Although there were delays on issuing 1099s, and some problems have surrounded the telephone tax refund, the 2007 filing season has been relatively uneventful, observers said. The traditionally frenetic period had, at press time, passed its midpoint without any real snags."So far, the season has been remarkably quiet and very smooth," said Teresa Mackintosh, CPA, CITP and vice president of strategic marketing at Thomson Tax and Accounting Professional Software and Services.
Jo Ann Cummings, CPA, product manager at CCH ProSystem fx Tax, agreed. "It's been very busy, but smooth," she said.
E-filing is up on all fronts thus far, as the number of taxpayers filing from their home computers rose 7 percent over last year, according to the latest statistics from the Internal Revenue Service. Overall, e-filing has increased by nearly 4 percent since last year. In addition to the 7 percent increase in self-prepared e-filed returns, e-filed returns from tax professionals climbed by more than 2 percent, to 78 percent of filed returns.
Jorge Olavarietta, senior product manager for Intuit's Lacerte line, confirmed the increase in professionally prepared e-filed returns. "ProSeries and Lacerte have nearly a million more returns filed electronically this year over the same period last year - more than a 10 percent increase," he said.
PHONE TAX GLITCH
Bill Fleming, managing director for Big Four firm PricewaterhouseCoopers' Private Company Services, singled out the telephone excise tax rebate as a factor complicating returns.
The excise tax refund was designed to refund previously collected long distance telephone taxes from between Feb. 28, 2003, and Aug. 1, 2006. Individuals may claim a standard refund amount between $30 and $60, based on the number of exemptions claimed on their return. Some tax software has not taken this into account.
"Most of the software didn't automatically take it, and it's the one thing clients are looking for - they'll know if we make a mistake and they don't find it on their return," Fleming said.
Dan Meehan, tax partner in J.H. Cohn's Tax Advisory Services Group, agreed. "It's such a small amount on anyone's return, but a substantial number of people haven't claimed it," he said. "It's one of those one-year experiences that will generate more questions than it's worth, but it's still something you shouldn't leave on the table."
Changes in the education credit for college students have also complicated returns, according to Fleming. "We used to simply take the child off the parents' return so the kid could claim the credit," he said. "But now there's not a complete phase-out of the personal exemption on the parents' return, so you have to compare their return with the kids' to see if you can save by doing it separately."
CONFUSING CREDITS
Preparers also have to pay attention to the hybrid car tax credit, according to Fleming. "They have to know when they bought the car, because the credit begins to phase out once the manufacturer sells 60,000 qualifying vehicles," he said. "This happened for the Prius toward the end of the year. This credit and other energy credits are no good against the alternative minimum tax."
"Another confusion can come from a gift directly to charity from an IRA," he said. "There's no charitable deduction, but it's treated like a regular taxable distribution, and then the preparer has to sort it out."
"So now you have retirees taking the distribution and you've got to ask them whether it went to charity or not, and did they exclude it from income," Fleming added.
Meehan noted that 1099s and K-1s have created some problems. "The IRS put out a release encouraging partnerships and other pass-throughs to do a better job on issuing K-1s," he said. "It's very timely because practitioners have seen some inconsistency in the accuracy and completeness of those forms in the past couple of years. Along with 1099 correction delays, the K-1 is a big source of information for taxpayers, as more and more are investors in partnerships."
TARDY 1099S
Kristy Rempalski, CPA, a Tax Group executive in the Grand Rapids, Mich., office of Crowe Chizek, said that a number of the firm's clients have received notices from their brokerage houses that statements, including Form 1099 information, will be issued late this year. "The brokerage houses are getting permission to issue the statements later than the normal January 31 date because the government goal is to reduce the number of amended 1099s," she said.
While improved software technology has increased efficiency during filing season, Rempalski still works 70-hour weeks. "I get to the office between 5 and 5:30 in the morning and work straight through the day," she said.
Since her day-care center is only open on weekends, Kristy brings her two-and-a-half-year-old daughter into work on Saturdays, where Crowe Chizek provides its own day care.
Bob Scharin, RIA senior tax analyst at Thomson Tax and Accounting, noted that the intent of waiting to issue 1099s was to reduce the number of corrected forms, but he cautioned that they may still be amended. "The return preparer may still be in a quandary of whether to hold off on sending in the return, since the 1099 can still be amended," he said.
Alan Osmolowski, head of the Tax Department at regional New England CPA and business advisory firm Carlin, Charron & Rosen, said that although some 1099s were late, it didn't adversely impact his filing process. "Sophisticated high-net-worth individuals typically need some additional piece of information such as a K-1 or 1099," he said. "It's less a concern for us, since these returns usually end up getting extended."
Osmolowski said that his office was better able to handle the pressures of filing season because of its move toward a paperless system.
"We started to go paperless five years ago," he said. "With our offices in multiple locations, it gives us the ability to use technology to move work around the various offices."
CLOTHING DONATION RULES
The new requirements on donations of used clothing have caught some by surprise, according to PwC's Fleming.
"We have to explain that the clothing needs to be in good condition, and we're still bugging the charities on their 'thank you' notes. Many of them leave out the 'goods or services' language - they're supposed to give the amount of the deduction and say that no goods or services were provided."
Some tax preparers are erroneously advising donors that they are no longer able to claim a deduction for items donated to charities, according to George W. Kessinger, chief executive of Goodwill Industries International. While the Pension Protection Act of 2006 specifies that the goods must be in good used condition or better, donations that fall into this category are still deductible.
Although the legislation doesn't define "good used condition or better," taxpayers should keep detailed and specific records of donations.
The PPA also requires donors who make a charitable contribution of money to keep a canceled check, bank record or receipt from the recipient organization, showing its name, the date of the contribution and the amount, noted Kessinger.
INVESTOR ALERTS
A number of corporate actions might prove confusing to investors during this year's filing season, according to Stevie Conlon, senior tax editor for CCH Capital Changes.
"By identifying what we believe are the most complex corporate actions, we hope to assist investors in deciding how their taxes will be impacted," she said. "The No. 1 issue during the past year concerned Starwood Hotels."
Host Marriott agreed to buy 38 hotels from Starwood Hotels & Resorts in a deal that required Starwood to separate its paired shares and exchange one of the component shares for Host Marriott common stock and cash, she explained. "So there were two events - the pairing event and the exchange of half the unit. The de-pairing is not taxable, but the exchange is."
"Since the paired shares had not traded separately, the tax basis of each component was not readily ascertainable," Conlon said. "Holders need to know the tax basis of the exchanged share in order to compute the amount of gain or loss recognized on the exchange. They essentially had to look back to when they acquired the paired shares to determine the tax basis for each component share."
Meanwhile, U.S. companies that are required to e-file under new mandates are spending more time and money on compliance than before the electronic process was made mandatory, according to a new survey by Deloitte Tax LLP.
The findings, based on a survey of 312 senior corporate tax executives, were primarily from companies with annual revenues exceeding $1 billion.
"Clearly, the e-filing mandate had some challenges in its first year, but knowing that the mandate applies to your company, and taking some preparatory steps, can help avoid potential stumbling blocks," said Nathan Andrews, the national tax partner leading Deloitte Tax's E-Filing Project Management Office.
