Although the Tax Cuts and Jobs Act still presents preparers with complexities, most practitioners feel more comfortable going into the 2020 filing season with a year’s worth of experience behind them.
“We’re now in the second year, so we’re not running around with our hair on fire,” said Kristie DeLuca, a CPA and partner at Samet Samet & Co. “Practitioners will be giving clients a clearer picture of how they’re doing under tax reform.”
Roger Harris, president of Padgett Business Services, agreed. “Things should run a little smoother since we’ve had a year to digest tax reform, and know what advice we should be giving to which clients,” he said. “There should be a natural improvement as the tax law becomes more routing — like anything, the more you do it the better you get at it.”
One of last year’s issues was underwithholding, according to Harris. “Hopefully, we advised our clients to correct any underwithholding,” he said. “This year, we’ll see if they actually did anything about it. My guess is that if underwithholding made their refund smaller, they didn’t care, but if they had a surprise balance due they probably took our advice.”
“Along those lines, we now have a new W-4. We may want to educate our taxpayers on how to navigate the new form, and at least prepare them for the fact that the old system of allowances for dependents is no longer the system — the new system doesn’t work off allowances,” he added.
PTIN renewals for 2020 have an added statement that says the preparer is aware that ”paid tax return preparers must have a data security plan to provide data and system security protections for all taxpayer information.”
“This is a result of the 1999 Gramm-Leach-Bliley Act,” said Bill Nemeth, president and education chair of the Georgia Association of Enrolled Agents. “It requires financial institutions — companies that offer consumers financial products or services like loans, financial or investment advice, or insurance — to explain their information-sharing practices to their customers and to safeguard sensitive data. And the ‘financial institutions’ definition includes professional tax preparers.”
Nemeth recommends that clients “lock” or “freeze” their tax returns via the IRS IP PIN program. The Identity Protection PIN is a six-digit number assigned to eligible taxpayers to help protect against the misuse of their Social Security numbers on fraudulent returns. Eligible taxpayers are confirmed victims of identity theft, or taxpayers who live in one of 20 states and participate in the online IP PIN Opt-In Program. To be eligible for the Opt-In Program for 2020, taxpayers must have filed a federal return last year as a resident of Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas or Washington. The IRS says that states are being added to the program in phases “until the program moves nationwide.”
Nemeth also recommends that taxpayers put a fraud alert on their financial accounts, which they can do through any credit bureau for free. Under a fraud alert, the taxpayer is notified if someone tries to open an account in their name.
Roadblocks and more
The qualified business income deduction for owners of pass-through entities — should still be a major focus this year for practitioners, according to Vincent O’Brien, of Vincent J. O’Brien CPA PC. “This is especially true of rental real estate activities. Even though a taxpayer does not meet the safe harbor, they might still qualify as a trade or business. They have to be able to make a good argument and point to a lot of case law to determine if a rental activity is a trade or business, but it can be worth the effort.”
“Another issue is the fact that K-1 Forms have changed,” he said. “Practitioners need to review the Form 1065 [Partnership return] and Form 1120S [S corporation return] and be familiar with the codes. And the partnership capital reporting requirement has been postponed for a year. That’s a big relief because it has caused a lot of concern among practitioners.”
Gary Fox, managing partner of the Tax Services Group at Top 10 Firm Crowe, hopes that the tax filing season ahead will be better than last year’s. “From our perspective, it was the worst filing season we ever had, driven primarily by tax reform legislation and, more importantly, by the K-1 due date. The tax season was already compressed, but that made it worse. We did a lot of thinking as to what we can do to not let that happen again next year, but it’s a difficult position. We can’t tell an investor to stay out of a great investment just because they’re not getting their K-1s out until the last minute.”
For many professionals, part of the excitement of tax season is dealing with unforeseen issues. However, managing the risks in such happenings is vital to the long-term survivability of the practice, according to Deb Rood, a CPA and risk control consulting director at CNA, the endorsed underwriter of the AICPA Professional Liability Insurance Program.
“Even though the TCJA went into effect last year, helping clients understand its impact will be relevant for many years, including this one,” she said. “Failing to do so may lead to professional liability claims related to a CPA’s failure to advise. One area for CPAs to take note of is Qualified Opportunity Zone Funds. If a client has a big transaction and isn’t advised about the potential to defer the tax on the gain by investing in a QOZF, the client may blame their CPA for not advising them.”
“But advising clients about important tax provisions doesn’t end with the TCJA,” she said. “We see claims related to U.S. filing obligations related to foreign investments such as the FBAR, so mention that to every client, even if you can’t imagine it applying. And even individual clients may be impacted by the Wayfair decision — make sure clients know about it.”
Contact clients and get appointments scheduled, Rood urged. “Don’t wait for them to contact you, especially if they typically procrastinate. Explore ways to incentivize those procrastinators to get information to you earlier, such as a fee discount if information is provided by a certain date. Many silly errors are made in the days and weeks leading u[ to a filing deadline — errors that may be preventable with additional review time prior to filing.”
Tax practitioners should also review their prior year’s engagement letter templates for changes in the law and current developments in professional liability, according to Rood.
“This should be done every year, The AICPA, professional liability insurers, including CNA, and paid providers all have sample engagement letters for CPAs to leverage,” she said. “Customize your engagement letter for your firm, and understand how specific engagement letter provisions address the risk of providing service, and allocate this risk between the CPA and its clients. This will better position you to respond to any questions raised by the client.”
“Make sure the firm receives an engagement letter for every engagement regardless of the area of practice,” Rood advised. “Engagement letter use for tax services is far less frequent than for attest services, and this can make defending claims related to tax services difficult. If you aren’t using engagement letters for tax compliance services, consider using a unilateral or negative engagement letter, which only requires the firm’s signature,” she said.
“In effect, the client agrees to be bound by the terms and conditions of the engagement letter if they provide the CPA with their tax information. This approach is not as strong as a dual-signed engagement letter, but it’s better than nothing,” she said. “For high-risk clients and engagements such as high-net-worth clients and families, business returns, complex individual returns, IRS audit representation, and providing tax advice, get a dual-signed engagement letter.”
It’s not realistic to have signed engagement letters for a CPA’s assistance with responding to IRS notices, Rood observed. “However, the preparer should get an email from the client stating that the client agrees that the firm will respond to the notice on the client’s behalf and that the terms and conditions of the compliance engagement letter apply.”
“Remember, an engagement letter is like a seatbelt,” Rood said. “It may not prevent a claim from being filed, but if a crash does occur, it sure can help minimize the damage.”
When the season begins, Rood recommends using a control log — a list of every tax return and its due date — to reduce the risk of a missed filing deadline, which often results in a professional liability claim. “Make sure every return is included on the log, even if it’s only an informational return or will have zero tax due,” she said. “That means kiddie returns, returns for unfunded trusts, estate tax returns, FBARs and state returns. And consider including IRS correspondence and audits in your control log — notices not responded to are as likely to result in a claim as a missed tax return.”
Don’t over-rely on software, Rood cautioned. “While the software providers do a pretty good job of interpreting tax law, they don’t sign the return and, ultimately, the CPA is responsible,” she said. “Review software to make sure new forms and forms with changes are being properly prepared by the software. With all of the changes related to TCJA and new guidance being released almost every month, this is more important than ever.”
“Install updates as soon as possible,” she added. “Guidance continues to be provided by the IRs and tax returns filed need to reflect the most recent guidance. And make sure everyone understands how the tax software works. I’ve spoken with CPAs who realized, years later, that their clients were paying tax on 100 percent of income in more than one state because information was not entered into the software properly. That’s a pretty difficult situation to explain when it’s finally discovered.”
While most of these cautions concern individual returns, there is an important change for business returns if the CPA performs an attest service for the client, Rood noted.
“The AICPA Professional Ethics Executive Committee issued an ethics interpretation, Hosting Services, ET 1.295.143 which, effective July 1, 2019, indicates that providing hosting services for an attest client may impair a CPA firm’s independence. What does that mean? It means that if you are the sole repository for an attest client’s records, you independence may be impaired. How does that work in a tax practice? It means that if the CPA calculates tax depreciation, Section 263A or other calculations and the client does not maintain a copy of those records, the CPA firm may have an independence problem.”
“The good news is I think there is an easy solution. Provide your clients a copy of these items for their records. Regardless of the independence concern, this is a good practice to ensure the client’s records are complete,” she said. “Contact the AICPA or your professional liability insurer for more information.”
Looking ahead
Although tax professionals are advising their clients that the current tax system will be in place until 2026, that’s not necessarily the case, suggested Ed Renn, partner in the private client and tax team at international law firm Withers.
Renn believes he should prepare his clients for any possibility. “The big one is a potential Blue Wave — a sweep by the Democrats in the 2020 elections,” he said. “If they keep the House, and take back the Senate and the White House, there could be sweeping changes in the tax landscape. There could be a completely new system in place before we’re halfway through 2021.”
In addition to a Tax Code restructuring featuring higher individual and corporate rates, Renn cited the wealth tax proposed by several of the Democratic candidates. He recommends insurance products as protection from current tax, particularly private placement life insurance.
“Anyone with an interest in a partnership or an entity taxed as a partnership should be looking at the [Bipartisan Budget Act of 2015] changes to the partnership audit rules, where adjustments are made at the partnership level,” Renn cautioned. “If an adjustment is made in 2022 for a 2019 return, back taxes and penalties can hit an individual that wasn’t a partner in 2019.”
