While the late December tax cut extension slowed down the beginning of tax season for some, it brought a welcome degree of certainty to the tax landscape.
"Now, for two years, we at least know what our tax system looks like in a general sense," said Leon LaBrecque, managing partner of investment management firm LJPR LLC. "We can continue to look at dividends and capital gains with special rates; we can plan for our tax bill and make decisions based on at least some certainty."
Bob Scharin, senior tax analyst for the Tax & Accounting business of Thomson Reuters, agreed. "Taxpayers who made Roth IRA conversions are faced with an option when they file their 2010 returns. They can have their income from the conversion taxed in 2011 and 2012, or they can elect out of that deferral and have it taxed in 2010 instead," he said. "The extension legislation gives people more certainty regarding the 2011 and 2012 rates, so they should be more comfortable taking advantage of the tax deferral and not worry that the deferral will cause them to be taxed at higher rates in 2011 and 2012."
A delay in the start of tax season for some resulted from the late passage of the legislation, the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act. Generally, taxpayers who claim the higher education tuition and fees deduction or who claim the educator expense deduction will have to wait until mid-February to file their returns. The IRS said that the delay would impact about 9 million taxpayers.
"It also impacted the itemized deduction for state and local sales tax," noted Barbara Weltman, a tax attorney and contributing author to J.K. Lasser's Your Income Tax series. "The option to itemize state and local sales tax is on Schedule A."
"Taxpayers may be surprised that their preparers are required to file electronically," she noted.
The Internal Revenue Service noted that it is approaching the milestone of 1 billion returns processed electronically. And with the e-file mandate in place, this goal should be reached in the near future. In 2010, nearly 100 million people - 70 percent of taxpayers - used IRS e-file.
"Preparers will have some adjustments to make this filing season, especially those who have not adopted e-file across the board," said Jody Padar, chief executive officer of New Vision CPA Group. "Many practitioners are not prepared for that."
A RAL RETREAT
This tax season, the changing face of bank products is becoming evident as fewer refund anticipation loans are available, and the Treasury is issuing its own prepaid debit cards for taxpayer refunds.
The Treasury is sending letters to about 600,000 low- and moderate-income individuals around the country offering them the opportunity to have a MyAccountCard Visa Prepaid Debit Card. There will be no cost to have a tax refund loaded onto the card, which will also offer free point-of-sale transactions, free online bill pay, free cash withdrawals at more than 15,000 ATM machines nationwide, and free cash back at participating retail stores.
Several different features will be offered in the pilot program, with eventual expansion of the program dependent on the results of the pilot. Two of the four offers being tested involve a $4.95 monthly fee, while the other two have no monthly fee. There are no current plans to eliminate paper checks for tax refunds, according to the Treasury.
The IRS expects to receive more than 140 million individual tax returns this year, with most of those filed by the April 18 deadline. The deadline is April 18 this year because by law District of Columbia holidays impact tax deadlines in the same way that federal holidays do. Since a local holiday in the District of Columbia, Emancipation Day, this year falls on Friday, April 15, the filing deadline has been moved to April 18.
"Last year there was a decrease in the total number of returns filed," noted John Hewitt, chief executive of Liberty Tax Service. "We expect this year to be flat. It will be the first time in three years that there won't be a decrease in filers."
Hewitt noted the decrease in the availability of refund anticipation loans for this year's filing season. "Block and the mom-and-pops won't have RALs, and Jackson Hewitt will only have RALs at 80 percent of their locations," he said. "We have it at all our locations, including the 300 new locations we've added," he said. "But with opposition from various regulatory agencies and consumer groups, there is the belief that RALs will go away."
As a consequence, Liberty is experimenting with consumer loans, according to Hewitt. "They are not based on a refund at all. They're just a normal consumer loan based on credit criteria, but you can pay them back with your refund," he said.
If the program is rolled out nationally in the future, it will have to meet the requirements of each state, since the loans will be funded by finance companies that are subject to state regulation.
"Most people think the RAL will just go away," Hewitt observed. "They don't remember when there were none. People who have bad credit, and something goes wrong, such as a fire or flood, were at a disadvantage."
"Just last year when the fees for RALs got to their lowest amount, the IRS took away the debt indicator," he said. "There will always be a demand from people who live paycheck to paycheck to borrow against their tax refund. Who does the lending and how the preparer will be involved could change, but the demand won't change."
Although he offers RALs at his nine full-service Peoples Income Tax locations, chief executive Chuck McCabe won't be sorry to see them go. "I think it will help get rid of the fly-by-night operators like pawn shops and check cashing locations," he said.
The IRS announced in August that it would no longer provide a "debt indicator," which was an indication as to whether an individual taxpayer had any debt, such as student loans or child support, to be applied against the expected refund. Consequently, the RALs offered by Peoples Income Tax are limited to $1,500 for some taxpayers, and only $1,000 for others. "Last year they could basically get their whole refund, up to $9,000, in the RAL," he said.
The slow start to tax season has affected smaller preparers' cash flow, McCabe noted. "When tax season begins, they're spending money to get their offices up and running," he said. "Many tax business owners rely on the cash flow coming in during January and February to pay these bills."
THINGS TO WATCH FOR
In the current economy, numerous taxpayers have gone from being employees to becoming self-employed, according to Deborah Sweeney, chief executive officer of corporate services provider MyCorporation. "By operating through a corporate form, they can avoid the tax on self-employment income. Moreover, they will be less exposed to audit risk by operating through a C or an S corporation."
Preparers should use this filing season to caution their clients about the new Form 1099 reporting requirements set to take place in 2012, according to Bob Nault, chief executive of Greatland Corp.
The new rental property reporting requirement requires rental property owners to report any payments to service providers of $600 or more during 2011 on a 1099-MISC next year, he observed. "And the provision in the health care reform legislation will require all businesses to not only issue a 1099 to document income paid to contract workers, but also issue a 1099 to any business from which they purchase at least $600 in goods or services."
While either or both provisions may be modified or repealed, they are currently on the books, and complying with them begins immediately, Nault emphasized.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access