As we move into the home stretch of tax season, the general verdict of practitioners seems to be that there have been no huge surprises or speed bumps thus far in 2016 — which isn’t the same thing as saying that it was easy.
“Making sure you have all the records you need is the biggest challenge preparers face when dealing with clients,” according to Dave Kautter, partner-in-charge of the Washington National Tax Office at Top 10 Firm RSM US. “This year, the one wrinkle is the [Affordable Care Act],” he said. “Some people will struggle with respect to ACA requirements. For many it’s not a problem because they just check a box that says they have health care coverage and that will be the end of it, but if they’re trying to claim an exemption or if they have an individual shared responsibility payment or they’re entitled to the premium tax credit, there are some new things. That will be an area where taxpayers will stumble to get new forms and get everything right.”
“Whatever your definition of ‘normal filing season’ is, I think this is what we have,” agreed Roger Harris, president of Padgett Business Services. “That’s not to say there aren’t problems and challenges, but it’s what you would expect. You’re going to have issues with software, missing data, late forms — stuff that’s always there, but we don’t have anything else accelerating the pain. There’s nothing that jumps out as unique to this season.”
“The season so far has not been very different than has been the case in years past,” said Steve Henley, senior managing director and national tax practice leader at Top 10 Firm CBIZ MHM. “Although the extenders were passed late in December, it’s better than the last time around. Most accountants anticipated the changes they made so they didn’t make a huge impact this season. It’s always critical that clients try to get their information to us as soon as possible. There have still been delays in getting 1099s and investment information from investment houses, but that’s not much different than in prior years.”
Henley noted that there’s a little more time this year for last-minute filers since the Emancipation Day holiday in Washington, D.C., has pushed the filing deadline to Monday, April 18. “And for taxpayers in Massachusetts and Maine, Patriot’s Day gives them a further extension to April 19,” he said.
Henley noted that filing has been facilitated by the weather, at least in the Northeast. “We’re much better positioned than last year in terms of workflow because the weather has been much better than last year up to this point, when we had 100 inches of snow [in Boston],” he said. “Even when people work out of their home, it still creates bottlenecks. Clients are also impeded in their progress in getting their information together.”
Although clients were a little slow coming in at the start of the season, they’re beginning to catch up, according to Cathy Mueller, director of operations for Peoples Income Tax. “People have been later coming in, but it will even out,” she said. “That’s what our practice has been like for the past couple of years.”
This is reflected in the IRS filing season statistics. Earlier in the season, it looked as though the numbers of self-prepared e-filed returns were dead even with returns prepared by tax professionals, while the statistics for the week ending March 4 show a gap, with self-prepared returns at 30,036,000 compared to professionally prepared returns at 32,600,000. Nevertheless, the gap is smaller than the nearly 4.5 million returns that separated them last year at the same point in the filing season.
“The reason for the uptick in self-prepared returns is that online filing at home is easy to do and more convenient than going to a preparer,” said Tim Hugo, executive director of the Free File Alliance, the nonprofit coalition of tax software companies partnered with the Internal Revenue Service.
ONE MAJOR HEADACHE
The risk of identity theft continues to grow each season, observed Meg Sutton, director of Block Advisors, a new brand launched by H&R Block in December 2015. “This season, taxpayers are dealing with the increased risk of identity theft,” she said. “We’re encouraging taxpayers to keep their personal information personal, and to file early.”
“Many states are implementing stronger anti-fraud measures,” she noted. “Some have increased their review process to validate returns. This could cause a delay in receiving state refunds.”
“In 2013, the IRS identified more than 5 million potential fraudulent returns, and paid out $5.2 billion in fraudulent refunds,” she added.
Preparers should educate their clients on the dangers they face in having their information compromised, according to executives at several credit monitoring and identity protection services. “Between 2014 and 2015 there was a 47 percent increase in the number of ID theft cases, with the biggest portion attributable to ID theft that resulted in fraudulent tax returns and refunds,” said Mike Bruemmer, vice president of consumer protection at Experian.
The rise of the Dark Web has facilitated the use of stolen taxpayer IDs to commit fraud, he observed. “The Dark Web is the underground trading site where criminals who have stolen information will buy or sell the information for financial gain,” he observed. “There are certain protocols to get in there. We search those sites and determine what information is being bought and sold there. If your information is for sale it’s a sure indication that your identity has been compromised.”
Accounting firms and tax pros themselves are prime targets and victims of hackers, noted Bill Thompson, president of insurer CPA Mutual. “We’ve had firms that have been hacked with ransomware and had to pay a ransom in order to get back into their system,” he said. “I don’t think most CPAs are truly aware of the danger they face every single minute their servers are not protected properly, and they don’t have password-encrypted e-mail service. If you were a thief and wanted financial information, who is better than CPA firms?”
Harris agreed. “If you think about the kind of information we have and what you could do with it, we would be the pot of gold. We have quantity and quality, and everything the IRS puts in to block them we have — driver’s license, date of birth, prior year’s AGI, PINs, Social Security numbers, names, dependents — we have it all.”
“When we filed on paper, nobody wanted our files, but as we’ve advanced in technology we also created the opportunity for criminals,” he added. “We have to make sure that we advance in deterrence as we move forward to accelerated use of technology.”
And even the IRS is affected. It recently took its identity protection tool IP PINs off-line after it identified 800 returns filed by fraudsters with stolen personal identification numbers from the site.
“It’s important that accountants understand that if their client has previously been a victim of this type of fraud, then they must be extra careful, since there’s the possibility that the client’s information is still out there,” said Mary Ann Miller, senior director and executive fraud advisor at NICE Actimize. “There needs to be multiple layers of security, since fraudsters can get the information to answer security questions.”
As to which is more secure, the cloud or a hard drive, Miller said there are pros and cons for each. “It’s an organizational choice. Some technology officers are comfortable with the level of security on the cloud, but others are not.”
“You never want to get to April and learn something new,” said Jo Anna Fellon of Top 100 Firm Friedman LLP. “So encourage clients to help you help them all year long.”
One thing that some taxpayers will learn this season is that their household help are likely employees, rather than independent contractors, according to Daniel Rafeedie, director of sales and marketing for Homework Solutions. “We’ve had an increase in referrals from CPAs wanting us to help their clients with their household payroll taxes for the prior year. Much of it is driven by a clearer definition in the classification of household employees. The Department of Labor last July made a statement that most household workers are employees and not contractors.”
Lawsuits against Uber and Lyft are examples of the way the DOL is increasing regulatory oversight of the classification of employees, he observed. “This is trickling down to the household market as the need for eldercare in the home is becoming more prominent with an aging society.”