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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 33543
Experience:  Retired (mostly)
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I am a TAX PREPARER. I want to start preparing taxes for j1

Customer Question

I am a TAX PREPARER.
I want to start preparing taxes for j1 students from Europe,by using form 1040NR(Nonresident Alien).My question referes to "tax refunds":
can I collect tax refunds directly deposited in my preparer's bank account?So that I can send clients their refunds via PAYPAL?

(Irs can mail checks overseas,but there is the risk of check getting lost)
Is there a Power of Attorney I can make,to specify that Client"X" agrees that their refund to be direct deposited in my account and sendt to hime via PAYPAL?

Thanks
Submitted: 9 months ago.
Category: Tax
Expert:  socrateaser replied 9 months ago.
Hello,

Treas. Reg. 1.6695-1(f) provides:

  • (1) No person who is a tax return preparer as described in §(NNN) NNN-NNNN15 of this chapter may endorse or otherwise negotiate, directly or through an agent, a check (including an electronic version of a check) for the refund of tax under the Code that is issued to a taxpayer other than the tax return preparer if the person was a tax return preparer of the return or claim for refund which gave rise to the refund check. A tax return preparer will not be considered to have endorsed or otherwise negotiated a check for purposes of this paragraph (f)(1) solely as a result of having affixed the taxpayer's name to a refund check for the purpose of depositing the check into an account in the name of the taxpayer or in the joint names of the taxpayer and one or more other persons (excluding the tax return preparer) if authorized by the taxpayer or the taxpayer's recognized representative.

 

Based upon the above-quoted regulation, the tax preparer who prepares the return for the taxpayer can endorse or negotiate a tax refund check on behalf of the taxpayer for whom the tax preparer prepared the return generating the refund. Consequently, if you were to enter into a contract including a special power of attorney which permits you to endorse the check and deposit it into a trust account for transfer to the taxpayer, then that would be a lawful activity.

 

And, while I could quickly draft a generic contract to accomplish this goal, because banks tend to have different rules about accepting third-party checks, I must recommend that you contact a bank of your choice, and then determine from the bank what it will require for you to endorse and deposit your clients' checks into your own account for later transfer to the taxpayer.

 

Legally, if you commingle your clients' funds into a single account, then you must be able to scrupulously account for each and every client's funds separately from the others, and you must also be certain that you are not commingling your own funds in the account. If you do, and for some reason the account is overdrawn, then that action could be deemed criminal embezzlement, fraud against the United States, and/or breach of fiduciary. You can generally maintain a small balance to cover the possible overdrafts, but ideally, you would want to immediately deposit the check in an account set up for the client, rather than in a trust account -- because by doing so, you would avoid any possible claim of impropriety on your part.

 

Concerning a contract that you could use with each client, I strongly suggest that once you determine your bank's requirements, and if you choose to open a single account to manage the funds, rather than individual accounts for each client, that you have a local business attorney draft the contract, so that there can be no likely errors. This is the sort of arrangement that could land you in a federal prison if you are not careful.

 

Please let me know if my answer is helpful or if I can provide further clarification or assistance.

socrateaser, Lawyer
Category: Tax
Satisfied Customers: 33543
Experience: Retired (mostly)
socrateaser and other Tax Specialists are ready to help you
Customer: replied 9 months ago.

Thank you for your answer.I do have some other questions ,please.

1)So If I will be able to do that bank account,where I would endorse/deposit my clients ' checks(to that I can then send them thru paypal),and also a Power of Attorney that each client will sign,giving me the authorization to deposit their checks and then send the funds to them thru paypal:

 

Would I have to attach that Power of Attorney, with each tax Returns(so that all is transparent for the IRS)?

 

How can I recover FICA taxes for J1 students(in case Employers took that)?Are j1 nonresident aliens exempt form FICA for 2 consecutive calendar years or any 2 years(if they participated in the J1 program for more years,for example 2010,2012,2013,would they be FICA exempt for 2010 and 2012?)

 

Is there a way to deduct Program Costs and Flight Ticket for J1 students?

 

Question about forms 1040NR and 1040NR-EZ.Are these forms eligible to E-FILE?Or they have to be filled by paper and mailed to the IRS?

 

 

 

ANOTHER TAX QUESTION:different subject:CORPORATION TAX for TAXI MEDALLION business.

 

My friend has a taxi medallion in Chicago.He has a C Corporation.He purchased the medallion in 2010 with $100,000.In 2012,medallion price/value is $300,000.

He refinaced the medallion in 2012 (loan balance was 90000) and took out cash 50.000.So now the Medallion Loan Amount is 140,000.

VAlue of medallion on Market is 300,000.

 

When doing the Tax Returns for 2012,does he have to report anything related to the "cash out amount of 50000"?does he have to pay taxes of the Refinaced cash out amount of 50000?Or he can do as many refinances he wants ,without reporting it,and only pay taxes when he sells the medallion ,for the profits(for example,purchase price was 100000.he does a few cash-out refinances that are not reported ,and in a few years he sells the medallion for 500000,and pays tax on the total profits of 400,000)?

 

And what is the his ASSET VALUE(that needs to be reported on tax return)?(considering he has a Loan of 140000 of a Medallion whose estimated current market value is 300000)?

 


thank you

Expert:  socrateaser replied 9 months ago.

1)So If I will be able to do that bank account,where I would endorse/deposit my clients ' checks(to that I can then send them thru paypal),and also a Power of Attorney that each client will sign,giving me the authorization to deposit their checks and then send the funds to them thru paypal:

 

Would I have to attach that Power of Attorney, with each tax Returns(so that all is transparent for the IRS)?

 

A: No. This arrangement with your clients is entirely outside of any federal reporting requirement.

 

 

How can I recover FICA taxes for J1 students(in case Employers took that)?Are j1 nonresident aliens exempt form FICA for 2 consecutive calendar years or any 2 years(if they participated in the J1 program for more years,for example 2010,2012,2013,would they be FICA exempt for 2010 and 2012?)

 

A: This question, and the question that follows it is way outside the scope of the original that you asked. Per website policy, you must open a new Q&A session for each new subject that you raise.

 

If you would like me to answer your new question, please put my userid ("ToCustomer only") in the first sentence of your new question, and the website will send me an alert that you have posted a new question for me.

 

Thanks in advance for your understanding and cooperation.

Expert:  socrateaser replied 9 months ago.

Hello,

In an effort to provide great customer service, I frequently review answers provided during the week, where I believe that the law may be ambiguous or where a customer's liability may be unusually high.

I have discovered an ambiguity in federal law which requires that I modify my original answer. Treas. Reg. (Title 26) 1.6695-1(f), which is the regulation to which I originally referred, has a companion regulation, found in Treas. Reg. (Title 31) 10.34, which provides: "A practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability."

The combination of the two regulations suggests that the only means of accomplishing your original goal of providing refunds to clients would be to deposit the client's refund check into a bank account held in the client's sole name. Your name cannot be on the account. The reason for this is that Section 1.6695-1(f) provides the only available "safe harbor" to avoid liability for endorsement/negotiation of the check -- which is to deposit the check into an account in the client's name (but, not an account in which the tax preparer's name also appears).

What this means is that there is no way that you can make a PayPal transfer to the client, because you would not be authorized to access the account into which the refund check is deposited.

I regret that I did not find this companion regulation earlier. Unfortunately, these regulations have been substantially modified several times during the past few years, and there have been court cases that have altered the regulations, because of a continuing struggle by the IRS to regulate all tax preparers in the USA.

Consequently, what should appear as a single regulation in a single section of the Code of Federal Regulations, appears in two different sections -- making a complete analysis of the law unusually difficult.

I hope that this memo finds you well, and I'm glad I was able to catch this circumstances quickly, so that you do not proceed in a direction which will not provide you with a satisfactory outcome.

Please let me know if you require further clarification or assistance. And, thanks for using justanswer.com!

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