Kogod Tax Center - BNA Article by American University, Kogod School of Business

Daily Tax Report

Reproduced with permission from Daily Tax Report, 225 DTR J-1, 11/21/13. Copyright 姝 2013 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

Ta x P r a c t i c e

With the filing season for 2012 tax returns complete, professional tax return preparers say they saw fees increase this year—but they add that complexity of the tax laws and the government shutdown created challenges for their practices, according to a survey just concluded by American University’s Kogod Tax Center. The center’s managing director, David Kautter, examines the results.

Return Preparers See Fees Increase but Say Tax Complexity, Government Shutdown Added to Pressures in 2013 BY DAVID KAUTTER ogod Tax Center at American University conducted its second annual survey of tax return preparers in October; unlike the 2012 survey, which was conducted as filing season was getting under way, this year’s survey was conducted after the 2013 filing season for extended 2012 corporate and individual returns had passed. This year’s survey also included a question for tax preparers about how they may have been affected by the government shutdown in October. Tax professionals participating in the survey are involved in preparing returns for all types of taxpayers including C corporations, passthrough entities such as

David Kautter is managing director of the Kogod Tax Center at the Kogod School of Business at American University in Washington, D.C., and executive in residence in the school’s Department of Accounting and Taxation. He joined the Tax Center after more than 30 years at Ernst & Young LLP, most recently as director of national tax. The Kogod Tax Center promotes independent research and expands knowledge with respect to tax policy, tax planning and tax compliance for small and midsize businesses, entrepreneurs and middle-income taxpayers.

partnerships and S corporations, individuals, trusts and estates, and nonprofit organizations. Conducting the survey after the extended filing season also provided insights into actual experiences as opposed to anticipatory views of how tax professionals expected filing season to unfold. Most of last year’s expectations about expected issues for filing 2011 returns were substantiated by actual experiences in filing 2012 returns: s In 2012, just over half of respondents said they expected their fees to increase, for a variety of reasons. In 2013, following filing season, more than three-fifths said fees did in fact increase. s Possibly as an indicator of increased tax complexity—or more skill at developing new business— more than half of those practitioners who needed to spend more time this year over last year preparing returns said it was a result of having more clients. s Form 1065, U.S. Return of Partnership Income, maintained its ranking as ‘‘most difficult,’’ although the margin decreased by about 8 percentage points over the nearest competitor, the individual tax return. The decrease could possibly be due to increasing familiarity with the Form 1065 and associated regulations, or it could be attributable to the increasing complexity of the individual tax return with its growing list of data gathering and reporting requirements.

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2 Here are some of the major findings of the survey in more detail.

Time Spent on Return Preparation Stayed About the Same Or Increased for Most Preparers About 45 percent of tax return preparers surveyed said they spent about the same amount of time during the 2013 filing season on tax return preparation as they did last year. In our 2012 survey, nearly the same percentage said they expected to spend moderately more or significantly more time in 2012. For 2013, about 40 percent said they spent moderately more or significantly more time this year, and only slightly more than 12 percent said they spent significantly or moderately less time. As indicated above, of those who spent more time in 2013, nearly 60 percent said it was because of having more clients. Other factors cited included: s fewer staff, s information reporting complexities, s partnership allocations, s basis reporting complexities, s state and local tax issues, and s clients who expected more from the tax professional. Some respondents further elaborated upon why they needed to spend more time preparing returns in 2013. Policy makers may want to take special note of these factors: s the increasing difficulty of returns, and s a delayed start to the 2013 tax filing season arising from legislation enacted earlier in the year. Tax professionals also expressed frustration with other events out of their control, including failure of software vendors to keep abreast of legislative changes and the increasing complexity their clients’ investments.

Return Preparation Fees Increased More than 70 percent of survey respondents said their fees increased slightly in 2013. This could be attributable to a greater volume of business, an increase in hourly billing rates, increased charges for dealing with more complex technical or data gathering issues, or some combination of these factors. Only about 13 percent said their fees were about the same as last year. In our 2012 survey, 44 percent said they expected fees to stay about the same. A slightly stronger economy may also be a factor in the ability of tax professionals to seek and obtain higher fees from clients.

Client Frustration With Data Gathering Increasing In a virtual chorus of unanimity, 81 percent of tax preparers cited the time and complexity of gathering 11-21-13

data to complete returns as the most frequent complaint heard from clients during the 2013 filing season. Yet for a year in which fees seemed to increase across the board, not even 20 percent (18.8 percent) cited fees as an area of client concern, the same percentage who cited the alternative minimum tax (AMT), the proverbial thorn in the side for tax professionals and clients alike. In our 2012 survey, just over half (56 percent) of respondents said the biggest concern for their clients was the time and complexity required to compile data for return preparation and the cost of compliance, including professional fees. The difficulty in client collection of data may also have repercussions for tax preparers, who then must explain to clients why returns often cannot be completed by the original due date, thereby necessitating extensions.

Partnership Returns Again Prove to Be Problem Child As mentioned above, Form 1065, U.S. Return of Partnership Income, was cited by more than 50 percent of respondents as the most difficult form to complete. Form 1040, U.S. Individual Income Tax Return, was cited by about a quarter of respondents and the Form 1120, U.S. Corporation Income Tax Return, for C corporations and the Form 1120S, U.S. Income Tax Return for an S Corporation, were cited by 17.2 percent and about 14 percent, respectively.

Form 1065, U.S. Return of Partnership Income, was cited by more than 50 percent of respondents as the most difficult form to complete.

Tax professionals said that among the factors contributing to problems associated with completing Form 1065 were: s partnership structures that are continuing to increase in complexity; s the difficulty of calculating Form K-1, Partner’s Share of Income, Deductions, Credits, etc., allocations, including those relating to basis; s calculating partnership transactions between the entity and the partner was described as ‘‘brutal’’; and s Forms K-1 and 1099 are frequently delayed, amended or corrected after initial issuance.

Basis Information Continues To Be Most Difficult to Obtain Consistent with the Kogod Tax Center survey of 2012, the accurate basis of assets was cited by respondents as the most difficult information to obtain. The percentage decreased slightly over last year, falling to 64 percent from nearly 70 percent. Expense receipts and information about charitable contributions tied for second-place at 25 percent each.

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Technology Continues to Drive Increased Efficiency but Not Always Tax preparers are actually reaping the benefits of new technology, as they anticipated they would in our 2012 survey. Technology in a wide range of areas was cited by 44 percent of respondents as a source of increased efficiency. Some of the key areas cited by respondents included:

fected in some manner by the government shutdown. The largest area of impact, cited by 37.5 percent of respondents, was the inability to reach an IRS specialist for assistance. Nearly 22 percent of respondents said the shutdown affected a pending transaction a client was contemplating because IRS approval was needed, and therefore the transaction had to be delayed.

s new software installed within their organizations,

Continuing Challenges for Compliance

s paperless work papers for Forms 1120S and 1065,

With recent studies showing that more than 60 percent of individual taxpayers and more than 90 percent of small businesses use tax return preparers to meet their compliance obligations, tax return preparers are increasingly becoming the focal point for tax compliance in the country. In a sense, they have become the linchpin between the tax law on the one hand and the American taxpaying public on the other. What the survey reflects, in part, is that the increasing demands by the IRS and state and local taxing authorities for greater and greater specificity as part of the tax compliance process are challenging even the most experienced tax return preparers to maintain the quality of their work at an affordable price for their clients. With 81 percent of tax return preparers in the survey citing the time and complexity of data gathering by their clients as a significant problem, it is clear that taxpayers don’t understand, or if they understand can’t or won’t maintain, the records required of them under the nation’s tax laws. This presents a substantial challenge to the integrity of the tax system. When you combine this with the fact that 46 percent of survey respondents said ‘‘New IRS or State regulations’’ decreased their efficiency this year, it seems clear that the tax compliance system isn’t headed in a good direction. In a sense, it is as though tax return preparers feel that they are, at best, running in place with technology increasing their efficiency while new IRS and state regulations are decreasing it.

s receipt of source documents from clients in digital format, and s more familiarity with new software that had been installed the previous year. Notable about technology, however, is that it is a twoedged sword on the efficiency front. Technology changes were cited by about 21 percent of respondents as a factor in decreased efficiency in 2013 over 2012. However, the factor contributing most to decreased efficiency, respondents said, was new Internal Revenue Service or state regulations, cited by about 46 percent. This encompassed such areas as the late release of forms by government agencies and delays in the enactment of laws affecting 2012 tax returns. Among factors other than technology cited as increasing efficiency in 2013 was specialization. A specific example of this was a tax preparer who transferred responsibility for preparation of Forms 1040 from office generalists to a separate processing center focused just on this form. Increased staff experience over the prior year was also cited as contributing to increased efficiency in 2013.

Impact of Federal Government Shutdown Nearly one-half of respondents said their tax practices (both compliance and advisory units) were af-

DAILY TAX REPORT

ISSN 0092-6884

BNA

11-21-13

DTR

ISSN 0092-6884

DAILY TAX REPORT

ISSN 0092-6884

BNA

11-21-13

DTR

ISSN 0092-6884

DAILY TAX REPORT

ISSN 0092-6884

BNA

11-21-13

DTR

ISSN 0092-6884