Virtually all tax preparers were adversely affected by the late start to the 2013 filing season, with the added complications of late forms, late information from brokerage houses and, in some cases software glitches.

"Tax return season as always is hectic, but Congress this year provided a case study on how last-minute legislation can make the situation even worse," said Bob Scharin, senior tax analyst at Thomson Reuters. "And the result was that a lot of filing extension requests were made because the returns could not be filed until later, and with all those delays, preparers could not file until later, so they needed to file more extensions."

"The bottom line," Scharin said, "is that many return preparers will have less summer fun as tax return season was pushed ahead to cover all the filing extensions. Usually after April 15 they can take a breath, but they won't get to do it this year. Return preparers are continuing to operate in a semi-crisis mode."

As a result of the late enactment of the American Taxpayer Relief Act, this year's filing season did not get underway until Jan. 30, 2013. It took the Internal Revenue Service additional time to update forms and computers to reflect changes for 2012 returns, with the result that all 2012 returns were not accepted by the IRS until March 4, 2013, just six weeks before the April 15 due date.

This filing season was unique, according to Brad Hall of Irvine, Calif.-based Hall & Co. CPAs. "In my 36 tax seasons, it was probably one of the most difficult. The challenge was created by the fiscal cliff, pending legislation, and the fact that we didn't have answers for our clients. They would call and ask if they should buy more equipment, and we had to tell them we didn't know. We had no answers."

"From a gifting standpoint, they asked if the exemption would go from $5 million to $1 million," he said. "We didn't think so, but it could potentially have done so. In this sector, clients rely on us to always have the answers, so it was disheartening to tell them that we really couldn't advise them. There was very little planning we could do because we didn't even know if the changes in the law would be retroactive or not."

The other big challenge was corrected Form 1099s from brokerage houses, Hall said. "We were getting the corrected forms all the way through the first week of April, after we had filed the returns. We had to amend them all. In one case there was a family trust fund. We had to amend three trust returns and three individual returns related to an incorrect Form 1099." And a large number of clients didn't want to go on extension, Hall indicated. "They may have thought they were going to get a refund, or they wanted to know exactly what their state tax was going to be after the retroactive increase in California tax from November to Jan. 1, 2012. A lot of deals were predicated on the California tax rate being 3 percent less than what it ended up."

 

THE CASCADE EFFECT

The filing season was uniquely difficult, agreed Roger Harris, chief executive officer of Padgett Business Services. "All of our offices would say it was one of the most difficult they've ever had, and one they hope not to repeat," he said.

"Extensions will be a lot higher than in previous years, because of the late start. And taxes aren't getting simpler. Everything is getting more complex. The information from the brokerage houses is getting later each year, so you have to change the return, amend the return, or wait to prepare the return until you get a final corrected Form 1099-B from the brokerage account. It has added a tremendous amount of frustration, because you never know when you have all the information," he said. "You can get the Form 1099-B, then two weeks later get a corrected form, and two weeks after that get another corrected form. The basis rules make it more complex for the brokerage houses, and the late start made all the other problems worse because you had less time to deal with them."

There was a larger-than-expected crunch toward the end of tax season, noted Bill Armstrong, partner and group leader at West Coast Top 100 Firm Moss Adams. "Because of the tax law changes, people had a harder time getting their data together. If there is one taxpayer doing that, it's no problem, but with everyone doing it, it has a cascading effect."

As a result of the uncertainty in the rates, some taxpayers made assumptions in 2012 that turned out to be incorrect, observed Armstrong. "For example, where someone was going to sell an asset in 2012, they might have been sophisticated enough to know about installment sales. They thought they could save significantly by spreading out over a period of years. But because of the rate change, it might have saved them money in 2012 but be far more expensive in 2013. So even though many taxpayers had their data ready, there were many who extended in order to have more time to analyze their situation."

Since filing season ended, Armstrong has noted a substantial increase in the number of taxpayers who are looking for answers as to how to reduce their liability. "In the past, we would identify the problem and suggest possible solutions," he said. "Now they call us, and ask if they should convert an S corporation to a C corporation or a partnership to an S corporation or a C corporation. There's a fair amount of confusion, but also a fair amount of determination to do something about their situation."

Of course, there's no easy answer, Armstrong observed: "When the rates are the same for corporations and individuals, the answer is easy. The Medicare tax may impact the decisions as well. There's no boilerplate answer for anyone. There are so many taxes now that are fact-specific as to their application."

 

PLANNING AHEAD

Miguel Farra, principal of the Tax and Accounting Department at Florida-based Top 100 Firm MBAF, said they prepared for the tax season with a lot of planning. "We knew the rates would go up, so a lot of our clients accelerated capital gains to get the 15 percent rate and avoid the Medicare tax," he said. "They paid dividends in December to take advantage of the reduced rates. And there was a lot of gifting and planning for gifting."

The 2013 tax season promises to be very interesting and challenging because of the new tax regime, he observed: "There will be issues with the 3.8 percent Medicare tax. It applies to passive income, but there are questions as to what that includes, and how it affects real estate investors."

Among the lessons learned this tax season by tax return offices is the need to ensure adequate staffing, according to Chuck McCabe, president and chief executive of Peoples Income Tax and The Income Tax School. "We were short and ended up hiring people that were not properly trained," he said. "They had worked for other firms that primarily did low-end returns, and were not up to speed on doing more complex returns. They had to learn by on-the-job training. The lesson learned is to get more people in your tax class in the fall - it's always good to train more people than you need."

McCabe recommends offering tax preparation classes as a means not only of finding qualified preparers to hire, but as a screening tool. "Having them take a class with us gives us time to observe them, and determine their attitude, and how they interact with people," he said.

McCabe sees a shrinking market for firm-prepared low-end returns. "The retention rate for low-end returns is significantly lower than for the more complex returns," he noted. "The low-end returns have a retention of just 65 to 70 percent, which means that you have to replace 30 percent of your client base before you can show any growth. The more complex returns have a retention rate of close to 90 percent," he said.

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