This may well be the year that the do-it-yourselfers make a serious dent in the practice of professional preparers. With fewer itemizations and simpler returns, the number of self-filed returns using commercial software could mushroom — and that will have differing impacts on accounting firms and smaller preparers, according to Bob Charron, tax practice leader at Top 100 Firm Friedman.
“In watching late-season football games, I saw an abundance of commercials for Intuit and H&R Block showing people snapping pictures of tax documents and then engaging in family activities such as going to the beach. So there’s a significant uptake in terms of getting people to do their own taxes, or going to H&R Block or Jackson Hewitt,” he said. “That’s fine with us, because we like to devote our expertise to more complicated situations where we can bring more value-added. We’re not just in the compliance business, we’re in the compliance and advisory business.”
Allan Boress, a Central Florida-based CPA, agreed. “I have a strong hunch that more people will be doing their own returns this year than would normally be the case,” he said. “This is due to ever-increasing advertising by the usual suspects, dramatic simplification of the 1040 tax return since Schedule A itemized deductions have been eliminated for so many people, and word of mouth with people telling their friends how easy it was to file their own return last year.”
“A lot of CPAs would agree that last year was the worst tax filing season in their professional career,” Charron said. “But it would be a mistake to think the upcoming season will be easy just because everyone is now familiar with the Tax Cuts and Jobs Act. There may be a slight reduction in the complexities we face, but all in all it will be a challenging busy season.”
One of the ways Charron intends to meet the challenges of the season is by increasing the firm’s outsourcing of returns. “We just don’t want to compress our staff with all the rigors of tax season,” he said. “We’ll be doing both domestic and international outsourcing increasingly this year. It’s our way of efficiently doing data input for tax return obligations.”
One issue that won’t be much of a factor is Opportunity Zone investments, Charron indicated: “Only a small percentage of our clients have entered into investments in Opportunity Zone Funds.”
Year-end surprises
A December surprise will affect the filing of some returns this year, said Bill Nemeth, president and education chair of the Georgia Association of Enrolled Agents. “On December 20, Congress surprised everyone when the long-overdue extenders and the SECURE Act were tacked onto the Consolidated Appropriations Act of 2020.”
“Among the individual extenders, the AGI floor now goes back to 7.5 percent of AGI. Above-the-line tuition and fees deductions back, and are up to $4,000 of qualifying tuition. They also include a deduction for PMI — private mortgage insurance — as qualified residence interest and the exclusion of qualified principal residence indebtedness from gross income,” he said.
“The extenders may not affect a lot of people, but if you’re one of them, it’s very important to you,” said Mark Steber, chief tax officer at Jackson Hewitt Tax Services. “And since they’re retroactive to the day they expired, it may be worthwhile to consider amending a return to take advantage of a deduction that had expired but is now reinstated.”
“After tax season, many companies offer a free look-back for taxpayers,” he said. “It’s a good opportunity to attract new clients by offering a free review, which should include a check of the extenders.”
“Most of the extenders were extended retroactively to 2018, so there’s a potential for amended returns if the dollar amount is significant enough,” said Anthony Licavoli, senior manager at Top 100 Firm Rehmann. “The two main ones for individuals were the tuition and the medical expense deduction. The extenders on the business and energy credit side are industry-specific.”
“The Work Opportunity Tax Credit was extended,” he added. “It provides a per-employee fixed credit to an employer for hiring individuals from certain groups designated by the Treasury Department that have significant employment barriers, such as veterans and ex-felons. We have a lot of clients that take advantage of the credit, especially in jobs that typically have a high turnover, such as franchises.”
“There’s a special provision for film, television and live theatrical performance to allow the expensing of a lot of the costs immediately,” Licavoli said.
One of the items not extended was the electric car credit, Licavoli noted. “Tesla lobbied to get it in, because they had already reached the cap, but they didn’t extend the number of units for the cap. Why incentivize people to buy something when there is already a huge demand, since the reason for the credit is to affect behavior? And at a sale price of $100,000, there’s a question as to whether the credit is really necessary.”
The legislation included some TCJA “fixes,” Licavoli indicated: “The TCJA had an unintended consequence of high tax bills for some recipients of military survivor benefits and certain other income.” The SECURE Act, part of the spending bill, repeals the changes made by the TCJA. “They just scrapped the TCJA changes so it reverts back to the way it was pre-TCJA,” said Licavoli.
The SECURE Act also makes major changes for 401(k) plans, and IRAs, and creates a new pooled multiple employer plan, according to Livavoli.
“The big change for individuals is that now there is no maximum age cutoff for making IRA contributions, as long as they are otherwise eligible, effective Jan. 1, 2020,” he said. And it raises the age for required minimum distributions, from age 70 ½. to age 72.
“The savings vehicle for education — 529 plans — can now be used for apprenticeships, and to repay student loans,” according to Licavoli. “And you can now make distributions from a retirement plan penalty-free, not tax-free, for the adoption of a child,” he said.
Risks remain
Filing season still has its risks, according to Rickard Jorgensen, president and chief underwriting officer at Jorgensen & Co., administrator of professional liability insurance program CPAGold. “Tax errors remain the most frequent category of professional liability claims made against CPAs,” he reminded preparers. “About half of these arise from improper tax treatment or advice, and about a quarter arise from actual filing errors.
“Often the source of the error is a lack of information from clients or bad information from clients,” he said. “Regular and effective communication with clients is key to risk avoidance.”
Other issues Jorgensen has seen include:
- Missed deadlines and poor diary systems have been problematic, especially when the ability to refile is passed.
- Electronic filings have caused problems when the CPA omitted to check whether a filing was received and acknowledged by the IRS.
- There have been some software issues in the past year, so CPAs should ensure all tax preparation software is current.
- A recent trend is the use of foreign subcontractors for tax preparation work. The concern is that often these third-party vendors do not have adequate professional liability insurance, if any, and attempt to shift the burden for malpractice claims to the local CPA via indemnification clauses.
“The good news is that the number of claims arising from fraudulent tax filings has diminished as many CPAs have improved their cybersecurity,” Jorgensen said. “Likewise, the IRS has implemented better security protocols to protect taxpayers.”
