This past tax season will be remembered for a number of complications in preparing and filing tax returns -- despite the fact that there was not much in the way of legislation.
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"Both the IRS and the states added complexity to the process administratively," said Bob D. Scharin, senior tax analyst at Thomson Reuters. "New tax legislation is not the only source of complication. The IRS has initiatives to encourage electronic filing of returns and reduce the number of paper returns it receives, yet the number of pages in those returns is bound to have increased. A prime example is new Form 8949. Instead of using only Schedule D to report capital gains and losses, separate Forms 8949 need to be used depending on whether the transactions were reported on Form 1099-B, and if so, whether basis was shown on those forms - and then gross amounts from those forms reported on Schedule D."
Another complication has resulted from state recognition of same-sex marriage, Scharin added: "Tax returns for those couples need to be completed using different filing statuses for state and federal purposes - married for state returns, and single or head-of-household for federal returns."
Internal Revenue Service statistics indicate that for the week ending April 27, 2012, the total number of refunds was up, but the average refund amount was down. "Lower investment income and reduced mortgage interest deductions when mortgages were refinanced at lower interest rates could have contributed to that," Scharin noted.
FORMS OF CONFUSION
A number of taxpayers were confused by the filing requirements of Form 8938 (the FATCA form) and Form TD F 90-22.1 (the FBAR form).
"They felt strange to be asked about their foreign assets, not just the income," said Linda de Marlor, president of Rockville, Md.-based Tax-Masters and the "Tax Lady" on C-SPAN. "Some clients lived overseas for years and never filed or heard of FBAR or the form. Apparently their previous accountant was not aware of this rule."
"We have numerous clients faced with these requirements, since we speak 10 languages here," said de Marlor.
A number of clients intended to file their returns before April 17, knowing there were mistakes but assuming they could amend the return later. "This is a bad practice," she said. "Instead, we suggested they file extensions, and get it right the first time."
An issue this filing season that is sure to grow is the number of identity thefts, according to de Marlor. "We had a number of cases that we couldn't e-file because the Social Security number had already been filed on a return," she said.
A recent Treasury Inspector General for Tax Administration report said that over 640,000 taxpayers were affected by identity theft in 2011, and that the problem threatened to overwhelm IRS resources.
THE COST OF COST BASIS
Most preparers had problems dealing with the new basis reporting rules.
"It was the first year that brokers had to report cost basis, mainly for stocks acquired during 2011," said Stevie Conlon, senior director and tax counsel at Wolters Kluwer Financial Services.
"There was a learning curve for brokers, return preparers and taxpayers in adapting to the new rules," she said. "It created some level of delay. The new Form 8949 is a significant development, and places real concern on any difference between what the broker reports on Form 1099-B and the gain or loss that the taxpayer calculated, and it could increase the risk of audit because of its design."
"People did not all get their Form 1099s on February 15," she noted. "More brokers than usual were requesting 30-day extensions in the delivery of Form 1099s because they weren't ready. The assumption is that they were still trying to organize the data."
The basis reporting probably created the most problems this filing season, agreed Roger Harris, president of Padgett Business Services. "There was inconsistent reporting from different brokerage houses, and different ways the tax software wanted to enter data, along with delays in reporting of Form 1099s and late corrections. You would get the information late, then when you finished the return you got something new that said, 'We want to correct this.' It clearly added cost to people's tax preparation this year."
"The bottom line was that reporting capital transactions is much more complicated than it used to be," said Marty Davidoff, of Dayton, N.J.-based E. Martin Davidoff & Associates. "We did a smaller number of returns, but they were more complex returns. Some of our simpler clients fell off due to cost," he said.
Another recurring issue was the question on Schedule C regarding the issuance of Form 1099, Harris observed.
"It asked if you made any payments requiring the filing of Form 1099, and if so, did you or will you file the form? When you ask a taxpayer that question who you see once a year, you'll get some answers that maybe you don't want to hear," he said.
"The rules aren't new, but putting the questions on the tax return put taxpayers in an awkward position," he continued. "The right answer might have been, 'Yes, I should have' and 'No I didn't.' The taxpayers want to know what happens if they answer it that way, and the answer is that I don't know. A lot of taxpayers learned about issuing Form 1099s that didn't know before, so in the long run it was an educational process that increased compliance."
TECHNOLOGY ON THE RISE
More preparers are using portals, especially as a result of the new e-filing rules, according to David Bergstein, director of strategic relationships at CCH. "It changed their work flow for the better, and drove more of them to a paperless, or a less-paper, environment."
More are also using scanning as part of the return process, he noted. "Upfront scanning is well-received, but flowthrough - to actual lines on the form -- is not yet generally accepted," he said. "The use of three monitors has become pretty standard, and some firms are now using four."
But the move to the cloud has hit some rough patches, according to Bergstein, with many preparers, and their firms, adopting a "wait-and-see" attitude.
It came as a surprise to many taxpayers that their taxes would go up dramatically on Jan. 1, 2013. "They were especially shocked that taxes would go up 50 percent on the lowest-income taxpayers," said Allan Boress, an Orlando, Fla.-based CPA and marketing expert. "This shows how ignorant the taxpaying public is when it comes to what will affect them in the near future."
That's true of taxpayers in general, agreed Thomas DiLorenzo, manager in the Employee Financial Services Group at Ernst & Young LLP. While nearly 70 percent of taxpayers used at-home software, close to a third didn't know the difference between a tax deduction and a tax credit, he said.
The information was learned from a poll on an Ernst & Young financial planning Web site for corporate clients that subscribe to the service for their employees. "It covers a pretty good cross-section of the taxpaying public, dealing with everyone from entry-level employees to managers to executives."