The current filing season has proved to be frustrating for tax preparers and taxpayers alike, but it has been predictable, which has made it more palatable, according to most preparers.
“After 36 tax seasons, this is on the better side,” remarked Rob Cordasco, founder of Cordasco & Co. PC. “This is the first time in a very long time that we did not have last-minute tax changes to learn and delay the start of filing season. This has led to a more stable processing environment.”
“Like every tax season, it has not been without its challenges, like new passthrough entity tax elections at the state level and late guidance on K-2 and K-3 filing, but that is the nature of the business,” he added. “The IRS responsiveness and backlog continue to cause problems for many taxpayers, but fortunately as practitioners, this only really affects us when dealing with notices and tax resolution matters.”
For many practitioners, there were a number of frustrations. A survey by the National Association of Tax Professionals indicated that its members are concerned about the workload and stress for themselves and their employees. The survey indicated that only 13% of respondents thought that this year’s filling season will be better than last year’s season.
Members were most concerned about accurate reporting of economic impact payments and advance Child Tax Credit payments, as well as reporting of Paycheck Protection Plan and other COVID-related loans. And much of the concern about increased workload came from the assumption that only 4% of taxpayers are knowledgeable about tax law changes.
“Through conversations with preparers and members, anecdotally, it seems as though tax season is just as frustrating as they predicted,” said Jennifer Van Elzen, director of member relations and analytics at NATP. “Unfortunately, it looks like tax season is going about as well as our members thought it would. Serving their tax clients has been further complicated by an increase in delays and lack of IRS resources, a persistent effect from the pandemic.”
So far, the complaints have been more about the backlog going in than about the current filing season, said Roger Harris, president of Padgett Business Services: “There are still businesses waiting on the Employee Retention Credit,” he said. “One of the biggest issues we’ve had has been confusion over Schedules K-2 and K-3. They created a lot of angst when they first came out. The other thing is some confusion over inherited IRAs and required minimum distributions. The guidance hasn’t been fully issued yet, and there could be a 50% penalty if you don’t take the distribution that was required.”
“Also, people are not bringing in Letters from the IRS for the Advance Child Tax Credit, but that was anticipated,” he added. “For the most part, tax season has proceeded exactly as expected.”
Bearing bad news
The good news is that after the last two tax seasons, the current season is more like a traditional filing season, according to Jim Guarino, managing director in the tax practice at Top 100 Firm Baker Newman Noyes.
“A month ago there was some chaos over the additional K-2 and K-3 schedules that had to be considered when business entities, especially flowthroughs, prepared returns,” he said. “Now we’re in a little better place than we were.”
Guarino noted that in many instances, tax preparers had to be the bearer of bad news. “Many retirees had to take minimum distributions in 2021 that didn’t take them the year before,” he said. “The result was income kicked up in 2021. In some cases it may have crossed over the tax bracket from 24% to 32% — that’s an 8% jump and if there was no tax withheld on the distribution, so they may owe more tax than they were prepared to pay,”
An example of this was a retired couple that came to Guarino in March who had a large amount of capital gain distributions. Between actual stock sales that generated capital gains and distributions from their mutual funds, their overall capital gains for the year were approximately $700,000.
“We had to explain to them that their overall taxes were up over $100,000,” he said. “It’s a classic example of the left hand not knowing what the right hand was doing. They had no communication with us during the year. Their investment advisors were doing a good job of investing, but no one anticipated the amount coming from these funds. We could have sold securities and built up a cash reserve to pay taxes in April. … This is a poster child for having good communication between investment people and tax people.”
This is the time of year when clients have to talk to — and listen to — their tax advisor, Guarino noted. “A recently retired individual told me his income was going down but he still had investments and wanted advice on estimated tax, since he would have no withholding or W-2 income. He casually mentioned that he would be doing some consulting this year which could earn him close to six figures. I told him this would make him liable for both sides of FICA taxes at 15.3%, so I was able to advise him to track his expenses to reduce his self-employment income.”
The inflation that has been part of the economy during the past year has generated opportunities for tax planning, observed Ryan Losi, executive vice president of accounting firm Piascik.
“When there are rising prices, especially for businesses that either produce or distribute goods, one of the major tax planning ideas to consider is switching your accounting method to determine cost of goods sold to LIFO instead of FIFO,” he said. “This takes advantage of today’s prices versus yesterday’s prices. Most businesses will be on a FIFO basis, but in inflationary times it makes sense to use last purchases out for cost of goods sold.”
The rise of new investors entering the market through online trading apps such as Robinhood might be a complicating factor, according to Losi. “They have lowered the barrier to entry into the equity market through no-charge trading and partial ownership of shares,” he explained. “If you can trade common stocks for free and buy fractional shares, it’s a very low barrier. When the market was going up, a large number of individuals thought it was a good way to make money while they were sitting at home during the pandemic. But this year the market has been choppy and a large loss may lead them to reconsider. They need to be aware that just because there’s a low barrier doesn’t mean there’s a low risk.”
Looking ahead
The state of the economy, particularly in the coming era of rising interest rates, is often the No. 1 question on the minds of taxpayers when they have their taxes done. Tim Speiss, partner in the personal wealth group at EisnerAmper, advises his clients to sell assets to a trust for the benefit of a family member, rather than making a gift. “The funds that are transferred to the trust must be paid back at the applicable federal rates that are currently about 60 basis points,” he said. “The growth on the assets, however, accrues to the trust beneficiaries. That growth could easily eclipse 60 basis points as the Fed raises interest rates.”
The effects of the pandemic, for both good and bad, are still evident during the current filing season.
“This season has produced great dividends from the many changes we have been forced to implement,” observed Cordasco. “The pandemic forced us to streamline processes, like requiring legacy clients to provide and receive documents electronically, as well as integrating and automating workflows.”
“The most profound impact has been forcing us to really focus on the staffing challenges that have plagued our profession since the start of my career,” he added. “In an environment of restricted capacity combined with a more competitive and mobile workforce, we really needed to focus on flattening our staff hours. Although we have not been able to achieve a flat 40-hour goal, we have made great progress in that direction.”
“The extending of major due dates, staff mobility and increased demand over the past two years has made us think about our business in new and different ways. This has led to more creative ideas around staff structuring, work hour flexibility and premium pricing for high-demand times, like March. I think all of these have led to a better tax season, client experience and work environment. However, it is a work in progress,” he said. “For the first time in my career, I can see the path forward for my business and our profession.”
