The recession defined this year's tax season in a number of ways, including legislation designed to stimulate the troubled economy, as well as hiring and engagement practices, according to veteran practitioners. Legislation such as the Making Work Pay and First-Time Homebuyer Credits, as well as changes in income levels for IRA conversions, both affected and confused a number of taxpayers during the filing period.
"Our firm did about 800 individual returns," reported Beanna Whitlock, owner of San Antonio-based Whitlock Tax LLC and former director of National Public Liaison for the Internal Revenue Service. "This year we had far more people who wound up owing than in the past, and it's always alarming to someone who is a first-time ower. ... Some got caught in the Making Work Pay Credit where they already received the $250 [the amount of the credit] because they had their withholding reduced while they were receiving Social Security benefits. That also happened to government retirees and those receiving veterans' benefits."
Changes in the First-Time Homebuyer Credit also confused some taxpayers, added Whitlock. The credit originated as an interest-free loan in 2008 legislation and then morphed into a refundable credit for homes purchased in 2009. It was successful in stimulating home sales, but one of Whitlock's clients found out the hard way the consequences of ceasing to use the home as a principal residence prior to the end of the 15-year recapture period.
"Six months after she bought the house, she met the 'love of her life,' moved in with him and rented her house out. What a surprise when she found that $7,500 was due immediately because she had converted her home to rental property," Whitlock said. "This underscores the fact that there is virtually no financial decision you can make that doesn't affect your taxes. Taxpayers have to be educated to always talk to their tax professional first, before they make these decisions."
A surprise was also in store for a California resident who was transferred to San Antonio during the year, recounted Whitlock: He had paid $350,000 for his house, but sold it for $128,000 on a 'short sale.' "Under federal law, there's a million-dollar exclusion for cancellation-of-debt income on a personal residence, but at the time he filed his taxes, California hadn't followed the federal law, so he owed substantial state income tax," she said. "Happily for him, California changed their law on April 12, so we were able to amend his return and get back what he had paid."
Many of her clients expressed anxiety over the state of the economy, revealed Whitlock: "They believe that their 2010 taxes are the lowest they will ever pay in their lifetime. There is an undercurrent of concern over how much they will be paying in the future based on the deficit."
MIXED REVIEWS FOR E-FILING
The filing season is still open, noted George Jones, managing editor of CCH's Washington, D.C. office. "It continues for many up to the October 15 extension date, because people delay. Some of the delays, of course, are because they can't pay," he said.
"Someone in need of money might take it out of their IRA, and suddenly their accountant tells them that it's income," said Jones. "Despite the rule which makes it clear that the six-month extension is only an extension to file, not an extension to pay, people want to close their eyes and hope that they might have missed a deduction or credit, and that things will work out."
"But the IRS is being very liberal at entering into installment agreements. Generally this is done on the phone, and works very efficiently," he explained. "E-filing, on the other hand, has not been as flawless as some people thought."
An interim report by the Treasury Inspector General for Tax Administration found that errors in the Modernized e-File system limited its utility and caused it to erroneously reject returns. While the IRS had estimated that 5.9 million tax returns would be processed through March, the system had successfully processed only 98,596 returns as of March 5. Tax returns were erroneously rejected from the system and the number of returns processed was significantly lower than expected, according to the report.
Although this was the inaugural year for MeF for individual returns, it has been used by entities for several years, and will eventually replace the legacy system.
IRS cumulative filing statistics as of April 30, 2010, showed a 2.8 percent gain in individual e-filed receipts over the same period a year ago. Self-prepared tax returns experienced a 7 percent growth over 2009, while returns electronically filed by tax professionals grew just 0.3 percent. Overall, total receipts for individual income tax returns were down by 1.7 percent compared to the same period last year.
IRA CONVERSIONS
The challenge for Crowe Horwath during this tax season was in continuing to implement a common technology platform across its 25 offices, according to Lou Miller, partner-in-charge of Crowe's national tax office.
"We're trying to become more efficient with our paperless workflow," he said. "There have been some growing pains, but we have seen some gains. The challenge is to unlearn the old way and learn new ways of doing things, but we anticipate it will lead to success down the road."
"Last year, a lot of our clients had cut back on staffing so the information we needed for returns flowed later," he said. "This year the situation was alleviated somewhat, as companies are beginning to hire again."
Preparers received many questions about IRAs this tax season, noted Bob Scharin, senior tax analyst for the Tax & Accounting Business of Thomson Reuters: "That's because starting in 2010 people could convert their traditional IRA to a Roth IRA regardless of income. Even though they were filling out 2009 returns, preparers were getting questions about what should be done in 2010. It puts them into the position of trying to guess at tax rates and earnings in the future."
Planning was particularly difficult this year because tax rates are scheduled to rise in 2011 with the sunsetting of the Bush tax cuts, observed Scharin. "We're waiting for Congress to pass new legislation, but until it does, it's hard to advise clients," he said.
HIRING ON
This year, nearly a third of U.S. adults used accounting professionals to get their taxes done, according to a survey conducted in April for Ajilon Finance by Harris Interactive. The survey found that among those who use an accountant, 64 percent use the same accountant every year, and nearly 50 percent feel they would not be able to do their taxes without the help of an accountant.
"After the 2008 season, accounting firms let a significant number of positions go," said Jodi Chavez, senior vice president at Ajilon. "This season, where there had been four accountants on an engagement there were only two, while the amount of work increased more than they had anticipated. So gearing up for the second tax season deadline [the October 15 extension date], firms are going back to aggressive hiring."
Chavez said that she has noticed more accounting firms contending for the same projects as the economy heads out of the recession. "The aggressiveness of competing CPA firms has hit a level we haven't experienced for some time," she said. "If a firm is bidding on a tax project of any size, it's going against other CPA firms. A client who needs help with taxes is at an advantage coming out of this tax season."
