Tax season promises opportunities — and obligations
With the filing season just begun already labeled “1986 on steroids,” practitioners face tremendous opportunities — and obligations — to bring their clients up to speed on a host of developments spanning the tax world: the Tax Cuts and Jobs Act provisions that are just now affecting tax returns, the state responses and varying approaches to the act, and the varying state approaches to the Supreme Court decision in Wayfair. And many practitioners are bracing for an anticipated increase in clientele. At an Accounting Today webinar in mid-January, attendees were asked how they felt the TCJA would affect their practice, and more than 80 percent responded that it would increase the size of their practice due to its complexity.
And millenials, commonly thought to be the most digital and tech-savvy generation, actually prefer to use accountants rather than doing taxes on their own through an online service, according to a Captify, a search intelligence company. In their recent survey, 66 percent of respondents said that they prefer to use accountants, versus 34 percent who will use DIY software. The data was collected from billions of monthly searches related to tax filing; first-time filers more often searched for tax deductions and exemptions, whereas experienced filers more often searched for tax credits.
Of course, do-it-yourselfers looking for deductions this tax season will be hard-pressed to find the traditional deductions, since many were repealed or made moot by the TCJA and its nearly doubled standard deduction.
“That’s the first thing taxpayers need to focus on, is whether to take the standard deduction or itemize,” said Dustin Stamper, a managing director in Grant Thornton’s Washington National Tax Office. “Tax reform has changed the math on this because the standard deduction itself is nearly doubled and a lot of deductions have been repealed. IRS data shows that in the past, 70 percent of filers took the standard deduction. That is expected to jump to over 90 percent. Millions of taxpayers who are used to itemizing will now be taking the standard deduction.”
“The second thing they need to understand is how much tax they will actually pay this year,” he said. “A lot of people will be surprised. It’s not very easy or intuitive to figure how everything comes together to affect their overall bottom line. People may have a decent understanding of the new $10,000 cap on their state and local tax deduction, but it’s really difficult to understand the impact of other changes without running the numbers. These are things like the movement of the tax brackets, the increase in deductions for the Alternative Minimum Tax, and increases in some of the high-income phaseouts.”
Beyond the shutdown
Given the government shutdown, one of the biggest things about this tax season is that it started at all, according to Roger Harris, president of Padgett Business Services. “We don’t know yet what it’s immediate effect will be on refunds,” he said. “One of the last remaining hurdles is guidance. We were hoping for additional IRS guidance on Section 199A [the pass-through provision] before we got too far into filing season, but with the shutdown that’s not a certainty. And the extenders weren’t passed — in the present atmosphere, it’s unlikely that they will be. Most of them are obscure, but they’re not obscure to the people who get them.”
The biggest issue for many filers will be the SALT cap, according to Lisa McCann, special counsel at law firm Withers Bergman: “And although it’s not part of the TCJA, the postcard return will be something that taxpayers will have to wade through. It’s anything but simple.”
This season will be especially challenging with the budget not passed and IRS services slowed, observed Deb Rood, a CPA and risk control consulting director at CNA, the underwriter for the AICPA professional liability program. “One of the challenges that practitioners will face is in convincing clients that just because the government is having problems doesn’t mean that filing season isn’t going on, so we still need information from them on a timely basis,” she said. “We don’t want a bigger crunch than we have to at the end. And from a professional liability standpoint, preparers are more likely to make mistakes when there is a crunch at the end. That’s because CPAs are tired and don’t have enough time to review returns. So they may miss something that they otherwise would have caught.”
“Most CPAs can remember a time when they looked at a return for a prior year and thought, ‘Who made that silly mistake?’ and then looked and saw that it was them,” she continued. “And the date of the return was late in April after 10 p.m. So the more work we can push to early in the season, the better service we can provide our clients and the less likely we are to make mistakes.”
“There are a lot of areas where there isn’t any guidance, and it will fall on CPAs to advise their clients of this,” said Rood. “They should advise their clients of the actions available and the consequences of each position, and then have the client make the decision on how to proceed. And they should [note] the discussion, then send the client an email summarizing the discussion. It makes billing for the additional service easier, and in the event of a professional liability claim, it documents that it was the client’s decision, not the CPA’s decision.”
Uproar in sales tax
“The Wayfair decision is another area that CPAs need to discuss with their clients this busy season,” said Rood. “Taxpayers have to collect and remit sales tax in other states when they have a significant economic nexus in the states. If the CPA doesn’t inform their clients about this potential exposure, and the states later find the client, the client may come back to the CPA and say the CPA should pay the tax plus the penalties and interest. The client will say, ‘I can’t collect and remit from my customers now because it’s too late and you failed to advise me to do this when I made the sale.’ I think that this will result in some large claims against CPAs.” So what should accountants do? “They should tell all of their clients about Wayfair via a newsletter or alert,” she said. “And CPAs should know that it’s not always obvious from the face of the return that someone has economic nexus from selling over the internet. Their child may be selling something such as small pieces of jewelry. Even though the price is low, if it exceeds a specified number of transactions it will create economic nexus and a corresponding obligation to collect and remit sales tax.”
“There are many things that we need to do this year, that we need to do on the tax return to take advantage of the 2017 act,” said Tom Wheelwright, CEO WealthAbillity. “For example, most CPAs have clients whose gross sales are less than $25 million for the past three tax years. Those clients can now switch from the accrual method of accounting to the cash method. And just as big is the fact that they can now switch from treating inventory as inventory and a capital item and treat it as non-incidental materials and supplies. If they make that change, they can deduct currently all inventory items $2,500 under the de minimis rule.”
“Another area CPAs must address is bonus depreciation,” said Wheelwright. “Bonus depreciation for real estate is so big that we may choose not to take all that we can, but if we choose that we have to elect out of it ... But the biggest issue with the government shutdown [which as we go to press had not been resolved] is IRS notices. We’re getting notices from the automated computer system and there’s no way to resolve them. For example, your client may get a notice of intent to levy which they believe is incorrect. How do they fight it? There are situations where you have to help the client decide whether to pay something they don’t think they owe, in order to avoid a tax lien.”