A unique feature of this year's filing season thus far is the fact that there's nothing unusual about it.
The IRS is catching up on its backlog, there are fewer special credits and deductions to account for, and there hasn't been any new tax law issued during tax season.
In fact, the National Association of Tax Professionals cited "business as usual" as the unusual trend so far this tax season.
After a few years of pandemic-related updates, mid-tax season IRS guidance, last-minute tax law changes and more, the relative quiet is a welcome change to many, and some preparers are even feeling anxious filing returns in the event of a mid-tax season shakeup, according to the NATP.
"It's been really quiet," said Tom O'Saben, the association's director of tax content and government relations. "It's probably heightened because, compared to the last few years, there have been minimal tax law changes. It's almost as if we're back to pre-COVID activity."
While the 2022 Inflation Reduction Act added credits for taxpayers who purchase an electric vehicle and make energy-efficient home improvements, there are few other changes to the tax laws that need to be implemented, reported and reconciled on most taxpayers' 2022 returns, he indicated. "But, as we've seen in the past. Things can change at the drop of a hat."
Bill Nemeth, president and education chair of the Georgia Association of Enrolled Agents, agreed.
"There's been nothing unusual about it so far," he said. "It is actually a little easier since we don't have to talk about how much stimulus payments and Advanced Child Tax Credit the clients received."
"It's been a bit of a surprise," agreed Mark Steber, senior vice president and chief tax information officer at Jackson Hewitt. "This filing season has been very smooth, both for the IRS and for Jackson Hewitt. That's refreshing for a number of reasons. People think that the tax community wants complexity, but that's not so."
The most unusual aspect of this year's filing season so far was the surge right at the beginning, according to Steber.
"It came on like gangbusters during the first week or 10 days, and then it normalized," he said. "Refunds are up in volume but are down in amount, in line with what we expected due to the pullback in COVID-related credits. Interestingly, the number of returns filed by professionals is up 3% compared to the same point in the filing season last year, and the number of self-prepared returns is down 2.5% for the similar time period."
The complexity of tax laws may be a factor, but that's not all, according to Steber. "It's probably more than just being more complicated," he said. "It is more complicated, but that is so every year. The fact that we're coming out of the pandemic has allowed people to get out more, and many are making the choice to go to a professional preparer. The lion's share are going to a physical retail space — we're seeing it, and I'm sure others are too."
There's always something …
"Business as usual" doesn't mean there aren't issues to keep an eye on, of course. Tax preparers should be especially alert to cryptocurrency reporting, remarked Nemeth.
"Recently I have talked with several taxpayers who have received IRS letters for prior year returns. I got a form 8821 [Tax Information Authorization] and pulled their transcripts to discover they are engaged in cryptocurrency and have neglected to report it on their tax return — the transcripts show the crypto sales."
Nemeth recalled agreeing to handle a client's 2021 return while they were being audited for their 2020 return, which they had prepared with TurboTax. "I would not handle the audit since he had made so many costly errors," he said. "I commented that it was unfortunate that he didn't purchase the TurboTax Audit Guarantee — he said that he did. I told him to have TurboTax defend him since they had a dog in the fight."
Then the client handed over his tax documents. "When I pulled his IRS wage and income statement I found he had 'forgotten' to tell me about the half million dollars of cryptocurrency he sold during the year," Nemeth continued. "I called him and told him I was not interested in preparing his return because he was not truthful with me. But this is all just 'another day at the office' for most tax preparers."
We're back to the way filing season was three years ago, whatever that was, according to Roger Harris, president of Padgett Business Services.
"The IRS is definitely doing a better job of answering their phones," he said. "The issues we're faced with are the ones we always dealt with pre-COVID, and that's a good thing."
Harris sees the Employee Retention Credit as an issue for some time to come: "A lot of people ignored it when it first became available, but because of all the advertising these ERC mills are doing, we can't ignore it. IRS enforcement in the future will be dealing with a lot of questionable claims that came from these mills. The issue will be with us for a few more years."
Deb Rood, risk control consulting director for CNA Accountants Professional Liability, the underwriter for the AICPA Professional Liability program, agreed.
"CPAs may face a future professional liability claim if a client's ERC is disallowed by the IRS, even if they only prepared the business income tax return and did not calculate the ERC or amend the payroll tax return," she observed.
"In some cases, the IRS has up to five years to audit payroll tax returns claiming ERC, longer than the typical three-year statute of limitations for income tax returns," cautioned Rood. "This two-year difference can create a 'whipsaw effect' for taxpayers whereby otherwise available income tax wage deductions in years closed under the statute of limitations may be lost, along with the disallowed ERC taxes. A triple whammy, if you will."
Arguably, the third party that calculated the erroneous credit should be responsible for any errors, rather than the CPA who prepared the related tax returns, according to Rood.
But positions taken on tax returns prepared now may not be overturned until several years down the road, and the third party that performed the calculation may no longer be in business, she pointed out.
"Furthermore, even if the third party remains an ongoing enterprise, it may lack assets or insurance coverage, leaving the CPA to respond to client assertions of improper advice," she said. "Defending these assertions may be challenging if the CPA failed to abide by professional standards or did not maintain documentation to demonstrate that they did."
Given the magnitude of the risk, practitioners should protect themselves by obtaining a signed engagement letter from the client defining the federal and state tax returns to be prepared or amended, as well as discussing the CPA's responsibility related to the review of work performed by third parties, Rood cautioned.
Regardless of whether the tax preparer believes the client qualifies for the ERC and whether the preparer believes the calculation is correct, Rood said that all clients should be advised, in writing, that:
- The IRS may disagree with the ERC calculation reflected on the client's payroll tax returns;
- If the client's ERC claim is disallowed after the statute of limitations to amend the business tax return has passed, the client will be unable to deduct wages upon which the ERC was calculated, resulting in a lost deduction and overpayment of federal income tax;
- If the client's ERC claim is disallowed, the client may owe additional payroll taxes, interest and penalties for which the client will be responsible; and,
- The client may be unable to obtain refunds for fees paid to a third party or recoup other losses from them for incorrect ERC calculations.
"Nothing is guaranteed, but informing the client of the risks related to ERC and having documentation of such notice and warning deflect a client's assertion of 'You should have told me,'" she said.
With the 2023 filing season running so smoothly, the hope, the NATP's O'Saben concluded, is that there are no major changes that result in taxpayers and tax professionals needing to amend returns.
"What we're waiting for next is to see what happens when the Tax Cuts and Jobs Act provisions expire in 2025," he said. "Then things are bound to ramp up again, and it will be even more important for tax preparers to be informed and educated for their clients' sake."
