Tax season: A learning experience for all concerned

Late legislation at year’s end and after the year started, as well as during tax season itself, had a major impact on a tax season already affected by earlier coronavirus-related legislation and working conditions. And that meant that the Internal Revenue Service, tax preparers, and individual taxpayers all had plenty to learn from this year’s tax season.

“It’s been a year like I’ve never seen before,” said Mark Steber, chief tax information officer at Jackson Hewitt Tax Services. “Remember when there were summertime tax changes affecting the next tax season? Then it became end-of-year extenders, and now March retroactive late law changes.”

“We had to deal with three sets of stimulus payments over two tax years, then the rules changed on the first recipients. We learned to be flexible. Part of that was to deal with multiple channels of delivery for tax services,” he said. “It’s not new — we’ve had virtual for years, but it really caught fire with other tax service vendors this year. There’s a new appetite for different types of tax preparation, and I don’t think it’ll go away. Tax prep has not really changed in what you do — you take your information and show it to a professional or do it yourself. But it’s becoming more robust with different offerings and more channels of service delivery growing in the last 18 months.”

The varied delivery of services over the past filing season has accustomed customers to expecting more convenience, according to Steber. “There is a greater demand and greater appetite for availability and interaction. They have an appetite for information because of partial awareness of changes in the tax law. As people become more experienced with technology, the more they have information and access to technology, the more comfortable they are with contacting their provider,” he said. If your tax business is not good with technology and social media interacting with clients, you had better catch up.”

Mountains of mixed-up mail

Various IRS communications have indicated how well things were going, but if you talked to tax preparers, they would have a different story, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.

“One of the main complaints we heard from accountants was in continuing to receive correspondence from the IRS that doesn’t acknowledge prior submissions,” he noted. “There’s a continuing backlog due to the coronavirus, and they have to devote people to other issues like tax legislation. So they had a problem processing returns from 2019 and their computers sent out demand letters for things that have already been submitted but the IRS hasn’t looked at. People have correspondence sitting on their desks that they haven’t resolved, and they’re trying to communicate to the IRS but the IRS does not appear to know it yet.”

There have been some issues regarding the handling of recovery rebate credits, and comparing the credit on the return to notices sent out, according to Luscombe: “Some preparers had trouble getting taxpayers to come up with the notices — they didn’t have the best information for what the taxpayer received, so the IRS might have had some trouble with the recovery rebate credit.”

“The new charitable contribution for non-itemizers caused a problem for some preparers,” he noted. “A lot more people could claim the charitable contribution because it was available to non-itemizers. Many may not have had good records. It may be a problem if the IRS decides to audit those, but with only $300 at stake I’m not sure that it will be an audit priority for the service.”

The whole unemployment compensation issue — allowing a $10,200 exclusion after the return had been filed — added to the burden on the IRS, Luscombe remarked. “Processing returns may have been delayed by the IRS going back and making the allowable exclusion,” he said.

“On the business side, businesses were having trouble with the retroactive ability to claim Paycheck Protection Program loans and expenses for the loans that they initially hadn’t been entitled to claim,” he said. “And credits for paid leave and sick leave could have held up business returns as well.”

Crypto crackdown

The cryptocurrency question, moved to the front page of Form 1040, may also have held up some returns, Luscombe observed. “If the answer was ‘Yes,’ they held up those returns to see if they actually reported any crypto currency income.”

It will cause a problem for many taxpayers, agreed Withers partner Charles Kolstad.

“More clients are investing in cryptocurrencies than ever before,” he said. “The IRS is very focused on getting information about cryptocurrency investors, as their view is that there are a large number of such investors who are not complying with the current tax rules. The IRS has successfully subpoenaed several cryptocurrency exchanges such as Coinbase and Kraken to get information on clients with more than $20,000 in activity.”

For investors who trade cryptocurrency on a regular basis, complying with the recordkeeping and reporting requirements can be very difficult and complicated, which discourages investors from complying, Kolstad observed. “IRS guidance does not address many of the tax issues that arise, such as whether the mark-to-market provisions of Section 475 apply to traders of cryptocurrencies, or whether non-fungible tokens — NFTs — are collectibles subject to the higher 28% capital gains tax rate.”

And taxpayers need to answer the question regarding virtual currency on the first page of Form 1040 accurately, he explained: “The tax return is signed under penalties of perjury, so taxpayers need to be very careful to answer that question correctly. If a taxpayer checks the ‘No’ box, but in fact has cryptocurrencies, history suggests that the IRS will take the position that the taxpayer willfully failed to disclose their interests and impose significant penalties.”

AT-062421-individual tax returns processed by IRS

The work’s not over

Just because tax season is over doesn’t mean preparers can leave their offices, noted Beanna Whitlock, a Canyon Lake, Texas, preparer and former director of IRS National Public Liaison.

“Now it’s notice season,” she said. “Millions of returns were filed incorrectly. Any time ‘free money’ is available there will be fraud.”

As an example, she cited a client’s child whose professor at a well-known university suggested to the class that each should tell their parents that they would claim themselves this year, and get both the $600 and $1200 Economic Impact Payments for 2020. “The 1040 specifically says you cannot claim yourself if someone else can claim you. They’ll all be getting CP2000 notices. It’s a fraudulent return, and a preparer that prepares such a return is liable for preparer penalties,” she said.

Toward the end of filing season, the IRS released statistics comparing year-to-date filing statistics between this year and last year, showing nearly an 18 percent increase in ERO-accepted returns in 2021 over the same time period last year. And extensions increased 235% in 2021 over last year.

“Tax firms (EROs) are doing well this year,” commented Chuck McCabe, former CEO of The Income Tax School (now Surgent Income Tax School). “The huge increase in extensions may be due, in part, to a shortage of qualified tax preparers.”

“The IRS didn’t know going into tax season that they would have to come up with a system to send out advance payments of the Child Tax Credit, or send out another set of stimulus payments, or figure out the tax or non-tax of unemployment benefits,” said Roger Harris, president of Padgett Business Services. “Could they have done a better job? Of course, but so could all of us.”

“We learned that tax was not the most important thing to everyone. We spent a lot of time working on PPP loan applications and Employee Retention Credits because taxes aren’t the most important thing when a business owner is struggling to survive,” he continued. “Some of our extensions and delays and extra work was caused by doing other things. It’s necessary to prioritize what’s important to our customers — if getting PPP loans means taxes get extended or delayed, that’s what we should do. We just put taxes on top of our list and sometimes it doesn’t deserve to be there.”

“Preparers complained that their clients couldn’t get their refund, the IRS didn't answer its phones, and that they sent out notices that shouldn’t have been sent,” he said. “All these criticisms are true, but you have to put them in context with the environment in which we were working. IRS employees are still working remotely, they don’t have enough funding, and their technology is still not up to speed. How would anyone think that this tax season would be normal?”

“Clients come to us to put out the fire, not to throw gas on it. They will get as upset and frustrated as we let them, but if we’re calm they will calm down. It’s been a tough tax season for all of us. Our job is to deal with the frustrations — that’s why people come to us,” he added.

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