The filing season currently underway is the second season following the changes brought by the Tax Cuts and Jobs Act, and is naturally going somewhat smoother than last year at this point, according to Tom Wheelwright, a CPA and CEO of WealthAbility.
“We know the forms have already changed from the 2018 filing season, beginning with an entirely new form for the 20 percent pass-through deduction,” he said. “The IRS has also added new questions and changed other questions.”
“Clearly, the IRS is asking the preparer to do more work on their end to help ensure compliance by taxpayers,” he continued. “The commissioner has made it clear that he believes preparers are the first line of compliance for the IRS — it appears he believes it is the preparer’s responsibility to assist the IRS with their compliance responsibilities.”
Ed Zollars, a CPA with Thomas Zollars & Lynch Ltd., and an instructor and lecturer for Kaplan Financial Education, agreed, citing Form 8867, the paid preparer’s due-diligence checklist: “The requirement for these was added by Congress. The virtual currency question on Schedule 1 may give the perception that the IRS has decided to move compliance questions to preparers.”
A new question on Schedule 1 asks the taxpayer whether or not they received, sold, exchanged or otherwise acquired a financial interest in virtual currency during 2019.
Zollars noted that millions of gamers would have been subject to the disclosure requirement if they received “Robux” or “V-bucks” in the video games Roblox or Fortnite. The IRS website, since updated, originally listed them alongside bitcoin as virtual currencies.
“Most clients know about bitcoin,” he said. “But other than the gaming explanation, if I have to explain cryptocurrency to clients, the odds are that they don’t have it.”
“Things have been calmer this year,” Zollars added, “mostly because the software is not in flux as much as last year at this point. We’re not getting retroactive changes as a result of the extenders that passed at the end of 2019. Those who might benefit have to decide whether it’s worth amending their return to claim a refund.”
On the client side
Salim Omar, CEO of Straight Talk CPAs, noted that clients have been coming in earlier this year than last. “Last year, taxpayers had a lot of apprehension with the overhaul of the tax system,” he said. “Apprehension leads to people stalling and not taking action. Other than the SECURE Act, there were no major changes this year. Clients who are expecting to get a refund want to get their refunds sooner.”
Although people might be more proactive this year about getting their taxes done, the information is still coming later, according to Gary Fox, managing partner of the Crowe LLP tax services group. “They continue to come in later and later, and from what we hear from our colleagues, that’s been their experience as well,” he said. “And the new question on Schedule 1 is getting people to think seriously. It’s right at the top, so there’s no hiding from it.”
“We’re seeing a growing complexity of people’s tax, even among the self-employed,” noted Dina Pyron, global leader of EY TaxChat. “Many taxpayers are caught by surprise when they find they’re liable for the self-employment tax. This is particularly true of the gig economy — workers that formerly paid their Social Security and Medicare taxes through payroll withholding. ... Many are involved in the gig economy through a ‘side hustle’ to supplement their income,” she added. “Some of them receive income from multiple states, and might receive some of their compensation in cryptocurrency. It can become bewilderingly complex to an average taxpayer.”
EY’s TaxChat, a tax compliance offering, is an outgrowth of this complexity and the emergence of digital technology. “It was formerly available only to our own employees and to employees of other businesses on a B-to-B basis,” she said. “But this year, we’re offering it to the public — the opportunity to have their tax returns done by EY at a market price.”
The “market price” starts out at $199 for both federal and state returns, with additional pricing varying by complexity of the return. “The taxpayer starts out by answering a few simple questions, gets a quote, and submits information by taking a picture and uploading to EY. We take it from there,” Pyron said “It’s not tax software for do-it-yourselfers; it’s a way for people to submit their information to EY. Once a taxpayer is in the system, they have the ability to communicate via text with a dedicated person who is doing their return. When we’re done, the taxpayer reviews it and if it’s OK, we e-file it for them.”
“We’re not looking at every filer, but at those that have a growing complexity in their returns,” Pyron said.
Only the usual complications
The issues that made last year’s season difficult were not a factor this year, according to Ryan Losi, executive vice president of Virginia-based CPA firm Piascik. “The government shutdown, regs not issued, forms not finalized — those are things of the past. This year, we have most of the guidance we need, and the software providers have had another year to tweak their systems to make sure they work. The software code is their interpretation of certain positions; if it contradicts Treasury it has to be changed — every week we were getting updates on computations, particularly on QBI.”
Losi indicated he is changing course from the traditional advice given to taxpayers to defer paying tax. “We’ve been migrating into a very low corporate tax and individual rate structure — sometimes, the best solution is to pay the tax right now because we’re in a low-rate environment,” he said. “Then the taxpayer will have the capital, and can do whatever they want with it, rather than become engaged in elaborate deferral strategies.”
Angst and uncertainty characterize many of the taxpayers in PwC’s private company services, according to personal financial services leader Frank Graziano. “A lot of them were nervous last year because of the SALT limitation, but most did OK. The 199A deduction and the elimination of the Pease limitation [which reduced itemized deductions above certain thresholds] took the sting out of losing the state deduction,” he said. “But now we’re getting to the presidential campaign, and it doesn’t matter which party affiliation the taxpayer favors. Different candidates are proposing a rollback to a higher tax rate, an increase in the capital gains rate, the elimination of the 199A deduction, and a wealth tax.”
The individual tax cuts are scheduled to roll back in 2025 anyway, but the conversation still creates uncertainty, Graziano said.
The lifetime gift tax exemption, currently $11.58 million, is scheduled to roll back in 2025 to $5.5 million. “A lot of clients were hesitant to use it because if they used it and passed away after 2025 there might be a clawback,” said Graziano. “But Treasury has said there will be no clawback, so our advice is to use it — before the rollback — or lose it.”
