The late start to the filing season this year has had an impact, but so far things are running smoothly.
"January was the slowest January in memory, and with refunds delayed until February, there was a significant decrease in the number of early filers," said John Hewitt, president of Liberty Tax Service. "But we still expect a million and a half more to file this season than last year."
Hewitt credits the Internal Revenue Service with making the season run smoothly, up to now. "We had a status-of-season meeting [early in February] with the IRS and it was a record-short five minutes long," he said. "The IRS has performed exceptionally well and things are going incredibly smoothly. Sometimes these meetings take an hour to talk about the difficulties of filing season, but there was nothing to report at the most recent meeting."
"A lot of taxpayers are finding this year's filing process time-consuming and confusing," said Matt Becker, regional managing partner in the tax services practice at Top 100 Firm BDO USA. "We're focused on a couple of things when we talk to taxpayers. The first is to make sure they assemble all the correct paperwork before they start, and remember that the information that was reported to them isn't just being reported to them - it's also being reported to the IRS. It's important they include all that information on their return, because if they don't, when we go to e-file, it might get rejected, or they might get notices after the fact."
"The other thing we're emphasizing is the importance of taxpayers protecting themselves against fraud," he said. "The IRS is increasing its fraud investigations, but taxpayers can be proactive when it comes to keeping their records safe. Keep track of your documents and file early, so that if anyone else attempts to file with your information, it's apparent what's happening."
JAMMIES AND COCOA
Adam Levin, former director of the New Jersey Division of Consumer Affairs and co-founder of both Credit.com and Identity Theft 911, agreed: "The IRS has been paying out between $3.6 billion and $4 billion in inappropriate refunds every year. In the first six months of 2013, there were more instances of tax ID theft uncovered - 1.6 million instances - than in all of 2012, which had 1.2 million instances."
"Every time the IRS sends money to the wrong person, they eventually have to send it to the right person, who has been waiting 180 to 210 days," he said. "So taxpayers are forced to pay double on refunds, once to the wrong person and again to the right person."
Part of the reason for the rampant rise in tax ID fraud is the congressional mandate to speed returns for taxpayers, according to Levin. "The emphasis is on 'Refund now, ask questions later,'" he said. "Organized crime has gotten into the act because it's a lot safer than doing a drug deal. You don't have to stand under a street light late at night - you can sit in your jammies drinking hot cocoa and playing with your computer. They file as many returns as they can and hope they get lucky. All they need is a name and address, a Social Security number, and a doctored W-2 form."
"Preparers should tell their clients that if they ever get a phone call or e-mail from the IRS, beware. Contact the IRS immediately, because neither the e-mail nor the phone call came from the IRS. It is not in the normal course of business for the IRS to communicate with taxpayers by e-mail or phone - it's likely a scam," he said. "They also will go through mailboxes during the day while you're at work, and even steal bags of mail from mail trucks. I've even seen instances where fake tax prep stores pop up. They look legitimate, but they could be gone in a matter of days or weeks. The whole purpose of the store was to bring in as many taxpayers as possible and steal their refunds or personal information and use it for other forms of ID theft. Those running a small tax preparation business should run a background check of anyone who comes to work during filing season, and make sure they use the most up-to-date software possible," he said.
For Miguel Farra, partner-in-charge of the Tax Department at Top 100 Firm Morrison, Brown, Argiz & Farra LLC, the 3.8 percent net investment income tax has already surprised a number of clients. "I just did a client's 2012 numbers, and rolled it to 2013 using 2013 rates," he said. "Based on the new rates, his tax went from $100,000 to $150,000 because most of his income was net investment income. Its was a combination of the 3.8 Medicare tax on net investment income, the rate increase from 35 percent to 39.6 percent, and also the phaseout of itemized deductions. Preparers need to prepare our clients that just on tax rates alone they will be paying more in tax."
Newport Beach, Calif.-based CPA Charmin Wu agreed: "They're paying more in FICA with the disappearance of the 2 percent break, and they're hit with higher rates, a loss of exemptions and the net investment income tax and the Medicare tax. They wonder why they're paying more tax this year than last, even when their income is lower than last year's income."
"The net investment income tax is the biggest thing this season because it's completely new," said Mark Luscombe, principal analyst at CCH. "It has created a lot of confusion as to what is included and what is not, so it's likely to cause some consternation."
"There are a number of things that could result in higher taxes," he noted. "If taxpayers didn't raise their estimated tax payments in anticipation, they might have been underpaying for the course of the year."
The new home office safe harbor, effective for 2013, provides a simpler method for calculating the deduction, Luscombe observed. "However, people still have to calculate under the original method to determine if the new simplified method is advantageous," he cautioned.
"On the business side, there are the repair regulations," he said. "The new final repair regs don't have to be applied until 2014, but taxpayers have the option of using the proposed or final regs for their 2013 taxes. There's a lot there for return preparers to figure out. It's something that could really lengthen the return preparation process and affect a lot of businesses."
Congress has yet to extend the expiring tax provisions. The extenders, which would include the deduction for state and local sales taxes and the R&D credit, are unlikely to be reinstated until late in the year, according to Luscombe. "Tax reform advocates say they won't address the extenders because they want to focus on tax reform," he said. "Once they realize that they're not getting tax reform, they might turn back to the extenders, but it probably won't happen until the end of the year. It's a repeat of the 2012 situation, where we went through the whole year without their reinstatement."
The Windsor case and the defeat of the Defense of Marriage Act will create different filing issues for legally married same-sex couples, Luscombe observed. "For the ones that live in states where they can file jointly it will be easier, but for those in states that don't recognize same-sex marriage, it will be more complicated."
"What a difference a year makes," said John Vento, a New York-based CPA and CFP. "Last tax season the big thing was that Congress and the president had still not agreed on tax laws from the previous year, so we were delayed by a month waiting for tax forms. So far this tax season is going smoothly and we are not experiencing any major delays."
"The biggest issues this year are all the tax hikes," he continued. "Many people have heard about it, but now they're faced with the reality. Even though they know they've heard about the new taxes and higher rates, they're surprised at the extent of the increase."
Not only are there new taxes arising from the Affordable Care Act, and higher rates, a reduction in itemized deductions, and a phaseout of personal exemptions for higher-income taxpayers, but even the medical expense deduction is more limited, Vento indicated. "To benefit from the medical expense deduction, your unreimbursed costs will have to be more than 10 percent of your [adjusted gross income] starting Jan. 1, 2013," he said. "In previous years, this amount was only 7.5 percent."
"There is no last-minute legislation to throw a wrench in the process, but affluent clients are likely to see higher tax liabilities due to increases in the top tax rates for both ordinary income and long-term capital gain, and the new-for-2013 tax on certain net investment income," said Bob Scharin, senior tax analyst for the Tax and Accounting business of Thomson Reuters. "If high-income individuals who are affected by these tax hikes did not increase their income tax withholding or estimated tax payments, they may have the unwelcome surprise of having to write a large check when they are handed their completed tax returns."
"Return preparers may be seeing fewer long-term capital gains on tax returns this year, even though the stock market rose in 2013," Scharin observed. "That is because high-income clients may have sold their winning investments at the end of 2012 in order to beat the capital gain tax hike that took effect in 2013. The gains on investments they acquired in 2013 would, if sold during that same year, be short-term in character."
Scharin noted that same-sex married couples will be filing joint federal returns, which could mean owing more or less tax than if they were unable to file jointly. "The marriage penalty is more likely to arise if both spouses have high incomes," he said. "The marriage benefit is generally enjoyed when one spouse earns most of the income."
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