession is, you know what AI is going to maybe eventually it'll outrun us and replace us, but I think it's going to be a challenge to you quicker if you're not good at what you do and you don't take what you do seriously and invest in your knowledge, invest in yourself [00:39:30] and and do things that I can't do versus just do what it could do or does good enough. So, um, it should hopefully make us all want to do better at being good at what we profess to be good at. And, and part of it's being just a good communicator so that you can discuss in language that your client will understand their taxes.

Blake Oliver: Yes. Yeah. Help me explain this concept to a client. Use words. A sixth [00:40:00] grader would understand something like that, right? Use words a Non-accountant would understand. It's really good at at simplifying complex into something that the general public can understand, which is hard for me to do. Honestly. It's a real challenge.

Roger Harris: Well, we have to be careful. I always said, you know, don't talk in code. You know, I've talked to people in our profession and and they start by saying, well, code section. I said, I don't care what code section it came out of. Tell me what it means to me in my situation, [00:40:30] you know, because I'm it doesn't matter what book it came out of, what code section it came out of, I could care less. So, um, we just it just hopefully will make us better at what we do. And then if we are, we'll we'll probably outrun it. At least I will.

Blake Oliver: Sticking with the IRS. I saw a story in accounting today about how the IRS. Uh, well, this is a follow up to a story I. From last year about how the IRS destroyed all those millions of unprocessed paper information returns. [00:41:00] Remember that one? Yeah, yeah, I think it was mostly like 1099, right? Yeah.

Roger Harris: All the paper that comes in, you know, so.

Blake Oliver: A lot of people still paper file their 1099 to the IRS. And the business.

Roger Harris: Community is slower and adapting e-filing than the general public. I mean, most most individuals file their tax returns electronically. Most businesses file their income tax return electronically but still file paper when it comes to payroll tax forms. 1099 [00:41:30] W-2s though they change some requirements on that this year to get an increase there. But businesses have not adapted electronic filing for certain. It's funny. They'll they'll file their income tax because they go to a third party. So they go to a third party to get their business turned on. They file electronically, but they're still printing out and signing a paper payroll tax form and put it in an envelope and mailing it. And paper is the is the Kryptonite of the IRS.

Blake Oliver: And during the pandemic, it [00:42:00] became their Achilles heel. It totally filled up their cafeterias. We saw the pictures of the paper they were storing them out in. They were storing all these mailed in information returns in giant containers, shipping containers outside. And they finally made the decision just to destroy them. Yeah, just to shred them or burn them or whatever. And when this came out in a, uh, taxpayer, uh, who's the advocate? Right?

Roger Harris: Payer [00:42:30] advocate. Yeah.

Blake Oliver: Taxpayer advocate reported this, and then it got picked up in the press that the IRS had destroyed 30 million documents. People were up in arms. And the end to that whole sad story is that actually, uh, the taxpayer inspector general for tax administration said it didn't matter that actually it had little impact. Um, only about 1% of the potential examination cases identified may have been selected because their information returns were destroyed. So [00:43:00] few, if any, payers were assessed, a failure to timely file penalty for an information return that the IRS destroyed. They did follow their established policy when destroying the returns, transporting them to IRS locations own shredding facilities in locked trucks. Remember, there was that report about how, like, some of these went missing or something, right? Apparently not all of the bins used to collect classified waste at the Austin, Texas processing center had locking lids as required, and the IRS has now ordered lockable bins [00:43:30] for immediate use and updated its procedures. So, uh, so basically the the end of this is like it didn't really actually matter all that much. It was a lot, probably much ado about nothing.

Roger Harris: Yeah. For those returns, it probably didn't. You know, as I said, paper is is the biggest problem at the IRS. And we don't have to go back and think, you know, but when you comply and COVID and paper, the IRS was just put in a I mean, the employee retention credit [00:44:00] required every qualifying business to send a paper form into a building where no one was working. And so what was in the building when Covid hit just grew and grew and grew and grew while all these forms were coming in. And then as people started coming back to the buildings to open them, guess what? They're still trying to catch up. And I have a lot of confidence in the new commissioner. I think he's come in with a fresh approach to things. But there's a they've been underfunded. They've [00:44:30] had fewer, not enough people. There's just been so many problems that it's just going to take forever. But I mean, you passed a bill that required a paper form to go into a building with nobody working in it that already had backups with paper. And then you wondered why people were waiting to get their credits.

Blake Oliver: Would you agree that the best thing Congress could do would simply to require all these forms to be filed electronically?

Roger Harris: Well, that's what they ultimately did for income tax returns to get people to file income [00:45:00] tax returns electronically. Now they're slowly doing it. You know, they cut the mandate for filing W-2s electronically from 250 to 10. So that's in effect a mandate. I mean, most businesses are going to have ten W-2s 1099 combined. So they're trying to do that, but they're still also trying to be sensitive to that really small business that. Just doesn't, you know, has one employee and maybe one 1099. And, I [00:45:30] mean, they're still clients out there who don't know how to use computers, you know. So yeah, that's true. I mean, they're trying to be sensitive to the very small but ultimately income taxes, the way they got to the numbers they got was they just said it's required. So I have to file them electronically. And if not, I have to give a reason why I didn't file it electronically. So yeah, that is the solution. The question is when will they get the guts to do it?

Blake Oliver: I got one more story for us to talk about. Roger. [00:46:00] Let's go. This one. This one goes a bit further afield. This is from the Tax Foundation. I love tax foundation.org. They do such great research.

Roger Harris: Research?

Blake Oliver: Yeah. And I mean I get I don't know much about them other than I've been reading their stuff for years and I just feel like they're fairly nonpartisan. Like they really do just care about like taxes should be.

Roger Harris: Which is hard to find. Fair.

Blake Oliver: Yeah, it's really hard to find when it comes to taxes. Right. Um, so they did a 2024 state business tax climate [00:46:30] index. And the idea here is to rank the best states for taxes, the ten best and the ten worst states for taxes. And you can look up them all. But that's the the way they've ranked them. And I'll share my screen for you, Roger, so that you can see. All right. And I thought it would be interesting just to like go through and take a look and see what we, what we find here.

Roger Harris: So and best.

Roger Harris: Let.

Blake Oliver: Me are you able to see my screen there Roger I got [00:47:00] you. Okay. Cool. You can maximize it to if you need to. Awesome. Yeah. Um so here's the ten best states in this year's index. Oh, and by the way, this is not by how much states tax. They don't care if it's like a high tax burden or a low tax burden from like a dollar percentage amount. This is just based on how efficiently the states have structured their tax systems.

Roger Harris: Okay. So how how effective they can collect and assess. [00:47:30] Yeah I guess how easy it is to comply, how.

Blake Oliver: Easy it is to comply. Right. And to do business. Um, so the best state is Wyoming. And then going down the list we've got number two, South Dakota, three, Alaska four, Florida five, Montana six, New Hampshire, seven, Nevada eight, Utah, nine North Carolina and ten Indiana. [00:48:00] Any surprises for you there, Roger?

Roger Harris: Um, no, not on the way that they look at it. And this doesn't include, I'm sure, regulations. This is just taxes. So. Yes. Um. Well, the immediately as we sit here in an election year when I saw that is there's probably somebody who is going to make a calculation of how many of these are red states versus blue states and turn it into a political argument at some point.

Blake Oliver: Yeah, that would be clever, actually. Maybe I should [00:48:30] write that article. I get a lot of clicks. Roger.

Roger Harris: Yeah, I'm well, somebody's probably already done it, but you know. Yeah. Not dealing in all those states. I think I understand the concept. I mean, some state tax returns are obviously harder than the federal return because they, they separate themselves from the federal return significantly. And, you know, again, forget the rates. Those also tend to be high income states. A lot of those don't have it. So um, I'll avoid any political comments there. But I think you were about to [00:49:00] show the worst.

Blake Oliver: Oh I will yeah. I just wanted to point out that one thing, of course, that our listeners may have noticed about this list is that many of the top ten do not have one major type of tax. They don't have a property tax or they don't have, well, more. They don't have an income tax, right. Or a sales tax, right. So that makes things easier, right? If you just don't have a whole category of taxes that you have to pay. Yeah. Although there there are two on the list that do have levy all major tax types, which is Indiana and Utah. Uh, [00:49:30] but they do it with low rates on broad bases. Okay. The ten lowest ranked or worst states in this year's index okay. So we're going to go from. Least worst to most, worst to the worst. Right okay. So we're going to go we're going to go back to the bottom from the top to the bottom okay. So number 41 Rhode Island. Then we've got Hawaii, Vermont, Minnesota, Maryland, Massachusetts, Connecticut, California, [00:50:00] my home state.

Roger Harris: There you go.

Blake Oliver: My my birth state. Uh, New York and finally new Jersey. New Jersey makes a lot of the worst state lists for a.

Roger Harris: Lot of things. Almost every list. Almost any list, they're going to be somewhere in it. Uh.

Blake Oliver: They say, uh, that new Jersey is hampered by some of the highest property tax burdens in the country, has the highest rate corporate income taxes in the country, and has one of the highest rate individual income taxes. Additionally, [00:50:30] the state has a particularly aggressive treatment of international income levies, an inheritance tax, and maintains some of the nation's worst structured individual income taxes. Well, sorry, new Jersey ites. Is that what you call them? I don't know.

Roger Harris: I don't know, but my only comment about new Jersey has nothing to do with the tax system. But the last time I was in new Jersey, you know, it's illegal to pump your own gas in new Jersey.

Blake Oliver: There's a few states like that, right? Uh, Oregon is another one.

Roger Harris: I don't know.

Roger Harris: I've never been [00:51:00] in Oregon where I had to put gas in my car. But, I mean, thinking if you try to get out and put your gas nozzle in your car, someone's going to come running out and threaten to arrest you.

Blake Oliver: Full employment for gas pump operators.

Roger Harris: Yeah, right.

Roger Harris: Well, again, after seeing that list in the first list, again, there is a political story in there for someone to tell if they are so inclined. Yeah.

Blake Oliver: I find that, uh, just fascinating. I mean, it would be nice if, you know, we had, um. Just [00:51:30] simpler compliance. I feel like as a business owner myself, right? I, I owned a practice and now I own a startup, right? And for me, even in a place like Arizona, trying to comply with everything I got to comply with is really a headache. It's a lot of work.

Roger Harris: Well, and people sometimes think that a one kind of tax is simpler than others. And generally sales tax is simpler than income tax. But even that, I mean, you get into something where food is exempt. I mean, you can buy a hot dog and a bun [00:52:00] and it's tax exempt, but if you put the hot dog in the bun, you got to pay tax on it because it's consumable. I mean, you know, everything can get just so confusing when we try to carve things out that there's got to be a better and simpler way to collect the money that we all owe. And, you know, in some fashion, I don't know how many times I've gone to Washington and said, guys, the only people you're helping with what you're doing is people like me, and I shouldn't be the one who [00:52:30] benefits from this, but you're making it impossible for businesses or individuals to understand what you're asking them to do. And so you're forcing a cost that's not always measured. When you talk about how much tax is, is how much does it cost me to comply with this crazy system?

Blake Oliver: And what really is unfair is when the cost of compliance is higher than the cost of when the cost of filing is higher than the cost of non-compliant compliance. Yeah. Which which [00:53:00] then then makes people have these ethical questions. Right. Like or just especially with like sales tax. That's a great example. Right. With all the sales tax issues we've got, like if I sell one product to one state now I got a Nexus. Now I got a file, I might as well just not file though, because the penalty for not filing is going to be less than the cost of filing. Right. And I don't like systems that create that kind of behavior.

Roger Harris: And the worst one is somebody gets a notice. It can be state. It can be federal [00:53:30] that says you made a mistake and you owe us $200. And they bring it to me. I'll use me as an example. And I said, well, you probably don't owe it, but it's going to cost you $500 for me to figure out if you owe it or not, at least.

Roger Harris: Right? Yeah.

Roger Harris: And so they go, well, I'll just pay the 200. Well, that system shouldn't work that way.

Blake Oliver: I just had that exact situation with Ohio, um, unemployment tax, like they said, I didn't file, said it was $50. I said, fine, I'll just pay the 50 bucks. It's [00:54:00] not worth anyone's time to try to contest.

Roger Harris: This, right?

Roger Harris: There's just this de minimis amount that I'm just going to suck it up and pay you because I don't know.

Blake Oliver: Cost of doing business, I guess costs.

Roger Harris: Cost of doing business.

Roger Harris: And you know, well.

Blake Oliver: Roger, that's all I have for this week. I have saved all the links to these articles and they will be in the show notes for this episode. So anyone listening, if you want to find this state of Small Business Tax Climate Index report, you can find it in the show notes. [00:54:30]

Roger Harris: All right.

Roger Harris: Well, first of all, Blake, thank you so much for doing this. This was fun. Let's do it again. Yeah. Yeah, I enjoyed having we could go on I probably for hours, but we should probably break it up into little smaller segments.

Blake Oliver: So thank you for helping me like get through these stories. They've been sitting here. I've wanted to talk about them with somebody for, you know, a month now and I you've totally satisfied that desire.

Roger Harris: Well that's good. So you keep your accounting topics over on your other [00:55:00] podcast and you got tax ones. You are welcome to join. Even if Annie's back, bring them over here and we'll talk about them.

Blake Oliver: That'd be that'd be a blast.

Roger Harris: All right. Again Blake thank you. Thanks, all of you, for listening to the Federal Tax Update podcast today. Join us again for future podcasts. Hopefully Blake will be back again for other ones. So thank you for listening and we will be back soon. See you later. Bye.