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A Look Ahead: Practitioners Prep for Unknowns in 2021 Filing Season

Posted on Dec. 31, 2020

For taxpayers, practitioners, and the IRS, the challenges of the new year began before the old one ended.

Taxpayers’ year-end planning, usually finished by December 31, was pushed back until at least January 5, 2021, according to Bill Smith of CBIZ Inc. That’s when two special elections will decide the Senate’s partisan majority, and likely the fate of the incoming Biden administration’s tax agenda. “We didn’t get any of the usual year-end tax certainty, because we’ve all got Georgia on our minds,” he told Tax Notes.

Meanwhile, the IRS is revving up for its second pandemic tax return filing season, another round of economic impact payments (EIPs), and other congressionally mandated stimulus measures that will run through the tax system, said Mark J. Mazur, director of the Urban-Bookings Tax Policy Center.

A second round of EIPs, distributed while so many taxpayers will also be expecting tax refunds, is likely to be difficult for the IRS and confusing for individuals, Mazur said. A “massive” education campaign will be necessary to help recipients track the two payments, he said. “The tax system may have learned something” from the 2020 coronavirus pandemic filing season, Mazur said. “The taxpayers, not so much.”

Practitioners said their year-end plans are being upended by ongoing mail backlogs at IRS processing facilities, the anticipation of new congressional rules for Paycheck Protection Program loans and forgiveness applications, additional EIP reconciliations on 2020 tax returns, and other uncertainties. 

Tech Updates

“With the 2020 filing season, many CPAs realized that their technologies were outdated,” said Stephen Mankowski of the National Conference of CPA Practitioners. CPAs and other tax professionals spent most of 2020 adapting their offices and practices because of the pandemic, he said.

Mankowski said he expects that stay-at-home orders will continue in 2021, requiring practitioners to maintain home offices. Expanded use of secure cloud-based portals for document exchange, new apps for handling and signing PDFs, virtual networking, and visual meeting services have all seen explosive growth among tax businesses that will likely continue in the new year, practitioners said.

This transformation raises several issues for tax and accounting businesses.

“I think it’s become clear . . . that CPA firms are really in the cybersecurity business,” said Troy Lewis, former chair of the American Institute of CPAs’ Tax Executive Committee. Work-from-home networks have opened a lot of potential security holes for hackers, he said, adding that both clients and the IRS expect online security to be a top priority for tax businesses.

Mazur observed that the past year has widened and sharpened the digital divide — in tax businesses and at the IRS — between employees who can telework and those whose job precludes it. That growing chasm will have both tax and human-resource implications in the coming years, he said.

Lewis said his firm, Lewis & Associates CPAs LLC, like many tax businesses, has upgraded its IT and other equipment and adapted its offices for social distancing and other COVID-19 accommodations. But Lewis said the firm is also still dealing with practitioners who haven’t upgraded, and with clients needing help with their tax professional's technology. Tax businesses, like the IRS, will need expanded outreach for nontechnical taxpayers, he said.

Return to Normal?

Mankowski said his group is anxious to see the IRS’s reorganization plan, which was mandated by the Taxpayer First Act and is expected to be released in January.

Several tax professionals told Tax Notes that their top IRS priority for 2021 would be a dedicated practitioner service portal — both phone and online — with trained personnel empowered to resolve taxpayer and practitioner problems.

But tax practitioners’ 2021 expectations for the IRS generally are pretty low. No one is sure how much, or whether, Congress will fund the agency’s statutorily required Taxpayer First Act customer service, employee training, and internal restructuring plans.

Mazur said he is worried that the entire 2021 filing season will be shaped by the unpredictable pandemic. “The IRS’s starting point is going to be return to normalcy,” he said. “But what if there’s [another] major COVID breakout? . . . The IRS being flexible will be important.”

Congressional uncertainty and delays are influencing tax advice, Mankowski said. “With all the head-butting between Treasury and Congress, a lot of us have suggested waiting to apply for PPP loan forgiveness until they decide the deductibility of expenses,” he said.

Taxpayers are also losing patience with IRS paper mail backups that delay refunds and correspondence, and with penalties for notices that were never received, or were replied to but went unacknowledged by the tax agency, Smith and others said. The IRS’s automated systems are “often far out ahead of their manual systems,” Smith said.

By intensifying practitioners’ and taxpayers’ need for electronic communications with the IRS, the pandemic has also focused attention on the agency's heavy reliance on paper, tax professionals said.

A major challenge in 2021 will be minimizing the use of paper, said Lewis. But he acknowledged that such progress would require IRS and tax community outreach to communities where electronic service adoption is lowest and least consistent.

Plenty of Optimism

Financially, 2020 “was not a horrific year” for most tax businesses, according to Mankowski.

Mankowski said discussions with his National Conference of CPA Practitioners colleagues suggest that CPA firm revenue may have slumped 10 to 15 percent in 2020 compared with the year before.

Marchelle Foshee of the National Society of Accountants estimates that while her private practice has experienced more revenue fluctuations because of the economic crisis, it will end 2020 about the same.

On the other hand, “I’ve heard some [practitioners] say they’ve never had a better year” than 2020, Lewis said.

The issue in 2021 “will be less the absence of work than the collectibility of fees,” Lewis said.

Mankowski said banks and the Small Business Administration actively discouraged practitioners from charging fees for PPP loan applications in 2020. Doing so for PPP forgiveness applications, which require a lot more record gathering and information reporting, will be difficult, he said.

While tax businesses aren’t immune to the pandemic’s economic fallout, “many practitioners are in a much better space, professionally, than one year ago,” Mankowski said.

Mazur said preparation for uncertainty — such as delays in tax deadlines and unusual spikes in the volume or location of COVID-19 outbreaks — should be the guiding principle of the filing season, if not the year.

Foshee said that while tax businesses are sensitive to the financial fortunes of their clients, “everyone has got a tax return they have to file. Even if a business is closed a month or two, they’re going to need services.”

Smith said that 2021 will probably be a turning point for return preparation businesses. “They have clients who need help more than ever,” he said. “As long as you don’t lose too many, you have skills that are critically important to these small businesses.”

Lewis recalled an old saying: “You might think your headache is awful, but it’s great for the druggist.”

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