Tax preparers are persevering despite being hit with a number of negatives at the start of filing season, including bad weather, the effects of the poor economy, and the demise of several major bank product programs.

"IRS filings are down compared to the same period a year ago," revealed Amy McAnarney, CPA, executive director/vice president of the Tax Institute at tax prep giant H&R Block.

"The IRS predicted that 2 percent less would file this year due to the recession, and we think that's holding true," said John Hewitt, chief executive of Liberty Tax Service. "Our day-to-day filing for February is down because of the snow in the East, but overall Liberty is up 10 percent for the year."

The weather, in the form of several large snowstorms that blitzed the Northeast and the mid-Atlantic region, is responsible for a decline in filing volume, agreed Chuck McCabe, chief executive of Virginia-based Peoples Income Tax.

"We're down primarily because of the snow," he said. "We missed a lot of early business at the end of January when the first snowstorm hit. We shut down two Saturdays in a row at what would normally be our busiest time. But most of those clients will be in later, unless they stayed home during the snow and decided to do their own returns."

McCabe noted that a number of his company's clients have been affected by the recession. "To counter this, we're offering a 50 percent discount for those who are unemployed," he said. "We want to be able to keep our loyal clients, and attract some new ones for an ongoing relationship."

"The average fee of tax preparers is dropping slightly," added Tony Johnson, a Sacramento, Calif.-based CPA and speaker for Gear Up, the CPE provider of the Tax & Accounting business of Thomson Reuters. "Our Gear Up attendees expected it to be tough this tax season, and so far it is. Clients want to come in and pour their heart out to the preparer. It's good therapy for the taxpayer, but it can get time-consuming for the preparer." To save time, he suggested offering a discount for clients who mail in or drop off their information.

Johnson views outsourcing as a means to deal with time and staff constraints during tax season. "Outsourcing used to be a buzzword, then it became a bad word," he explained. "But rather than outsource to a foreign country, many preparers are finding it attractive to outsource returns to retired tax professionals who live in their neighborhood. In my own practice, I have a retired IRS Appeals officer who prepares 100 returns during tax season."

YOU STILL NEED TO FILE!

Many workers who lost their jobs during the past year believe that they are not required to file a return, according to H&R Block's McAnarney.

"A survey administered by the Tax Institute found that three out of four unemployed don't understand that unemployment compensation is taxable. And many think that if they're unemployed, they don't have to file a return," she said. "Of course, the good news is that for 2009, the first $2,400 of unemployment compensation is excludable. It gets netted out before it's placed on the return."

McAnarney noted that even though individuals might be under the filing threshold, they might be eligible for refundable credits such as the Earned Income Tax Credit, the Additional Child Tax Credit, the American Opportunity Credit, the Making Work Pay Credit and the First-Time Homebuyer Credit.

Taxpayers are generally confused by what they perceive as the negative effects of the Making Work Pay Credit, say preparers. "Taxpayers with more than one job, or with a job and Social Security income, are at risk of being penalized," explained Maria Ku, a San Francisco-based CPA. "They don't understand why the government is forcing them to be under-withheld and charging them a penalty for it."

CLIENTS STILL COMING IN

A slowdown in construction and a high foreclosure rate typifies the economic picture in Boise, Idaho, said Richard Jackson, a partner at Jackson Coles.

"We're going to get very familiar with Code Section 108 [on cancellation of indebtedness income]," he said. "Also, the state government is here and we expect another holdback in state spending and the furloughing of a lot of employees. But we must be close to the bottom - our clients are still coming in and are glad to see us."

Linda de Marlor, president of Rockville, Md.-based Tax-Masters, said that her client base has suffered economically. "We have a lot of taxpayers who have invested in real estate. They're shocked to see they could lose so much on their houses and their 401(k) at the same time."

The cancellation of Santa Barbara Bank's refund anticipation loan program affected thousands of preparers who were notified in late December, said Lyn Bendendorf, a Virginia-based preparer and tax prep business and marketing coach. "It put a lot of [electronic return originators] at a disadvantage because they're not able to offer the bank products that they had in the past," she said. "Jackson Hewitt got hit the hardest. They still have offices that can't offer RALs. I was also with Santa Barbara, but I was able to get backing from another bank just before the start of tax season."

Although the weather and the economy have both contributed to a slight decline in filings, Bendendorf said that many do-it-yourselfers are coming back. "They tried Free File and found that it wasn't really free," she said. "They normally leave for a year and then come back, especially if they have a more complicated return."

Nick Rizzi, chief executive of New York-based franchise startup Smart Tax, agreed. "A lot of do-it-yourselfers are having trouble navigating the different credits available," he said. "They've heard somewhere that they can get a credit if they buy a new boiler or repair their roof, but they're not sure about the details. Also, we've noticed people filing earlier to get their refunds."

The continuing complexity of the Tax Code is driving additional taxpayers to professional preparers, observed Sheila Clark, director of operations for Peoples Income Tax. "We get a lot of questions about a third child for EITC eligibility, and about the Making Work Pay credit."

"There also seems to be misunderstanding about the sales tax deduction for a new car - a lot of our clients think it should apply to a used car," she said. "And there's a tremendous amount of confusion over the First-Time Homebuyer Credit. The ones who purchased their home before the end of 2008 wonder why they have to pay the credit back, while the ones who purchase after 2008 but before April 2010 don't have to pay it back so long as they use the home as a principal residence for three years."

A large number of businesses are taking advantage of bonus depreciation this tax season, according to Mike Solomon, partner-in-charge of the Tax Department at the Philadelphia office of Amper, Politziner & Mattia. "It's not available after 2009, so a lot of businesses did their best to place in service as many assets as they could," he said. "There's been talk of extending it, but you can't rely on it."

RELUCTANT ROTH CONVERTS

One unexpected feature of tax season so far is the lack of desire for regular IRA holders to convert to a Roth IRA.

"The modified adjusted gross income ceiling has been eliminated beginning in 2010," Solomon said. "The Roth IRA is advantageous because future earnings are tax-free, and it can remain intact after the holder reaches age 701/2. There was so much coverage about this in both the financial press and the popular press that we mobilized for a flood of conversions."

"We bought a proprietary program to show the taxpayer how much better off he would be by converting," explained Solomon. "Each office had a designated expert for the conversion process, and a designated computer just to do Roth conversions. Then we showed an actual taxpayer how much he and his heirs would gain if only he would pay $350,000 for the privilege of converting, and he nearly keeled over. It turns out that there are very few taxpayers who want to write a check for 35 percent of what they're converting."

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