Tax Season Post-Mortem: Lessons Learned and Best Practices for 2020
By Jason Cullari, CPA, and Jay Soojian, CPA, Cullari Carrico, LLC –
September 27, 2019
Many CPA firms reported that the 2019 tax season was more challenging than usual as they worked to implement all of the Tax Cuts and Jobs Act (TCJA) and New Jersey tax changes.
Immediately after the April 15 filing deadline, our firm holds meetings where all departments convene and discuss what went right during tax season, what challenges caused frustration and what improvements need to be made to internal processes so that these same stressors do not carry into our next busy season. The following summarizes what we found, how we responded and what we are continuing to do. Other accounting professionals may also have experienced the following:
New Jersey’s Changes
We found through these internal meetings that not only was the 2019 tax season particularly challenging because of the TCJA, but helping our clients navigate through the New Jersey Gross Income Tax Act added additional complexities. That Act increased the income tax rate for filers over $5,000,000 and increased the Earned Income Tax Credit. The property tax deduction increased from $10,000 to $15,000 and a new Child and Dependent Care Credit was added. Tax staff were charged with understanding, analyzing and communicating the new legislation to our clients. Since the changes impacting New Jersey taxpayers were relatively easy to understand, we were able to use white papers to blast a description of the changes out via email. Overall, members of our tax department found that clients read the white paper and had a general understanding of the changes before year-end conversations occurred which helped the overall flow of the planning and preparation process.
The Jan. 31 deadline for 1099 issuance provided a short window for client accounting departments to summarize data, prepare forms, process and e-file 1099s. For us, staff accountants and administrative staff were particularly nervous about the quick deadline. Although partners and managers prepared our mid-sized and larger clients, we didn’t get as far in front of the deadline for some smaller or unforeseen jobs. While extensions for 1099s are a useful tool, they are allowed in certain limited circumstances. Additionally, staff reported that the client perception of extensions directly at the start of the season factored into their overall client satisfaction level at the end of the season. Our firm realized that at the beginning of December, our staff need to be reminded to educate clients of their responsibilities in the e-filing process.
Understanding 199A and 163(J)
Another challenge for our staff and the profession as a whole was understanding IRC Code Section 199A and the complexities of the qualified business income (QBI) deduction. For example, our tax partners urged managers to provide staff with the tools necessary to get through this change. Since our firm has a concentration of real estate related clients, we assigned two firm industry leaders as point persons and educators, which helped to ensure staff were familiar with parameters, such as assessing whether clients’ activities rose to the level of a Section 162 trade or business.
The application of IRC Code Section 163(j) relating to the limitation of the business interest deduction, particularly with controlled groups, is also a point of discussion at many firms. Since most attention was focused on QBI, this complexity caught professionals by surprise, specifically on the reporting and disclosure side. One way that our firm addressed this issue was by drafting a uniform disclosure format for our pass-through entity tax returns. Providing consistent disclosure limited the requests from other professionals for more detailed information.
It was vital to understand the potential confusion that changes to the withholding tables in early 2018 would create as taxpayers began filing tax returns in early 2019. For example, we began our education early by providing a tax reform impact summary to certain clients in order to manage expectations. Clients were still unpleasantly surprised when 2018 tax refunds were smaller or balances owed were higher. Managers and staff commented that clients were challenged in attempting to understand an already misunderstood concept; that the amount of taxes due or refunded depend upon the amounts paid in.
Enhanced Due Diligence Requirements
Another challenge involved the expansion of the due diligence requirements under the TCJA to cover the head of household filing status. According to treasury regulations, tax professionals can satisfy these requirements by interviewing the taxpayer, asking adequate questions and contemporaneously documenting the responses. Having a telephone interview with clients who claimed an earned income, child care or education credit as well as those utilizing the head of household filing status in lieu of trying to obtain a written questionnaire yielded the most efficient approach. However, staff commented that a standard interview sheet to document responses would have been helpful. In our case, managers and partners found that ensuring the staff interviewer sign and attest to the documented conversation helped hold them accountable to both the conversation and the return. Feedback from these person-to-person communications produced a positive client response, and we found that junior tax staff grew professionally through this interaction.
Our post-season shakedown highlighted that accounting professionals are still feeling the impact of the federal and state tax law changes. Firms need to place an emphasis on consistent client communications so that clients understand how they were impacted, giving them a chance to reflect on how to take advantage of this new law in overall planning and choice of operating entities and residency. While there was a concern that some clients might take on their own tax preparation given the increased standard deduction limitations on itemized deductions, that has been dulled by the amount of post-season planning and projection work we have already accumulated. The complexities of the QBI deduction, the mortgage interest deduction including definitions of acquisition indebtedness, and limitations on deductibility of interest on home equity indebtedness, as well as state and local tax limitations, has increased work and billings in many accounting practices. Overall, it’s a welcome light at the end of the tunnel.
Jay J. Soojian
Jay Soojian, CPA, is a member and an executive committee member of the firm and a tax committee leader at Cullari Carrico, LLC.
This article appeared in the September/October 2019 issue of New Jersey CPA magazine. Read the full issue.