FIL­ING SEA­SON LESSONS

With the dead­line be­hind them, tax pros share take­aways and chal­lenges of a ‘painful’ 2019

Accounting Today - - News - By Roger Rus­sell

In a word, the 2019 fil­ing sea­son was “painful,” said Ryan Losi, ex­ec­u­tive vice pres­i­dent of Vir­ginia CPA firm Pi­as­cik.

“It was painful be­cause Trea­sury did not is­sue the reg­u­la­tions on changes in the Tax Cuts and Jobs Act be­tween Jan­uary and March, so if you were try­ing to un­der­stand what the law was in or­der to do tax plan­ning, you were guess­ing,” he ex­plained. “In the heart of tax sea­son, you had to de­cide whether to file or put a re­turn on ex­ten­sion un­til the fi­nal regs came out. It would have been nice to have more of the fi­nal regs well be­fore tax sea­son be­gan.”

“As of the be­gin­ning of the 2019 fil­ing sea­son, the Of­fice of Chief Coun­sel had is­sued 79 pub­lished TCJA guid­ance prod­ucts,” the Trea­sury In­spec­tor Gen­eral for Tax Ad­min­is­tra­tion stated in a May 16, 2019, re­port. “Fur­ther, Chief Coun­sel is­sued four additional guid­ance prod­ucts be­fore the end of March 2019. How­ever, much work re­mains to is­sue com­plete guid­ance for the TCJA. Chief Coun­sel plans to is­sue more than 90 pub­lished guid­ance prod­ucts af­ter March 29, 2019.”

The ab­sence of cer­tain guid­ance af­fected state gen­eral as­sem­blies, which were try­ing to fig­ure out the IRS po­si­tion on cer­tain types of items, such as bonus de­pre­ci­a­tion, which added to the con­fu­sion, Losi in­di­cated.

“The states need to know how to con­form to the fed­eral po­si­tion so they can par­tially con­form, con­form, or de­con­form,” he said.

De­spite the pain, Losi gave good grades to the IRS for its han­dling of a dif­fi­cult sit­u­a­tion. “From an ad­min­is­tra­tive per­spec­tive, it was a pleasant sur­prise that it ran as ef­fi­ciently as it did rel­a­tive to the changes in the Tax Code and the gov­ern­ment shut­down oc­cur­ring just be­fore tax sea­son,” he said.

Vin­cent O’Brien, of Vin­cent J. O’Brien CPA PC, agreed: “It went much more smoothly than ex­pected,” he said. “As far as pro­cess­ing re­turns, they did a very good job — a lot of dire pre­dic­tions at the start of the fil­ing sea­son didn’t ma­te­ri­al­ize. The re­fund is­sue was less of a prob­lem as the sea­son went on, and the num­bers seem to bear that out. The pre­vi­ous fil­ing sea­son was just as dif­fi­cult, be­cause that’s when the law had just been en­acted, and we were try­ing to get peo­ple pre­pared for it.”

“Of course, the sea­son had its nor­mal is­sues en­demic to every tax sea­son,” ob­served Roger Har­ris, pres­i­dent of Pad­gett Busi­ness Ser­vices. “We wish we had more in­for­ma­tion sooner from clients — the nor­mal tax sea­son chal­lenges that didn’t go away.”

“We all learned how im­por­tant it is to have with­hold­ing done prop­erly,” he added. “So many peo­ple didn’t get the re­fund they were ex­pect­ing. It wasn’t a tax prob­lem, it

was a with­hold­ing prob­lem.”

In fact, IRS data from the end of April showed that the av­er­age re­fund was down just slightly — it was roughly $2,730, ver­sus $2,770 in 2018.

“We also learned that there’s a dif­fer­ence be­tween a tax pre­parer and a tax pro­fes­sional,” Har­ris ob­served. “A true tax pro­fes­sional took the time to go over the re­turn and ex­plain to clients how they gained from tax re­form, and how they lost. Tax­pay­ers who dropped off their re­turns and picked them up had dif­fer­ent per­cep­tions of tax re­form than oth­ers with similar re­turns be­cause they had dif­fer­ent sets of knowl­edge and dif­fer­ent ex­pec­ta­tions. De­pend­ing on what they heard in the me­dia, most ex­pected ei­ther bet­ter or worse re­sults in their bottom line — this just high­lights the need for qual­i­fied tax pre­par­ers who not only pre­pare re­turns but work with their clients to make sure that they un­der­stand their tax sit­u­a­tion and how to make changes to make it bet­ter or worse go­ing for­ward.”

A tough sea­son

In a sur­vey of tax pro­fes­sion­als by the Na­tional Cen­ter for Pro­fes­sional Ed­u­ca­tion Fel­low­ship, 74 per­cent of re­spon­dents said that this fil­ing sea­son was more dif­fi­cult than last year, with over half cit­ing the Sec­tion 199A passthroug­h de­duc­tion as the No. 1 is­sue. Ninety-six per­cent said they were neg­a­tively af­fected by the Fe­bru­ary re­lease of fi­nal 199A regs.

Over half of sur­vey re­spon­dents gained new clients, al­though over­all fil­ing sea­son sta­tis­tics as of May 10, 2019, showed a slight de­cline — 0.5 per­cent — in the num­ber of elec­tronic re­turn orig­i­na­tor re­turns over 2018.

For Boca Ra­ton, Florida-based CPA Har­vey Be­zozi, the SALT cap proved a ma­jor is­sue.

“Many of my clients are in the en­ter­tain­ment in­dus­try, with res­i­dences in New York or Cal­i­for­nia. The $10,000 lim­i­ta­tion on their SALT de­duc­tions hurt them,” he said. “The only real so­lu­tion is to re­lo­cate to states that don’t have in­come tax. There are spe­cific ways to exit when chang­ing domi­cile, but if they fol­low the pro­to­col they will be OK.”

Many pre­par­ers were not ready for tax sea­son, ac­cord­ing to Tom Wheel­wright, a CPA and CEO of WealthA­bil­ity. “Many pre­par­ers did not un­der­stand the new law,” he said. “Too many de­duc­tions were missed.”

Wheel­wright lists these as the most com­mon:

Bonus de­pre­ci­a­tion. Many did not un­der­stand how the bonus de­pre­ci­a­tion de­duc­tion ap­plies to real es­tate, and even more, didn’t un­der­stand how to ap­ply it to syn­di­ca­tions.

Qual­i­fied busi­ness in­come de­duc­tions. Many did not un­der­stand the rules for Spec­i­fied Ser­vice Trades or Busi­nesses that im­pact whether a busi­ness qual­i­fies for the QBI de­duc­tion. “A lot of sales peo­ple told me they

were told they didn’t qual­ify for the 20 per­cent pass-through de­duc­tion, in­clud­ing real es­tate agents/brokers and in­sur­ance agents, even though the reg­u­la­tions give clear ex­am­ples to show that these peo­ple are not SSTBs,” he said. “Sim­i­larly, phar­macy own­ers were told they are SSTBs and didn’t qual­ify, even though they met the min­i­mum thresh­old for health care ser­vices and would not be SSTBs.”

In­ven­tory de­duc­tion. “Ap­par­ently, many pre­par­ers read the Blue Book to un­der­stand how the $2,500 de min­imis rule works for in­ven­tory that is treated as non-in­ci­den­tal ma­te­ri­als and sup­plies,” he said. “One CPA told my au­di­ence that if they fol­lowed my rec­om­men­da­tions for po­ten­tial in­ven­tory de­duc­tions, they would be sub­ject to a 40 per­cent penalty even though most of the au­di­ence clearly qual­i­fied for this tax ben­e­fit.”

As a fi­nal les­son, Losi em­pha­sized that use of soft­ware does not elim­i­nate the need for prac­ti­tion­ers to un­der­stand the

law and the forms.

“This fil­ing sea­son un­der­scores the need for pro­fes­sion­als who un­der­stand what a re­turn should look like with­out hav­ing to rely on their soft­ware,” he said. “You can’t rely on soft­ware to get it right the first time. It takes time to work out the kinks, and tax sea­son is not the best time to do that. Mov­ing from lo­cal servers to the cloud can have un­in­tended con­se­quences. Which­ever you used, they all strug­gled to up­date the soft­ware to ad­dress every fed­eral is­sue that re­sulted from the TCJA.” AT

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