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Daily Tax Report

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Reproduced with permission from Daily Tax Report, 61 DTR J-1, 03/30/2012. Copyright 姝 2012 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 well under way, professional tax return preparers are feeling pressure from a number of different sources, according to a survey conducted by American University’s Kogod Tax Center. The center’s managing director, David Kautter, examines the results.

Complexity, Expanded Filings, and the Economy Big Concerns for Return Preparers BY DAVID J. KAUTTER recent survey of professional tax return preparers conducted by the Kogod Tax Center at American University between Feb. 17 and March 14 focused on how the current filing season is progressing. What emerged was a picture of a compliance system under significant stress as a result of three primary factors:

A

s the steadily increasing complexity of the tax law, both federal and state; s increasing requirements at both the federal and state level to provide more information as part of the compliance process; and

quirements and that businesses are keenly focused trying to better control both internal and external tax compliance costs. Here are the major findings of the survey.

Time Spent on Return Preparation Expected to Increase Almost 54 percent of the tax return preparers surveyed said they expected to spend moderately more or significantly more time on tax return preparation in 2012 and another 43 percent said they expect to spend about the same as in 2011. The primary reasons for the increase are a mix of business and technical issues with three issues virtually tied for the top spot:

s significant economic pressures. Practitioners report that clients feel increasingly burdened by expanding recordkeeping and reporting re-

s increased information required on federal and state tax forms,

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.

s fewer staff. All three factors were within 2 percentage points of each other. The Internal Revenue Service has expanded the information required on the tax return in two key areas, the basis of assets and foreign accounts (Forms 8949, Sales and Other Dispositions of Capital Assets, and 8938, Statement of Specified Foreign Financial Assets). These were the two reporting areas most frequently cited by preparers as requiring an increase in time. In addition to new forms, preparers noted that IRS keeps adding more schedules and questions to existing forms, for example on Schedules C, Profit or Loss From Business, and E, Supplemental Income and Loss. This means more taxpayer time to gather the required infor-

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.

COPYRIGHT 姝 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC.

s more clients, and

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2 mation and more time for preparers to complete returns. It is not just federal returns that are expected to take more time this year either—state returns are expected to take more time as well but for a different reason. Practitioners cited constantly changing state tax laws as the primary culprit with respect to state returns. The other two factors cited for an increase in time represent a continuation of the trend of fewer and fewer taxpayers feeling comfortable preparing their own returns and preparers’ efforts to control their costs in an uncertain economic environment.

Preparation Fees Expected to Increase Consistent with spending more time on tax return preparation, nearly every respondent to the survey said fees for 2012 will either stay about the same or increase slightly. Just under 56 percent of respondents said that they expected fees this year to increase slightly and 44 percent said they expected fees to stay about the same. No respondent said fees would increase significantly.

Partnership Returns Most Difficult to Prepare By a wide margin, the tax form cited as the most difficult to complete this year is Form 1065, U.S. Return of Partnership Income. Nearly 60 percent of respondents fingered Form 1065, whereas only about 20 percent pointed to Form 1040, U.S. Individual Income Tax Return, about 27 percent to Form 1120, U.S. Corporation Income Tax Return, and only 5 percent cited Form 1120S, U.S. Income Tax Return for an S Corporation. Complex law combined with complex partnership agreements seems to be the main problem. According to a number of respondents, the greatest difficulty is attributable to ‘‘complex partnership allocations governed by [Internal Revenue Code] Section 704(c).’’ One respondent said the ‘‘partnership rules are getting more complex by the day,’’ and another said ‘‘partnership returns are not only tricky but risky.’’ With so many businesses operating in unincorporated form today, preparing partnership returns seems to be viewed as not only an area of significant complexity but an area where there is significant practice management risk.

Basis Information Most Difficult to Obtain Time to Gather Info, Compliance Costs Biggest Areas of Concern for Most Taxpayers One theme that came through clearly in the survey was increasing frustration on the part of both preparers and their clients with the expanding amount of time they have to spend gathering and maintaining tax records. Clients feel it is diverting them from focusing on their business. Preparers, on the other hand, are frustrated with the quality of information they are receiving from their clients and the effort it takes to gather complete and accurate information to prepare a return.

By an overwhelming margin, respondents cited one piece of information as the most difficult to obtain from their clients. Nearly 70 percent said ‘‘basis of assets.’’ A distant second was expense receipts.

Factors Hindering Efficiency

Fee complaints seem to reflect clients’ lack of

More than 40 percent of respondents cited new IRS or state reporting requirements as the biggest factor expected to decrease their efficiency this filing season. In the words of one respondent, ‘‘Efficiency will take a hit because of new reporting complexities. Clients don’t want to pay for the additional work that goes into the tax return.’’ Second on the list was staff turnover (36 percent) and third was changes in the underlying tax law (25 percent).

perceived value with respect to complying with the

Factors Enhancing Efficiency

ever increasing reporting requirements of both

In the area of encouraging news, tax return preparers cited three factors as enhancing their efficiency in 2012. Nearly 50 percent of respondents cited increasingly efficient tax preparation software as the top reason their efficiency would increase this year. Additional experienced staff was second cited by nearly 30 percent of the respondents and improved internal processes such as the networking of computers, greater use of scanning technology, and implementation of better input and review processes were cited by 23 percent of the respondents. The importance of retaining experienced staff clearly comes through in the survey with staff turnover ranking as the second most significant reason for a decrease in efficiency and staff retention as the second most significant reason for an increase in efficiency.

federal and state governments.

More than one-half of respondents (56 percent) said that the biggest sources of concern for their clients are: s the time and complexity required to compile data for return preparation; and s the cost of compliance, including professional fees. While fee complaints are not uncommon in all types of professional services, here they seem to reflect clients’ lack of perceived value with respect to complying with the ever increasing reporting requirements of both federal and state governments. The desire to control internal compliance costs may be a factor contributing to the quality of information return preparers believe they are receiving. 3-30-12

A System Under Stress Overall, the survey indicates a system under significant stress. While preparers are finding ways to in-

COPYRIGHT 姝 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC.

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3 crease their productivity, there is clearly a feeling among preparers that they are swimming against the tide. Despite the absence of significant new tax legislation at the federal level affecting this year’s returns, that has been more than offset by tax law changes by the states as they try to close budget gaps. Expanded requests for information in the form of new tax forms, schedules, and questions by both federal and state governments is clearly increasing stress on an already overburdened system. Ever expanding reporting requirements, changes in the underlying tax law, increasing complexity, and a difficult economic environment are making most preparers feel that this filing season is the most challenging ever.

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Kogod Tax Center Survey in Bloomberg BNA's Daily Tax Report  

Bloomberg BNA's Daily Tax Report published the results of Kogod Tax Center's second tax policy survey.