Filing season seems to get tougher each year for both accountants and taxpayers as they head into crunch time.
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This year is no different, as there are more forms to file, more information needed to file them, and that information itself is coming in more slowly.
"There's more [forms] to file this year, which complicates the filing season," said Greg Rosica, tax partner at Big Four firm Ernst & Young. "Historically, there was one Schedule D to track gains or losses when stock was sold. Now there's Form 8949, in three different versions, in addition to Schedule D. Form 1099s and Schedule K-1s, which should be in already, are still coming in."
"The IRS is collecting much more data, which adds complexity to the return process," explained Steve Eliach, principal-in-charge of the tax practice at Top 100 Firm Marks Paneth & Shron. "Form 1099 requirements, Form 8949, and the stricter information requirements for foreign bank accounts are just some of the examples. Each one individually may not be that much, but when you take them all together, the compliance burden seems to be significantly increasing both for taxpayers and practitioners."
Taxpayers who lack the information to complete their return are naturally filing later, while simpler returns that generate needed refunds are being filed earlier. "Refund returns started coming in earlier last year when people wanted their refund sooner due to the poor economy," said Roger Harris, president of Padgett Business Services. "This year is a verification of the same thing."
The new basis reporting rules are adding to the complexity, he noted. "It's taking a little while to figure out how the software wants the data to be entered, and there's an adjustment about getting the data. I don't think we have enough experience to know if it will be consistent from brokerage house to brokerage house, and this has added to the preparation time."
REFUND DELAYS AND 1099S
For tax preparation franchisor Smart Tax, returns are up over 30 percent from a year ago, according to chief executive Nick Rizzi: "The people we typically see have already been in, because they want their refunds."
However, the delays in refunds that characterized the start of filing season persist, he noted. "Refunds are still late, and e-file switched back from Modernized e-File to the legacy system for a week," he said.
"The IRS is stricter in terms of its matching, as well as certain questions being asked which go to the heart of compliance," said Joe Perry, partner-in-charge of tax at Top 100 Firm Marcum. "For example, Schedule C and the other business forms ask if you are required to file Form 1099, and if so, did you? It's used for matching purposes. If an individual or business takes a deduction for expenses, another company should be picking up that income."
"While these are reporting requirements, we have to make sure the clients answer the questions correctly," he said. "Where a firm is doing full service for the client there's no problem, but when you get information only at the end of the year or during filing season, it can create a problem."
This is the first year that clients are required to furnish Form 1099s to their accountants if the total they paid exceeds $600, explained Perry. "We sent out information to our business clients at the end of last year, and followed it up with phone calls, but they are still taking time to be in compliance."
"And it's not just the federal government that requires additional information," Perry pointed out. "For example, New York asks if you filed a rent tax return for New York City."
PTINS, FBAR AND FATCA
The PTIN requirement still leaves questions open as to who needs to have it, said Perry.
"An intern just gathering information doesn't need it," he said. "That's okay so long as they don't make decisions on how an item is treated on a return. We require all staff persons to apply for a PTIN. At $65 per individual, it adds to the cost of compliance. But on the bright side, many practitioners who started out in public accounting and did returns on the side will stop dabbling in preparation. We'll have more competent professionals."
The increased emphasis on foreign bank accounts has added to the regulatory burden, as the FATCA and FBAR filing requirements are added to the mix. (For more on those, see "FBAR, FATCA put pracs on alert," page 12.) "The IRS continues to seek taxpayers who are sheltering or hiding income abroad. We usually ask, 'Is this all the income you have?' and that should be broad enough," said Perry.
There are a number of factors that have placed a greater burden on tax return preparers than ever before, according to Mike Solomon, tax partner at Top 100 Firm EisnerAmper. "Form 8949 gives three choices to track the cost basis of stocks. If there are differences between how you are reporting cost on Form 1040 and how it's reported by the brokerage house, it gets reconciled on this form. The additional burden is trickling down to taxpayers and tax preparers."
"More states are now mandating e-filing, and some, such as New York, don't give the opportunity to opt out. That's the only way they will accept it," he said.
The Roth conversions from 2010 gave taxpayers the option to report everything on their 2010 returns, or half in 2010 and half in 2011, Solomon noted. "Well, 2011 returns are here. Will the software pick up on it? It's possible that it won't. The government will send a notice if you should have reported from the rollover and didn't, but we as preparers don't want to have left it off."
Solomon agreed that the questions on business forms relating to Form 1099s are an additional burden. "Under the Obama health care legislation, you had to send a Form 1099 to everybody for everything. Even though it was repealed, they haven't completely given up on the idea. So every business tax return asks if you have issued all of the appropriate Form 1099s. It puts the burden on preparers because we're the ones signing the tax return. We have to make inquiries. If the client says, 'I don't know but I think so,' and they didn't, it can lead to conversations and possible investigations."
"This puts a barrier between the preparer and the client," he said. "It's in our interest to make sure they answer accurately, but clients want to answer affirmatively because they don't want to raise any questions on their tax return."
CHANGES IN SECURITIES TRANSACTIONS
Part of the 2010 compromise that froze estate tax rates was an agreement that stepped up the gift tax exemption from $1 million to $5 million for two years, Solomon noted. "With proposed changes in the tax law, it's clear that this may be cut back, so we have an obligation to alert our clients about the opportunity. It expires at the end of 2012. If you have a client that finds out in January 2013 that they missed the opportunity, they could be very upset and might even have a claim against the accountant," he said. "We can be faulted not only for giving bad advice, but for failing to give good advice."
The change in reporting of securities transactions has added to the burden on practitioners, said Alan Dlugash, tax partner at Marks, Paneth & Shron: "It's all part of the regulatory explosion that we've seen over the past few years. Everything is more complex, especially if there's foreign involvement. For example, an inordinate amount of [Mitt] Romney's 203-page tax return had nothing to do with tax, it simply had to report the amount of involvement in foreign investments."
"It's not enough anymore to simply be a tax preparer," Dlugash observed. "Three things are making life difficult, particularly for the older generation. When you look at their overall economic picture, you see that they're retiring too early, they're living too long, and interest rates are too low to provide them with the funds they need to live."