Paying the Piper

The last 10 day have been crazy with continuing ed, 2009 software, directing a show and catching up on office stuff put off while I finished the web site update. And there is still a lot to do before electronic filing reopens on January 15, 2010. Congress has been busy and are in the process of extending the tax extenders. There are new rules for the First Time Homebuyer’s Credit and we finally heard what the 2010 standard mileage rates will be. That’s part of the job, there will always be tax changes. Some will be well thought out but too many will be confusing and open to interpretation. These changes got me thinking about all the changes I have seen in over 20 years preparing income taxes. Especially the changes to the business of preparing taxes.

In January of 1988, I started working for a HRB franchisee. He was very progressive for the time in that we used a computer program to prepare the return. We interviewed a client and filled input sheets with their information. They were given an estimate and sent home. Next, the data entry operator put the info into the computer and print out the return and send it back to us. We checked the return to make sure it was correct. If it wasn’t, changes were made to the input sheet and it was re-sent to the data processor. Once we we happy with the return, we signed the return and sent it to be checked. If there were any problems with the return, it was sent back to us and the process continued until a correct return was achieved. It was then copied for the client, IRS and any states and the client was called to pick up the return.

Then electronic filing arrived in the early 90s and the business changed forever. Preparers had to deal with Refund Anticipations Loans and direct deposits and the special paperwork they generated. Computers were bought and software learned. Client bases grew as taxpayers started bringing in their completed returns to be electronically filed to speed up their refund. Once they became comfortable with using a tax preparer for filing, many decided to stop doing their return and let someone handle it. But computers were being bought to use at more than tax preparation offices but at home too. Consumer tax software was being marketed to the self-prepared market and some of these consumers decided to not only to do their own returns but returns for family and friends, too.

For many years, the tax business looked quiet. There were no big changes. But behind the scenes, issues were fermenting. The business was growing as more people hung out their “open for business sign.” Pawn shops and car lots began to offer to prepare your return. Relying on computer software, many had little or no true tax knowledge. Too many put their profit above preparing an accurate return. Refund Anticipation Loans were marketed to both the consumers and tax preparer. The taxpayer could get their money, first in 3-4 days and then in a day or even a few minutes. Preparers could make money with incentives from the RAL banks and extra fees from the clients using the products. But there was a major temptation to push the products on clients and in some cases sign them up without their knowledge. More programs were created to take advantage of the taxpayers’ desire to have their refund now. In the rush to prepare returns and secure clients, refund were being issued before taxpayers received their W-2s.

The backlash began simply with EIC due diligence and the IRS putting more pressure on preparers to help verify client’s claims that they were entitled to the funds. Then, consumer groups began to lobby against the RALs and the costs involved (The Department of Defense has banned offering these to current military personal or their spouse.) The Refund Banks learned a hard lesson when their “pre-season” loans lost big money. But they had whetted the appetite for early money and there were preparers willing to file returns without W-2s to get them their money. Enforcement was difficult since most of the problem preparers were gone April 16th (many long before that).

But the problems hadn’t gone unnoticed and actions began to be taken. In her 2001 suggestions to Congress, Nina Olson the Taxpayer Advocate recommended tax preparer licensing. While no licensing bill has been enacted, Congress has passed several bills which died when the session ended. Until recently, the IRS wasn’t fully behind licensing but things have changed this year with the Commission holding hearings this year. General thought is that we will see some sort of licensing soon. Concerns about taxpayer privacy and abuse by some RAL practitioners have brought changes to Code subsection 7216. This alone throwing tax professionals into an interpretation tizzy as we try to figure out exact what qualifies and how to put it into practice. §7216 is just another issue RAL banks and practitioners have to deal with. Public outcry about fees have the banks scrambling to lower rates and in the process they have cut incentives to preparers and limited the add on fees allowed.

The business of preparing tax returns is changing on an almost daily basis. Gone are the days of only having to keep up with tax law changes. Besides the increased due diligence on EIC return and the increased paper work for Use and Disclosure Consents (§7216), preparers are facing increased IRS scrutiny of their tax work and procedures and higher fines if they make a mistake. A few months ago, Congress snuck in e-file mandates for preparers who do more than 10 years to go into effect next year. Licensing of some form is coming. And, Modernized e-File begins phasing in this year. Add to this continual tax law changes and the rules the states are beginning to enact, and this is a stressful time to be in the tax preparation business. I’m sure there are people making plans to retire but for me, this is what keeps the job interesting. Now off to the store to load up on Tums. Tax Season is Coming.