The later start to the filing season resulting from last year's government shutdown shouldn't have been a major problem for most preparers, since they had the option of performing all the preparation work before the actual filing date -- but the shutdown did affect the IRS's ability to complete some key tasks for filing season readiness, according to Timur Taluy, chief executive of FileYourTaxes.com and ProTaxPro, and a member of the Electronic Tax Administration Advisory Committee.
"The real concern is that starting the season late affected lower-income and underserved taxpayers, those that may be receiving some of the refundable credits. They rely on their tax refunds the most, so we always encourage filing season to start as early as possible," he said. "Also, an on-time filing season helps reduce some risks. By January 31, just like last year, we saw a large amount of pent-up volume of returns waiting to be filed."
"In a normal year, the filing season starts [earlier] and there's a lower volume," he explained. "So if any issues arise, they affect a lower number of people because there are fewer returns when the season starts earlier. So we like to see an earlier start to the season to serve those taxpayers that need their refunds, and also to ensure that all our systems are operating at the highest potential."
"Last year saw some issues with the new tax provisions," he said. "There were a lot of challenges, but had we started earlier, some of those issues could have been mitigated."
FRAUD AND OTHER HEADACHES
Instances of fraud are proliferating, noted Ryan Blume, a senior manager with Top 100 Firm Moss Adams. "We've had several clients whose e-filed returns were rejected because they were already filed by fraudsters. Individuals are getting more and more sophisticated and figuring out strategies for getting refunds. When this happens, the preparer has to paper file, and complete paperwork to explain the situation. It can cause significant delays."
Blume is hopeful that the extra year given brokers to prepare their systems will eliminate the problems of late Form 1099s. "In the past couple of years, we've seen Form 1099s from brokers delayed because of reporting rule changes, especially around cost-basis information," he said. "The 2013 tax year will be the first year in which there were no rule changes. So brokers will be able to issue the Form 1099s earlier this year."
Changes for this filing season that could prove a headache for preparers and taxpayers include the additional Medicare tax on Form 8859, and the net investment income tax on Form 8960, Blume indicated. "Form 8960 is very straightforward and simple, but the calculations are anything but simple," he said. "There are so many varied nuances and complexities. If preparers have not been spending time learning about the new tax, it may come as a surprise because aspects of it are very complicated. It will show up as a specific line item on page 2 of Form 1040, so a lot of taxpayers will see this tax and want explanations. Not a lot of taxpayers yet appreciate the fact that they will be paying this, and it will be a shock to them."
At least some of the expired extenders will be reinstated retroactively, either by the end of the year or the beginning of next year, Blume believes. "They could go the entire year without having, say, the research credit in place. It does make it hard to plan -- if we get to this point next year, people will be uneasy if nothing has been passed."
Jeff Malo, research credit services practice leader at tax consultants WTP Advisors, agrees. "The last time the research credit expired was December 2011, and it wasn't re-authorized until the Taxpayer Relief Act of 2012 was signed into law on Jan. 2, 2013, so companies conducting R&D in the U.S. have at least a full year before they should seriously question whether there will be a research credit for 2014 and beyond," he said.
WTP Advisors advises clients to continue gathering the data and documentation needed to claim the credit. "We are confident that the research credit will be renewed for 2014," Malo said, "and we don't want congressional inaction to stop clients from properly preparing their research credit claims."
For Cindy Hockenberry, Tax Knowledge Center manager at the National Association of Tax Professionals, the biggest issue will be compliance with the Affordable Care Act.
"Some of the questions we're getting on the ACA, from the employer's perspective, show that there are a lot of things that are still not very clear. They want to know what they can do and what they can't do. People are afraid of the penalties, and preparers continue to be under the IRS microscope. Preparers are afraid to advise their clients incorrectly."
Hockenberry noted that penalties under Code Section 4980H, added by the ACA, can be prohibitive. "The client goes to the tax professional expecting guidance and asks to keep from being assessed a penalty. The compliance is very burdensome for the taxpayer and the tax professional. That's going to be the biggest source of heartburn for this tax season."
Hockenberry noted the emphasis on increasing preparer responsibility for returns. "The IRS has been sending 'soft touch' letters to practitioners notifying them of problems in meeting their Earned Income Credit due diligence requirements," she said. "They're trying to make returns as accurate as possible on the front end so they don't have to do so much work on the back end. It makes sense for the IRS to do this, but preparers feel they're being asked to audit their clients."
ON THE BRIGHT SIDE ...
Mark Steber, senior vice president and chief tax officer at Jackson Hewitt, believes that early indicators show it will be a very good tax season for all sectors. "The tax market will be up for a number of reasons, in contrast to the slow start so far," he said. "The economy has improved, and there are still favorable tax rules for the vast majority of taxpayers, especially the lower-income ones. Except for the high-income taxpayers, the majority will enjoy a good season because the rules have not changed that much from last year."
Steber expects the ACA to generate questions about enrollment, and risks for penalties. "Taxpayers will look to preparers to answer those questions," he said. "Our company and the larger firms have spent a great deal of time to make sure our preparers are well-positioned with respect to the ACA," he said. "We've spent considerable time developing educational materials and software interfaces to do with the tax law change."
John Ams, executive vice president of the National Society of Accountants, agreed that ACA issues will comprise a major portion of the conversations tax professionals have with their clients. "A lot of preparers are planning on talking to their clients about getting ready for the ACA," he said. "That can take more time than doing the actual return."
"Unlike last year, there are not a lot of significant last-minute changes," he said. "Everything was set to go by mid-year. What we can't advise clients on are the provisions that have expired. We don't know whether Congress will retroactively extend bonus depreciation, which is a big-ticket item. Do we meet with clients in February and tell them to buy something, or wait until the end of the year when we know what the rules are? It's a crap shoot, because we just don't know what Congress will do, but clients expect us to have the answers."
An area affecting businesses are the tangible property regulations, which were effective Jan. 1, 2014. "Preparers should be having a lot of conversations about these, because they affect nearly all businesses," Ams said. "They're effective January 1 of this year, but the regs say that if you have an accounting procedure and audited financial statements in place, there are more flexible rules for a safe harbor to apply. But the procedures need to be in place now."
To deal with taxpayers who typically wait until the last minute to file, Chuck McCabe, chief executive of Peoples Income Tax and The Income Tax School, said that preparers should offer encouragement to have their clients file early. "In addition to the advantage of getting their refund faster, if they expect to owe the IRS they have the option of filing early and waiting until the April 15 deadline to pay what is owed, which will provide additional time to budget for the expense," he said. "Also, they can use their refund to fund an IRA, since the IRA contribution does not have to be funded until the tax filing deadline."
"Filing early can also reduce the possibility of errors by allowing adequate time to review the return before filing. And by filing early, they can minimize the risk of identity theft, since there is less time for someone to file a false return using their identity," he observed.
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