It wasn’t the best of times for anyone, but for many tax preparers it was the worst.
“This was the worst tax season I’ve experienced, even worse than the 1986 filing season,” said Rick Wojciechowski, partner-in-charge of the tax office for Top 100 Firm The Bonadio Group. “With the IRS encountering a lack of funding from Congress and increased responsibilities, the firms experienced delays in completing returns while rushing to finalize everything by April 15. Due to difficult, highly complex regulations, everyone was impacted, whether they knew it or not.”
“The biggest difference between the 1986 season and this year was that then we knew what was coming,” he continued. “The Tax Reform Act of 1986 was passed in October, and we had several months to digest it. This past year legislation was passed December 18 extending the depreciation rules, which affected everybody. The late passage of the law had a cascading effect. IRS forms weren’t ready, and because the IRS forms weren’t ready, the software vendors needed to reprogram their systems, and with the late delivery of the software product we couldn’t complete tax returns until February 7.”
“The fact that many states decoupled’ from federal law on bonus depreciation meant that, for a time, we could do a federal return but couldn’t do a state return,” said Wojciechowski. “Another issue was the tangible personal property regs. We had a group dedicated to cost segregation studies that produced a 72-page survival kit’ and a cheat sheet. The regs potentially affected every taxpayer in the country, so we had to be able to disseminate the information to our professional staff.”
“There was the possibility of tremendous savings for our clients,” he said. “We were able to go through the regulations and identify where they could take advantage of the one-time opportunity for savings that the regulations presented. Our Buffalo office alone had 293 clients that filed Form 3115 [Application for Change in Accounting Method]. Part of what we had to do was digest the rules and disseminate how you apply them, both for our professional staff and our clients.”
“Then the IRS came out with [Revenue Procedure 2015-20] in February, which provided small businesses with a simplified method to comply with the regs, which eliminated the necessity of filing Form 3115,” he said. “We had to digest that and decide if it was in the best interest for our clients to use the simplified method — in most cases we concluded that it was not in our clients’ best interest.”
Another negative was the late sending out of Form 1099s by the brokerage houses, according to Wojciechowski. “The big brokerage houses were allowed an extension, but the tax preparers weren’t,” he said. “There were cases where they didn’t issue them until March 15. That compressed the filing season to 30 days.”
COMPRESSION ISSUES
Of the 136,191,000 returns received by the Internal Revenue Service by May 1, 119,865,000 were e-filed. Of that number, 70,835,000 returns were filed through tax professionals, a 0.2 percent increase over last year. Surprisingly, 49,030,000 were self-prepared, an increase of 5.9 percent over last year.
“There were lots of complaints about the [Affordable Care Act] burdens, but in the end a lot of accountants concluded that the complexity was for a relatively small number of clients,” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer. “The majority could check the box,’ because everyone on the return was fully covered. However, there were a lot of complaints for people who had to deal with premium credit issues and the individual shared responsibility payments.”
“On the business side, the repair regs are looking like a major complication,” said Luscombe. “The IRS did issue some small-business relief in mid-season, giving the option to not file Form 3115 and make it retroactive. By my calculations, that could affect over 95 percent of businesses out there, so it did provide potential relief for a lot of people. It came with some issues in terms of the fact that you needed two sets of depreciation schedules, pre-2014 and post-2014. You lost audit protection for the earlier years if you didn’t follow the regs, so there were some tradeoffs in taking the easy way out.”
The other issue that affected filing season was the IRS budget cuts, Luscombe observed. “There was some publicity about their unresponsiveness in phone contacts, and some minor delays in processing returns, but on the whole, unless taxpayers were trying to contact the IRS they were not too disappointed about how quickly they got their refund or how quickly their return was processed.”
For Randy Abeles, managing partner at Top Six Firm McGladrey, the late Forms 1099 were an issue. “Everything is getting later and later,” he said. “Because information is coming in later, tax season is getting condensed into a smaller period of time, making it almost impossible to staff for. The government is demanding more information on 1099s, so we don’t see them until the end of February or early March. It’s hard to staff for just a six-week period of time, and with all the extensions, we have to repeat the same process in September and October.”
“I can’t see it getting any better,” he said. “We could get it done easily if we hired an extra 100 people, but we’re still running a business — that’s why we need seasonal and part-time help.”
Matt Becker, managing partner of Top 10 Firm BDO’s National Tax Office, agreed. “The tax law is becoming increasingly complex related to the time frame during which we provide services. Everything gets compressed. Information is available later and later in the year but the deadline is still April 15, so the time commitment needed is compressed. It requires significant additional resources to get the same amount of work done. New aspects of the code, like the Net Investment Income Tax and the reporting on the Affordable Care Act, take additional time.”
“Clients are willing to pay for high-quality service, but I think that all taxpayers have a low level of tolerance for an increasingly complex code driving the cost of compliance higher,” he observed.
Identity theft is becoming a serious problem, Becker indicated. “We have many clients who are impacted by it. It’s disconcerting on the one hand, and on the other it’s expensive to deal with. It’s not a reassuring feeling when you receive a letter saying someone has already filed your return.”
MIXED RESULTS
This year’s filing season was about equal to prior years, according to Jeff Call, partner and service line leader for the Tax Department at Bennett Thrasher. “It was probably a little tougher at the end because of the push for late information, and it definitely put pressure on managers and partners,” he said. “Information came in at the last minute, and returns had to be reviewed more quickly to get them out the door. It’s challenging when there is less and less time to turn things around.”
Bennett Thrasher has been working with an outside consulting firm to help streamline the tax return process, and has seen good efficiencies as a result, according to Call. “We had 50-plus touches per return before they went out the door, and have reduced that to 15 touches,” he said. “It’s allowed us to have more consistency across the entire practice.”
“A lot depends on your clientele as to what type of filing season you had,” commented Roger Harris, president of Padgett Business Services. “For the more affluent taxpayers that had health insurance, it wasn’t a big job to check the box. On the flip side, if a lower-income taxpayer was buying through an exchange, there might have been a Form 1095-A problem.”
“The people with ACA problems didn’t have repair reg problems, but we probably spent more time preparing for the ACA issues because we didn’t know what to anticipate coming into filing season,” Harris said. “The Form 1099 delays with the brokerage houses are almost routine now, since everyone knows when you will get them.”
“If you take away those two things — the ACA and the repair regs — it was just like every other tax season, but if you ran into one or both issues, it was probably somewhat stressful,” he said. “Both are here to stay.”
LESSONS LEARNED
Wojciechowski said that he learned two lessons from tax season: “You have to be good at communicating with your professional staff. We had weekly dinner meetings to go over the repair regs and to resolve issues as we went,” he said. “Second, you have to be proactive in managing your clients. You have to manage them to pull the work in and stratify them based on your ability to get the work done.”
“We came out of tax season better and stronger because we worked so well together as a team,” he said.
At a debriefing session at the end of tax season, Wojciechowski asked his staff to complete the sentence “Tax season is like ”
“Seven out of the 50 at the meeting came up with the same response,” he said. “They responded Tax season is like childbirth.’ There’s a lot of pain as you’re going through it but at the end you feel great joy and accomplishment.”
