This may be the year when the move toward do-it-yourself tax preparation shifts back to professional preparers, according to Dina Pyron, Global TaxChat leader at Big Four firm EY.
“The more I look at what’s happening, the more I see that people that did taxes themselves in the past using DIY software are having second thoughts about 2020 taxes,” she said. “This is the year they will consider professional preparation because they want to feel comfortable that they get it right. With so many things changed by the CARES Act, the SECURE Act, and the different shelter-in-place rules, they want to take advantage of whatever breaks they can, and make sure that they report and pay tax on the right amount.”
Many preparers see anything but smooth sailing in the offing. “I’m anticipating a very delayed tax season and probably not a very taxpayer-friendly one,” said Ryan Losi, executive vice president of accounting firm Piascik. “Many departments in the IRS are still not operating at full staff or are experiencing extreme delays in processing taxpayer information, such as payments made months ago or requests for information or amended returns that haven’t been processed.”
Moreover, it’s getting more difficult to resolve taxpayer issues due to the delay in processing powers of attorney, Losi noted.
“Without a POA, I can’t speak to the IRS on behalf of a taxpayer. I can’t even start to resolve any kind of issue with regard to notices or mismatches on payment or checks in the mail. The [Centralized Authorization File] Units are experiencing huge delays in processing POAs, and this will create a snowball effect for the filing season ahead. Every week I’m hearing from clients saying they’re getting letters from the IRS about past-due balances from 2019. The letters are incorrect, but I can’t speak to anyone about it.”
For example, Losi cited a client who just received a letter saying they owed $26,000 in penalties on a joint return. They thought they owed twice as much because they received duplicate letters. “On top of that, we know they made a $27,000 payment in July, but the IRS still hasn’t processed it and applied it to their account,” he said. “In any event, they should have an overpayment applied to their 2020 return.”
Situations such as this can place preparers in a difficult position regarding what fees to charge.
“You have to strike a balance,” said Losi. “There are no fixed fees — compliance work doesn’t include handling all subsequent notices that the IRS or state authorities will issue. We do have to charge — we may discount it to show empathy, but clients don’t feel good about paying it because it’s not their fault.”
The CARES Act reinstated the ability to carry back net operating losses, Losi observed. “A lot of business owners have massive losses, and will be amending returns to carry them back. How long will it take to resolve those, when they can’t process a two-page POA? A year or two years is a lifetime when a business needs cash to pay its bills. And if it has to show its tax return to get a loan, the NOL may cause it to be disqualified.”
Nervous about the service
“It doesn’t look as though the IRS is well-funded to handle this next cycle,” Losi concluded. “Practitioners will have another difficult year, clients will be upset, and they may extend the filing season again.”
“The IRS had a pretty tough year and had trouble recovering from the shutdown,” agreed Mark Luscombe, principal tax analyst at Wolters Kluwer Tax & Accounting. “They were getting a black eye for sending out automated notices before getting through their mail.”
A lot depends on what Congress does in the next few weeks, Luscombe indicated. “There may not be a lot of new forms and last-minute changes, so this filing season could begin on time.”
“It may be another remote season,” he suggested. “Taxpayers will need an appointment to see a return preparer rather than just walking in the door. This past year showed the real value of working in the cloud, and it will probably be true again this year. I’m not sure if it will need to be extended again like last year.”
Luscombe can envision both sides of the DIY issue.
“The trend has been to see increasing numbers of taxpayers preparing their own returns,” he said. “The COVID shutdown, with everyone working from home and having trouble going out, may accelerate this. On the other hand, more taxpayers may feel they need professional help because of the complications in the COVID-related legislation.”
A new form that accountants should ask for in preparing returns is Notice 1444, “Your Economic Impact Payment,” Lusbombe said. “Taxpayers should have this form to know what payment they received, and if they are entitled to any credit on their return.”
The IRS mailed this notice to each recipient’s last known address within 15 days after the payment was issued.
Future taxes
Filing season could get very complicated very quickly if the Democrats win both Senate seats in the runoff elections on Jan. 5, 2021, in Georgia, according to Gary Fox, managing partner of the tax business unit at Top 100 Firm Crowe.
“That would give them a majority in both the House and the Senate, and they would be able to pass legislation retroactive to the first of the year,” he said. “If the Republicans win one or both races, it will slow things down. It’s hard to imagine that with the deficits and the money being spent that there won’t be reform in the future, but the speed with which it happens could depend on what happens in Georgia. If the Republicans hold the Senate, it would potentially eliminate any retroactivity.”
Sanjay Agarwal, partner and tax practice leader at Top 100 Firm MGO, agreed: “The runoffs in Georgia will be critical. If the Democrats don’t pick up both seats, then tax planning for the next two years will be in terms of implementation. Assuming they don’t pick up both seats, the scenario we’re looking at is no major tax reform as it relates to the 2020 or 2021 filing seasons, but I would expect some minor tax reform as a result of a stimulus package between January or February. Expect to see some type of tax relief, and possibly some extension of deadlines.”
The focus will be on economic recovery, Agarwal believes: “We’re hoping for some provisions on cancellation of indebtedness such as occurred in 2009.”
Cancelation of debt income was allowed to be deferred over a five-year period for certain debts in 2009 or 2010, with the deferral period beginning in 2014.
“It was a major relief because the debtor could renegotiate the debt and turn it into equity or cancel the debt without any tax impact in the current year,” explained Agarwal. “Beyond that, we’re hoping that PPP loans may get extended, as well as other provisions of the CARES Act, such as those affecting retirement plans and above-the-line charitable deductions.”
“The IRS has said that they’re ready to start on time, which is a credit to them,” said Roger Harris, president of Padgett Business Services. “From a small-business perspective, we’re still hoping for a stimulus bill that will make the accounting easier for taxpayers that received PPP loans and questions that arise about the deductibility of expenses that were paid with PPP funds that were forgiven. Congress can help a lot by passing something that says these expenses are deductible. If they don’t, there are a lot of questions and scenarios that need to be addressed heading into filing season.”
