The 2010 filing season promises to be unique both in the amount of advice sought by clients, and in the volume of analysis and planning necessary to service them.
"It will be like none that we've ever seen," promised Lewis Taub, tax director at the New York office of RSM McGladrey. "We're at a crossroads. The economy is recovering but not all of our clients are recovering. It's very important to be cognizant of clients' situations where they're kind of recovering but still showing wounds."
"There will need to be increased planning as a result of the tax law changes we've already seen, and the ones we expect to occur during the year," added Greg Rosica, CPA, tax partner at Ernst & Young and a contributor to the Ernst & Young Tax Guide.
As a result of changing economic conditions and the Tax Code, preparers have to ask questions they never had to ask before, Taub noted. "Typically, you don't ask questions like, 'Did you restructure your debt this year?'" he said. "Now you have to ask that, because it can be a taxable event. The client doesn't realize that it has very significant tax implications."
"For example, a company owes the bank $10 million, it goes to the bank and restructures the loan to $8 million. The $2 million difference is forgiveness of debt, which is a taxable event," he explained. "Now the payments on the debt are less, but the business is hit with a tax bill of 35 percent, or $700,000. Code Section 108(i) says you can make an election to defer that income to the year 2014. Not only do you not have to pick it up now, you can spread it over five years, from 2014 through 2018. It's in effect for forgiveness of debt in 2009 and 2010, so it will impact returns this year. And if you're not speaking to clients about it, the election will be lost." It may seem like a no-brainer to make the election to defer, but the decision requires some real analysis, particularly in the case of an S corporation, he noted.
Net operating losses are another item that will require analysis, said Taub. The expanded provision, which allows most businesses to carry back losses five years, rather than two, requires the election by the due date of the 2009 return, he emphasized.
WATCHNG THE ELEPHANT
Planning for the future will be a challenge this filing season, agreed Barbara Rosenbaum, CPA, CVA, an executive vice president of Gumbiner Savett Inc. "There are a bevy of 2009 changes that will impact a lot of taxpayers. The NOL carryback options, the sales tax deduction, and the homebuyer and education credits are among these. It will take some focus this filing season, because you don't want to miss opportunities for your clients."
"Of course, the elephant in the room is the estate tax repeal," she observed. "The pundits said we wouldn't get here - the estate tax rules would be fixed before 2010 - but they were wrong. Now they say that there will be a fix this year and it will be retroactive. One of our clients passed away on January 11, so there's an estate tax return due in nine months. We don't know whether these will have been addressed by then, so there's a lot of 'what-if' analyses to do."
The Making Work Pay Credit will impact the majority of taxpayers, said Amy McAnarney, CPA, executive director of The Tax Institute at H&R Block. "The withholding tables were changed to accommodate the credit," she said. "The question is whether the change in taxpayers' withholding matches what they're supposed to be getting in the credit. Many will either be getting smaller refunds than they anticipated or end up owing the government. Taxpayers in the danger zone are those that have more than one job, or who have a spouse who works; taxpayers who can be claimed as a dependent; or retired taxpayers."
Changes in the child tax credit and the Earned Income Tax Credit will help more taxpayers this year, she noted. "If the credit exceeds tax liability, taxpayers can still get a refund as an additional credit if their income is over $3,000. Last year it had to be over $8,500," she said. "And formerly, the EITC allowed a credit for only two children. The new law gives a credit for one more child."
SILVER LININGS
More taxpayers will seek professional help to do their taxes this year, according to Nick Rizzi, founder and chief executive of tax prep franchiser Smart Tax. "With the changes in the credits and the stimulus plan, there will be many confused taxpayers," he said. "And there will be some do-it-yourselfers who want someone to take a look at the return because their refund is less than they expected."
New England firm CCR sees an opportunity to sell additional services in the state and local tax area, according to Tax Department head Alan Osmolowski. "Driving this is the fact that 45 states are operating under a deficit," he said. "A lot of taxes are being enacted that are not based on income because so many businesses don't have any income. So you'll find taxes on gross receipts, gross margin, net worth or assets, and other types of taxes not based on income. It's creating challenges for businesses to be compliant."
Taxpayers who didn't fare well in 2009 may have added incentive to file early if they're anticipating a refund, noted Bob D. Scharin, senior tax analyst at the Tax & Accounting business of Thomson Reuters. "The expanded NOL carryback and the First-Time Homebuyer Credit are both incentives to file earlier for those that qualify." It may be worthwhile to claim the homebuyer credit on an amended 2008 return, even though the purchase was made in 2009, he advised. "The law says you can claim the credit in the year you purchased the home or the prior year," he noted.
He also observed that the IRS is sending letters to around 10,000 preparers with large volumes of the types of returns that generate errors: "The IRS says that revenue agents will personally visit thousands of these preparers in the coming weeks to discuss their responsibility to prepare accurate returns."
