A tax season for the record books
Every filing season is different, but the one that just ended was very different, according to observers.
Some of the factors adding to the confusion were changing deadlines, changing rules for retirement plan distributions, the myriad programs offering loans, stimulus payments, teleworking nexus issues, and, for many taxpayers, just finding a preparer to prepare their return.
“This was one for the record books,” said Mark Steber, chief tax information officer at Jackson Hewitt. While providing virtual filing opportunities for clients, the company still maintained offices in every jurisdiction, rendering it subject to multiple rules regarding the COVID-19 pandemic.
”Taxpayers were confused as to when to file, and whether they had to pay when they filed — it made for a remarkably complex year,” he observed.
“The moving deadlines were a surprise to everyone,” agreed Dina Pyron, global head of EY TaxChat. “It created confusion for taxpayers, especially where the federal and state deadlines didn’t match up.”
Pyron noted a disconnect between the excitement over the economic impact payments and the refund-due taxpayers who waited till the last weeks to file their returns: “People were clamoring for their stimulus payments, but often neglected to file early to get their refund. Statistically, about 70 percent of filers had at least a $3,000 refund due on their return, but with the filing deadline pushed back to July 15, they put off getting their refunds. With the IRS also on lockdown, it would have been to their advantage to file as soon as possible.”
Looking to 2021
As a result of what has happened in 2020, next year’s filing season will usher in new complexities, according to Pyron.
“The 2021 filing season will be unprecedented for individuals,” she predicted. “First, many are not aware that the extra $600 a week in unemployment benefits they receive will be taxable. The stimulus is not taxable, but unemployment is taxable.”
“The ability to withdraw up to $100,000 from a 401(k) or other retirement plan without the 10 percent early withdrawal penalty is a huge development,” she said. “You still have to pay tax on the withdrawal, but it can be spread over three years. Or you can pay back the plan over three years. So if you took out $100,000 this year you have to put back one-third of it by Dec. 31, 2020, or pay the tax on one-third of it by next April 15 [assuming the filing deadline reverts to its traditional date]. A lot of taxpayers will get a Form 1099 from their plan administrator, and not be aware that they can pay it back over three years.”
“Many taxpayers left their home state, went virtual, and now think they’re residents of a different state,” Pyron said. “Each state has different rules, but it can be hard to break the residency hold of a state. New York is even refusing to waive the taxability of first responders who volunteered to come on a temporary basis from other states to help out with the expected surge in area hospitals.”
Additional complexity will face taxpayers who turned to gig work because they were laid off or lost their jobs, she observed: “It will be confusing to change from being an employee to being an independent contractor.”
Some sole proprietors whose businesses involved doing work at peoples’ homes suffered because the public was less inclined to have workers in their homes, Pyron noted. “For them, the NOL applies to individual sole proprietors as well as companies, so they can carry back their loss for two years to get tax back from the previous years when they were more successful,” she said.
“Volume was less than normal during much of the season, but began to normalize as we approached the end,” Steber observed. “It’s possible that some may take a pass and file two returns next year.”
And next year will be even more complicated, Steber predicted: “The economic impact payments will need to be reconciled for taxpayers who did not get all or who got too much. Moreover, unemployment was the largest we’ve seen in decades and that will have to be folded into the return. And there could always be post-election tax legislation, such as a proposal to exempt unemployment benefits.”
Working from home should not be a problem for most filers, according to Steber. “But those that commute to one state and now work in a different state will have to deal with additional issues,” he said. “Some states have changed their rules, some have not. Meanwhile, regular life issues march on with or without COVID — people get married, children get born, couples get divorced.”
Teleworking from a different state will potentially raise confusing issues for both a business and its employees, agreed Charles Kearns, partner at Eversheds Sutherland.
“It can affect entity-level taxes of a business including state income tax, employment and withholding and unemployment insurance,” he said. “If a telecommuter is physically present in a state outside of where his business is usually situated, that can create nexus. For example, if an employee works from New Jersey for a New York-based business, that single teleworker can create nexus for the New York company in New Jersey, according to Telebright Corporation Inc. v. Director, Division of Taxation. There have been a number of rulings in other states that come to similar conclusions. A lot of states don’t distinguish between sales and use tax nexus or income tax nexus.”
Taxes and the pandemic
Kearns noted that a bipartisan bill, introduced on June 18, 2020, by Senators John Thune, R-South Dakota, chairman of the Senate Finance Subcommittee on Taxation and IRS Oversight, and Sherrod Brown, D-Ohio, a senior member of the Senate Finance Committee, would ensure that medical professionals from around the country who supported areas hard hit by the COVID-19 pandemic do not face unexpected or increased state income tax bills. The bill would also address potential problems remote workers are facing during the pandemic, including the possibility of having their state income taxes become out of balance because they worked from home in a different state than their ordinary place of employment during the pandemic.
The bill establishes a special 90-day standard for health care workers who traveled to another state to help during the pandemic, ensuring that no health care worker faces an unexpected tax bill for the contributions they made to fight the coronavirus. The bill would also provide relief to remote workers by maintaining the tax status quo. This would protect employees who have been displaced by the virus and are working remotely, and ensures they would continue to have their income taxed as if they were still going to their physical office every day.
Other pending legislation that would affect the 2020 tax year is a bipartisan bill called the Paycheck Protection Small Business Forgiveness Act, introduced in the Senate. The bill would allow small businesses that received a Paycheck Protection Program loan of $150,000 or less to obtain automatic forgiveness. The bill would require the small business to fill out a one-page form certifying that it complied with forgiveness requirements in the CARES Act.
“The bill makes a lot of sense,” said Kearns. “There’s a lot of support for it, but legislation is moving very slowly right now.” (See our story on legislative efforts.)
Unfortunately, a number of businesses weren’t able to survive the pandemic, which can lead to increased risk on the part of accountants.
“Whenever we see businesses go under, and the firm has provided some form of attest services, we see an increase in claims related to that business failure,” said Sarah Ference, risk control director at liability insurance provider CNA.
“There’s not only the potential issue of failing to advise, but there are situations where people are struggling for cash and are enticed to steal money from within the company or commit financial fraud,” said Stan Sterna, vice president for professional firms at insurance provider Aon Affinity. “There’s a strong tendency for an increase in claims. We’ve seen claims against tax preparers where a partner was stealing and the claim is that the tax preparer should have discovered the theft.”
Advice over compliance
Roger Harris of Padgett Business Services sees two lessons the pandemic taught the profession.
“First, we learned through all of this what our real value is to our clients, and it’s not in compliance, it’s in our advice. Our clients were a lot more concerned with getting help in the loan and forgiveness procedures than in getting their taxes done,” he said. “We’ve known that our industry has been moving in this direction, and COVID-19 has pointed that out — I hope we don’t forget it when the pandemic is over.”
“Second, I think we all learned how to work remotely,” he continued. “Either we had the technology in place to do this, or we got it in place. We learned that working remotely has some benefits and we should take advantage of those benefits going forward.”