Late legislation, a hold on e-filing Schedule A returns and a later deadline for delivery of Form 1099s were among the factors that caused the past tax season to be more compressed than usual.
"Preparers received a lot of client information later than in the past," said Greg Rosica, tax partner at Ernst & Young. "Some Form 1099 items didn't get corrected until later, and in some cases there were several versions of corrections."
The Internal Revenue Service Oversight Board, which released its annual report to Congress in mid-May, noted that the IRS has been challenged in the past few years to implement and administer many new tax provisions intended to bring relief to taxpayers feeling the effects of troubled economic conditions.
"The IRS has responded well to these challenges, but the result has been to stretch the IRS's resources thin. Every new tax provision added to the Internal Revenue Code requires both service and enforcement resources for successful implementation," the report stated.
Moreover, mandatory e-filing and tax preparer registration issues added complexity to the season.
Overall, the IRS processed 123.8 million individual returns through April 29, a 4.9 percent increase over last year. Nearly 105 million of these were e-filed, an increase of 12.3 percent over last year.
"Mandatory e-filing caused us to make significant changes in our internal process and be much more proactive in educating and communicating requirements to our clients," revealed Jodi Robinson, director at the Kansas City, Mo., office of CBIZ MHM.
Beginning Jan. 1, 2011, paid preparers who anticipated filing 100 or more Forms 1040, 1040A, 1040EZ and 1041 during the year were required to use IRS e-file. The requirement also applies to firms, which must compute the number of returns prepared by their members in the aggregate.
"A lot of our clients didn't really understand the current requirements," Robinson said. "Even though our office has been increasing the number of e-filed returns each year, the requirement more than doubled the amount of e-filed returns that we submitted this tax season. We had one person who managed that entire process. It worked out well, but there are always clients that don't open up their tax package until the very last day. Even as proactive as we are in managing the process, we were still trying to get them in the door at the last day so we could get them to sign the Form 8879 [IRS e-file signature authorization]. We've already met as a group to debrief what we learned and improve that process going forward."
"Part of the answer," she said, "is to be more active in communicating with clients what the expectations are up front, and then making sure we have the people in place throughout the office, whether an administrative assistant or people at the front desk, to follow up with the client. Since this was the first year, there were a lot of questions from clients who in the past were just used to signing the return and dropping it in the mail."
Robinson credits a push to transition toward a paperless environment for generating efficiencies during the tax season. "Our national tax office wants everyone to operate in a paperless mode during the next couple of years, but it's up to the local offices to implement," she said. "We decided to do it as close as possible to 100 percent this year. The young professionals are completely on board, but it has taken a little longer to get managers and directors at the same point."
INFLUX OF ERROR NOTICES
The late legislation from Congress and shortened tax season may be to blame for the erroneous error notices sent out by the IRS, opined Cindy Hockenberry, supervisor at the National Association of Tax Professionals' Tax Knowledge Center.
"There were a lot of strange error notices being sent," she said. "For example, in one case a wife had a sole proprietorship, and her husband owned an S corporation. The S corporation had health insurance for the employees, including the shareholder-husband. Premiums were reported on his W-2 as wages, and he took an adjustment on the front page of Form 1040. The IRS was adjusting the wife's Schedule C business self-employment tax by the health insurance adjustment taken on the front page. This is incorrect because health insurance was correctly reported on the Form 1120 of her spouse."
"The biggest burden was trying to explain to the IRS that what was done was correct, and it was a processing issue on the IRS end," she continued. "Early in the tax season, notices were sent out for a variety of reasons rejecting the First-Time Homebuyer Credit. They told the taxpayer that they needed to repay the credit when they may already have repaid it, or when they did not have to repay it. The fact that the tax season was delayed in the first place may have caused some of this, since the late legislation had a snowball effect."
IRA CONVERSIONS
Last year was the first in which there were no income restrictions on converting from a traditional IRA to a Roth IRA, noted Bob Scharin, senior tax analyst for the Tax & Accounting business of Thomson Reuters.
"A complication to this was that people who converted in 2010 could have it all taxed or have it treated as converted half in 2011 and half in 2012, which deferred their tax liability," he said. "That's good news, but the people who made their conversions might want to adjust their withholding in 2011 so that they are not hit with a big tax bill next April based on their 2010 conversion."
"Moreover," he said, "there is the added incentive of paying in their state income tax on the conversion amount during 2011, rather than waiting until next year when they file their return, because that would give them a 2011 state income tax deduction."
PORTAL POWER AND DIY'ERS
The benefits of client portals were apparent during tax season, said Bob Dias, vice president of tax product management at CCH, a Wolters Kluwer business.
"The concept of having a portal as a connection point between the CPA and client has become obvious," he said. "We've seen an explosion of usage. It's encouraging to see the level of adoption. Any firm that's not deploying a portal already or doesn't have a short-term strategy to deploy one should step back and take a look at the advantages."
Dias said that CCH transmitted over 8 million e-filed returns, up 20 percent over last year in total volume. The focus on catching errors on the front end resulted in an acceptance rate well over the industry average, he indicated.
For Jesse Lipson, chief executive of file transfer concern ShareFile, the most interesting trend was how accountants used client portal tools during tax season. "It's used both for the one-off, large file transfer such as a large QuickBooks file, where the amount of information is too large to be e-mailed," he said. "Then there's the need for security with especially sensitive information. Accountants need a secure way to send and receive information from a client. Every year we've seen far less faxing and mailing and a lot more e-mail and portal use."
"Do-it-yourself" taxpayer trends have continued at the same level, indicated Jorge Olavarrieta, group product manager for Intuit.
This season's increase in prepared returns was almost equally divided between professionals and do-it-yourselfers: tax professionals e-filed 67.1 million returns, an increase of 12.2 percent over last year, while 37.9 million self-prepared returns were e-filed, an increase of 12.4 percent from the year-ago period.
"The growth in both the DIY and professional preparation spaces is the same," he said. "The professional preparer is not losing out to the consumer. There's a very intrinsic value that the accountant provides that can't be mirrored in an application. It's a lot more than just data entry and submitting something through the wire to the IRS."
PRE-CRASH STAFFING LEVELS
The economic downturn of the last two to three years has opened up slots for accounting professionals as a result of firms cutting staff at the outset of the recession.
"A lot of firms slashed their staff," pointed out Omri Avdi, practice director at Parker & Lynch, a division of Accounting Principals. "This is the first year where the economy is starting to pick up, and business is beginning to come back to the level it was. As a result, this year requisitions were up for tax-related contract roles almost 300 percent from last year."
Avdi noted that many firms are especially short-staffed in middle management. "Many firms laid off accountants with two-to-four years of experience, so there's a lot of senior management and partners, and first- and second-year classes. What's missing is the middle gap of knowledge," he said.
Avdi recommended that firms proactively hire needed staff six to 12 months in advance of tax season.
A complicating factor to tax season was not only the slow release of 1099 forms, but the number of times they were amended and corrected, indicated Jim Oliver of San Antonio-based Jim Oliver & Associates.
"You were never sure if you got the correct ones, so you waited," he said. "It seemed to go on and on. Another area that surprised some clients was the increasing use of publicly traded partnerships," he observed. "I don't think brokers know what they're doing to clients when they have clients invest in these. They think it's like a stock, but it requires totally different reporting. There seemed to be a lack of knowledge in the investment community about the tax consequences, and we spent more time with clients as a result."
Oliver noted more concern about fees this past season: "Sometimes they didn't understand the complexity of their return. And sometimes they thought our fees went up, but when we checked last year's return the fee had actually gone down. This may be just the result of a bad economy."
Although he acknowledged the efficiencies of e-filing and the use of portals, Oliver suggested that clients are less likely to spend time reviewing their returns as a result.
"In the old days when they actually signed the return, it meant more," he said. "Just now we're finding out that they didn't look at it. We still want the client to look at the return, even thought we review it twice in the office, because there are some corrections only they would know about."
