Better phone service from the Internal Revenue Service, overly aggressive third-party-induced Employee Retention Credit claims, a talent shortage, and the sheer amount of updated tax knowledge necessary for preparers are among the big factors of this year’s filing season for tax preparers.
Although busy season is still in its early stages, it appears that the IRS is doing a better job of answering the phones, according to Roger Harris, president of Padgett Business Services.
“We’re beginning to see improvements in that area, and that’s a reflection of hiring an additional 5,000 people prior to the Inflation Reduction Act,” he said. “E-filing is up, and, as expected, refunds are down. That’s a product of the reduction in COVID-related tax credits.”
New legislation is not an issue, but there has been a staggering amount of information to absorb over the past five years, observed Jim Guarino, managing director in the tax practice at Top 100 Firm Baker Newman Noyes. “By my count, there have been seven major laws enacted starting with the Tax Cuts and Jobs Act in December 2017. That was followed by the SECURE Act], the CARES Act, the Consolidated Appropriations Act, the American Rescue Plan Act, the Inflation Reduction Act, and the SECURE 2.0 Act of 2022.”
For Nicole Bencik, managing partner of the Tax Business Unit at Top 25 Firm Crowe, there are some add-ons to the normal filing season issues. “There are a number of things that keep me up at night,” she said. “The first is the talent shortage. We’re not unique with this issue — even our clients are struggling with similar issues. We have to find the right resources, and then match clients with the right expertise. So we’re intentionally matching our clients with the right talent pool.”
“There’s a war for talent,” agreed John Raspante, director of risk management at CPA liability insurer McGowanPro. “All accounting firms are bidding for the same people to help with staffing. There was a huge shortage of accountants even prior to the pandemic, and it’s an aging profession. One of the risks associated with it is that a lot of firms are turning to outsourcing, which increases their potential liability. They now have to deal with client disclosure, engagement letters, and have a review process in place. Equally important is the security of data.”
Having the right tools to match clients is important for Bencik. “There are so many technologies out there,” she remarked. “Anyone can say they are transforming. Our focus is on strategically and intentionally leveraging the right mix of technology to serve our clients — not everything can be automated. We are striving to make sure that our team has the right tools so they have more time to consult with clients on the issues keeping them up at night.”
ERCs in the spotlight
The issue most raised by colleagues early in the season was the Employee Retention Credit, remarked Harris. “Many of our preparers question how to handle a client that received the credit at the urging of one of the third-party ‘ERC mills,’ and they don’t believe the client was entitled to receive the credit. The ERC mills are more aggressive than maybe they should be, and preparers want to know what they should be doing regarding due diligence.”
“The service is looking at it,” he said. “I would tell someone to hold off if they have severe doubts, since it involves amending prior returns. Just set it aside to see if there will be further guidance on what to do.”
Raspante agreed: “It’s another level of responsibility for the CPA. Clients are constantly calling our advisory line with clients that have been contacted by a third-party consultant. They hear that they can get the credit even though their sales increased, and want to know why their CPA didn’t tell them. The money is received through the payroll tax return. It’s a business return so it has to be amended because the money received is taxable income — it’s not free money like the Paycheck Protection Program. The accountant has to explain this to the client. The IRS will question these returns, and there’s a five-year statute of limitations.
Another responsibility is the pass-through entity tax, which is different for each state, Raspanted observed. “Clients look at it as a minuscule responsibility, that it’s just another election. But the CPA has to make sure the election is appropriate and timely, and payment is both timely and accurate.”
As accountants are getting older, so are their clients, observed Raspante. “There are exceptions — some elderly accountants may have younger clients, but typically their age mirrors the age of their clients. Accountants are being bombarded by clients wanting to pick the accountant’s brain. A lot of accountants tell me that clients come in and want to discuss estate planning and residency concerns. They’re thinking of moving and they want the answer now — and busy season is probably the worst time to pick an accountant’s brain.”
Many taxpayers have not received refunds because the IRS has held up on processing refunds on ERCs, noted Cheryl Prout, partner and team leader of the small business advisory practice at Top 100 firm The Bonadio Group.
But for Prout, the R&D Credit is problematic on 2022 returns. “That’s a big ticket item for businesses,” she noted. “There was guidance issued in January, but there is still a lot of uncertainty. Everybody in the industry recommends extending to wait for further guidance.”
There is no deduction for R&D expenses in 2022 because the amount will be added back to taxable income. The amount available for the credit can be amortized over five years.
“No full deduction is available but you can get a current credit,” she explained. “So the credit exists the same as it has — what has changed is that the amount of expense is only allowed ratably over five years.”
Counting your losses
There is a potential surprise for taxpayers who sold stock during 2022 to take advantage of “loss harvesting” according to Ryan Losi, executive vice president of Piascik. “If they then repurchased the same or similar securities to balance their portfolio, it might be the first time they came across the ‘wash sale’ rule, which prohibits a loss on the current year return if the sale and purchase occur within 30 days of each other. One way around this is to buy ETFs,” he suggested. “They’re not considered ‘substantially similar.'”
“One of the most uncomfortable positions to be in is when a client starts trading on their own, and has never been in a down market. The accountant is the one who gets to tell them that they can’t take the loss,” he added.
Taxpayers who suffered crypto losses on collapsed platform FTX are in somewhat of a quandary, according to Losi. “There are probably six areas of the Tax Code that a taxpayer may fall under for losses on the investment, but each one is uncertain. After the Tax Cuts and Jobs Act, theft losses are only deductible if there is a presidentially declared disaster. Worthless securities is another route, but cryptocurrency is not considered a security by the IRS, so that route isn’t available. To use an abandonment loss, you have to be able to prove the property was abandoned prior to the end of the tax year. If it simply dropped in value and you are still holding on to it, it’s not a closed transaction. To claim a nonbusiness bad debt, you have to show there was a debtor-creditor relationship when setting up the account.”
The most favorable route to take may be to claim a Ponzi loss in 2022, according to Losi: “An investor in a Ponzi scheme is entitled to deduct losses as a theft loss instead of a capital loss. But it’s uncertain — we just don’t have enough facts at this point.”