With the election only just completed, tax preparers aren’t yet sure how much it will change the tax landscape, but they do know there’s a different set of leadership in place with a different approach to tax, the tax burden and tax administration.

“It will be curious to see how much the balance shifts,” observed Kelly Myers, an advisor with Myers Consulting Group LLC, and formerly a career IRS officer with 30-plus years of experience. “The Republicans won’t have a super-majority, so there will still be a give and take in their congressional negotiations. If you have some Republicans who break stride with a proposal, they won’t be able to force their way through. Republican legislators are less likely to operate in lock-step, as the Democrats do.”

“People will be watching as they move forward on the Tax Cuts and Jobs Act; the biggest thing is the SALT limitation with its $10,000 cap,” he continued. “There have been discussions on it, particularly as it creates a marriage penalty — a married couple filing jointly has the same $10,000 cap as a single filer. So there should be some palate for action, creating a $20,000 cap for a married couple.”

Eva Marie Uzcategui/Bloomberg

Also, there is wide support for a renewed R&D credit to operate on a dollar-for-dollar basis, instead of a five-year amortization procedure, according to Myers. There may be a stronger appetite to modify this with a Republican House in January. The bonus depreciation that was passed to act as a stimulant may not fare so smoothly, since, with inflation a continuing issue, it may not be desirable to stimulate the economy. 

Another TCJA issue is the qualified business income deduction, Myers remarked. “It will be hard to touch that since it was put in the legislation to create equality with the corporate tax rate,” he said. “If they had a super-majority, they could ram through their dream provisions, but it’s probably a good thing they don’t — one party can’t ram something through in one direction or the other. We’ll know more about the party priorities once the cabinet gets settled.”

Theory versus practice

“Trump said a lot of things during the campaign that may be difficult to implement,” according  to Bill Nemeth, president and education chair of the Georgia Association of Enrolled Agents. “Many things he will not have direct control over. He has said that any of the $80 billion in funds for the IRS that hasn’t been spent will be seized. He would also do that with the CHIPS Act, where they’re building a chips factory in Upstate New York. It’s questionable how much of this he can accomplish. At this point it’s all speculation. The net is that he made a lot of promises during the campaign that he may not be able to bring to pass.”

“As one who prepares a lot of individual returns, the suggestion by Trump of repealing the tax on Social Security would make things easier for a lot of people and make it easier to do returns for retirees, but it’s not clear how it would work in practice,” said Stephen Mankowski, tax chair at the National Conference of CPA Practitioners. “And making overtime pay nontaxable would likewise add to the complexity. Payroll systems would become very complicated. Companies that have hourly workers would be more apt to get workers willing to work overtime when they know they wouldn’t be taxed on the additional pay.”

One of the complications of the “no tax on tips” proposal, he added, is the situation where tips are below the minimum wage, with the employer obligated to make up the difference where a worker has a slow night and brings in little in tips. 

“Our hourly rate is $7.65,” he said. “It hasn’t moved in years. If a server or bartender gets paid $3.00 per hour, the business makes up the difference at the end of the shift. That would be difficult where they are only taxed up to $7.65. And issues would arise as to how it would affect the Social Security base, and how much income could be labeled tip income. Hopefully with the new Congress they will do what they can to  insure the IRS has proper funding. They’re looking at modernizing the IRS and they need sufficient funding to do that — additional funding to the IRS can pay for itself many times over.”

One casualty of the Republican victory is likely any immediate attempt to tax unrealized gain, according to Gil Baumgarten, chief executive of Segment Wealth Management in Houston. 

“You can only have an income tax on something that is income. Unrealized gain is not income,” he said. “Overall, the election was good for business — that’s the reason the market went up more than 1,500 points the day after the election. I can’t think of a better approach to government. Elon Musk is right — sooner or later we’ll run out of money. There is so much government waste. I would love to see 90% of government workers laid off. There’s nothing that government can do that the private sector cannot do better. Trump understands this.”

The first two pages; a Rainy day; in all modesty; and other highlights of recent tax cases.

Freeport, Texas: Tax preparer Krystal Wright has been sentenced to two years in prison to be followed by a year of supervised release for aiding and assisting in the preparation and filing of false income tax returns.

Wright, who pleaded guilty earlier this year, was the sole owner and only tax preparer at the tax prep firm WW2F. Most of her clients did not have a business nor did they discuss any business income or expenses with her. From 2017 through 2020, she prepared and filed some 83 federal income tax returns that contained false and fraudulent items, including qualified solar electric property costs, gifts by cash or check, business expenses, wages, salaries, tips and supplies. After Wright completed a return, she did not review the completed documents with clients and only provided them with the refund amount and first two pages of the return.

The filings resulted in a total tax harm of $525,404. Wright was also ordered to pay that amount in restitution.

Terrell, Texas: Tax preparer Toronto Henderson, 49, has pleaded guilty to conspiracy to aid, assist, counsel or advise in tax fraud and has been sentenced to two years in prison.  

Henderson owned two tax prep businesses and recruited tax preparers to prepare and file income tax returns for clients. Henderson or others at his instruction personally trained the preparers and instructed them to create, among other things, fraudulent Schedule Cs; preparers used taxpayer information unrelated to the operation of any business or created fictitious and false information with respect to operation of a business to allow the claiming of undeserved losses.

The tax loss totaled $373,230, which Henderson was also ordered to pay in restitution.

Columbus, Ohio: Tax preparer Ali Kasimu Alston, 48, has pleaded guilty to aiding in the preparation of false and fraudulent returns.

From at least 2015 through at least 2022, Alston owned and operated the prep business in Columbus Overtime Ventures LLC, d.b.a. Raining Cash Tax Service. He admitted to systematically falsifying client tax returns to maximize federal refunds, filing Schedule Cs with fake businesses to maximize tax credits. He also tried to bribe one of his former employees with $4,000 to provide false information to law enforcement that was investigating the tax prep business.

Aiding in the preparation of a false and fraudulent return carries up to three years in prison. Alston will also pay more than $1.2 million in restitution to the IRS.

Beaumont, Texas: Tax preparer Michelle Denise Johnston, 42, has been sentenced to 15 months in prison and ordered to pay $196,177 in restitution for federal tax violations.

Johnston worked at Allen and Johnston Tax Service, which she formed with Yolanda Allen Morris in 2011; each had worked as Jackson Hewitt office managers at Wal-Mart locations and had decided to open their own tax prep business. The company existed until Allen and Johnston split in February 2021.

Johnston requested refunds on clients’ federal returns that were not based on the clients’ actual income, expenses, deductions and qualifying credits. She inflated refunds based on fabricated income, expenses, deductions and credits reported by Johnston without clients’ knowledge.

The IRS deposited the refunds with a third-party vendor; Johnston then caused the third party to pay the clients a modest tax refund that she’d originally made known to them. Before the vendor paid, however, Johnston deducted what was essentially a second tax prep fee from the refunds, the amount generally being the difference between the filed, larger refund and the modest refund made known to the client.

Johnston also signed an income tax return and falsely stated the amount of gross receipts and fraudulently stated taxpayers’ total expenses on returns, knowing the information was false.

Fairmont, West Virginia: Tax preparer Jack Lee Oliver, 56, of Rivesville, West Virginia, has been convicted on 26 counts of filing false returns.

Oliver owns an insurance sales and tax prep business known as Insurance Depot. He prepared returns for clients claiming business losses for non-existent businesses without the clients’ knowledge and prepared returns for clients who did have businesses, falsely inflating expenses to cause a business loss, again without the knowledge of the clients.

On his own returns, Oliver claimed the foster son of one of his clients, resulting in thousands in undeserved refundable credits.

The expected federal tax loss exceeds $500,000. Oliver faces up to three years in prison for each count. 

Lenexa, Kansas: Tax preparer Hophine Bwosinde has pleaded guilty to preparing and filing false income tax returns for clients.

Bwosinde operated the tax prep business Ambroseli Professional Services and from 2018 through 2022 prepared and filed false returns by either inflating legitimate business expenses or claiming losses related to fake businesses. He also falsely reported negative income on clients’ returns, generating undeserved refunds.

Bwosinde caused a total tax loss of more than $1.5 million.

Sentencing is Feb. 18. Bwosinde faces a maximum of three years in prison as well as a period of supervised release, restitution and monetary penalties. 

Miami: A federal court has issued an order holding Gerald Vito, James Eleby and Kwame Thomas in contempt for violating a permanent injunction that prohibited Vito and Eleby from preparing, filing or assisting in the preparation or filing of federal returns for others.

According to the complaint filed against them in March 2021, the pair prepared returns that significantly understated clients’ tax liabilities by claiming deductions for fabricated or inflated charitable deductions, medical expenses and employee business expenses. The complaint further alleged that the defendants significantly understated clients’ tax liabilities by reporting false or inflated business losses. In December 2021, the court issued a permanent injunction barring Vito and Eleby from preparing returns for others.

Following a hearing in September, the court found that the two violated the injunction by continuing to prepare returns for others. The court further found that Thomas, who was not a defendant in the original complaint, worked with Eleby to prepare returns in violation of the injunction.

The court held Vito, Eleby and Thomas in civil contempt and ordered that they disgorge, in the aggregate, $988,789.56 in fees they earned while violating the injunction. Vito and Eleby were further ordered to disclose to the government the names of all taxpayers for whom they prepared returns after Dec. 27, 2021, notify those taxpayers of the injunction, vacate the premises at which they prepare returns and file an affidavit of compliance with these terms.

San Antonio: Resident Rachel Olivia Markum has been sentenced to 15 months in prison for tax evasion.

Markum and her husband, Robert Franklin Markum Jr., prepared and signed a false joint 1040 for 2016 attesting that the couple’s sole income was gross receipts or sales from the business Camping and Fishing Outlet as $3,530,473. She was aware that the true gross receipts exceeded $4 million.

Rachel Markum pleaded guilty on May 28 to one count of tax evasion and aiding and abetting. Robert Markum pleaded guilty on April 1 to one count of tax evasion, and on Aug. 28 was sentenced to 27 months in prison. The couple was also ordered to pay $359,108 in restitution.

Vanguard agreed to pay $40 million to settle a potential class-action case over steep capital-gains taxes that hit thousands of investors in the firm’s target-date funds.

In the Nov. 6 preliminary settlement awaiting approval in Philadelphia federal court, the asset management giant did not admit any guilt or wrongdoing. However, the payout would add on to another $6.25 million in fines and restitution against Vanguard in 2022 in the settlement of a case filed by Massachusetts regulators on behalf of investors who absorbed capital gains — and the accompanying tax burden — when the firm opened the lower-cost institutional share classes of the funds to midsize retirement plans it had previously shut out from them in 2020.

Those clients rushed into the cheaper shares in a move described by The Wall Street Journal as an “elephant stampede” that caused the target-date funds to sell 15% of the products’ holdings in transactions saddling taxable-account investors with a capital-gains distribution that was 40 times any previous level, according to the March 2022 lawsuit. Less than a year after reducing the minimum-asset requirement for institutional shares to $5 million from $100 million, the firm merged them together with the retail versions of the funds. That adjustment caused no tax impact, leading experts to question why Vanguard didn’t simply do that in the first place.

“You got these huge capital gains that had to be distributed, and that was really the big problem,” said Daniel Sotiroff, a manager research senior analyst of passive strategies for Morningstar Research Services. “Vanguard actually did kind of mess this one up.”

Representatives for Vanguard didn’t respond to requests for comment on the case or the settlement.

READ MORE: How Vanguard’s tax-bomb target-date funds slammed wealthy investors 

It and the plaintiffs had indicated in September filings that they reached agreement in private mediation that month. The investors accused Vanguard and its top executives of breaching their fiduciary duty, aiding and abetting that breach, gross negligence, breaking the covenant of good faith and fair dealing, unjust enrichment and violations of several state laws. In the course of discovery, Vanguard deposed 10 of the plaintiffs and produced 250,000 documents.

The company agreed to the settlement “solely to eliminate the burden and expense of further

litigation,” and nothing in it is “an admission or finding of any fault, liability, wrongdoing or damage whatsoever or any infirmity in the defenses that [the] defendants have asserted, or could have asserted,” according to court filings.

“Defendants have denied, and continue to deny, that they have committed any act or omission giving rise to any liability or violation of law,” the “stipulation of settlement” document stated. “Defendants have asserted, and continue to assert, that the conduct was at all times proper and in compliance with all applicable provisions of law, and they believe that the evidence developed to date supports their positions that they acted properly at all times and that the action is without merit.”

In the agreement ordering Vanguard to pay $40 million to target-date investors who paid the tens or even hundreds of thousands of dollars in taxes three years ago, the plaintiffs agreed to take roughly 15% of the “best-case scenario” payment of $259.5 million in damages, according to their filing for approval of the settlement. The settlement agreement limited attorney fees to no more than one-third of the award and capped litigation expenses at $985,000. If the settlement gets preliminary approval, the plaintiffs would then reach out to potential class members for their reaction before seeking the final green light on the agreement.

The cash settlement “provides an immediate recovery to impacted Vanguard [target-date fund] investors and avoids the considerable risks of continued litigation in this complex class action,” the filing stated. “Plaintiffs and class counsel believe that the case has merit, but they recognize the significant risk and expense that would be necessary to prosecute Plaintiffs’ claims successfully through class certification, continued fact and expert discovery, summary judgment, trial and subsequent appeals, as well as the inherent difficulties and delays complex class action litigation like this entails. As previewed in the parties’ class certification briefing, which focused almost exclusively on damages model issues, proving damages would be risky, complicated, and uncertain, involving conflicting expert testimony.”

READ MORE: Vanguard to pay some — not all — of tax bills created for TDF investors

Besides the substantial payout, the case helped remind financial advisors and their clients of the potential risks involved with holding mutual funds in taxable accounts, Sotiroff said. ETFs or separately-managed accounts could help avoid the tax surprises in non-retirement holdings, even though target-date funds may not be as readily available in that form.

“If you’re going to hold a mutual fund, you have to expect that you’re probably going to get some capital gains distributions from it,” Sotiroff said. “You’re always potentially on the hook for a capital gains distribution.”