It’s the start of another tax season, and while many preparers are cautiously optimistic that this year will mark a return to some sort of “normalcy,” it is likely that keeping pace with legislative changes, late information from clients, and potential filing extensions will result in another complex tax season.
“I’m expecting it to be just a normal tax season. My fingers and toes are crossed for that. … However, we are geared up internally for anything because the tax season was July one year and then May another year. We’re geared up. Things get crazy when the IRS, the government, makes tax law changes as they go to apply to 2021 rather than 2022,” said Renee Daggett, CEO of AdminBooks in Morgan Hill, California.
When asked what he anticipates for this tax season, Mike D’Avolio, senior tax analyst at Intuit, said, “Hopefully normal … Hopefully not the challenges that we’ve seen the last two years with the COVID-19 virus itself and the surges. We had extended tax seasons, and a lot of extra work for practitioners. They had to do Paycheck Protection Program loans and unemployment comp, and they had to digest a lot of new legislation as the ink was drying. At the same time, I think we’ll still be busy as usual given the number of tax changes that we have on our plate that are already in motion.”
There’s no doubt that the last few tax seasons have proven challenging, to say the least. When the pandemic struck in 2020, firms had to swiftly switch gears to meet the day-to-day hurdles of operating in a pandemic, while helping many of their business clients stay afloat amid the uncertainty.
Today, many tax preparers are still adjusting to a new normal as rapid legislative changes, a lack of timely information from clients, and remote or hybrid work environments continue to impact the profession. Despite the challenges, forward-thinking firms that have the right planning, processes and technology in place are ideally poised to weather any storms this tax season.
Ever-changing tax legislation
Keeping pace with legislative changes has been especially difficult in recent years and, unfortunately, this tax season could be much of the same. The key is having the right resources and technology in place, which we’ll discuss in more detail shortly, and proactive communication with clients.
Just as the dust from the Tax Cuts and Jobs Act settled and preparers had a moment to catch their breath, the COVID-19 pandemic hit and unleashed a whole new set of changes.
Since the onset of the pandemic, preparers have scrambled to stay ahead of various COVID‑19 relief programs from the CARES Act and the American Rescue Plan, including, but not limited to, the Employee Retention Credit, PPP loans for businesses, and expansions of the Earned Income Tax Credit and Child Tax Credit, plus an extension of unemployment compensation to independent contractors and other workers ordinarily ineligible for unemployment benefits. On top of that, many states and localities enacted their own tax changes and relief initiatives.
Unfortunately, as the profession heads into the 2021 filing season, the pace of legislative change shows little signs of slowing.
According to the findings of a recent Wolters Kluwer survey of more than 800 professionals from tax and accounting firms, preparers are adapting to a new kind of normal that includes rapid legislative changes, a longer filing season, difficulties in working with the IRS, and the lack of timely information from clients.
“More legislative changes seem likely as federal, state and local governments seek to close tax gaps and raise revenue to fund new initiatives such as infrastructure. Last-minute tax changes also seem to be the norm now. Many professionals wonder if we will ever see a return to a ‘normal’ tax season. Planning for tax season has become complicated by late changes to filing deadlines and forms, and firms struggle to get clarification and guidance from the IRS,” the Wolters Kluwer report stated.
Said Cathy Rowe, vice president of tax product management at Wolters Kluwer Tax & Accounting North America, “The legislation landscape is still changing. The infrastructure bill has passed but the Build Back Better Act is still in flux. … There are about five different issues that could impact the taxpayer and the preparer as such.”
As outlined by Rowe, such impacts to taxpayers could include:
- The retroactive termination of the Employee Retention Credit for the last quarter of 2021 will be confusing for businesses and will require some IRS guidance.
- The Child Tax Credit and tracking the advance payments will be a new wrinkle for 2021 tax returns.
- The Recovery Rebate Credit and tracking economic impact payments will be a similar issue for 2021 returns as it was for 2020.
- The charitable deduction for non-itemizers is available again in the 2021 tax returns as it was for 2020, but now as a deduction after adjusted gross income, rather than before adjusted gross income as it was for the 2020 returns. “This will make a lot more taxpayers eligible for a charitable contribution deduction and it’s not clear that it will be available for the 2022 year, at this point,” Rowe said.
Said Trenda Hackett, an executive editor at Thomson Reuters Tax and Accounting and a former IRS revenue agent, “In the line of tax issues, [the important thing for tax preparers is] just being prepared. Probing their clients more, digging a little bit deeper and keeping due diligence in the back of their minds. There’s so much we can take at face value, but there are some things we do have to go a little bit deeper on because of the due diligence requirements. And, of course, I would always say documentation — documentation is key.”
Hackett also outlined several tax considerations that preparers should keep top of mind this tax season, starting with the Recovery Rebate Credit of 2021 from the American Rescue Plan, which has to be reconciled.
“You have people that received the credit, already received the stimulus payment in advance and, of course, that has to be reconciled to the tax return. Some people may not have gotten the full amount,” Hackett explained. “The IRS did send letters out … to let people know this is how much your credit was but, of course, we as CPAs know that taxpayers don’t always keep track of that information. … I think we as CPAs need to be forward- thinking about preparing for being able to obtain that information.”
The advanced Child Tax Credit raises similar issues. “We had a lot of families, even some high-income families, that are getting this credit in advance. Families were able to get up to half of that credit in advance and, of course, that has to be reconciled to the tax return,” Hackett said.
Reconciliation may be a key word for the tax season, but so is forgiveness.
“When I think about forgiveness, I’m thinking more of businesses with [PPP loan forgiveness]. You have the Economic Injury Disaster Loan, the grants out there, and the advances out there. So you’ve got all of this COVID funding that businesses had the opportunity to tap into, all of which have different tax reporting requirements or tax aspects,” Hackett said.
Another tax consideration, said Hackett, is cryptocurrency. Virtual currencies, like Bitcoin and Ethereum, have increasingly shifted into the public eye in recent years, as well as into the eyes of the IRS for reporting and compliance.
“We can’t just be so careless in checking that virtual currency box on that tax return. There’s a question that started with the 2020 tax return, and it’s going to be on the 2021 tax return as well, that says, ‘Did you have any virtual currency during the year?’ We can’t take that question lightly because that’s a very loaded question,” said Hackett. “I think we’re going to have to probe a little bit more, because that’s part of our due diligence in checking that box on the return for our clients.”
‘Get the message out’
As noted earlier, proactive client communication is important in helping clients navigate the complexities of today’s tax environment, as well as attracting the attention of prospective clients.
“Our clients … they know that they just have to sit tight and not panic and just know that if something comes up we’re going to let them know. … We’re trying to make [clients] active participants in the process, as opposed to dropping their stuff off and leaving,” said Glenn Harper, the owner of Columbus, Ohio-based Harper & Co.
The firm provides tax compliance, as well as business advisory and consulting services like financial projections and forecasts, cash flow and budgeting, and entity structure planning. To help promote its advisory services, Harper said that the firm is “doing a lot more marketing this year on social media, podcasts, and just revamping the website and just trying to get the message out there so people know.”
He continued, “You’d be surprised how many people come in the door and they didn’t even know that a CPA firm does what we do, more of an advisory practice as opposed to just crunching out tax returns. … When you get the message out, then clients want to ask you questions, and when they want to ask you questions that creates more and more opportunity. It is more about the dialogue, the communication, and just letting them know that they can call us anytime when they have a situation and we’re here to help”
Underscoring Harper’s point, and the profession’s increasing shift from a compliance-based business model to more strategic advisory services, the “Insights for Tax Professionals 2021” study from the Thomson Reuters Institute found that 95 percent of tax professionals believe that their clients want business advisory services. It’s a trend that was accelerated by the COVID-19 pandemic and is expected to remain strong well into the future.
Furthermore, Wolters Kluwer research found that tax planning, tax advisory services and business consulting were the top services added at firms in 2021, regardless of firm size. More than one-third of the surveyed firms reported an increase in the number of services offered. Additionally, 47% saw growth in their client engagements in 2021.
The bottom line: Tax firms looking to drive greater client loyalty and boost revenues should not overlook the value of strategic advisory services, especially in today’s ever-changing tax environment.
“They’ve got to explore the advisory mindset. They’ve got to invest in that technology; they’ve got to invest in their people; they’ve got to get their online presence out there,” said Harper. “It is just trying to change the practitioner’s way of thinking to bringing solutions versus doing tasks.”
Have the right technology
Given the advancement of cloud-based solutions and greater automation and collaboration tools, the tax and accounting profession was already in the midst of change prior to COVID-19. However, there’s no denying that the pandemic shifted the adoption of technology into high gear and changed the way many preparers work and serve their clients.
Today, leveraging cloud-based solutions is table stakes for those tax firms looking to drive efficiencies, improve collaboration among both staff and clients, and enable a more flexible work environment. Furthermore, client-facing tools that boost staff capacity while reducing the drain of time-consuming, low-value work are essential.
“I would say looking at technology in a few key areas is going to be really important. So, that’s having cloud technology for that flexibility; looking for tools for efficiencies, such as a scan, auto flow, and being able to understand which clients are impacted by different legislation changes; and then, of course, collaboration tools,” Rowe said.
According to the Wolters Kluwer research conducted in August 2021, both small and large firms outlined process automation tools that they intend to add. At small firms, these include:
- E-signature solutions;
- Client portals;
- Document management solutions;
- Document scanning solutions; and,
- Tax return automation tools.
For large firms, they include:
- Artificial intelligence tools to read documents;
- E-signature solutions;
- Tax return automation tools;
- Practice management solutions; and,
- Client data ingestion tools (e.g., tools for collecting and integrating data from different sources)
The good news is that solution providers recognize the needs of today’s preparers and are continually developing solutions to help them better serve their tax clients.
Intuit’s D’Avolio also highlighted the importance of leveraging electronic organizers and client portals for secure client collaboration, as well as a cloud-based practice management solution.
“We’re seeing a big trend upward in firms that are embracing that technology because of the efficiencies that come with it,” he said.
Hackett at Thomson Reuters stressed the importance of data security, especially given the current economic climate and a rise in remote work environments. “The thieves are running rampant, especially with the landscape that we’re in. Make sure that you’re on your data security ‘A’ game, because you don’t want to be the victim of a data breach.”
As outlined by the IRS, security measures for tax preparers include:
- Use antivirus software and set it for automatic updates to keep systems secure. This includes all digital products, computers and mobile phones.
- Use firewalls. Firewalls help shield computers from outside attacks but cannot protect systems in cases where users accidentally download malware — for example, from phishing email scams.
- Use multifactor authentication to protect all online accounts, especially tax products, cloud software providers, email providers and social media.
- Back up sensitive files, especially client data, to secure external sources, such as external hard drives or cloud storage.
- Encrypt data. Tax professionals should consider drive encryption products for full-drive encryption. This will encrypt all data.
- Use a virtual private network product. As more practitioners work remotely during the pandemic, a VPN is critical for secure connections.
Staffing
Attracting and retaining top talent has long been a concern within the profession and it continues to be a challenge today, especially in light of the COVID-19 pandemic and the Great Resignation.
“It’s hard to find people that fit the culture, and have the experience, and want to work. And I’m hearing that from all of my peers. What I’ve been hearing, and I totally agree with this, is finding that mid-level tax manager position or accounting manager position, it’s almost like they’re unicorns,” said Heather Satterley, CEO of Portsmouth, R.I.-based Satterley Business Solutions, which includes both Satterley Accounting Services and Satterley Training & Consulting. “So that’s a real challenge, and I honestly don’t see that getting better because I feel like people that are in that position, if they have an entrepreneurial spirit, they are looking to go out on their own and start their own firm and do it on their own.”
Echoing the sentiment, Daggett of AdminBooks said, “While right now we’re solid and ready to go for the upcoming tax season, in the fall we had to [do] some hiring. We had some job openings and it was a struggle to find the right candidate. … The climate of hiring is tough.”
Added Daggett, “I feel like what sets a firm apart in finding good candidates is the process. For us, we focus on the values that our firm has and the goals that we want to help accomplish for our clients. And we have a specific culture being remote. … I think it kind of boils down to the hiring process is key and creating an environment where there is opportunity for each team member to grow, learn, [and] be promoted.”
It is important for tax firms to keep in mind that leveraging technology that drives greater automation and efficiencies can also help improve staff engagement and morale.
As noted in the Wolters Kluwer report, “Efficiency gains result in the ability to increase client volume without requiring extra staff, while also ensuring staff can focus on the more challenging and rewarding work. Multiple studies have shown work satisfaction is a significant factor in both staff retention and organizational performance.”
Clearly, this tax season may, yet again, be riddled with its share of complexities, but those firms that have done as much planning as possible upfront will likely reap the benefits. And, as we look to the 2022 filing season in 2023, that’s advice that will continue to stand.
Said Satterley, “One of the things that I’m seeing from tax preparers or tax firms that are coming to me for help is that not having a system in place and just kind of taking whatever comes at them, when it comes at them, are the ones that are really struggling. … Taking the time in the last couple of months of the year to really focus on processes and making sure your communications and expectations [both internally and externally with the client] are set — that is what really sets a firm up for a smooth tax season.”
