Tax Privacy Exposed: Data Breaches, Ethical Solutions, and the Power of Enrolled Agents

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution. While we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision. Hey, this is Daniel, the founder of Bookkeeping for Painters.

And this is Richard. I'm the tax director with Bookkeeping for Painters. How's it going, Daniel?

It's going well. How you doing?

Good, good. Another, another great Friday. Nice summer day. I don't know if you've seen in the news this week, but a big report came out of Congress that affects the tax world. They were—

I saw that you sent to me right before the podcast. So, yeah.

Okay. So you see, you checked your messages. That's good. Yeah, that's good. Well, yeah. So I thought, I thought maybe we should talk about it because I think it's going to affect, you know, it's, it's definitely going to affect a lot of people and probably, you know, a good amount of our listeners. But, you know, basically this congressional report exposed that there were 3 large tax prep firms, specifically TaxAct, H&R Block, and TaxSlayer, that had been sharing taxpayer information with Meta, Meta being what Facebook has evolved into in the last few years. And Google and then other tech firms without people's permission.

So, so in this case, sharing is not a good thing. Like, because, yeah, for, for me, sharing is like a good connotation. I'm always trying to get my kids to share.

Sharing is caring.

Yeah. But in this case, as we do, this is not good.

Right? Right. When it comes to your personal information, sharing is not caring. That's why it's personal. But yeah, so people would be going on to these websites to file their taxes. Some of this was, was paid and then some of this was also the IRS Free File for lower income taxpayers. But they would go on to these websites to file their taxes and they were using these things called pixels, which are little tracking I'm not super tech savvy, but little tracking bots that would record people's information. And so they were getting your— obviously your name and your address, but also your filing status. So they knew if you were married or single, your approximate gross income for the year, your approximate refund, and also how many dependents you had. So this was very valuable data for, you know, Meta and Google, and they were using this to target ads to taxpayers and also for AI algorithms.

Yeah, I'm sure their Facebook ads were really dialed in using all that information to target folks on Facebook. So their cost per click and their cost per lead on Facebook, I'm sure were pretty good. For TaxAct and H&R Block and TaxSlayer using all that personal information that they stole.

Right, right. Can you imagine like, hey, we know who just got a $5,000 check from the IRS. Would you like to target them for, for advertising your stuff? Yeah, that's, that's— I can see why it was so tempting. Also improper. Because these things were not being disclosed. This was not part of, you know, those terms and conditions that, that, that page that shows up there that nobody reads. We just hit accept. Well, even if you had read it, this wouldn't have been in there because, you know, this was, was being excluded, unfortunately.

Right. And don't you also have to use taxpayer information? You have to get a signature from the taxpayer specifically. That you can use that information for, for offering them other services, right?

Yeah. Yeah. The IRS has a disclosure. It's, it's in the code 7216, I believe, where you can't legally use the information you glean from a tax return to offer somebody services without their permission. So, you know, for example, I do a lot of tax planning. If I want to look at your tax return to see if you would be a good fit for a 401(k) or maybe a whole life insurance policy or something like that, I can't even make those suggestions unless you give me permission to do so. By default, the only thing a tax preparer should be able to do with your information is prepare your tax return unless you say otherwise. So, yes, this was a pretty big violation. You know, the IRS estimates that the average American spends $250 and more than 13 hours a year just filing their personal taxes. So that's, you know, buying the software, you know, collecting all of your records, putting in all the data, that's a pretty hefty investment of time and money. And then to not even be able to trust that your information is being protected, that feels like a pretty big violation. And if you have a business, especially a business entity like an S corp or a partnership, then those numbers are going to be a lot higher. I don't have the data on it, but business returns are always going to be more complicated than a personal one.

Yeah, that's like, uh, just doing the math, that's like almost 2 billion hours and that's about 220,000 years. 150 million folks in, in the US, right? I mean, there's 300 million, but let's just assume half of them are kids. So 13, 13 hours per person, right?

Yeah. And you probably have some joint returns in there too.

Yeah, that's true.

Yeah. Well, I do. I mean, if you really— if you want to dig into it, I did look up the numbers. I don't have them anymore. I want to say it was close to about 100 million returns that were filed in 2017, personal 1040s. So 100 million, about 100 million. Yeah.

So that's, that's 1.3 billion hours divided by 24. So that's 54 million days because we divided by 24.

And that's if you don't sleep, right? Yeah.

Divided by 365. So that's 100 and basically 150,000 days of time. That the United States, uh, collectively is spending each year on, uh, 150,000 years. Yeah, I said years, right? 150,000 years is if we added up all the time that Americans are spending on their tax returns. Oh my goodness, right?

And there is, there is a solution to this. Um, in fact, it's a solution that a lot of other countries use. And part of this congressional report that, that exposed this problem, that the report is kind of pushing for this idea. I don't know if it'll gain any traction, but it has been talked about before. And that is basically that, you know, the IRS has the information for most taxpayers already. They know your W-2, they know your 1099s. So why are they asking us to submit to them what they already know. So the suggestion is let the IRS put your return together for you. And then if you like what it said— well, I shouldn't say like, because nobody really likes what it says. If you agree with it, if you agree with it, then, then great. You know, take your refund, pay your balance due, move on. If you have special deductions or credits or something isn't correct, then you always have the option of filing those forms. But that would take a lot of the, of the burden off of the taxpayers and free up some of that time that we were talking about.

Yeah, it sounds good, but my, my hesitation would just be having the IRS do my tax return for me. Even— I know you said I can refute it or submit a return in response or whatever, But my concern would just be they end up just saying, oh, don't— there's no good— there's not going to be any refuting from this point forward, like in a slippery slope situation. So that would be my, my only concern. I— it would be good in the sense that, like, folks getting penalized for not submitting a tax return right now, that's good. So they wouldn't have to worry about it if this were implemented. But then, then I feel like, you know, the IRS is not going to prepare your tax return in the most advantageous way for you. Um, they're, they're, they're probably not— motivations are not the same as yours. Uh, so they're going to be basically, um, the tax— the taxes owed are going to be a lot higher when they do it than if you were to do it yourself. So that would be that concern. But then then you might say, oh, but you can refute it by submitting that. I feel like that's one of those things where it's just like in the beginning that's what it would be, and then eventually they'd be like, ah, uh, yeah, we're not doing that anymore. And then it would just— oh, they just tell us how much. So yeah, it sounds good, but yeah, I would definitely be, um, like concerned about, but about that. But you know, but again spending $150,000 each year on taxes is probably not optimal either.

Yeah, those are all very, very good points. And this idea has been around for a while. It has received a lot of legitimate pushback. So it's by far not perfect, but it is something that, that has been out there. In the meantime, or even, even, you know, as things change, The best way to protect yourself from your data being misused is by using a qualified tax professional. And the reason I say that is because enrolled tax professionals are bound by certain ethical standards that are spelled out by the IRS. So I'm talking about like a CPA or an enrolled agent. These are credentialed professionals who are overseen by the IRS or the AIC— oh gosh, I can't remember the acronym now— the AICPA. You know, these governing bodies are holding these professionals to a strict standard. And the, the, and I can say the punishments for, for violations are going to be a lot harsher on these professionals than, than what TaxAct, H&R Block, and TaxSlayer are probably going to see. You know, about 10 years ago, the IRS tried to get more oversight of tax professionals because there were a lot of just kind of unqualified tax professionals out there who weren't CPAs or EAs. There was this whole plan to have them register with the IRS, pass a competency test, take 15 hours of continuing education each year. That was back in about 2013, and that was overturned by the federal courts. The courts decided that it was not up to the IRS to judge a tax preparer's qualifications, but that was up to the person who hired them. So it is putting the power back into the taxpayer's hands. And I am a huge advocate for empowering our clients. It puts it on them to decide who they think is qualified. So the only downside of that is now there are no real requirements to get what's called a P-10. The P-10 being the only part of that program that really kind of survived. It's just registering with the IRS that you are going to be preparing taxes for compensation. But anyone can obtain— almost anyone can obtain a P-10. I think, I think there may be some— if you have a criminal record or something like that, they might deny it. But basically anyone can prepare a tax return for profit. So how do you know if the person you're paying to do your taxes knows their stuff and can be trusted.

Yeah, yeah. And, uh, a common question I get is, what is an enrolled agent? Because everyone knows what a CPA is, that it's very synonymous. Everyone knows they have great marketing over there at the AICPA, uh, so everyone knows what a CPA is. And, uh, and just to define what a CPA is, because people know what they know of the term, that that's someone who does accounting, but they might not necessarily know exactly what that means. So CPA is someone who is a certified public accountant. They've passed, uh, 4 tests, basically 4 4-hour tests, on one on regulatory, which is— and there's taxes— one on financial accounting and reporting for public publicly traded companies, one on auditing publicly traded companies, and one on business environmental concepts, which is just about business basically. So the CPA test is very focused on publicly traded companies, which some of it transfers to private small businesses, but a lot of it doesn't. I would say probably about half of it doesn't. So, so a CPA, someone's passed that credentialing, that test, that CPA test, and then also has like a bachelor's degree in accounting or some degree, some, some, uh, a lot of accounting classes basically. Uh, and so that's how you can get a CPA. And then there's usually some work requirement in there, um, for how long they've been in the accounting industry. And so that, that's a very heavily focused on publicly traded companies, that credential. And then the enrolled agents, again, like when I tell folks about that, they're like, I have no idea what that is. That's someone that's passed the IRS. The IRS has this program where it's all, uh, all the— there's 3 tests and it's all focused on business and personal taxes and ethics. and it's very focused on the tax side of things. So the, an EA is someone who is very spun up on, on taxes, which all small businesses have to deal with that portion. So basically a, a very high percentage of the test is applicable to small business owners. So those are the, the two main credentials, uh, that you might look out for, for, uh, selecting a tax preparer.

Yeah, yeah. One thing I try to let people know too is like an enrolled agent is governed by the IRS and is recognized in all 50 states to practice before the IRS. CPAs are extremely qualified accountants. They are governed by the state that they live in. Usually they have reciprocal agreements in place that they can practice in other states. But the big difference, like, like Daniel mentioned, is not all CPAs specialize in taxes. Some of them don't even touch taxes. They're, they're in the audit world, whereas EAs, that's, that's all EAs do is taxes. So, and then there are some CPAs who do specialize in taxes. They're very good at what they do. But I wouldn't, I would not let the fact that EA is not as maybe a popular or ubiquitous term as CPA scare you off. These are people who have worked very hard to prove their, their competency. There are ethical standards they must abide by, just like CPAs. That's in Circular 230, and then also continuing education requirements each year to make sure that they're on the top of their game. So I mentioned the Circular 230. That is the IRS handbook that spells out what CPAs and EAs can do and what they cannot do. And that is something that as an enrolled agent myself, we kind of, we live by. That's our ethics Bible, so to speak. And just to kind of give you some of the highlights of what Circular 230 has It talks about diligence as to accuracy. So, you know, what kind of source documentation we're required to have, you know, how, how thorough are we in making sure that everything is accurate? It has guidance on charging appropriate fees. So, for example, one thing that is absolutely not allowed is an enrolled agent is not allowed to charge you a fee as a percentage of the refund that you're getting. So if you ever walk into a tax house and they say, hey, we're going to charge you 20% of whatever your refund is, walk back out. That person is not living by Circular 230. Giving false or misleading information. Pretty, pretty obvious. Willfully assisting in tax fraud and evasion. That's a big no-no. Conflicts of interest. Should, should a tax preparer do a return for, for a husband and a wife who are getting divorced? Probably not. If he does, there's definitely some guidelines as to how he has to conduct himself to make sure that there's no conflict of interest. And then, of course, protecting your taxpayer information, you know, having a written information security plan making sure that we are not, you know, obviously not selling your information, but even just misusing it.

That's targeting you on Facebook to sell you more stuff based off your tax return.

Exactly. Exactly. And if you get caught violating these, there are discipline options available, everything from, you know, a censor to, you know, monetary fines and, and disbarment. So if you are interested in using a credentialed tax professional or if you are just wondering like, hey, you know, the guy who does my taxes, he says he's a CPA. How do I know he's telling me the truth? One thing you can do is you can go to the IRS website. You can— is irs.treasury.gov. /rpo, and that is the Registered Preparer Database. You can enter in your zip code and it will let you know what EAs and CPAs are around you. Now, just a word of warning, if your favorite tax preparer— if you search and your favorite tax preparer is not on this list, it doesn't necessarily mean he's lying to you. Some people do choose to opt out for privacy reasons, but you can— there are other ways to verify if you need to. I do strongly recommend that whoever you do have do your taxes, whoever is doing your taxes, is qualified. We mentioned some of that IRS data from, you know, 2017. According to the IRS, just over half of all 1040 tax returns were prepared by unenrolled tax preparers. So this does not include people who did them themselves, but these are tax preparers who are not bound by Circular 230, who have not, you know, proven their, their sort of looking for their competency. And maybe they are good tax preparers, right? I'm not going to say anyone who's not a credentialed tax preparer doesn't know what they're doing. I have friends who are unenrolled tax preparers and they're very smart people, but they do seem to be, you know, the exception to the rule. So, you know, kind of keep that in mind when looking for a tax pro.

Absolutely. All right. Well, I think we covered this topic pretty well. Let us know your thoughts on finding a competent tax preparer. Do you use a CPA? Do you use an EA? How do you vet who you're, who you're using? Or maybe you have questions, how, how should I vet? What questions should I ask? Or whatever your questions are, definitely let us know those questions. You can go to Grow Your Painting Business on Facebook, just search that, Grow Your Painting Business in Facebook, and there's a private group you can join to ask any question you have on this topic. Or if you have questions just generally about finance or recommendations for another episode, definitely let us know.

Yeah, absolutely. And just one quick thing before we sign off, EAs and CPAs have unrestricted representation rights before the IRS. So if you are having some tax problems and the IRS has not been your friend lately and you need help with that, an enrolled agent can help you with representation. Everyone at the Bookkeeping for Painters tax team is also an enrolled agent, so we can— we would be in a position to help you with that.

All right.

Awesome.

I hope you all have a great week and we'll see you next week.

Yeah, thanks for listening.