The economic crisis and the downfall of the real estate market spurred a slew of tax law changes that will impact the upcoming filing season.
While some of the new laws could mean more money in the pockets of some filers and more taxes for others, for tax advisors it will mean taking on a new profession - fortune-telling.
"The most important thing that we are going to be faced with in the first quarter of 2010 is dealing with the increased pressure put on the tax advisory community to be fortune-tellers," said David Lifson, a partner at New York City-based Crowe Horwath. Lifson noted that for the past 20 years, most of the changes in the tax system have been neutral or favorable to taxpayers. Now, however, there is a stated governmental policy of tax increase, and the question for the crystal ball is who it will fall on, and how.
"We are going to be called upon to help our clients support their educated guesses on the who and how of tax change," explained Lifson.
Staying abreast of the latest tax law changes is always an imposing task for accounting professionals, but one could argue that it will be even more important this filing season.
In order to spur the economy, several initiatives have been put in place that will impact taxpayers, but industry sources agree that unearthing some of the money-saving opportunities will require a bit more legwork than in prior tax seasons.
NEW THIS YEAR
One example is the expansion of the net operating loss carryback option, which impacts businesses. The relief provided under the Worker, Homeownership, and Business Assistance Act of 2009 differs in that the previous relief was limited to small businesses, the Internal Revenue Service stated.
The current relief applies to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program. The relief also applies to a loss from operations of a life insurance company.
According to the IRS, eligible taxpayers may elect to carry back NOLs for a period of three-to-five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer's taxable income in that fifth preceding year, a limitation that does not apply to the fourth or third preceding year.
The procedure applies to taxpayers who incurred an NOL or a loss from operations for a taxable year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.
What this means is that tax advisors preparing taxes for businesses may have to take an even closer look at the client's history to determine how best to take advantage of the expanded NOL carryback.
Karen Fickes, managing editor of the U.S. Income Tax Group for BNA Tax & Accounting, considers the expansion of the NOL provision to be significant.
"This provision gives the taxpayer a choice of a carryback period of three, four or five years, and so the practitioner will need to determine how far to carry that back, depending on the previous years' income and how much of a refund each will generate. So that's the first issue that the practitioner needs to look at and the law provides that you can only elect one of those [years]," Fickes said.
"I see the NOL provision as being one that will cause accountants to spend more time preparing loss-year returns in order to determine which year to elect as the carryback year," she added.
In addition, the Worker, Homeownership, and Business Assistance Act of 2009 extended the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. If a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase, the IRS stated.
The maximum credit amount remains at $8,000 for a first-time homebuyer - that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.
But the new law also provides a "long-time resident" credit of up to $6,500 to others who do not qualify as first-time homebuyers. To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.
"The First-Time Homebuyer Credit, like the NOL carryback, is an opportunity that can affect 2009 tax returns, even with a 2010 [home] purchase," said Mark Luscombe, principal analyst for CCH, a Wolters Kluwer business, and a tax columnist for Accounting Today. "So preparers will want to be alert to this."
In addition, the new law raises the income limits for people who purchased homes after Nov. 6, 2009. For homes purchased prior to Nov. 7, 2009, existing modified adjusted gross income limits remain in place, the IRS stated.
POTENTIAL PITFALLS
Allan Ratafia, a partner at Ratafia & Co. CPAs PC in New York, also pointed out that the rise in "short sales" of homes could spell potential tax ramifications for some taxpayers.
According to a September report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision, new short sales increased to 23,102 during the second quarter of 2009, roughly a 35 percent jump from the previous quarter and a 146 percent rise from the year-ago period.
Looking to help jumpstart sales of new automobiles, a new car sales tax deduction has been put in place. The American Recovery and Reinvestment Act of 2009 provided a deduction for state and local sales and excise taxes paid on the purchase of qualified new vehicles through 2009.
However, the IRS noted that the deduction is phased out for higher-income taxpayers. Even purchases made in states without a sales tax can qualify for the deduction, as taxpayers in those states are entitled to deduct other qualifying fees or taxes imposed by the state or local government.
While some tax preparers argue the monetary significance of the Making Work Pay Credit tax ramifications, there's no doubt that the potential ramifications for some taxpayers could raise questions and spell unwelcome surprises for others, so tax professionals who serve such clients should be prepared.
The MWPC is a provision of the American Recovery and Reinvestment Act of 2009 and applies to most taxpayers who earn income during 2009 and 2010. The credit is advanced to taxpayers by their employers through reduced withholding, resulting in an increase in take-home pay.
However, the Treasury Inspector General for Tax Administration warned in November that more than 15.4 million taxpayers may be advanced more of the credit, through reduced withholding, than they are entitled to receive. As a result, when filing their tax returns for 2009 and 2010, such taxpayers - including those with dependents who receive wages; single taxpayers with more than one job; and joint filers where one or both spouses have more than one job or both spouses work - may ultimately owe additional taxes. Some taxpayers may even be subject to estimated tax penalties.
"More than 10 percent of all taxpayers who file individual tax returns for 2009 could owe additional taxes because their withholdings were reduced by more than the Making Work Pay Credit," stated J. Russell George, the Treasury Inspector General for Tax Administration. "If corrective actions are not taken, this problem will continue to plague taxpayers in 2010."
William E. Massey, senior tax analyst at the Tax & Accounting business of Thomson Reuters, said that the Making Work Pay Credit "will result in problems for some people. Some people may be surprised to learn they will get less money or may even owe money."
Meanwhile, the increased scrutiny of all foreign transactions due to a rise in non-compliance by some U.S. taxpayers relating to foreign accounts and foreign income means that tax advisors should be diligent in making sure that their clients are disclosing all foreign transactions.
"Those people who do work for people who live both inside and outside of the United States have a huge amount of work to do to make sure that they don't have clients who have foot faults. Minor failures to disclose are being blown up into huge problems," said Crowe Horwath's Lifson, noting that even minor foreign bank accounts or things that a taxpayer may have signature authority on outside of the U.S. must be disclosed.
Many industry sources agree that there is a perceived heightened responsibility on the part of the advisor.
"Up to this year, accountants felt that if they asked if a client had a foreign bank account, they had exhausted their responsibility, but now with the stiff penalties accountants are starting to feel they have to take responsibility for these foreign accounts," said Luscombe. "There is a lot more activity in that regard."
KEEPING CLIENTS IN THE LOOP
Looking ahead, estate tax reform should be among the items on preparers' watch list. While estate tax reform is currently clouded by a great deal of uncertainty, what appears to be certain is that it will not stay the same.
"The only thing we know is that it will be different than the law is now. That I would make book on," said Lifson. "What the change will be, I can't tell you. How to plan for the change is to stay alert."
To prepare, Lifson said that his firm has, over the last two years, been collecting data on all of its largest clients so that it will be ready to hit the ground running when the change happens.
The new tax law changes listed above are just some of many; however, many industry sources agree that they are among the changes likely to have the most impact on the filing season.
Being aware of the new tax law changes is one thing - but getting all of the correct information from a client in an efficient manner is another. Sending out a tax organizer or an e-newsletter can be a great way to inform clients of the new tax law changes and how they may affect them. That's what works for Ratafia.
"We run very much a virtual kind of practice and it requires excellent communication. For us, making a checklist of the most important items that we know a lot of people are going to be dealing with and distributing that to the clients and partnering with them so they let us know if it applies to them is a major part of our work," explained Ratafia. "We don't really send out organizers, but what we'll do is send it through a newsletter or an e-mail blast to those people who opted in. We will distribute it that way and will do it a few times and it seems to work really well."
Sending out an organizer or newsletter can certainly help tax professionals with the extensive legwork this filing season is likely to bring, say observers. In fact, many say the filing season isn't only going to give way to more legwork, but a different type of legwork than preparers may have experienced in years past - going vertical.
"In doing your first-quarter planning and doing your compliance work, the tax accountant should be trying to mine the taxpayer's history for opportunities," said Lifson. "So my advice to tax people who normally work year to year is to do what I'm telling my troops: You have to go vertical. Don't go horizontal. You have to dig into the client's history and take a more holistic approach than normal."
