Tax seasons past and future are on the minds of many practitioners despite the summer slowdown. Many, like Kim Cooney, ponder the way things worked this year and wonder what's on the horizon for next year.
"Overall, we did things pretty well," said Cooney, tax practice leader at the Reno, Nev., office of Grant Thornton. "The main thing we did differently is we didn't lose the month of January. We managed January a lot tighter by being proactive in December. Many engagements can be done early, such as smaller business returns and extensions. It's all in knowing the issues early and planning ahead."
"There's a lot more to think about, and you want to make sure you don't ever sacrifice the quality of the return when you can extend it, so be prepared to communicate to the client the reasons for an extension," she added. "Don't consider April 15 or March 15 a hard deadline."
Clients are coming in later because many are getting their information later, according to Cooney. "They think they need all the information before you start the return, but that's not always the case," she said.
The economic downturn has also affected staffing levels during the filing season.
"Companies are being careful about services they buy, and that includes tax and accounting," she said. "We're not getting the normal attrition in our staff, so we're being a lot more careful in bringing in extra staff. There are some great people we'd love to hire, but we don't want to overstaff and try to fill it with work."
CHECK YOUR CLIENTS
Practitioners should take a look at how the economy has affected the profile of their clients, advised Bob Scharin, senior tax analyst for the Tax & Accounting business of Thomson Reuters.
"With the high unemployment rate, practitioners might want to brush up on certain law provisions that they haven't dealt with much in the past, such as the earned income credit and cancellation-of-debt income," Scharin explained.
"Many people have been taking early retirement plan distributions, whether from an IRA or a former employer's 401(k) plan," he said. "There's a 10 percent additional tax on premature distributions, but there are a variety of exceptions. There's a new exclusion for up to $2,400 for unemployment benefits. And a number of clients that have capital loss carryovers from a prior year may need advice as to whether they should realize gains in 2009 because they have losses carried over from 2008."
The recession has affected the clients of tax practitioners to the extent that many are hurting economically or going out of business, according to Salim Omar, a Cliffwood, N.J.-based CPA. "The practitioner should consider positioning themselves as an expert," he said. "It helps to target a specific group of prospects."
Omar recommended surveys of existing clients. "It's an ideal way to identify opportunities and establish a relationship. In addition, it's a good way to find areas that are bothering the client," he said. "Our manager called our small-business clients and asked just five questions. Without exception, they were gratified that we took the time to call."
IRS: A PASSING GRADE
Although the 2009 tax season does not technically end until October 15, both the Treasury Inspector General for Tax Administration and the Government Accountability Office give good grades to the Internal Revenue Service for its handling of the 2009 tax return filing season.
"The IRS is accurately processing tax returns during the 2009 filing season despite the challenges of processing returns that include claims for tax credits designed to stimulate the economy and encourage homeownership," concluded a TIGTA report.
Meanwhile, the IRS inched closer to its targeted 80 percent mark for e-filed returns, with 91 million filed electronically out of 127 million total as of May 15, according to the GAO.
"It might seem mundane, but electronic filing is the big issue now," said Benson Goldstein, senior manager for tax at the American Institute of CPAs. "We're in the process of leaving the current system for 1040s to go to the modernized e-file platform, or MeF," he said.
The current, soon-to-be-legacy system will be phased out over a three-year period starting with the 2010 season, explained Goldstein. "The new system will provide cost savings on data processing, and will help the IRS with examinations because it will permit data analysis of returns by computer that are now done manually," he said.
The administration budget initiative has a proposal that the IRS would have the right to promulgate regulations that would mandate e-filing by preparers that file more than a specified number of returns, Goldstein noted. "In the past, we would handicap any legislation with this initiative as not high, but given the general economic and political climate, this proposal may have realistic prospects," he said. "Assuming we have the mandate, everything will be on MeF over a three-year period."
DEALING WITH 7216
The new regs under Code Section 7216 will continue to plague preparers, according to Goldstein.
Code Section 7216 is a criminal provision first enacted in 1971 that prohibits preparers of tax returns from knowingly or recklessly disclosing or using tax return information. Its regulations had been substantially unchanged for over 30 years until they were updated last year, and applied to uses and disclosures beginning on Jan. 1, 2009.
"This set up the ground rules as to when a preparer can use or disclose tax return information of clients," observed Goldstein. "Generally, if you want to use information for non-tax purposes within the firm, you need the client's written consent. It can arise in situations as simple as checking to see if the client might benefit from financial planning services or the sale of an investment product."
"Going into this past season, preparers were just waking up to the new regs going into effect, and wondering how they could handle it," he continued. "The consent must be on a separate sheet of paper, with a specified font, and include specific warnings and disclaimers. It's difficult not only to know when you need to get clients' consent, but to get them to sign."
If a client calls and wants you to send his return to the bank for a loan transaction, it's unclear whether you can send it to the bank without getting written consent, said Goldstein.
Likewise, newsletters sent from an accounting firm with articles about other services that are non-tax-related might fall afoul of the regulations, he said. "If it promotes the fact that you might need an IRA and the firm can fund the IRA or sell an investment product, it appears that you need written consent," he said.
"This will be an ongoing concern into next tax season," he said. "The AICPA and other professional organizations have provided the IRS with draft FAQs to get further clarification on these types of transactions."
BRACE FOR REGISTRATION
The registration of tax preparers is an issue that continues to be raised, said Goldstein. "There have been legislative proposals for several years that would require some type of registration," he said.
"However, [IRS Commissioner Douglas Shulman] called for an IRS study that will make recommendations to Treasury by the end of the year, so it's getting to the level of serious consideration," he said. "He's not endorsing any specific program or legislation. It could be as simple as a preparer filling out a form to notify the IRS, or could go all the way to having all preparers take a test and require CPE."
"This could totally change the way the IRS deals with bad preparers," opined Marty Davidoff, of E. Martin Davidoff & Associates. "You're now dealing with the fact that a lot of people who are going to be preparing returns will not register, then there will be others who are unenrolled who will try to be enrolled. The IRS will be able to find and deal with the latter, but I fear the people who get registered will be the people the IRS picks on, and the ones who don't register will be left alone."
"It's a tremendously complicated issue, and shouldn't be done without a lot of input from practitioners," he said. "A number of organizations don't like the idea because they believe that registration implies the idea that you're qualified, and you now have another category of competition."
THE FBAR FACTOR
The filing of new Report of Foreign Bank and Financial Accounts Forms (TD F 90-22.1) is an issue some practitioners may have overlooked, according to Bill Smith, director of the National Tax Office at cbiz. "It's not a tax return, but it has tax implications, and there are huge penalties for not filing it. If you haven't paid tax on the income associated with it, there is another set of penalties," he said.
The filing deadline was June 30, but a teleconference on June 12 informed many practitioners for the first time that owning an interest in a foreign hedge fund or a foreign private equity fund would constitute ownership of a financial account, triggering the requirement to file the FBAR form.
"To most practitioners, that represented a change in the IRS position from their prior position, which indicated the contrary. This was on the heels of a voluntary disclosure program announced on March 23. So they issued a set of FAQs that provided for a limited extension for filing the 2008 FBAR until September 23, under certain circumstances."
"It's confusing, because practitioners have to figure if clients have to file an FBAR form, and if they do, did they miss the June 30 deadline, and if they did, are they eligible for the September 23 extension? They have to decide what's involved in preparing amended returns for years where the client didn't pay the taxes, and what penalties are going to apply if they don't participate in voluntary disclosure," he said. "Then, they have to decide what to do if the client says, 'Forget it, I've never filed and I'm not going to file. The penalties and taxes are too much.' What ethical issues are there for the practitioner in that situation?"
"Even under voluntary disclosure, there's a penalty for 20 percent of the combined value in the foreign accounts in the highest number during the past six years, in addition to the income tax penalties," said Smith. "And you're only eligible if the IRS hasn't already contacted you. Suppose they received information from a John Doe summons on [Swiss bank] UBS - presumably, you could submit under the voluntary disclosure program and be denied because they had your name already."
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