IRS Form 1040 arrangement
Daniel Acker/Bloomberg

In the future, the 2018 filing season may be remembered with nostalgia.

“Wave goodbye to tax seasons of old,” said Roger Harris, president of Padgett Business Services. “This was the last filing season as we know it, because next year it will be totally different.”

Many preparers spent more time explaining to taxpayers the changes for the year ahead, rather than explaining their 2017 taxes. Harris found a wide difference between what people knew about the new Tax Cuts and Jobs Act, and what they thought they knew. “Most had no idea how it would impact them,” he said. “They had preconceived ideas, but some were right and some were wrong. They fell into different categories and had to be dealt with differently.”

And some of their questions were simply unanswerable. “Many wanted information on the treatment of pass-throughs under tax reform. Unfortunately, we couldn’t answer them,” he said. “We had to tell them that we’d get back to them when we get IRS guidance, hopefully over the summer.”


The season in numbers

In the National Center for Professional Education’s “After Tax Season Survey,” when asked what lessons they learned in conducting their practice, 10 percent of respondents said that they would hire more seasonal help; 25 percent said that they would fire some clients; and 12 percent said that they would attend more education sessions. Among the reasons cited in the “Other” category were the following:

  • “I need to know how to say no.”
  • “Clients with K-1s will be put on automatic extension.”
  • “Will increase rates.”
  • “I need to improve my organization of records (clean my desk and keep it clean).”
  • “Get clients to work around our hours rather than us working around their hours.”
  • “I need to delegate more work.”
  • “More new clients walked in the door because of the TCJA.”
  • “Businesses were doing better, and many sole proprietors had to be moved to entities such as S corporations.”

When asked how stressful the season was, nearly half said that it was not stressful, while 30 percent said that it was more stressful than other filing seasons, and 26 percent said that it was less stressful than others.

Twenty percent thought that the TCJA would lead to them losing clients, while 5 percent said they would gain clients. Meanwhile, 28 percent cited health insurance as the biggest issue during filing season. Other issues cited were the Earned Income Tax Credit, the Child Tax Credit and education credits, and late receipt of documents such as K-1s and brokerage 1099s, and due diligence paperwork.


Expect the unexpected

Ensuring adequate staffing before tax season begins is crucial, according to Kate Rooney, principal at Boston-based Edelstein & Co.

“I thought we were adequately staffed, but there are some things that you can’t prepare for,” she said. “You can fix last year’s problems, but new ones will pop up. The work was more complicated this year, which demanded more time on the part of preparers.”

“Frontload the tax season as much as possible from an administrative standpoint,” advised Lisa Mrkall, a senior manager of tax at Williamsville, N.Y.-based Tronconi Segarra & Associates. “You can never frontload enough regarding planning, scheduling and organizing.”

Alyce Notaro, also a senior manager at Tronconi, agreed. “And we’ve learned to always have a contingency plan,” she said. “We organize and schedule as to how we hope and expect things will work out, but if a particular deadline gets missed or something else goes astray, what will you do to keep things from spiraling out of control? Basically, we try to anticipate the central issues that may come up.”

Taxpayers this year were confused, mainly because of the press about the new tax law, according to Beanna Whitlock, a San Antonio-based preparer and educator and former director of Internal Revenue Service Public Liaison. “They all thought their taxes were going to go down this filing season,” she said. “When they found out most of the law didn’t apply to them until 2018, they wanted to talk about 2018 taxes, rather than 2017 taxes.”

Citing the Tax Cuts and Jobs Act and the Bipartisan Budget Act, passed in early February, that brought back some of the expiring tax provisions, Whitlock suggested a deadline date after which Congress can no longer make changes affecting the current year. “Give the IRS time to issue regulations and forms, and have the professional community get up to speed on the changes,” she said.

“Tax planning is back,” she noted. “The writers of the tax bill didn’t consider what would happen to outside sales persons under the law. Beginning in 2018, miscellaneous itemized deductions are gone. That includes their unreimbursed employee business expenses.”

“I told them to go to their employer and have the employer reduce their W-2 income, and reimburse the employee’s business expenses under an accountable plan. They’ll make less in wages but keep more in their pocket,” she said. “And why would the employer do that? Because the employer will save on FICA and Medicare taxes.”

“A good preparer will spend additional time with the taxpayer so they can get the arrangement done early in the year,” she said. “Even taxpayers you can’t help need to understand what the law did to them.”

Since investment expenses are no longer deductible, Whitlock advises clients to consider switching to a mutual fund that does not charge an annual fee. “One client was paying $34,000 in investment fees. They complained they wouldn’t make as much in mutual funds as in individual stocks, but if they reduced their return by the $34,000 fee, which is no longer deductible, they’ll come out ahead. But I highly recommend that tax professionals not get into areas of advice for which they are not certified or qualified.”

Whitlock also recommends that preparers get a medical checkup and have any medical issues taken care of before filing season. “Tax season is highly stressful, so make sure you are healthy enough to do it,” she advised. “This past season, five members of the Fellowship died during a stressful filing season.” Whitlock is executive director of the National Center for Professional Education Fellowship.

She says a technical corrections bill will be necessary to fix many things in the TCJA, among them the deduction for meals. “When they took away the entertainment deduction, they took away meals without intending to do it,” Whitlock explained. “This has left a lot of confusion in the industry.”

Michael Greenwald, a partner and corporate and business tax practice leader at Top 100 Firm Friedman LLP, agreed, and would tell Congress “not to pass any more tax bills.”

Just the sheer volume of reporting requirements can be daunting, according to Greenwald. “Because of the new tax bill, it’s especially important to have a really good due-date tracker,” he said. “There are so many reporting requirements at both the state and federal level. It’s critical to be aware of and manage everything you have to file.”

“This year one of the biggest issues was to be sensitive to people who needed to make payments under the tax repatriation provisions passed for controlled foreign corporations,” he continued. “You have to make sure you’re tracking every jurisdiction in which the taxpayer has to file.”

Cryptocurrency has its hazards not only as an investment risk, but in the possibility that a taxpayer may unwittingly be subject to FATCA and FBAR reporting requirements, Greenwald noted. “Anyone who held cryptocurrency outside of the U.S. during the year is subject to reporting requirements,” he said. “They may not realize it, but it’s considered an asset held overseas, and they may be subject to a reporting requirement.”

“The other challenge this year was that information seems to be getting to us later and later,” Greenwald said. “Whether it’s 1099s from brokerage firms or K-1s from partnerships, they’re coming in later and therefore it’s compressing the amount of time available to prepare the return. This year, the problem was compounded by the IRS computers going down on filing day, which provides a cautionary lesson — don’t wait until the last minute. And sometimes it’s better to extend a return, rather than trying to rush it out and risk errors or problems with e-filing.”

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