Tax Season 2019: Lessons learned
In a word, the 2019 filing season was “painful,” said Ryan Losi, executive vice president of Virginia CPA firm Piascik.
“It was painful because Treasury did not issue the regulations on changes in the Tax Cuts and Jobs Act between January and March, so if you were trying to understand what the law was in order to do tax planning, you were guessing,” he explained. “In the heart of tax season, you had to decide whether to file or put a return on extension until the final regs came out. It would have been nice to have more of the final regs well before tax season began.”
“As of the beginning of the 2019 filing season, the Office of Chief Counsel had issued 79 published TCJA guidance products,” the Treasury Inspector General for Tax Administration stated in a May 16, 2019, report. “Further, Chief Counsel issued four additional guidance products before the end of March 2019. However, much work remains to issue complete guidance for the TCJA. Chief Counsel plans to issue more than 90 published guidance products after March 29, 2019.”
The absence of certain guidance affected state general assemblies, which were trying to figure out the IRS position on certain types of items, such as bonus depreciation, which added to the confusion, Losi indicated.
“The states need to know how to conform to the federal position so they can partially conform, conform, or deconform,” he said.
Despite the pain, Losi gave good grades to the IRS for its handling of a difficult situation. “From an administrative perspective, it was a pleasant surprise that it ran as efficiently as it did relative to the changes in the Tax Code and the government shutdown occurring just before tax season,” he said.
Vincent O’Brien, of Vincent J. O’Brien CPA PC, agreed: “It went much more smoothly than expected,” he said. “As far as processing returns, they did a very good job — a lot of dire predictions at the start of the filing season didn’t materialize. The refund issue was less of a problem as the season went on, and the numbers seem to bear that out. The previous filing season was just as difficult, because that’s when the law had just been enacted, and we were trying to get people prepared for it.”
“Of course, the season had its normal issues endemic to every tax season,” observed Roger Harris, president of Padgett Business Services. “We wish we had more information sooner from clients — the normal tax season challenges that didn’t go away.”
“We all learned how important it is to have withholding done properly,” he added. “So many people didn’t get the refund they were expecting. It wasn’t a tax problem, it was a withholding problem.”
In fact, IRS data from the end of April showed that the average refund was down just slightly — it was roughly $2,730, versus $2,770 in 2018.
“We also learned that there’s a difference between a tax preparer and a tax professional,” Harris observed. “A true tax professional took the time to go over the return and explain to clients how they gained from tax reform, and how they lost. Taxpayers who dropped off their returns and picked them up had different perceptions of tax reform than others with similar returns because they had different sets of knowledge and different expectations. Depending on what they heard in the media, most expected either better or worse results in their bottom line — this just highlights the need for qualified tax preparers who not only prepare returns but work with their clients to make sure that they understand their tax situation and how to make changes to make it better or worse going forward.”
A tough season
In a survey of tax professionals by the National Center for Professional Education Fellowship, 74 percent of respondents said that this filing season was more difficult than last year, with over half citing the Section 199A pass-through deduction as the No. 1 issue. Ninety-six percent said they were negatively affected by the February release of final 199A regs.
Over half of survey respondents gained new clients, although overall filing season statistics as of May 10, 2019, showed a slight decline — 0.5 percent — in the number of electronic return originator returns over 2018.
For Boca Raton, Florida-based CPA Harvey Bezozi, the SALT cap proved a major issue.
“Many of my clients are in the entertainment industry, with residences in New York or California. The $10,000 limitation on their SALT deductions hurt them,” he said. “The only real solution is to relocate to states that don’t have income tax. There are specific ways to exit when changing domicile, but if they follow the protocol they will be OK.”
Many preparers were not ready for tax season, according to Tom Wheelwright, a CPA and CEO of WealthAbility. “Many preparers did not understand the new law,” he said. “Too many deductions were missed.”
Wheelwright lists these as the most common:
- Bonus depreciation. Many did not understand how the bonus depreciation deduction applies to real estate, and even more, didn’t understand how to apply it to syndications.
- Qualified business income deductions. Many did not understand the rules for Specified Service Trades or Businesses that impact whether a business qualifies for the QBI deduction. “A lot of sales people told me they were told they didn’t qualify for the 20 percent pass-through deduction, including real estate agents/brokers and insurance agents, even though the regulations give clear examples to show that these people are not SSTBs,” he said. “Similarly, pharmacy owners were told they are SSTBs and didn’t qualify, even though they met the minimum threshold for health care services and would not be SSTBs.”
- Inventory deduction. “Apparently, many preparers did not read the Blue Book to understand how the $2,500 de minimis rule works for inventory that is treated as non-incidental materials and supplies,” he said. “One CPA told my audience that if they followed my recommendations for potential inventory deductions, they would be subject to a 40 percent penalty even though most of the audience clearly qualified for this tax benefit.”
As a final lesson, Losi emphasized that use of software does not eliminate the need for practitioners to understand the law and the forms.
“This filing season underscores the need for professionals who understand what a return should look like without having to rely on their software,” he said. “You can’t rely on software to get it right the first time. It takes time to work out the kinks, and tax season is not the best time to do that. Moving from local servers to the cloud can have unintended consequences. Whichever you used, they all struggled to update the software to address every federal issue that resulted from the TCJA.”