Every year, it seems as though the tax profession is faced with year-end legislation, late forms, and radical changes that add to the complexity and headache of preparing a client's tax return. At the same time, though, most practitioners realize that it's the complexity and confusion that drives clients their way.
This year, however, promises to be unlike any year ever. Not only are there expiring provisions that may or may not be extended -- there are provisions that already expired last year that may or may not be retroactively reinstated, and 21 new taxes under the Affordable Care Act, which may or may not be repealed in whole or in part.
"This is probably one of the most difficult years for planners and taxpayers to plan for year end," said Rick Bailine, principal-in-charge of McGladrey LLP's Washington National Tax Office.
"One of the possibilities for small and midsized businesses is to consider deferring income from 2012 to 2013, if possible, and to accelerate deductions," he said. "Both Romney and Obama have advocated a reduced corporate tax rate, Obama down to 28 percent except for manufacturers, and Romney down to 25 percent. Normally that would be a no-brainer -- defer income to 2013 when the rates will be lower, and accelerate deductions because they will be worth more in 2012. However, what we've seen is that because of the impasse in Congress, neither side is able to push their agenda very well."
"Whoever wins will very likely push for some sort of comprehensive tax reform," Bailine said. "It could happen, but there's a lot of disagreement on what comprehensive tax reform should look like. Unless the two sides show a willingness to come together and compromise, it's not likely. What is more likely to be passed are the Bush tax cuts, because they can be tied to the debt ceiling."
"The compromise in 2011 happened because the Republicans were willing to vote for an increase in the debt ceiling as long as the Democrats pushed for tax cuts. It will come up again, probably before December 31, so it may well be tied to the debate on whether and how to raise the debt ceiling," he said.
Practitioners advising small and midsized businesses should consider if there is excess cash in the business, Bailine indicated. "If there is, consider paying dividends. If nothing happens and the tax goes up from 15 percent to 44 percent, the best use of cash would be to pay a dividend under very favorable tax rates, which may go away even if there is a compromise. Traditionally, dividends are taxed as ordinary income, but that's not true of capital gains."
Something similar goes for individuals regarding capital gains, he noted: "If Congress does nothing, the capital gains rate will go up to 24 percent. That's not as high as the dividend rate, but it's still something to consider if your client is planning to sell stock."
Likewise, the change in estate tax rates will affect planning, Bailine observed. "High-net-worth individuals need to sit down with their tax advisors. This year, you can give away over $5 million per donee tax-free. Embedded within that is a planning opportunity. If you give an income-producing asset to your minor child, the kiddie tax becomes operative -- but the 3.8 percent tax on investment income imposed by the Affordable Care Act is not subject to the tax. Many see this as a loophole, and it may be changed, but currently it can be done."
NEGATIVE KNOWLEDGE
Although the current political environment makes tax planning difficult at best, at least we know what will happen if nothing is done, noted Edward Smith, director in the Tax and Accounting Department at Morrison, Brown, Argiz & Farra in the Private Client Wealth Services Group.
"We're trying to get people to plan for the future, especially year-end planning as it relates to estate tax issues, the new Medicare 3.8 percent tax, and for potential expiring tax extenders," he said. "The 3.8 percent Medicare surtax will apply to individuals, trusts and estates if certain criteria are met, and is imposed on the lesser of net investment income (which includes interest, dividends, royalties, annuities, rents, income from passive activities, and most capital gains) or the amount by which the taxpayer's modified adjusted gross income exceeds a threshold amount. If a taxpayer doesn't make over $200,000 or $250,000, if he or she files a joint return, or if they exceed that amount but have no net investment income, then they don't have to be concerned about the surtax. If they do, they may want to consider re-allocating their portfolio, restructuring pass-through entities and using certain IRS and other strategies to reduce their net investment income or modified adjusted gross income."
Estate planners are faced with the potential that the gift tax exemption may drop from its current $5.12 million to $1 million per person if Congress fails to address this issue, while the maximum rate will jump from 35 percent to 55 percent, Smith observed. "While most think there will be some compromise at some point, there's no real guarantee in this environment," he said. "So get as much out in gifting as you can. The consensus is that there won't be a clawback of taxes. In other words, if you give away $5 million this year and pass away next year, the IRS most likely won't be looking at taxing the gifts you made this year. There are many strategies to gift assets, and Congress has not closed the door to discounts for gifts of closely held family entities yet."
While clients with significantly high net worth have no problem gifting away the amount of the exemption, there are those who might be hesitant and uncertain if they can afford to make gifts now, according to Smith: "This window may not be open for much longer, so they might consider creating non-reciprocal gift trusts. An irrevocable trust could be created for the spouse that grants the spouse certain access to the trust's income, but will still be considered completed gifts in trust and ultimately benefit and pass to the children and grandchildren."
These have to be carefully drafted, because if both husband and wife set up trusts that are mirror images of each other, the IRS could invoke the reciprocal trust doctrine to bring the assets back into the estate.
"Each spouse can create an irrevocable trust, but they can't have the same terms and the same beneficiaries or the IRS will view them as an attempt to avoid estate or gift taxes," Smith said.
WAIT -- THERE'S MORE
Many other issues are facing practitioners as the end of the year approaches, observed Smith. "Long-term capital gains rates will increase if nothing is done; the regular tax brackets will change and go up; the payroll and self-employment tax, which were reduced by two points, will go up; higher-income families will be faced with the itemized deduction phase-out and the exemption phase-out. The biggest issue is probably the Alternative Minimum Tax patch. If they don't fix that, approximately 26 to 31 million taxpayers could be subject to the AMT."
Practitioners with clients in an installment agreement with the IRS should make sure they don't overpay, advised Marty Davidoff, of E. Martin Davidoff & Associates. Taxpayers on an installment agreement often overlook a tax refund. "Suppose the taxpayer owes $22,000 and is paying $400 a month," Davidoff explained. "If he's due a $2,500 refund, the IRS will take it and he still will have to pay the $400 per month. He's paying down the debt, but he could have saved $2,500 for current living. It's fine if you want to pay down, but it should be intentional."
The uncertainty regarding the tax landscape is unique this year, according to Roger Harris, president and chief operating officer of Padgett Business Services: "In the good old days, we could apply tax law to a taxpayer's unique situation and reasonably estimate their most favorable tax position. But for 2012 and 2013, we are guessing at what the tax law may be and what possible affect it could have on the taxpayer's tax position."
The IRS is waiting for Congress along with the rest of us, noted Harris, a former chairman of the IRS Advisory Council. "Tax law changes will require new and modified federal tax forms, which is a lengthy process and could result in delayed filing, extended deadlines, and amended returns," he said. "State tax forms could also be affected."
"Common sense tells us to prepare for a crazy filing season, as there could be delays in refunds and processing returns. Whether you wait until after the elections or begin tax planning today, this year will be like no other," he emphasized. "It comes down to being flexible and staying in the know so that whatever the outcome, you are prepared and can act quickly."
12 Comments
Well, Your Majesty - it's now nearly 5pm and I just completed pulling Wage & Income and Account Transcripts for taxpayers' problem resolution through my personal "secure mailbox" at irs.gov.
As a licensed practitioner with credentials to represent taxpayers before the IRS, I have the ability to pull transcripts 24 hours a day direct from the IRS system without dealing with Customer Service or the Tax Practitioner Hotline.
But then, I suppose you are not even aware of the myriad of e-services offered to credentialed professionals. Not being credentialed, you probably don't even know such services exist.
Non-credentialed preparers cannot have true POA, and certainly cannot be given access to confidential taxpayer information.
When taxpayers have problems because of incompetent preparers, they must turn to credentialed professionals like me for help.
Why don't you get your credentials so you can find out what you're missing?
Kate Harner, EA
I also put over $1200 on my credit cards today, signing up for a few of the continuing education courses I take every year. But you probably don't know about those either - I would imagine that you simply pay a few hundred dollars for some minimal software package and expect the programmers to provide you with your updates each year.
Unenrolled preparers like you make no ongoing investment in education and licensing. You simply ride for free on our backs, but you have no problem charging as if you actually knew what you were doing. Licensed professionals actually end up charging less than the EIC Chop Shops whose victims we usually end up helping for free.
Posted by: KATEHARNER | September 17, 2012 4:19 PM
Report this Comment
House Resolution 1529 and Senate Bill 26, both designed to "clean up" the tax preparation industry, have been around since 2001. The Republicans in both the House and Senate actively fought the legislation, undoubtedly spurred on by the lobbyists for the sub-prime banks who controlled the "unenrolled preparers" through ownership of RAL Banks.
The one silver lining in the mortgage industry debacle was the collapse of the sub-prime banks, and their lobbyists, and the RAL industry.
Concurrent with the decline of the RAL, the IRS began implementing quicker refund cycles with direct deposit. Taxpayers can now get 100% of their refund deposited into their own bank account within 10 days. Why would they continue to pay some RAL scam artist outrageous fees for a short-term loan?
The driving force which finally achieved the desired clean-up of the tax preparation industry was Homeland Security, which became involved after the connection between the RAL scammers and identity theft was discovered. In January 2012, over 200 joint IRS-Homeland Security raids were held from California to Florida, resulting in arrests and convictions for monetary and identity theft in these check-cashing/EIC chop shops. (See IRS bulletin IR-2012-13).
The Inspector General for Tax Administration (TIGTA) studied this problem for two years before issuing its well-documented study, obviously more than the "38 returns" you mention - perhaps you could cite your source for that number. The suggestions contained within this study undoubtedly sent shock waves through the criminal element which has infiltrated the walk-in tax preparation industry.
I, for one, am thrilled to have at least some minimal standards in place. Taxpayers certainly have the right to expect that their tax preparer is an American Citizen, 18 years of age, able to pass a criminal background check, current with their own taxes, and able to pass a minimal competency test.
Tax preparation is a privilege, not a right. Anyone who welcomes the criminal element into my industry is suspect in my opinion.
Kate Harner, EA
P.S: Your Majesty and I are obviously from very different social and educational backgrounds. I am proud of the number of taxpayers I have helped, not the "money I've made" helping them.
Posted by: KATEHARNER | September 16, 2012 3:53 PM
Report this Comment
We certainly have different points of view of the same things and different ways of expressing them. Your accomplishments and government recognition of competence are commendable. Lawyers, CPA's and EAs are all in the position to gain financially from these regulations. They will be like the carpetbaggers after the Civil War. With better reporting and an increase in self preparation there may be fewer 1040 clients. A good reason to cheerlead regulation that will dramatically reduce competition. It seemed from your socially responsible and political comments blaming republicans for our ills and how democrats swept in with a "tidal wave of reforms" and how this administration collected billions from companies that didn't pay while the republicans were in office and that republicans fought these regulations for 8 years fooled me. Good one. This isn't about us, or our industry or our professional image as it is about how much government we want and that we need better management. It seems you want more and I want less. Instead of blaming the practitioner because he or she may not be able to keep up with thousands of last minute(why)changes we need to do more than talk about the real problem of simplifying the code. Unfortunately bureaucrats, politicians and money are involved so I don't have much hope. Government approval isn't something I ever wanted to make money. I didn't need any initials or anything. All I did was make money without anyone's permission. My affirmation comes from the hundreds of people I help. I know that sounds so bold as to think that one can just go ahead and make a living without some kind of government approval. Is that still legal? I hope so! Unenrolled preparers AND their work have always been the focus of my support. There is no reliable evidence that 350,000 practitioners should be suspect and to gut an entire private industry because of an invalid study. They are an important part of an imperfect system. What was the size of the sample in the study that energized this whole thing? 38 returns! It's just about control.
Posted by: hisexcellency | September 15, 2012 9:25 AM
Report this Comment
You need to do a little research into the Enrolled Agent designation of which you obviously know very little:
1. Enrolled Agents have passed the SEE (Special Enrollment Examination) which has been characterized as one of the most difficult given by the US Government; 2. Enrolled Agents pass a fresh background check at the time of their $125 license renewal every third year; 3. Enrolled Agents must maintain their accreditation by accumulating 72 hours of continuing education specific to Federal Taxation within each three-year period prior to the renewal of their license; 4. Of these 72 course hours, 2 hours per year must be devoted to Ethics; 5. Since I do not identify with any political party, your presumed powers as a "profiler" are rather dubious; 6. If you would care to re-read my comments more carefully, you will find that I characterized the tax returns of many unenrolled preparers as "garbage" which wastes many IRS man hours. If you are characterizing the preparers themselves as "garbage" I presume you have some personal inside knowledge to which I am not privy; 7. TPH (the Tax Practitioner Hotline) at the IRS was originally designed for tax professionals, and used to be answered before the third ring. This past Monday, a computerized voice informed me that the wait time was projected to exceed 30 minutes; 8. I always sign my comments. I do not hide behind some ridiculous, pompous and arrogant screen name, your majesty.
In closing, I would offer you a little advice. Stop being so profoundly jealous and earn some sort of professional designation for yourself. You will find it to be a far different view when you examine the tax preparation morass from a credentialed vantage point.
Kate Harner, EA
Posted by: KATEHARNER | September 14, 2012 5:27 PM
Report this Comment
Kate honey, as I have read your comments in several blogs I have yet to meet someone so full of themselves and their EA designation. To assume that your level of education is more advanced is arrogant and just incorrect. Your personal criticisms of other's use of the English language is rude and insensitive. Check your facts. The only new requirement for the exempts is that they must renew their PTIN annually. No test, no background checks, no compliance checks. My complaints have not been about the test but about the government's confiscation of peoples ability to earn a living. When did tax preparation become a privilege? A privilege granted by whom? Your comment about social responsibility and the desire for government to protect you from big business says all I need to know. Who is going to protect you from them? Your comments about Bush/Cheney and Republicans profiles you even further. Your reference about preventing "garbage" (unenrolled tax preparers)from using manpower resources at the IRS so Enrolled Agents will have less time on hold is offensive and classic you. Be careful, you may fall and hurt yourself from such a high place.
Posted by: hisexcellency | September 14, 2012 8:51 AM
Report this Comment
Marilyn:
I like the idea of extending tax season - how about a twist on the current law:
Taxes will be due on the 15th day of the fourth month after the TAX CODE IS FINALIZED FOR THE YEAR.
When Congress leaves for Christmas break before finalizing things again, they will take it upon themselves to re-designate the due date.
Kate Harner, EA
Posted by: KATEHARNER | September 13, 2012 6:27 PM
Report this Comment
No one is "exempt" from the new requirements, dear. Enrolled agents supercede all the low level requirements of the new RPTP designation due to our advanced levels of education, testing, and continuing education.
Would you like to continue complaining about this simple 100-question open-book test, or would you care to try for the SEE 5-part two day test?
Give it a rest sweetie.
Kate Harner, EA
Posted by: KATEHARNER | September 13, 2012 6:22 PM
Report this Comment
When are we going to extend tax season? This seems like the only solution. In Canada, returns are due May 1. Since they keep compacting tax season between Congress waiting to finalize tax law and the IRS getting their software ready to handle the changes, we only have about two months. And then there are those corrected tax forms.....
Clients do not understand all of this and they are pretty upset when you can not get the return completed on time!
Marilyn K. Ratliff, EA
Posted by: MARILYN@BTIPROFESSIONAL.COM | September 13, 2012 1:43 PM
Report this Comment
I'm sure all of the qualified professionals exempt from the new requirements are "UP" on ALL the changes in the "rules" and regulations as they come out. After all it's their job. No need to test them. The increasing complexity that resulted from numerous simplifications of the tax code could be part of the problem.It's easy to see that the republicans and democrats are at fault. Then it boils down to who hired them in the first place. A quick trip to the mirror and there is the guilty party. We don't deserve better unless we make better choices.
Posted by: hisexcellency | September 13, 2012 1:11 PM
Report this Comment
What about waiting to bill in 2013 to delay income to next year and the billed business now goes bust in 2013? Better to collect now?
Or advanced purchasing for items to complete a project for a business that is an impending basket case?
Just throwing more coals on the fire. Isn't tax planning fun? Perhaps one should just run a business for profit and not for tax consequences, the old fashioned way? Just a thought.
Posted by: tego@verizon.net | September 11, 2012 8:25 PM
Report this Comment
American taxpayers deserve better than this.
We should know the "rules" for 2012 in January 2012 for the most part.
This is not too much to ask of our representatives.
Posted by: Tickslash | September 11, 2012 8:55 AM
Report this Comment
Too much work. All you have to decide is whether or not one party is going to own 60 seats in the Senate after the election. If the answer to that is no, this article is much to do about nothing. The Senate leaders from the GOP showed the other guys how the game is played. The can may get kicked down the road, but any real change? No way.
Posted by: topbeancounter | September 7, 2012 6:03 PM
Report this Comment
Add Your Comments...
Already Registered?
If you have already registered to Accounting Today, please use the form below to login. When completed you will immeditely be directed to post a comment.
Not Registered?
You must be registered to post a comment.