Despite a number of last-minute tax law changes — highlighted by the Alternative Minimum Tax “patch” that will inevitably delay the processing of some returns — most observers expect a smooth filing season ahead.“The late passing of the Alternative Minimum Tax legislation had a tremendous impact on the start of tax season,” said Jo Ann Cummings, product manager of CCH’s ProSystem fx. “It caused the IRS to delay the filing of returns with certain forms until February 11.”
“We worked closely with the IRS to stay on top of developments, and we did a lot of pre-work to be ready as soon as possible after they made their decision. If anyone tries to export an affected return prior to the date the IRS can accept it, we’ll hold it until it qualifies,” she said. “The biggest impact will be on people who are used to getting their RAL refunds early in the year.”
The major problem will be the build-up of e-filing demand, said John Vora, chief executive of Randolph, N.J.-based TaxSimple. “By the time February 11 comes, there will be a huge amount of volume to be submitted on a single day,” he said. “If the IRS has a hiccup, then it could be a mess, but I don’t expect it because they will have had nearly a month of experience by then.”
“The busy season began with year-end planning, so the delay in passage left us with a very short amount of time to do a tremendous amount of work,” said Denny Linden, a director at the Cleveland office of CBiz Accounting, Tax & Advisory Services. “We’ve all become software-dependent — it would be horrible to make AMT calculations by hand. By delaying the AMT patch, it causes a backup in the process.”
Even pre-season tax advice might be subject to a new set of preparer penalties, noted Richard Wehrheim, tax partner at RSM McGladrey’s Davenport, Iowa, office. “The penalties are imposed on practitioners for positions that are being reported on a return that do not meet the more-likely-than-not standard and are not properly disclosed. Historically, prior to enactment I could sign a return where we could support a position with the realistic possibility of success, and the IRS only required the preparer to meet the realistic possibility standard to sign the return,” he said. “Today, though, Code Section 6694 requires that the signing practitioner must have a more-likely-than-not possibility of success; otherwise, the position must be disclosed on the return. If it’s not properly disclosed and I still sign the return, I would be subject to penalties this year, which a year ago I would not have because the burden was much lower.”
Wehrheim noted that the penalty applies not only to preparers who sign the return, but to non-signing preparers as well. “Any other advisor, including an attorney or CPA that gives advice that results in a position being taken on the return, is considered a non-signing preparer, so even the advice we gave out in November and December fell under these rules,” he said. “This will cause preparers to do a lot more due diligence up front, and will cause them not to take positions on returns that they otherwise would have.”
Since taxpayers are held to a lower “realistic possibility” standard, this can create a conflict of interest, noted Bob D. Scharin, RIA senior tax analyst at Thomson Tax & Accounting. “This could happen because the preparer wants a position disclosed on a return in order to avoid a potential preparer penalty, but clients would rather not disclose anything because their standard has been satisfied,” he said.
“The problem in processing returns apparently will not be as much as had been anticipated,” said Scharin, “But there will be a delay until February 11 for taxpayers using five forms related to the AMT legislation. It’s interesting that the delay doesn’t affect all taxpayers who will owe AMT, but it affects those who claim certain credits.”
“The people who claim those credits might not owe any AMT,” he continued, “but they’re the ones hit with the delay. These include credits like the education credit and the residential energy credit, so the affected taxpayers are not necessarily high-income people — in fact, high earners are not eligible for the education credit. It has to do with whether these credits can reduce the AMT.”
Scharin stressed the importance for firms to train their staff correctly both for the changes in the law and in using the relevant tax return preparation software. “Because there are some other changes in the law this year, it’s important to use a client questionnaire that solicits all relevant information up front,” he said. “That way, clients won’t be coming back after the practitioner has completed the return saying they neglected to give you important information.”
“For instance,” he said, “tax year 2007 is the first year for the mortgage insurance deduction. It permits people who pay a premium in 2007 to deduct those premiums as if they were mortgage interest. The other thing that could be annoying to explain to clients is that cash charitable contributions are not deductible unless they are supported by a cancelled check or some other form of bank receipt or an acknowledgement from the charity. Money thrown into a collection plate is no longer deductible.”
For future planning, Scharin noted that the Kiddie Tax would apply to older children starting in 2008. “When doing 2007 returns, it’s a good idea to alert clients that the tax will apply through age 18, or up to 23 if the child is a full-time student, in 2008.”
Dave Levine, a Reno, Nev.-based enrolled agent, sees real problems for practitioners with the new Circular 230 standards. “If we don’t ask the right questions or dig deep enough, or we’re misled by a client, there could be a problem,” he said. “For example, on the Form 843 Claim for Refund and Request for Abatement, if the service turns this down there’s no appeal. If they turn it down in 2007 that’s the end, but if they turn it down in 2008 the preparer of the claim for abatement is subject to a 50 percent penalty of the amount claimed for abatement.”
Staffing concerns are at the forefront for most practitioners as they prepare for tax season.
“We’d like to squeeze in one or two more clients. If someone gets sick or changes jobs, we’ve got problems,” said John Cameron, a partner in Torrance, Calif.-based Brigante Cameron Watters & Strong LLP. “It helps that the FIN 48 issue has gone away for us until next year.”
Cameron credits the efficiencies gained using workflow-solution software for easing some of the difficulties associated with tax season. “We’re very happy with it for scheduling and tracking and saving time,” he said. “We’re trying to have an enjoyable place to work and minimize overtime. Most clients are willing to work with us. In addition, we’ve developed our own templates over the past few years to help us in planning and setting up files, so we’re looking forward to a good season.”
Joseph Manzelli Jr., a director with New York City-based Fuoco Group LLP, also cited workflow software as an important improvement for this tax season. “It helps in our progression toward a paperless office,” he explained. “Now we can have an individual prepare a return in our Florida office, and review it here.”
Kenneth Kirkland, managing partner of Braintree, Mass.-based KAF Financial Group, foresees a smooth season ahead, in part due to a program he instituted to make tax season less taxing on employees.
“The busy season is still 75 days, and more than 70 percent of the client base will be touched during that time,” he said. “I met with our partners two years ago and told them that if we don’t look to make a change in creating a better quality of life for our employees, we won’t be around in a few tax seasons. We created a program we call ‘Project Life’ to help our employees better manage their workflow and still have time to relax during the season.”
“Last year we had our best season ever,” he said. “We work only four Saturdays during the tax season. On Monday and Tuesday we work late, but Wednesday night is family night and we shut down at 5 p.m. On Fridays, we close at 5:30 and we don’t open until Monday. The program not only helps us retain the staff we have, but it’s a great recruiting tool as well.”
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