The 2011 tax season has picked up steam after a slow start.
But as it heads toward the midpoint, however, it has presented its share of problems for most preparers.
"This has not been a smooth filing season up till now," said Beanna Whitlock, a San Antonio-based preparer and former director of public liaison for the Internal Revenue Service. "There were tax law changes on top of the PTIN registration issue, on top of mandatory e-filing," she said.
For some preparers, the online Preparer Tax Identification Number registration was simple and flawless. For others, it was a real hurdle, Whitlock said. "If your Social Security records didn't match the information you put on the application, you had a problem," she said. "My PTIN was in the name of 'B. Whitlock,' so the system was locking me out."
The same problem happened with those preparers whose records contained a clerical error, Whitlock noted. "My understanding is that there were about 3,000 PTINs that were requested where the date of birth did not match the Social Security records. In those cases the IRS could not issue a PTIN until the records were changed."
Whitlock said that the IRS is aware of the problems that practitioners face: "They informed practitioners that if they had applied for a PTIN before the end of the year but had not heard back, they could go ahead and use their existing PTIN or SSN. This is fine, except that tax preparers are the most compliant people on the planet. They like to play by the rules, and it raised the anxiety level for those who had to go this route."
The mandatory e-filing requirement, in place for preparers who will file 100 returns or more this year, is another potential snag. "Taxpayers have the right to opt out, but if they do the burden is on the preparer to have them sign an acknowledgment, and the preparer becomes responsible for filing it," she said.
The last-minute tax law changes, including the extension of the Bush tax cuts, affected the start of the tax season because the IRS had to have time to react to the late changes. The result is a compression of the filing season, which most taxpayers weren't aware of. "People were upset about not being able to file until mid-February, and it caused practitioners a backlog because the ones they might have filed in late January or early February were delayed," said Whitlock.
In addition, the changes affecting refunds had to be explained, she noted. "For example, taxpayers that got refunds because of the Making Work Pay Credit last year won't be receiving it this year. They don't understand that it was replaced with a reduction in the FICA taken out of their paychecks. It's a bad economy, and people who were expecting refunds are upset over that," she observed.
Mike Solomon, tax partner at the Philadelphia office of EisnerAmper, singled out the same issues. "The late-breaking legislation and the delay in filing that it generated caused us to be in a holding pattern for the first part of the season," he said. "And if a taxpayer elected to opt out of e-filing, you had to have them sign a statement. The bottom line is there's pressure on tax preparers to e-file individual returns, and ultimately it will spread to other returns as well."
CONFUSION OVER CONVERSIONS
Conversely, some taxpayers have been surprised that they are not able to file electronically this year, according to Barbara Weltman, a New York-based tax attorney and contributing author of the J.K. Lasser tax books. "For example, if they're claiming the First-Time Homebuyer Credit or the adoption credit, there are certain papers that have to be filed with the return," she said.
There is still much confusion over Roth IRA conversions from 2010, she explained. "Taxpayers are confused about whether they are still able to make contributions if they made the conversion. The answer is, they can. But there is still an income limit on contributions, even though there's no income limit on the conversion."
Another question on Roth conversions is where a husband and wife both converted to a Roth IRA. "Do they both have to use the deferral or can they make separate elections? The answer is we don't know," said Weltman. "There's nothing in the code that specifically prohibits it, but we really don't know."
With refund anticipation loan providers HSBC and Republic Bank on the way out of the RAL business due to pressure from different federal agencies, some taxpayers will be shocked that they have to wait extra days for their refund. Still, most of them do not mind, maintained Kansas City, Mo.-b
ased H&R Block preparer Elaine Smith. "When you tell them about the money they're saving, they don't get upset," she said. "They can get their refund via a refund anticipation check in eight to 15 days. It's not a loan, but they can have the refund preloaded on a debit card. It's essentially for people who don't want to pay out of pocket for their tax preparation."
MORE INTERACTIVE FILERS
As a result of the poor economy, many more taxpayers want to get involved in their returns, Smith noted. "More people want the return process to be interactive," she said. "In previous years, they were content to fill out a sheet and drop off their information. Now they want to sit down with the preparer, tell their story, and ask questions. For example, they may have heard on the news about the energy credit. They want to know if they qualify, and what changes are in effect for next year."
Overall, tax filing is down compared to the same point in the season a year ago, although Liberty Tax filing is up by double digits, said Liberty chief executive John Hewitt.
Meanwhile, the Federal Deposit Insurance Corp. has told Republic Bancorp, the main RAL provider for Liberty and Jackson Hewitt, that its RALs are "unsafe and unsound" without a debt indicator from the IRS.
Hewitt perceives the effort to get rid of RALs as similar to government efforts during the Prohibition era. "Regulators are trying to do the same thing with RALs," he said. "They've been around for as long as there have been refunds, but for the last 23 years they were legitimate. Prices for a RAL came down until last year they were at a historic low."
"There have always been people who live paycheck to paycheck. They have disasters in their lives - breakups, health problems, fire or theft or something that causes them to need money when they don't have access to credit," he said. "Before e-file and RALs, they would go to loan sharks or liquor stores. It looks like we may go back to those times."
Although the new cost-basis reporting rules don't cover this year's returns, preparers who haven't already explained them to their clients should do so now, said Stevie Conlon, CPA, Esq., senior director and tax counsel at Wolters Kluwer Financial Services.
The rules take aim at the practice of deciding after the fact what stock was sold where an investor holds different lots of the same stock, each with a different cost basis. For example, an investor holds three lots, with a cost basis of $50 for the first lot, $70 for the second lot, and $100 for the third lot. If shares are sold for $90, the investor might decide at a later date which ones were sold - those with the high cost basis, creating a loss, those with the medium cost basis, creating a small gain, or those with a low cost basis, creating a larger gain.
"Starting this year, investors have to decide what they're selling, and communicate this to the broker immediately," explained Conlon. "You have to identify the lots that were sold no later than the settlement date of sale."
"Next February, investors will receive a Form 1099-B showing the cost basis under that rule," she said. "It will show the cost basis that was communicated to the broker by the settlement date, or the broker will be required to use FIFO. If what you put on your tax return doesn't match, it will be obvious that you picked a different method after the fact. There will be taxpayers that are unsatisfied with both their broker and their tax advisor."
The issue should necessitate a closer relationship between investors and their tax advisors. "It requires getting tax advice on a recurring basis, almost in real time," said Conlon. "That's very different from an advisor's normal involvement with a client at year-end planning sessions and tax return time. The advisor has to be involved at the time of the trade, and that's significant."
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