While late-year legislative changes again delayed filing for some taxpayers, the season proceeded relatively smoothly, according to veteran practitioners.“It was one of the smoothest ones I’ve had, and my colleagues say the same. In part it’s because the software is getting better,” said Holliston, Mass.-based preparer Larry Novick. “I did notice that a lot fewer of my clients claimed non-cash contributions, and the amount of collection plate contributions decreased substantially. Most of them had heard of the stricter substantiation rules.”
Approximately 13.5 million taxpayers had to wait until February 11 to file as a result of a delay in the following forms, all related to the Alternative Minimum Tax: Form 8853, Education Credits; Form 5695, Residential Energy Credits; Schedule 2, Form 1040A, Child and Dependent Care Expenses for Form 1040A Filers; Form 8396, Mortgage Interest Credit; and Form 8859, District of Columbia First-Time Home Buyer.
The IRS delayed the forms to give itself enough time to update and test its systems to accommodate the changes initiated by the AMT patch, which passed in late December.
In her January report to Congress, National Taxpayer Advocate Nina E. Olson designated the frequency and magnitude of late-year changes to the Tax Code as the most serious problem facing taxpayers. In each of the last two years, she noted, Congress has acted in December to provide tax benefits with retroactive effect for the full year.
“For some taxpayers,” she wrote, “a delay of two to four weeks in receiving their refund could mean eviction, inability to pay the high heating bills that arise during winter, or defaulting on credit-card bills from the holiday season.”
SCORE 1 FOR THE IRS
“You’ve really got to give the IRS credit,” said Roger Harris, president of Padgett Business Services, chair of the Government Relations Committee of the National Association of Enrolled Agents, and former chair of the IRS Advisory Council. “They had to deal with the AMT patch and the stimulus payments at the same time, and they responded pretty well. Both of those were not things they asked for — one would have been a lot, but the two together could have been overwhelming.”
An interim assessment of the 2008 filing season issued by the Treasury Inspector General for Tax Administration found no significant problems with the IRS’s processing of individual returns. “In general, the IRS accurately processed the returns it had received and issued refunds in a timely manner,” the report found.
TIGTA also conducted an audit to evaluate the use of refund anticipation loans. The initial results indicated that, for the most part, “Survey respondents understood that they received loans; they obtained them to receive the money due from their refunds sooner so they could pay their bills.”
For some practitioners the biggest problem was software. “We initiated software changes at the end of December,” said Pauline Reynolds, tax partner and head of the Tax Department at Atlanta-based HLB Gross Collins PC. “Long-term it may be a good thing, but it made things a lot more difficult during tax season. An earlier conversion would have been better, since the glitches would have been worked out.”
Likewise, CBiz Accounting Tax & Advisory Services experienced problems as a result of its switch in tax preparation software, according to Anne-Marie Fisher, director of tax services at the firm. “The new program was shockingly poor,” she said. “Because of the new platform and errors in the program, we had to get numerous fixes from the vendor.”
Late issuance of Form 1099s had both positive and negative aspects, according to Fisher.
“It was good that we didn’t have to go back and do revised Schedule Ds, but it generated more of a crunch when they were issued,” she said.
Alan Osmolowski, head of the Tax Department at New England regional firm Carlin, Charron & Rosen, agreed. “The brokerage houses had extra time to issue Form 1099. The idea was to avoid having to issue amended forms, but the result was we got everything a lot later, and we still received amended 1099s,” he said. “As a result, we didn’t start our Form 1040 individual returns until later in the season.”
“We’re going to look for ways to get data sooner from our clients, because it was much busier in the last few weeks of tax season this year than past seasons, and a big part of the delay was in getting the 1099s,” he added.
Osmolowski said that his firm concentrated on professional standards because of the stricter preparer penalty rules. “Those penalties were made more substantial than they were in the past, so we had renewed focus to make sure we were in compliance,” he said. “If a tax position does not meet a more-likely-than-not standard of being upheld, you’re required to disclose it on Form 8275 or be subject to a negligence penalty. We had to look more closely at the positions we took.”
As a result, he said, the average time spent per return went up more than 10 percent. “We also had to increase the time spent with our clients to educate them to provide us with the information we needed to ensure we’re in compliance with the new rules,” he said. “Naturally, we had to pass our increased costs on to our clients, where we could.”
In addition to the stricter rules under the Tax Code, CCR was concerned with state privacy laws, said Osmolowski. “It’s a violation of state law in a number of states if you e-mail confidential information,” he said. “We had great success using private client portals on our Web site to get around this. It’s a secure connection, so it doesn’t violate the state privacy laws.”
Although his firm was one of the early adopters of outsourcing, it now is relying much less on this as an option, he indicated. “There are a number of reasons for this,” he said. “We’re doing a better job of recruiting tax professionals, so we can do more returns in house. In past years we were understaffed. Also, we made a strategic decision to outsource less because the quality of work coming out of India was not where we would like to see it.”
It’s important to do as much as possible outside of tax season, according to HLB Gross Collins’ Reynolds: “We have clients we work with all the time. If I know they sold real estate or had a stock transaction during the year, I tell them to get the basis and put it in a file. If they tie down all the loose ends during the year, it goes more smoothly during the season.”
For Cathleen Foley of Braintree, Mass.-based Kirkland Albrecht & Fredrickson PC, planning ahead was an important ingredient in completing shareholder individual returns early, along with corporate tax returns. “We had meetings with the shareholders early in the year to plan and gather the information we would need to do their returns. This helped us complete their returns weeks earlier than in prior years,” she said.
It pays to be prepared for unexpected events, according to Brian Falony, director of marketing for Atlanta-based Habif, Arogeti & Wynne LLP.
“Our season was extended to May 19 due to a tornado that hit the downtown area on March 14,” he said. “Businesses that weren’t directly impacted by the tornado qualified for the extension if their accounting firm was affected, but they had to ask for it. We made sure our clients knew, and had to decide who could benefit from the extension. The emphasis is on being flexible and having systems in place to take advantage of any situation that might arise that could benefit your clients.”
TOO LITTLE PLANNING
From an investor and trader perspective, the biggest lesson is that too many people neglect tax-smart trading strategies during the year, according to Stevie Conlon, tax director for GainsKeeper, part of Wolters Kluwer Financial Services.
“It concerns us when they import all of their data to us at once, because it means they haven’t been thinking about minimizing taxes through smart trading during the year. Also, more investors are trading in options and other types of financial derivatives, and some of these are subject to special tax rules. For example, broad-based index options are subject to mark-to-market taxation that taxes them based on year-end market value, rather than on realized gain and loss when they are sold. Some investors are surprised by this at tax time.”
Although post-tax season is the time for planning ahead, it may be time for a change to the traditional goal of deferring as much income as possible, advised Susan Hartman, tax and estate consultant for the financial planning group at Tampa, Fla.-based financial services concern Raymond James.
“That may no longer be appropriate in today’s environment,” she said. “In prior years it was recommended because it allows for current-year savings and tax-deferred compounding on investment dollars, and it’s based in part on the premise that the taxpayer will be in a lower bracket in future years. But there’s a lot of uncertainty with respect to that assumption now. The Tax Code is in a considerable state of flux, and more individuals are working into retirement and earning as much as they were in their youth.”
Moreover, she noted, the spread between the regular tax and the AMT is narrowing, with no real assurance that the AMT patch will be extended.
“A lot of professionals spent their time learning how to avoid the AMT,” she said. “But if your client is firmly in the AMT, you might want to accelerate income tax by moving money out of a tax-deferred environment, and incur a current-year hit so you pay tax at a lower marginal rate.”
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