Tighter IRS scrutiny of preparers and returns, staffing issues and a stagnant economy are facing tax professionals as they ready their practices for a new filing season.
"There's been a complete deadlock in tax legislation," observed Alan Straus, CPA, JD, a New York-based practitioner. "Returns this year will reflect the bad economy - more short sales and foreclosures, and forgiveness-of-debt issues. I've had a number of them. The fact that they came up in 2011 means that we have to report them now."
Straus explained that some of the issues this year could get quite complex.
"Clients come in and say, 'I got this interesting letter from the IRS that says I have $300,000 of income from cancellation of indebtedness - what does that mean?'"
Aside from debts cancelled in bankruptcy or discharged while the taxpayer is insolvent, there is an exclusion for qualified principal residence indebtedness during the years 2007 through 2012. To qualify, the cancelled debt must have been secured by, and incurred in the acquisition, construction or improvements of, the principal residence.
"I'm anticipating and experiencing a highly increased level of IRS scrutiny," said Alan Boress, CPA, an Orlando, Fla.- area tax practitioner and marketing expert. "The IRS is scrounging for money in ways that they've never done before. They've greatly increased the number of audits on self-employed and rental property owners. They're delving down deeper, to lower levels of income than they have in the past where they only concentrated on high-net-worth individuals. They're looking for reporting errors and tax abuse."
Boress said he expects more of this clients to opt for bankruptcy.
"More of my clients will lose their homes, with cancellation-of-debt issues. If it's rental property and they can show that they're insolvent, they can fill out Form 982 [Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)]. This is the accumulated pain of the economy not recovering," he explained. "Three fourths of my business clients were in construction-related businesses, and now they're out of business."
WEIGHTY ISSUES FOR PREPARERS
There may be a shortage of tax preparers this year as a result of the new preparer registration requirements, fees, and continuing education requirements, predicted Chuck McCabe, chief executive officer of Virginia-based Peoples Income Tax. "Some preparers are intimidated by the new regulations, as well as the fees, so some people will be dropping out of the profession and will have to be replaced," he said.
The IRS has mandated a 120-question preparer competency test as well as 15 hours of CPE annually for preparers who are not CPAs, attorneys or enrolled agents. (See "Preparers weigh in on PTIN," page 35.)
"Between now and December 2013 [the deadline for taking the preparer exam] we'll see an exodus of preparers who don't want to take the test. The industry has a significant percentage of elderly tax preparers, and they seem to dislike the testing requirement."
McCabe said that another challenge for the independent preparer will be marketing. "A good tax practice might have a client retention rate of 80 to 90 percent or more, but they still have to replace 10 to 20 percent of their clients every year just to break even," he explained. "Referrals have always been a major source, but that might not be enough. That's why a number of them rely on guerrilla marketing tactics, because they can't afford mass media."
Finding the right people to prepare returns will be more of a challenge, according to Sheila Clark, director of operations for The Income Tax School, a sister business of Peoples Income Tax. "The industry overall will have issues in hiring preparers that are competent and want to stay in the field because of the new regulations," she said. "Based on what they make during the tax season, it's just not worth it for some of them. We have people who applied for positions and took our courses, then decided they would rather continue to draw unemployment because it was more attractive than working. And we wonder, do we really want people who have that mentality?"
GOOD HELP IS HARD TO FIND
Staffing is an issue this tax season, declared Chris Frederiksen, chairman and chief executive of 2020 Group USA. "Firms are telling me about the lack of good people: skilled, experienced and motivated. Outsourcing is now back in fashion. There's been an uptick since last year, as more firms have gotten over the fright of asking their clients for consent. They find they can provide better, more timely service with fewer seasonal staff members through judicious use of outsourcing."
"Accountants will be faced with mounting time pressures as their clients take longer to get their paperwork to their accountant," said Damien Greathead, operations director for 2020 Group. "Since good people are still hard to find, it's a good idea for firms to be well systemized, especially in the area of utilizing scan, organize and populate technology to get the work out the door."
The merchant card reporting issue, a potential headache for small businesses, has been put on hold, according to Roger Harris, president of Padgett Business Services. The law requires the gross amount of reportable transactions for the calendar year to be reported on a monthly basis to both the business owner and the IRS. Since most businesses just report their net sales, there would be a mismatch.
While the requirement still exists, Schedule C for 2011 returns instructs the preparer to "enter zero" for 2011. "So the issue just goes away for 2011, and we'll see what changes they make for 2012," said Harris. "The IRS acknowledges they were not in a position to go forward to take that number and do something meaningful with it. There will be somewhat of a transition for basis reporting as we all get used to the new process on Form 8949," he said.
WILL THEY OR WON'T THEY?
"And end-of-year legislation might play a role in tax preparation," Harris said. (As we went to press, the payroll cut extension passed in the House but was expected to be defeated in the Senate, with extenders and the AMT patch lurking in the background.)
"What scares me is the possibility that they don't decide on the payroll tax cut before the end of the year, and then come back in January or later and extend it," Harris said. "If they don't extend it, we simply go back to the old rates. I used to think that October was late for updates to the tax law, but now I think legislation is timely as long as it's done during the current year. There are so many things that you think you know will be extended, but they haven't done it, and so there's a chance that it might not get done."
Although Congress doesn't have the political will to let the payroll tax cut and extenders expire, it also doesn't have the will to extend them in a timely manner, with the result that the business community and the tax preparation community are left hanging until some political event causes them to make a move, predicted Harris.
"Extension of the payroll tax cut is something both Republicans and Democrats agree should be done, but they still have a problem getting it passed. If they have a problem on that, what chance is there of passing items they disagree on? It not only has to make sense as tax policy, it has to make sense politically, or it won't get passed. It's getting to the point where I do my tax research on Politico. If it doesn't pass the political test, it doesn't matter what the economic or tax arguments are."
EXPIRING PROVISIONS
A surprise is in store for taxpayers this season who are expecting the Making Work Pay Credit, said Beanna Whitlock, a San Antonio-based tax practitioner and adjunct professor at Auburn University. "Of course, it's not there anymore," she said. "They received it already in their paychecks with the reduction of FICA [Federal Insurance Contributions Act] tax. The problem with that is they didn't see it and they got used to it over the course of the last two years. The $400 credit, or $800 on a joint return, could mean the difference between getting a refund or owing the government."
The deductibility of PMI, or private mortgage insurance, is one of the deductions set to expire at the end of 2011, indicated Whitlock. "It's tax deductible, but only through 2012. For a lot of them, this is the only time we will have them in our office, so take a few minutes and explain it to them."
Preparers should also explain the impending expiration of the cancellation-of-debt income exclusion, which also expires at the end of 2012, she advised. "When it expires, it can be devastating to the taxpayer who might otherwise have taken advantage of the provision," she said. "If you have a loan for $750,000 on your house and sell it on a short sale for $250,000, you have cancellation-of-debt income," she explained. "As long as it's your personal residence, you get no taxable income, but if you wait till 2013 to sell, you'll have half a million in taxable income."
Whitlock, a former IRS director of National Public Liaison, found the recent mailing of 21,000 letters to preparers offensive. The letters were sent to preparers who prepared 2010 returns with a high percentage of attributes that typically indicate errors on Schedules A, C or E, with visits scheduled for 10 percent of the recipients.
"The IRS representative comes to your office and looks at how you prepared a certain number of returns and gives suggestions on how to prepare. But many of them have never prepared a return, and don't know the special issues that taxpayers have, or the in-depth efforts that tax professionals go to in order to assist their taxpayers to prepare complete and accurate returns," she said.
