Taxable Talk

If you’re a tax professional here’s a warning: The 2015 Tax Season will be one you’re almost certain to remember for all the wrong reasons. If you’re a client of a tax professional be forewarned: Your tax professional will be even more grouchy than usual next year. Why? The upcoming tax season will likely be the worst in 30 years.

There are four reasons for this: tax extenders, budget issues the IRS faces, the Affordable Care Act (aka ObamaCare), and the new property capitalization/repair regulations. Let’s look at them seriatim.

1. Tax Extenders. Stop me if you’ve heard this before: Congress has essential tax legislation, but sits around and does nothing on it until after the November elections. Yes, that’s happened again. If Congress acts on extender legislation in the next couple of weeks, there likely won’t be much of a delay (if any) on the opening of the 2015 Tax Season. However, if Congress dallies or punts this to the new Congress in January, the 2015 Tax Season will be significantly delayed. This will also hurt the IRS’s resources when there’s a lot going on (see below). I’m hopeful that something will be passed by the first week of December but that’s just hope on my part. I have no idea if the extenders will be timely extended.

Odds that this impacts Tax Season: 95%
Odds of a significant impact: 50%

2. Budget Issues the IRS Faces. The IRS’s budget has been cut the last two years. The House of Representatives has done this because of anger over the IRS scandal; it’s clear to any objective observer that the IRS knows more about the scandal than they’ve revealed. The only thing that the GOP can do to impact the IRS is cut the budget.

Unfortunately, the budget cuts impact service that the public and tax professionals receive. Additionally, the cuts limit the IRS’s ability to adapt to new legislation. It’s not a recipe for good service. Given the major changes coming for the 2015 Tax Season, it’s a recipe for disaster.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 80%

3. The Affordable Care Act (aka ObamaCare) This is the first year that reporting on health insurance is required on tax returns. However, reporting isn’t required this year by insurance companies. Insureds who believe they qualify for an exemption must apply for that exemption; that exemption must be noted on the return.

For most individuals, the new law will not change their taxes. They have employer provided health insurance. However, for the other 20% the new law will change their returns. They’ll have their own insurance, or receive a subsidy, don’t have insurance, have an exemption, or any of the other ‘edge cases.’ There are two new forms that tax professionals will have to deal with, and the complications are an unknown.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

4. The New IRS Property/Capitalization Regulations. The IRS announced final regulations for repair/property/capitalization regulations in 2013. These regulations impact anyone who owns property, leases property, or produces property. This means you’re impacted if:

– You’re a business entity that manufacturers anything (you produce property); or
– You’re a business entity or an individual with a business that has depreciation; or
– You’re an individual (or a business) that owns rental property.

It might be easier to list those taxpayers who aren’t impacted by this: The typical family who works, owns a home, and has a simple situation. Put another way, if you file a Schedule C, E, or F, or you file a business return, you will likely be impacted by this change.

So Russ, you ask, what’s changing with these new regulations? Since most of you aren’t tax professionals and don’t care about the minutiae, the IRS changed the rules on what must be capitalized (and depreciated over time) and what must be expensed. That didn’t seem like such a huge deal back in May when I first heard about this (at a continuing education course). However, how the IRS is implementing this change will impact you if you’re a taxpayer impacted by this.

At the continuing education course I took, we were told that every impacted taxpayer would need to sign a statement noting compliance with the new regulations. That didn’t seem too bad–get a draft statement, and make the necessary modifications depending on the type of business. Unfortunately, that’s not what’s going to happen.

Instead, the IRS wants every impacted taxpayer to include Form 3115 on their tax return. This form is anything but easy or straightforward. You must make several calculations based on the past. The IRS estimates that it will take a taxpayer, on average, 23 hours and 48 minutes to be able to complete and file just this form. This is nuts.

No wonder Joe Kristan (via Tax Analysts) reported the following:

Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero. [emphasis in original]

Joe calls this insane; I agree completely. Yet as of now I’m required to do this procedure. No wonder it was stated, “…taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.” Consider a hypothetical client, Joe Lessor. Mr. Lessor has one rental property he’s leased out for the last four years. He has rent received, a mortgage, property tax, management fees, and every so often repairs. Do you think he’s going to pay me an additional $5,000 to get his return done to comply with this requirement? Or do you think he’ll tell me to make the numbers zero because the return was done right in the past and it will be done right in the future? (If you don’t like this scenario, choose your own.)

But there’s more. Form 3115 is (at least with my tax software) not a form that can be electronically filed. That means the IRS will have a lot more paper returns this year. Given the IRS’s staffing issues, that sure figures to work well.
UPDATE: Form 3115 can be attached as a pdf to electronically filed returns. That’s been clarified in Publication 1345. Thus, it can be (effectively) electronically filed.

I am hopeful that the IRS’s view on this will change. I know that the AICPA sent a request to the IRS for a de minimis exception to this. Maybe the IRS will see the light.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

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The 2015 Tax Season looked to be bad just given the first two issues. Adding ObamaCare and the new property/capitalization regulations to this just makes what was going to be a bad tax season into what will likely be a disastrous tax season. Nina Olson, the National Taxpayer Advocate, compared the upcoming tax season to 1985. In that tax season, the IRS Philadelphia Service Center “lost” about 20% of the paperwork they received. (This was back when returns were all paper-filed.) This will likely be a very bad tax season for tax professionals and taxpayers.

Tags: 2015.Tax.Season

This entry was posted on Sunday, November 16th, 2014 at 7:48 pm and is filed under IRS. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.