Tips for a better tax season

As CPA tax professionals gear up to prepare clients’ 2023 tax returns, they will have to address recent changes in tax laws and rules, as they do every year. In addition to technical issues, to best prepare for the upcoming tax season’s pressures and deadlines, practitioners should assess the management of their tax practices to identify areas for potential improvement.

Although tax professionals will not have to face as many significant tax law changes with broad impacts as they had to contend with in recent years, there are a number of technical areas to consider for 2023 returns. These include:

• The increased age for required minimum distributions from retirement plans and IRAs;
• The increase in maximum net earnings subject to Social Security payroll taxes;
• The reduction in the threshold for when third-party payment settlement entities must issue Form 1099-K, Payment Card and Third Party Network Transactions Transactions [Editor’s note: The IRS subsequently delayed the effective date of these changes. See “Lower Form 1099-K Threshold Delayed Again,” JofA, Nov. 21, 2023];
• The increase in the standard mileage rate for deductible business travel; and
• 2023 annual inflation adjustments to federal income tax brackets, standard deduction amounts, gift tax exclusion amounts, earned income tax credits, alternative minimum tax exemption amounts, and other common items. (For easy reference to many such amounts, thresholds, and other handy benchmarks, print out the Filing Season Quick Guide.)

In addition, Mark Gallegos, CPA, partner at Porte Brown LLC and a member of the AICPA Tax Practice Management Committee, highlighted the following recent tax law changes and concerns that are on his radar:

• Sec. 174 research and experimentation cost capitalization, with amortization over five or 15 years. “This was an issue for 2022 returns, but the IRS issued guidance in 2023 about what should be capitalized, and more is coming,” he said. “We need to help clients understand what they need to do to capture the right costs and be compliant in this area. There are taxable events in the current year they need to be aware of.” The IRS provided interim guidance on Sept. 8, 2023, when it issued Notice 2023-63, which is effective for tax years ending after that date. [Editor’s note: See also Notice 2024-12.]
• Decrease in bonus depreciation. Bonus depreciation at 100% ended in 2022 and is 80% for assets placed in service in 2023, Gallegos noted, the start of a gradual step-down in the percentage. Furthermore, he said, “There are states that do not recognize bonus depreciation, only MACRS [modified accelerated cost recovery system] or Sec. 179, so it has to be added back.” He noted that every client’s situation is different, and CPAs have to help clients decide which election makes the most sense for their business.
• Changes in business meal deductions. Gallegos noted that the costs of business meals were deductible at 100% in 2021 and 2022 (if provided by a restaurant — see Sec. 274(n) (2)(D)), but the allowable percentage dropped back to 50% in 2023. “And entertainment is still not deductible,” he said. Business owners need to be aware of the effect of this change for their 2023 returns and may want to change their business practices or tax treatment of these expenditures going forward.
• Business interest expense deduction limit under Sec. 163(j). Any business interest not deductible as a result of the limit may be carried forward to future tax years. “This is a planning issue, and clients need to understand their income projections and the limitations,” he said.
• Employee retention credit (ERC). “The IRS halted the program for processing [new ERC] claims in September, clients are still waiting for refunds, and practitioners are in a holding pattern, which may last until 2024,” Gallegos said. “Clients that qualify and send in a claim right now may have to wait a while until they get the credit.” (See “Moratorium Imposed on New ERC Claim Processing to Curb Abuse,” JofA, Sept. 15, 2023.) He noted there are also issues related to having to amend 2020 and 2021 returns because the tax credits reduce deductions of wages in the year the credit was claimed.

Although the IRS has added staff, made significant progress on its backlog and become more reachable by phone, not everything is smooth sailing. “Practitioners and clients are still consistently dealing with a number of issues dating back to operations during the COVID-19 pandemic because mail was never opened, like lost tax payment checks from prior years that were never cashed and responses to tax notices that were never read,” said Michael Whitmore, CPA, shareholder at HMA CPA, PS, and vice chair of the AICPA Tax Practice Management Committee. “We’ve advised our clients to only transmit payments electronically and stop making payments by check.”

TAX PRACTICE MANAGEMENT

In addition to technical issues, tax professionals should evaluate the management of their tax practices to determine how to complete tasks most efficiently and ensure their teams and clients work well together. This assessment should take place year-round, but firms can fine-tune operations in the few weeks left before tax season officially opens.

Following are common tax practice management issues CPA tax practitioners may encounter and suggestions on how to address them.

DEALING WITH LIMITED RESOURCES

“The biggest challenge for the industry in the past three to four years was having to do more with less, as there was a steady decline in the number of qualified staff, especially experienced tax professionals, along with the move to remote work as a result of the pandemic,” said Brandon Lagarde, CPA, J.D., partner at EisnerAmper, and chair of the AICPA Tax Practice Management Committee. Lagarde was a partner at Postlethwaite & Netterville prior to its acquisition by EisnerAmper in 2023. “As the workforce has gotten smaller and there are fewer qualified candidates, we had to train people on managing the workload, smooth work hours across the year, and manage client expectations in a short timeframe.”

One way firms address limited resources is using interns. “Colleges here do not offer many tax classes, so we have an intern program that gives students a way to learn if they want to choose tax as a career before they enter the workforce,” Lagarde said.

Gallegos agrees. “Every year, we have a great pipeline into universities to get interns to work for us in the summer and tax season,” he said. “We train them like other employees, see how they work and interact and communicate, and then we offer some of them full-time jobs at graduation.” He recommended firms look beyond big universities and consider students from smaller colleges.

Using administrative staff can take some of the strain off tax professionals. “Some firms do not view them as important, which is a mistake, but we make them part of the process,” Gallegos said. “They interact with clients, work on electronic forms and extensions, and participate in staff meetings.”

Whitmore’s firm also turns to administrative staff for getting and organizing client information, using scanning technology to populate tax returns, and coordinating tax return reviews by staff and managers. “We assigned one admin whose entire job is to be the ‘client concierge,’ ” he said. “She helps clients with electronic transmission, handles simple questions, holds clients’ hands, and also holds tax partners accountable. You need to identify the right person for this, with a good personality, that clients like.”

OPTIMIZING WORKFLOW AND PROCESSES

Although tax year 2023 is relatively stable in terms of new or radically different provisions, tax professionals have learned to be wary about the prospect of changes in law or administrative guidance implemented during tax season for the just-ended tax year, because they sometimes require not only altering their procedures going forward but also reviewing and perhaps recalculating returns already in process. Such retroactive changes also can delay the date on which the IRS will accept returns while it implements them.

“When there are changes in laws or guidance from the IRS or Congress or state authorities, or they provide guidance or forms late, it causes compression and pushes back the tax return processing start date; this puts a tremendous burden on preparers that are just trying to report income and expenses from events that have occurred the best they can,” Lagarde said. “Tax returns get backed up while preparers are waiting, and clients may not understand this and do not want extensions.”

And, because tax season is taxing enough even at the best of times, firms often look for ways to optimize their time and resources.

“Our firm is process- and procedures-driven all year,” Gallegos said. “We create workflows, ways to streamline things, to make it simpler for everyone, including preparation of financial statements and returns, training people, delegating, and having proper reviews and checks and balances.”

His tax team worked hard from January through April to complete as many returns as possible before the March 15 and April 15 deadlines.

“August and September can be very stressful,” Gallegos said. “Extensions require more time and can be inefficient because you have to revisit what you did earlier. You also have to look at the whole picture, because S corp extensions flow through to [Form] 1040s, and you don’t want to miss quarterly estimated tax deadlines.”

Whitmore’s firm, HMA CPA, ran a big initiative the past two years assessing both processes and personnel. Part of that project involved identifying work done by tax professionals that could be done instead by paraprofessionals or administrative staff.

“We are using the client accounting services (CAS) group to take client trial balance data and adjust it, reconcile accounts, and make sure account roll-forwards work and amounts are classified correctly,” he said. “This is more efficient, because it enables the tax staff to have a clean trial balance to work with and spend more time consulting and doing value-added work for clients.”

INCREASING EFFICIENCY WITH TECHNOLOGY

Tax preparation can require a lot of manual processing, but having clients use software (like QuickBooks), moving more activities to the cloud, and outsourcing work to third parties with automation capabilities are all ways firms can use technology to ease the burden on staff.

Client portals are being used more, and some provide for two-way communication. “Before COVID, we didn’t have any method of electronic communication with clients other than emails,” Lagarde said. “We had file sharing, but it was clunky for individuals, and we did not have a client portal that was seamlessly integrated.

“In the past year, we used an electronic organizer, a fillable PDF, but this still requires a lot of manual effort. Some clients still like their paper organizers and don’t like electronic organizers and tax forms.”

Many firms and their clients use portal services, such as TaxCaddy connected to SurePrep, to upload information faster and more securely.

“I’ve found that while some clients take longer than others, the more you educate your clients, the more they learn your process for sharing information, the better the relationship,” Gallegos said.

In the past year, Whitmore’s firm has looked at how it transmits information with clients. “We are using automation to free up time for value-add consulting,” Whitmore said.

To do that, the firm has increased the use of secure links to transmit documents to clients and upload their information, scan returns, and for electronic signatures and payments to the IRS and the firm. “We have much less paperwork and have saved postage cost and staff and administrative time in prepping documents (printing, stapling, binding) for mailing,” he said. “Last year, 20% of our tax returns were transmitted to clients electronically. This year, the goal is 50%, and we are excited about that.”

About the author

Maria L. Murphy, CPA, is a senior content management consultant, accounting and auditing products, for Wolters Kluwer Tax & Accounting North America, and a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Paul Bonner at paul.bonner@aicpa-cima.com.

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AICPA & CIMA RESOURCES

Articles

“COVID-19 Changes Allowing E-Signatures Made Permanent,” JofA online, Oct. 25, 2023

“As If They Were Never Filed’: IRS Outlines Steps to Withdraw ERC Claims,” JofA online, Oct. 19, 2023

“How to Go Easier on Staff During Busy Season,” JofA, October 2022

“Prepare for Next Tax Season by Looking in the Rearview Mirror,” The Tax Adviser, March 2020

Website

Tax Season resources landing page from AICPA & CIMA and the AICPA’s Tax Section.