Tax law changes, a surge in business e-filing, and a move by practitioners toward greater use of the Internet will impact the type of filing season that tax preparers have this year."It will be typical year in terms of filing," observed John Hewitt, chief executive officer of Virginia Beach, Va.-based Liberty Tax Service. "About a million-and-a-half to two million more people will file returns than last year."
However, Hewitt sees both positive and negative effects from some of the tax law changes introduced for the 2005 tax year. "The new dependent definition will cause some problems for preparers. Some taxpayers won't be getting the refunds they expected, and that could hamper e-filing and refund anticipation loans."
"But this could be balanced out by the new tax credits for housing," he said. "A lot of taxpayers will be asking questions of their preparers about energy saving tax benefits, and this could have a positive effect.
Between the two changes, they might balance each other out."
Ernest Zoumot, director of software product management for CCH's Torrance, Calif.-based ProSystem fx, foresees a good season ahead.
"The big trend will be e-filing coming into prominence on the business side," he predicted. "It wasn't part of the original game plan, but it's happening because of a number of factors. The Internal Revenue Service has mandated certain corporations to file electronically, and the e-filing program now allows the attachment of PDF files and other documents for corporations. States are also starting to piggyback e-filing for business returns."
Zoumot sees a strong surge in firms and users that want to go to online professional tax software programs. "Last year we more than doubled the number of firms using the [application service provider] model," he said. "It opens up a whole new arena as far as where employees can be located, and collaboration of multi-office sites, as well as eliminating the need to maintain data files and make application updates."
Jack LaRue, vice president of marketing at Dexter, Mich.-based Creative Solutions, agreed. "E-filing will continue to grow across all entities," he said. "States are mandating that returns must be e-filed, and that's driving up the adoption dramatically. As tax pros become comfortable with it, they're adopting it across their entire practice."
"One of the things we'll be watching closely is the adoption rate of the Web by the tax professional, particularly as they communicate with and provide services to their clients," he said.
"Last year we posted more than 14,000 Web-based client organizers, and saw a completion rate of 35 percent," said LaRue. "Considering that the average completion rate for paper organizers is 10 to 15 percent, that's dramatically higher. Some of that rate may be due to self-selection, but if we can maintain a 25 percent completion rate this year, while we double the number we send out, it will represent a tremendous savings in time and expense for the practitioner."
Although the congressionally-suggested goal of 80 percent return e-filing may not be met by 2007, Mike Lister, chief executive of Jackson Hewitt, expects a steady increase in the number of e-filed returns.
"They went over 50 percent last year, and the fact the states are now mandating it has gotten practitioners onto the bandwagon," he said.
Lister noted that the two hurricane relief bills contain a number of non-hurricane related provisions. "The legislation was passed late in the year, and contained quite a few changes. The Internal Revenue Service is still scrambling to draft certain forms that have changed because of the acts," he said.
Lister said that arrangements with ADP and TALX give Jackson Hewitt the ability to download W-2 information directly into its tax prep software. "The employee doesn't have to wait for the W-2 to come in the mail. He just needs a paystub or PIN number and we can populate the return. It eliminates input by the preparer, saves time and improves accuracy."
A boon for professionals?
Larry Novick, a Holliston, Mass.-based preparer, predicted that more taxpayers will use off-the-shelf tax software.
"I like it when they use their own software, because 99 percent of them don't know what they're doing and end up coming to a professional," he said.
Novick also predicted that more taxpayers will use professional preparers. "There was a surge in the housing market this past year, and most first-time home buyers go to a professional preparer," he said. "Of course, the second year a lot of them say, 'This is easy, let's do it ourselves,' so you lose 20 to 30 percent of them."
"Also, this will be a huge year for e-filing," said Novick. "Massachusetts requires any preparer with 100 or more returns to e-file, so this year I'll e-file 99 percent of my returns."
Jackie Perlman, CPA and senior tax research coordinator for Kansas City, Mo.-based H&R Block, said that the tax law changes will make for "an interesting season."
"We have a number of 2005 tax changes," she said. "We will have to deal with the new uniform definition of a child, the hurricane relief legislation, and quite a bit of planning for the following year. A lot of it will revolve around the alternative minimum tax. There are a number of patches to keep people from falling into the AMT that expire in 2006."
"H.R. 4096 was passed by the House recently," she continued. "It extends the increased AMT exemptions for another year and raises them a bit for inflation. Although this is for tax year 2006, preparers should keep abreast of it, since filing time for many taxpayers is also tax advice time."
She agreed that the change in the uniform definition of a child would create winners and losers. "People who never qualified before now will, and those who did qualify in the past may not qualify now," she said. "But for the basic nuclear family, there should not be much change. It's when you have complicated family situations - various adult relatives, unrelated adults in the house, children moving during the year - then it gets dicey."
Tax preparers who outsource should be concerned with privacy issues, cautioned Bob D. Scharin, of New York-based RIA and editor of RIA/Warren, Gorham & Lamont's Practical Tax Strategies.
"To the extent that tax preparation is outsourced, the practitioner should consider the privacy issues," he said. "This would include having procedures to monitor the services that are provided by the third party. The further you outsource, the more potential problems you have with the non-disclosure agreement. The practitioner should ensure that the client acknowledges in writing that he is aware his data is being transferred to a third party or offshore."
"Preparers should also be aware of their Circular 230 responsibilities and penalties. When you sign a return, you're potentially putting yourself on the hook for practitioner penalties. The thing to consider is that you must exercise due diligence in preparing the return, and that could include questioning clients who provide unsubstantiated requests for claiming large deductions," Scharin said.
"While this requirement isn't new, there's a heightened concern this year," he said. "It's another situation where you should make sure that the employee doing the return you are reviewing and signing is exercising appropriate discretions. For example, the client says, 'I took these trips, they're all business expenses.' The preparer should ask him if the amount is accurate, and if any family members accompanied him."
For some, the filing season will be longer with the new six-month automatic extensions available, according to Scharin. "If they file a lot of extensions, their season will be extended by two months," he noted.
Matawan, N.J.-based CPA Salim Omar has the solution to this. "We're tough on getting things done by April 15," he said. "We don't go in for a lot of extensions. It's one less thing to take care of later in the year."
J. Randy Penn, branch manager of a Fiducial office in Arvada, Colo., predicted that the filing season ahead will be free from trouble for most preparers. "It will be relatively smooth going," he said. "There are no major changes this year, so people should understand where they are now from looking at prior activity, which is a good thing. Big changes are tough for the public to deal with."
While tax law changes drive walk-in traffic to many tax prep offices, Penn noted that is not a part of his business model. "When the public is confused, it drives them in, particularly the bank customers," he noted. "But our offices are not geared toward that type of client."
Penn cited the single definition of a qualifying child as a welcome simplification to the tax law. "That one change should make anyone with children feel better about tax policy in this country. For those models that depend on EIC clients and refund anticipation loans, it may be a challenge, but it's good tax policy," he said. "It makes it easier for those of us in the business to do the right thing for our clients. Where the law is more complex, it's easier to make an inadvertent error and miss an opportunity or take a credit or deduction that shouldn't have been taken."
For example, Penn said, "The definition of child was more restrictive for the EIC than for the dependency exemption. If the preparer counted a child both as a dependent and as a qualifying child for EIC purposes, the IRS could determine later that it didn't qualify for the EIC. It might be 18 months before the IRS got back to you - the taxpayer has to pay back the amount whether the return was self-prepared or done by a preparer."
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