Aside from the extenders, most of the nuances of the 2015 filing season have been known for some time. That’s one reason most preparers are seeing a relatively smooth filing season thus far.
In fact, early-season filing statistics show that as of January 31, the IRS had received more than 14 million tax returns, with more than 13 million of them filed electronically. That was up more than 25 percent from last year at the same time, according to the service.
As an indicator of the perceived complexity facing taxpayers this year, the number of professionally prepared returns is up 39 percent over last year, while self-prepared returns are only up by 20 percent over last year at the same time. Visits to IRS.gov are up by 49 percent over last year at the same time.
The IRS notes that when comparing the tax filings from 2015 with those at the same time last year, it should be taken into account that the 2014 filing season began 10 days later than this year because the process for updating IRS systems saw significant delays in October 2013 as a result of the 16-day federal government closure.
“There’s nothing that’s really new and exciting so far this season, but it’s a good year for tax preparers because their clients are aware of the rules that are out there,” said Mike Campbell, a tax partner at BDO USA.
“There aren’t as many surprises as in past years,” he said. “For example, the transition from 2012 to 2013 was stark for many because of the sunset of the Bush-era tax rates into higher rates for both ordinary income and capital gains. Then in 2013 there was the addition of the Net Investment Income Tax, which affected a lot of our clients. It was a big jump in their income tax rates, since in 2012 the capital gains rate was 15 percent, and then in 2013 there was the increase to 20 percent. When you add in the 3.8 percent NIIT rate, the rate on long-term capital gains went from 15 percent to 23.8 percent, over a 50 percent increase from the year before.”
“From our perspective, our clients are a lot more informed as to the impact of their decisions, so this year is simpler for practitioners,” he said.
Michael Sonnenblick, editor/author with the Tax and Accounting business of Thomson Reuters, observed that the scams on the IRS “Dirty Dozen” list typically peak during filing season as taxpayers file their returns. They include frivolous tax arguments, creating false income to qualify for a credit, fake charities, hiding money offshore, and identity theft.
Sonnenblick noted that for those who have questions about these or other issues, the IRS is unlikely to answer even half the phone calls it receives. And it will answer far fewer tax-law questions than in past years. “The Affordable Care Act and the Foreign Account Tax Compliance Act are both expected to add considerable new work,” Sonnenblick said. “For example, many families will have to fill out a new Form 8965 this year to explain why they are exempt from obtaining health insurance. The form requires showing a family’s status for each month of 2014. For a family of five, that requires filling in 60 different boxes.”
IT’S NEVER EASY
Fred Davis, CPA, Esq., tax services and markets leader at Mitchell & Titus, observed that this year’s filing season has required more training of the firm’s preparers than ever before. “We trained our preparers from November through January,” he said. “We had to make sure that our people knew how to get the proper information from our clients to prepare their return. The biggest issue is
explaining to clients what the [Affordable Care Act] means to them, and that the information that we need to collect is not necessarily tax information, so it’s a little different from the past.”
Davis noted the increased waiting time for IRS phone line assistance due to funding cuts. “We have to make calls on behalf of our clients, sometimes for very simple matters,” he said. “Unfortunately, the wait time can be astronomical, and the client pays for this.”
Rob Grannum, a tax partner at Moss Adams, agreed. “A lot of taxpayers are not able to get in touch with live IRS assistance,” he said. “The whole compliance part will be cumbersome for a lot of taxpayers if they don’t use paid preparers,” he said.
“From a business standpoint, some ACA issues have been delayed for the past couple of years,” said Grannum. “Now that we’re in 2015, reporting will be required for applicable large employers. We’re dealing now with questions on how to comply with the reporting requirements.”
Also, the tangible property regulations, a.k.a. the repair regs, are prominent this tax season, according to Grannum. “They’re on everyone’s radar,” he said. “They’re really a set of rules that the IRS and courts have been wrestling with for the past 10 years. They provide a bright-line test for the treatment of tangible property acquisitions, improvement and dispositions. The IRS anticipates a lot of Forms 3115 will be filed this season to change accounting methods in compliance with the regs.”
Doug Bekker, office managing partner at the BDO Grand Rapids office, agreed. “Everyone needs to examine those regulations and decide whether they need to do an accounting method change,” he said. “The service expects most business taxpayers with a significant amount of tangible property will have to file accounting method changes.”
“Other than the extenders, there’s really no new tax legislation to deal with,” he said. “The repair regs were the most significant from a regulatory standpoint, but other than those we’re pretty much in the same position we’ve been in the last few years.”
Tax reform may have some legs under the new Congress, Grannum believes. “There seems to be a renewed interest in getting things done across the aisles. Both sides agree on the need for simplification, and the need for more clarity and fairness,” he said.
“Like anything else, the question is How do we finance it?” he said. “There’s agreement that the rate structure for corporations should be less — Obama says 28 percent, the Republicans say 25 percent. One of the provisions that would help pay for corporate rate reduction is doing away with the cash method of accounting for professional service firms. The AICPA and the [American Bar Association] are against that, but it is one of the revenue-raisers, and some form may likely be proposed in the coming months as part of the budget process or as standalone legislation. The elimination of accelerated depreciation is another item that will be considered as a revenue-raiser,” he suggested. Taxpayers really enjoy those benefits, so it will be interesting to see how it is played out.”
INTRICACIES OF THE ACA
“It’s a plus that this tax season started on time,” said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax and Accounting U.S. “Commissioner Koskinen warned that due to budget cuts the service will not be as good. People waiting for their refunds should file earlier or anticipate that they won’t get the refund in the normal time after filing their return. The additional time spent by preparers interviewing their clients about health care coverage for themselves and their dependents means additional cost for the taxpayers. The general trend is that preparers believe they have to charge more for these, and there is a lot of confusion as to what is required to comply. There will probably be a lot more extensions this year because many preparers are still sorting out just what they need to do.”
The IRS has announced that it will waive penalties for late payments or underpayment of estimated tax if they resulted from repayment of excess advance payments of the ACA’s premium tax credit. This is for this year only, and is to help “smooth the process for the first year of the Affordable Care Act,” according to the IRS.
“If they’re not going to get the failure to pay on time penalty, it might encourage preparers to get extensions,” Luscombe observed.
And although a number of filers will owe a shared responsibility payment under the ACA, insurance providers and large employers were given a one-year delay in reporting the coverage in 2014 to both the IRS and taxpayers, effectively rendering the health care penalty a voluntary reporting item, according to John Raspante, CPA, senior vice president and director of risk management at NAPLIA (North American Professional Liability Insurance Agency).
Raspante has created a standalone letter that he recommends every client of an accounting firm sign. The letter states: “In order to remind you of the rules and to protect us both from future IRS liability in the event of an audit and/or IRS inquiry, we require all individual taxpayers for 2014 to positively affirm the following items related to Health Care.”
“The letter has a box to check that the client had coverage for the full year, and five other boxes to check off,” said Raspante.
“Most taxpayers will check that they have health insurance,” said Jamie Canup, chair of the tax practice for Hirschler Fleischer. Although the extenders were “a day late and a dollar short,” Canup noted several important items. “The 50 percent bonus depreciation allowance was supposed to help the economy during the Great Recession,” he said.
The ability to deduct sales taxes is important for taxpayers that live in states with no income tax, Canup noted. “And, for the time being, the ability for an S corporation that used to be a C corporation to sell property and not recognize built-in gain [the gain on an asset prior to the corporation’s conversion to a C corporation] is important. It was another one of those provisions done to help spur the economy, by encourging corporations to sell the old, and buy the new,” said Canup.
PLANNING AHEAD
Mitchell & Titus provides an added service to their clients after tax season ends, according to Fred Davis: “After tax season, we compare the 2015 return with how our clients would fare against proposals out there, and try to do a summary of their positions for 2016 and beyond. This is based on proposals that the president has come out with, and the bits and pieces we see coming out from Congress.”
“We want people to grow with us and stay long term,” said Roxanne LaMonica, recruiting manager at CBIZ’s Kansas City office. “In order to accomplish this, we need to make sure that we are doing things to keep them happy and engaged. In our industry, you can’t get away from busy season, but you can make it a pleasant experience. We do that by offering a number of busy season perks.”
LaMonica said that she decides on the perks by thinking of what would make peoples’ life easier and would allow them to “de-stress and lighten up.” Among the activities, the firm offers chair massages, dinner Monday through Thursday for everyone who works after 5 p.m., and breakfast on Saturday.
“In addition, we have dry cleaning pick up at the office, free haircuts and trims at the middle and end of busy season, and express manicures/pedicures. Every Friday during busy season is free jeans Fridays. It’s a tremendous morale booster and it costs the company nothing.”
“We have a traveling barista come in to make anything you could get at the local Starbucks, and one Saturday during the season our COO and his wife make waffles for everyone,” she said. “People look forward to specific things, and some will reach some people more than others. For our interns, just the impact of seeing what a company does to keep employees engaged impresses them. The whole idea is for someone to get a snapshot of what it would be like to work here full time, and to get a sense of the fact that we work very hard but don’t take ourselves too serious. Activities like these are going on in our offices throughout the country.”
