While staffing, training, new software applications and the latest tax law changes are at the top of every practitioner's to-do list for the tax filing season that looms ahead, the overriding concern this year is the economic crisis and the changes facing both themselves and their clients.
Tough economic times and potential changes on the horizon mean that both businesses and individuals need to take extra care in the months ahead to maximize tax savings, according to Cheryl Burke, chief operating officer of Boston-based DeCicco, Gulman & Co. LLP. "Accounting firms have always been a lagging indicator," she said. "Clients still need their returns and other financial documents."
But she noted that, in some cases, businesses might ask for a review in place of an audit in order to reduce fees: "One of our clients went to his bankers prior to the economic crisis and asked if they would accept a review instead of an audit, and the bankers accepted it."
"Now might be a good time to consider gifting property as a result of the relative drop in values," noted Allan Willinger, tax partner at New York-based Rosen Seymour Shapss Martin & Co. LLP. "Clients have also called about portfolios with substantial unrealized losses. They may have had gains earlier in the year, and now want to harvest the losses. If they're good securities that are just depressed, they can sell, wait 31 days and buy them back."
"Taxpayers should also be considering converting their regular IRA to a Roth IRA," he said. "In most cases, the value has gone down so much that it makes sense to convert now. And taxpayers that turn 70-1/2 must take their first distribution by April. If they wait until then, they'll have to take two distributions, so we suggest they take the first distribution this year and not wail until April."
Elderly clients should be aware that some of the tips they see in the mass media may have unintended consequences, according to John W. Roth, senior tax analyst at CCH.
"Many of them are aware that those in the 10-to-15-percent bracket will be paying no capital gains this year, and brokers are contacting them and advising them to sell so they can avoid the tax. But once they sell, they may be in a higher bracket, and be subject to tax."
Practitioners should also be ready to alert their clients to cancellation-of-debt issues, Roth advised. "Cancellation of indebtedness can arise not only from foreclosures, short sales [selling a home for less than the mortgage balance and having the lender forgive the unpaid balance] and walk-away strategies where the borrower hands the keys to the lender and walks away," he said. "You can exclude up to $2 million of debt through 2012. The problem is that you can't cancel debt until you know how much the home will sell for. Since there has to be a legal process for foreclosures and the courts are backed up, it's not sure that people today entering the foreclosure process will be covered."
Recourse versus non-recourse is an issue that might catch some taxpayers unaware, Roth said. "In some states, the first mortgage is non-recourse - the bank can only recover the value of the house. But when the rates were dropping, a lot of owners went out and refinanced, and that debt is recourse. They can't just walk away - they're still on the hook for these debts, and when it gets cancelled it counts as income. There are a lot of ramifications that accountants will have to deal with on these issues."
Filing for some couples could also be especially interesting this year as a result of the referendums passed in a number of states prohibiting same-sex marriages, said Roth.
"There were already close to 50,000 same-sex marriages prior to the constitutional amendment going on the ballot in California," he said. "Other states have civil partnerships or unions that at the state level would allow married filing jointly, but the IRS will not allow them to file MFJ on their federal returns because of the Defense of Marriage Act. This will cause a lot of litigation down the road."
"We all do year-end planning," said Clarence Kehoe, tax partner and head of the 90-person tax department at New York-based Anchin, Block & Anchin LLP. "Usually, it's the same old stuff - defer income and accelerate deductions. This year there are two huge differences - the economy and the election."
"We can only guess what the election will bring in terms of tax policy, but the one theme we all agree on is that tax rates are going up," he said. "The point is that things will change. As a result, you get into a counterintuitive mode. It might make sense to accelerate income into this year and pay the tax on it at lower rates. So our year-end planning has taken a three-pronged approach: the traditional approach, plus year-end planning as it relates to bad economic times, plus year-end planning as it relates to potential tax raises in the future."
Staffing has been affected by the current economic conditions, according to Kehoe. "More candidates are reluctant to leave their current positions in today's economy. Our retention here is better than ever, and we're getting a lot of candidates at higher levels because of cuts at other firms," he said.
EBB IN OUTSOURCING
Kehoe noted that as a result of the new disclosure rules under Code Section 7216, his firm would not be outsourcing any returns overseas. "There are also some very restrictive rules affecting preparers sharing information with anyone other than the taxpayer," he said.
"If your client asks you to help in estate planning and you work with the estate attorney, you can't send him a copy of the tax return without specific permission in writing. Likewise, some of our high-net-worth clients have their own family office," he said. "We can't share information without specific permission from the family patriarch."
The recent reduction in preparer standards from the "more likely than not" threshold to the "substantial authority" threshold was welcome, noted Kehoe, but it still requires attention. "Even with the reduced threshold, it's higher than it used to be, and the penalties now have real bite," he said.
Mike D'Avolio, senior tax consultant for tax development for Intuit, said that this year's nine new tax laws were a record. "The provisions affecting the AMT exemption, the sales tax deduction, the additional standard deduction for real estate for non-itemizers, and the first-time home buyer credit are among the centerpieces of the legislation affecting taxpayers," he said.
TRAINING AND SYSTEMS
"We recommend that once you train your staff, you create experts within your office so you have 'go-to' people as questions come up in that area," D'Avolio said. He recommended setting up a "rapid problem solve and adapt" system before tax season begins, so that problems that arise can be dealt with immediately: "The old-school idea was to wait until April and sort everything out then. But if you have a system in place to deal with them and correct them immediately, things will go a lot more efficiently."
Alan Osmolowski, head of the tax department at New England regional firm Carlin, Charron & Rosen LLP, said that his firm is betting heavily on new scanning technology to organize and import information from source documents.
"If it works, it will be great. It will be a real timesaver," he said. "We're looking at the product now and deciding how to implement it and what the best practices will be."
Osmolowski agreed that the new rules under Code Sec. 7216 have made outsourcing overseas less attractive. "The trend has been for us to do less and less outsourcing each year. We used to do up to 1,200 returns a year," he said. "Last year we did only around 200, and this year we may not do any."
IT'S NOT TOO LATE ...
There is still time to take advantage of some tax breaks to maximize tax savings on 2008 returns, according to Michael Whitacre, Southeast Tax Region and Atlanta business line leader at BDO Seidman.
"The dollar limits for the Sec. 179 business equipment deduction have significantly increased," he said. "The Economic Stimulus Act gave an additional incentive for businesses to make capital investments by adding a special 50 percent depreciation allowance to the regular first-year allowance that is normally available for qualifying purchases - but this is only a one-year increase."
Whitacre also recommended that distressed companies consider tax attribute carry-forwards before consolidating debt. "If a distressed company successfully writes off debt, it may no longer have a net operating loss," he said. "While this might be the best option in some cases, companies should be aware that by eliminating the NOL, they could lose all of the tax deductions associated with it, and any other tax attributes that were being carried forward from past years."
This year's extenders bill was passed in early October, giving a little more certainty to practitioners and their clients, said Bob Scharin, senior tax analyst at the Tax and Accounting business of Thomson Reuters. "If you owed the Alternative Minimum Tax last year, you probably owe it again this year, if your financial situation is similar," he said. "People who owe AMT should hold off on mailing their final estimated tax payments from 2008 to the beginning of 2009. For regular tax purposes they should send it in December to get the itemized deduction."
"We now know that state and local taxes will be deductible for 2008, so someone planning to buy a car might want to purchase it in 2008, assuming they're not liable for the AMT," he added.
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