Tax law changes - both in volume and complexity - will make this season more confusing for taxpayers and preparers alike.
"Taxpayers will be in for a surprise at how much is new," revealed Barbara Weltman, a New York tax attorney and author of J.K. Lasser's tax books. "They may think that because they didn't buy a home or a car, their returns will be simple. But there's so much there that could complicate matters."
"For example, the Making Work Pay Credit, which was implemented by changes in the withholding tables, could result in under-withholding for a variety of reasons: They had two jobs, their dependent had a job and got a credit they weren't entitled to, or both spouses worked and each got a full credit," she explained. "They will be shocked, especially if they received big refunds in the past and are counting on one for this year."
For businesses, she observed, it's just as complicated. "The expanded five-year net operating loss carryback has been enhanced and will carry into 2010. Previously, only small businesses could use it, but nearly all businesses will be able to use it for 2008 and 2009 NOLs," she said. "They have to sit down with their advisors and determine if it's a good idea to carry the loss back that far."
"There's so much out there for tax professionals to master and for consumers to deal with, and we're not finished yet," she noted. "There may be legislation passed early in the year with some retroactive changes. The landscape is continually changing, making it challenging to keep up."
The IRS has hired so many new examiners and agents that it is reasonable to anticipate the number of audits will go up, she added. "People should be very careful and vigilant with their records. They should make sure they have all the proof to back up the positions that they will take on their return."
For those who might be affected by under-withholding as a result of the Making Work Pay Credit, CCH principal tax analyst Mark Luscombe recommended trying to pump up their January 15 estimated tax payment to help compensate. "Anytime there's something new like the First-Time Homebuyer Credit, it creates confusion," he said. "When the credit is refundable, it can lead to a potential for abuse. For 2008, there were errors because people had too much income to take the credit. There will likely be problems with people taking the credit for 2009, both purposeful and otherwise."
Ryan Himmel, CPA and CEO of online tax and financial forum BIDaWIZ, agreed. "Dates are crucial on the new credits, especially for the First-Time Homebuyer Credit," he said. "People aren't always forthcoming with the correct information. It's important that the CPA do extra due diligence when it comes to credits and deductions this year."
Practitioners should also be aware of a new mandatory e-filing requirement in the November legislation, warned Luscombe. "While it's not effective until next year, it will require nearly all professional preparers to e-file," he said. "The only ones excluded are those who prepare 10 returns or less. There's no guidance yet on exceptional situations, such as a last-minute computer crash or some other circumstance that precludes last-minute filing."
LOSSES AND DEBT
The expanded NOL carryback period is the major law change that will affect 2009 returns, said Natalie Tucker, manager in the national tax practice at RSM McGladrey. "The election must be made by the due date of the return for the last year beginning in 2009," she said. "Fiscal-year taxpayers actually have three years to make the election because they can have a fiscal year ending in 2008, 2009 or 2010."
In addition to the NOL carryback, cancellation-of-debt or COD income will be an issue for this filing season, maintained John Lanza, tax service coordinator at RSM McGladrey's New York office.
"This will be an issue that people will miss," he said. "The rules have changed. If the lender didn't actually cancel the debt, but changed the terms or modified the debt agreement, that would be cancellation, and can be included in income over a five-year period. For example, you're in arrears and the bank says 'We'll help out. Take the interest that you haven't paid in six months and stick it on the back end.' That's COD that you have to pick up as income in 2009, unless you elect to include it."
Under new Code Section 108(i), the deferral applies to discharge of indebtedness from re-acquisition of debt. A significant modification of a debt, which includes a change in the interest rate and a deferral of principal and interest, is treated as an exchange of the old debt for new debt.
"With all the bankruptcies and restructuring over the past year, this is an important provision for filing season," said Lanza.
MORE CLIENT FACE-TIME
This tax filing season could be like those of a number of years ago, observed Scott Van de Ven, of Cape Girardeau, Mo.-based Van de Ven. "My expectation is that there will be tinkering with the tax law into the filing season," he said. "Things expired and then were re-instated during filing season. And when they make provisions retroactive, it usually causes some headaches."
Van de Ven said that he is already spending longer hours with clients who are concerned with the economy. "They want more of your time than they get by simply dropping off information," he said. "They want to meet with the accountant and ask questions."
"There were some significant changes this year, after the last couple of years where there weren't that many," said Rob Stelzer, a Beverly Hills, Calif.-based CPA. "Compared to most of this decade, practitioners need to make sure they're up to date on the changes."
For those of his clients who have been adversely affected by the economy, Seltzer suggested considering a conversion of their regular IRA to a Roth IRA. "If they can do it without paying much tax, it might make sense to do it now," he said. "It has to be considered on a case-by-case basis."
The IRS is rolling out Modernized e-File to eventually replace the current e-filing system, said Attila Taluy, chief executive of FileYourTaxes.com and ProTaxPro. "Preparers won't notice the difference when they file, but acknowledgments will be much faster if the MeF system is used. In addition, the MeF acknowledgments will be much more precise," he said.
