Today I’ve got answers to questions from readers about tax preparers, inflation hedges and student loans.
Q: Jonathan P. asks, “Between the increasing national debt, looming Social Security insolvency, out-of-control Medicare expenses, Iraq war costs and the falling dollar, I have a fear that we will eventually face high or even hyper-inflation. Where is a good place to invest to protect yourself from this contingency?”
A: Stephen Cecchetti, a professor at Brandeis International Business School, disagrees with Jonathan’s premise - that inflation is going to be a problem. However, if an investor did want to hedge against inflation, the safest way to do it would be with Treasury Inflation Indexed Securities, he says.
These are U.S. Treasury bonds whose return is partly linked to inflation. Often called Tips, they pay a fixed interest rate plus a variable rate tied to the Consumer Price Index. The variable portion is not paid out, but is added to principal. Investors don’t get it until they cash in their bond, but they owe tax on it as it accrues.
The difference between the fixed yield on Tips and the yield on regular Treasury bonds with the same maturity is the expected inflation rate. Recently, this difference has been running around 2.3 percentage points. If you are sure inflation will be higher than 2.3 percent a year, you would prefer Tips over regular Treasuries.
The Bureau of the Public Debt plans to sell 10-year Tips on Thursday and five-year Tips on Oct. 23. For tax reasons, it’s simpler to buy Tips in a tax-sheltered account or through a mutual fund.
Another way to hedge against inflation is with Series I U.S. savings bonds. They are similar to Tips in that they pay a fixed rate plus a variable rate tied to the consumer price index. If you buy an I bond today, you will earn a fixed rate of 1.3 percent plus the inflation rate. You don’t owe tax on I bonds until you cash them in, so from that standpoint they are simpler than Tips. But if you’re worried about inflation, Tips are probably the better option.
You can buy Tips and I bonds in a Treasury Direct account. To learn more or open an account, visit «www.treasurydirect.gov»/.
Q: Kay writes, “I have been using a ‘retired’ tax preparer for the last few years. He has always been able to answer my questions fully and does research for my returns each year. I’m very satisfied with his work. However, I pay him what I would pay a currently licensed professional. What more would I get if he were currently licensed? Guarantees of security, accuracy, recourse in case of errors? Do CPAs carry insurance that would protect me in case my financial data were compromised?”
A: Believe it or not, anybody can be a tax preparer. No federal law requires tax preparers to be trained, tested or licensed - although many are. California is one of few states that imposes any requirements on paid preparers.
Any person who gets paid to do taxes, retired or not, is a paid preparer and must sign the returns they prepare.
No matter who prepares your tax return, however, you are responsible for its accuracy and the payment of taxes, penalties and interest. Many preparers promise that if they make a mistake, they will pay the resulting penalties and interest - but not your tax. No law requires them to make this guarantee, though.
If you have a beef with your preparer, you can sue him or her in civil court. Many preparers buy errors and omissions insurance that will pay judgments against them, but they do not have to obtain this.
All financial service providers, including tax preparers, are required under the federal Gramm-Leach-Bliley Act to ensure the security and confidentiality of customer information.
There are four types of preparers, each with different (or no) education and licensing requirements.
Certified public accountants and tax attorneys must be licensed by their states, complete a course of study, pass a rigorous test and meet their governing organization’s continuing educational requirements.
Enrolled agents are licensed by the Internal Revenue Service, must pass an IRS test and complete at least 72 hours of continuing education every three years.
These three types must meet ethical and other standards spelled out in Treasury Department Circular 230. They can represent taxpayers before the Internal Revenue Service in all matters including audits, collections actions and appeals - whether they prepared the return or not.
All other preparers - and there are gobs of them - are called unenrolled agents. They can represent taxpayers only in audits of returns they prepared.
Only a few states impose any licensing or educational requirements on unenrolled preparers.
Some firms set their own standards. H&R Block - which has about 5,000 enrolled and 85,000 unenrolled preparers - requires unenrolled ones to take 104 hours of in-house training, pass a test and complete 30 hours of continuing education per year.
California requires unenrolled preparers to register with the California Tax Education Council, but this is not a licensing program, says Celeste Heritage, the council’s administrator.
To register, a preparer must post a $5,000 bond and complete 60 hours of initial education at an approved school and 20 hours per year thereafter. There is no testing requirement, and the council has no enforcement powers.
Oregon licenses unenrolled agents and makes them pass a test.
Nina Olson, the IRS taxpayer advocate, has been pushing Congress to regulate all tax preparers. She wants them to register, pass a test, get continuing education and meet ethical standards.
Olson, who was an unenrolled preparer herself for many years, is concerned about companies that use tax preparation to get customers in the door and then sell them other things, from refund anticipation loans to cars.
There’s no easy answer to Kay’s question. Personally, I’d want a licensed CPA or enrolled agent. But if she trusts her tax preparer, I see no reason to change, assuming he keeps up with the ever-changing tax laws and is properly licensed or registered. If the preparer is not a licensed CPA, enrolled agent or tax lawyer, Kay should make sure he is registered at «www.ctec.org».
Finally, Kay should ask her preparer the same type of questions she asked me: What kind of education do you have? Do you have malpractice insurance? Will you pay my penalties and interest if you make a mistake? How do you safeguard my data?
For tips on choosing a tax preparer, see links.sfgate.com/ZBBT.
Q: Kathy H. has a question about my Sept. 16 column on student loans. “Your column mentioned an income-contingent repayment program, open to anyone regardless of occupation. It said that a borrower would have to consolidate or reconsolidate into federal direct loans to participate. I called Citibank, with whom I consolidated my loans about 10 years ago, and they gave me no help on this. How do I go about reconsolidating?”
A: There are two ways to get federally guaranteed college loans - from private sector lenders like Citibank under the Family Education Loan Program and from the U.S. Department of Education’s direct loan program.
The income-contingent program is only available under the direct loan program.
If Kathy had not yet consolidated with Citibank, she could consolidate them under the direct program fairly easily by saying she was unable to find income-sensitive repayment terms acceptable to her in a private-sector loan.
Since she has already consolidated them with Citibank, it’s going to be harder, says Mark Kantrowitz, who runs Finaid.com. To reconsolidate in the direct loan program - and become eligible for income-sensitive repayment - her loan must be selected for default aversion by the agency that guarantees the loan.
If Kathy’s loan has not been selected for default aversion, “she should call her guaranty agency, explain that she’s having a hard time making her payments, and see if they will let it through,” Kantrowitz says.
She also could call the direct loan program at (800) 557-7392 “and see if they might be able to contact the guaranty agency and get her selected.” The higher her debt and the lower her income, the more likely she is to succeed.
For additional help, she could call the Federal Student Aid office ombudsman at (877) 557-2575.
If she does not succeed, starting July 1, 2009, there will be a new income-based repayment program that is better than the existing income-contingent payment program and will be available for both private-sector and direct consolidation loans.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.
