The continuing economic slowdown means that tax preparation and tax planning will be more critical than ever, and this will be reflected in the questions that taxpayers will ask of their preparers during tax season."Economic uncertainty, coupled with tax law changes, will make this season busier than normal," said Mark Albrecht, CEO of XCM Solutions LLC, a provider of workflow and automation solutions. "Staffing and workload challenges will be even more acute."
"There will be a huge pressure to lower tax liability because taxpayers have to pay by cash or credit, and in this downturn there's very little of that," added George Jones, managing editor of the Washington Bureau for tax products and services provider CCH. "Businesses, where their survival is at stake, will want to see zero tax liability or close to it. This is where they pressure the preparer. If the preparer wants them to remain clients, they will want to come up with something. Even putting them on the installment plan if the money isn't available will help."
A potential cause of confusion among taxpayers will be the economic stimulus checks that many received during 2008, according to Cindy Hockenberry, research coordinator at the National Association of Tax Professionals. "Taxpayers received their checks back in July, August and September, but they have to remember what they received since they need to figure if they're entitled to more or not," she said. "It will cause a few headaches for preparers. And we'll see more people worried about losing their homes and the tax consequences of foreclosure. Taxpayers generally keep poor records. They need to know when they bought their house, how much they paid, what improvements they made."
MORE CREDITS, MORE WORK
Accountants often fall into the trap of relying too heavily on their tax preparation software, according to Mike Solomon, a partner in Amper, Politziner & Mattia's Tax Department.
"They look at the input screen and think it will prompt them for questions to ask, and they'll get their clients all the deductions and credits available. That's not always the case," he said. "For example, if you don't have a child's date of birth in the tax software it won't necessarily tell you that the Kiddie Tax may apply, since up to 2006 it only applied to children 14 and under."
"There are so many interrelationships that you need to understand how the rules operate and not just rely on the software," he continued.
Although some taxpayers may have a fairly attractive income year for 2008, the late-year economic downswing may generate less income in 2009, noted Solomon. "When you do their estimates for 2009, you should not rely on the old safe harbor, because they could have a lot less income and they may need the money. Ask your clients what they project their 2009 results to be, rather than go the default route."
Every year, third-party information comes in later than before, noted Mike Metz, executive vice president of tax services at RSM McGladrey. "We expect we'll see that again this year," he said. "Much of the information comes from brokerage and investment banking firms that have had challenging times this year. We're concerned that they may have difficulty in getting the information out to us. Some of the information will need to be corrected, and we expect to see more of this as a result of reductions in staff and general confusion in the industry."
With the downturn in the economy, some clients will have lower income than in the recent past, said Bob D. Scharin, senior tax analyst at the Tax and Accounting business of Thomson Reuters. "This may bring them below the phase-out levels for various deductions and credits," he noted. "Looking at last year's return will not prompt the preparer to ask about such expenditures this year, so preparers need to be extra vigilant to check whether clients qualify for additional tax breaks this year."
SILVER LININGS
Primary challenges facing preparers this year are the new rules regarding use and disclosure of taxpayer information and the higher penalties for nondisclosure, said Padgett Business Services president Roger Harris.
"The combination of these two could make this a very costly and burdensome tax season for practitioners and taxpayers alike," he said. "Make sure you look at what you charge because you have more responsibilities and increased liability for your actions than ever before."
All industries are feeling the impact of the recession, and firms can potentially lose both tax and accounting clients as cutbacks transpire, according to Mike D'Avolio, CPA, JD, senior tax consultant for tax development at QuickBooks parent Intuit.
"However, revenue opportunities will arise as people and businesses turn to financial advisors for guidance and support," he said. "In fact, the need for tax and write-up work can increase during hard times, as small businesses try to get their books in order to qualify for loans and lines of credit."
Accounting practices may need to become flexible in their payment terms, D'Avolio said. "They might try a monthly pre-payment plan, or work with clients on bill collection issues. By not taking a business-as-usual approach in billing, they may be able to actually increase their client base in a period of economic downturn."
The recent volatility and decline in the capital markets present the opportunity to lower gain or increase loss, according to Jeffery G. Kramer, tax partner at Teaneck, N.J.-based DeCotiis, FitzPatrick, Cole & Wisler LLP.
"The higher the basis of the securities sold, the lower the gain or the greater the loss," he explained. "An investor may be able to use the specific identification method, the first-in first-out method, the average cost method, and possibly even a highest-in first-out method. The different methods may result in different amounts of gain or loss, so a taxpayer may have some ability to select the method that is most advantageous to them."
