Practitioners Anticipate Tax Filing Season Wins And Woes

Phyllis Jo Kubey, a solo practitioner based in New York City, and Ryan L. Losi, executive vice president at PIASCIK, discuss the 2021 tax season and the unique challenges posed by the COVID-19 pandemic. 

Read the podcast episode’s transcript below. The post has been edited for length and clarity.

David Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: tax season kickoff. February 12 marks the start of the 2021 U.S. tax filing season. But this year, much like last year, will be far from normal.

First, the IRS announced that the tax season will begin three weeks later than in previous years. This is the second filing season since the start of the coronavirus pandemic and the third since the Tax Cuts and Jobs Act took effect. This has presented taxpayers and practitioners with some familiar but still unique challenges. Here to talk more about this is Tax Notes senior reporter William Hoffman. Bill, welcome back to the podcast.

William Hoffman: Hi, David. Thanks for having me back.

David Stewart: Now, I understand you talked to two practitioners about the 2021 filing season. 

William Hoffman: Phyllis Jo Kubey is an enrolled agent based in New York City. She served most recently as chair of the Internal Revenue Service Advisory Council’s Wage and Investment Subgroup, working with the tax agency’s Wage and Investment Division on implementation of coronavirus emergency tax legislation, such as the Coronavirus Aid, Relief, and Economic Security Act. Forbes also picked Phyllis’s Twitter feed as one of the top 100 tax accounts to follow in 2021.

Ryan Losi is executive vice president at PIASCIK in Richmond, Virginia, leading the company’s business development efforts. Ryan also heads the company’s international and real estate practices. Before PIASCIK, Ryan worked in international tax at both KPMG and PricewaterhouseCoopers. Ryan’s business takes him all over the world, allowing him to indulge a passion for scuba diving, for which he’s earned an advanced open water certification to 100 feet deep.

David Stewart: What sort of issues did you get into?

William Hoffman: I’ve been writing tax return filing season coverage at Tax Notes for almost 10 years and this year I wanted to do something different. We recruited these two tax professionals specifically to hear of two very different perspectives on this most unusual 2021 filing season. I also wanted to go beyond the routine questions about how this filing season differs from the last and what we can expect this year from the IRS.

Our tax professionals talk about the tax agencies’ response and practitioners’ preparations for February 12 when the IRS will receive almost one-third of the individual returns it expects to receive in just one day before April 15.

We also conducted the first Tax Notes podcast top 10 lightning round of major practitioner and IRS filing season issues, and challenged our guests to give us their first impressions and thoughts without any advance notice or preparation for the question. It was exciting, at least as exciting as tax filings season podcasts get.

David Stewart: Sounds great. Let’s go to that interview.

William Hoffman: Welcome, Phyllis and Ryan. Thank you for joining us on the Tax Notes Talk podcast.

The IRS starts accepting individual tax returns for the 2021 filing season on February 12, almost three weeks late this year, but practitioners have been completing electronic and paper returns and storing them for weeks in advance of submission. Given the IRS’s disappointing history with technology and long lines, are you worried about the agency’s ability to receive approximately 40 million tax returns in one day?

That’s almost one third of the individual returns the IRS would normally receive and process by April 15. That’s not to mention all the intervening deadlines for corporations, partnerships, and so on.

Also do you have any plans for client issues in case the IRS is unable to promptly process the roughly 37 million returns that it would usually have finished by now? 

Phyllis Jo Kubey: I do have faith that the IRS has done a lot of troubleshooting on this and they know what to expect. I would like to give them the thumbs up that we will not have any technological disasters. Of course, one never knows. Things do happen.

In terms of what I’m doing in my practice, my clientele is not habitually an early filing bunch, so I’ve been collecting information as I usually do. Most of my clients’ stuff is not yet complete so I’m working away.

In terms of what I’ll be filing on February 12, I think if I submit anything that day, it will be some amended 2019 and prior year returns that I’ve had in the hopper but haven’t been able to transmit.

Ryan Losi: Similar to Phyllis, I think the majority of taxpayers will probably experience little to any delay other than the actual three-week announcement of acceptance of returns that the commissioner made. But like her practice, probably a good 85 percent to 90 percent of our clients do not actually file timely returns.

We asked for extensions and whether there are extensions that are available to domestic taxpayers or special extensions available to international taxpayers. We use those quite a bit so really the second half of the year is when we filed the majority of our returns.

I will tell you, those are ones I’m more concerned about that the IRS processes correctly. If the last 10 or 11 months are any indication of the IRS’s ability to process timely, chronologically, in order, amended returns that were filed before and during COVID-19 as well as applying payments correctly on whether those were payments made on the extended due date, which the commissioner and Treasury extended last year to July 15, or whether it’s just amended returns where you’re choosing to apply the refund claim to a subsequent year, my hopes are not very high that the IRS is going to get that right.

That’s based on countless experiences our firm and myself have had over these past 10 months. I think that the vast majority of taxpayers that have simple tax returns are going to have a fairly routine exercise. For clients that have complications with multiple years carrying into 2020, I’m not holding my breath.

William Hoffman: Phyllis, you and I have talked about the extension issues before in previous filing seasons. I’m wondering if you share Ryan’s concerns about the processing of extensions and maybe the expected increase in volume given our current situation.

Phyllis Jo Kubey: I do agree with Ryan. When you ask about how the transmission of returns will go, that’s one issue. When you e-file a return, if it gets through the system without any immediate rejections, that’s step one. But then after that, there is a lot of stuff that goes on behind the scenes. The IRS returns get flagged for identity verification. They get flagged for errors. There are various other processing things that go on in the background that can cause delay.

In terms of what Ryan said about the ordering of things, that can definitely create a big mess. And in terms of extensions, you get another layer of filing. If you have clients that are apt to have balances due, you want to set up the payments with the extensions. That’s another layer of work. I think my enrolled agent colleagues and all tax professionals have some tremendous concern about these issues.

William Hoffman: Interesting. Phyllis, you and many other tax professionals have noted to me how important IRS and state tax conformity is harmonizing deadlines, tax forms, regulations, United States tax law, and how important that is to tax practitioners practices during filing season.

Can you tell me how much time and what kind of work the current state and federal systems impose on your particular practice and whether and how the IRS or the tax profession might minimize the troubles of tax conformity?

Phyllis Jo Kubey: I think the major burden is keeping on top of where the state tax agencies are with tax conformity both for individuals and businesses. I know New York state, which as a general rule did not conform to a lot of recent tax legislation, just within the last couple of weeks came out with some guidance that was a big sigh of relief for people who filed New York returns because they are conforming on some of the retirement provisions in the CARES Act and the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

We have a lot of issues that we thought were going to be messes. For instance, if somebody decided to take advantage of the federal three-year spreading out of a retirement distribution and if that weren’t the case with the state, you’d have issues not only filing the tax return and reconciling, adding things back on the state return, but also you’d have huge issues with basis going down the line.

Keeping on track of these things takes a lot of time. Something that I looked at yesterday might change today. I know having a practice where a lot of people do a lot of different state returns, I’m going to have to make sure to check out those websites before I file anything.

Then it’s not only a matter of the state taxing authorities. It’s how are the software vendors able to keep up and incorporate last-minute changes into our tax software? We’ve had issues before where it’s like, “Well, I know that this was finalized weeks ago, but, ‘Hey, Thomson Reuters — that’s my talk software vendor — why haven’t we incorporated this?'” I totally get it that it’s a nightmare for tax software vendors who have to test all of these things with the IRS and with the state tax agencies. It’s a big issue.

William Hoffman: Interesting. Ryan, how does your real estate and cross-border international tax experience compare with Phyllis’s? Especially considering, at least as far as I understand it, that the U.S. tax professionals are more or less at the mercy of foreign authorities over which he or she has no control.

Ryan Losi: If you have a multistate practice or even international practice, you start to understand the ability for different jurisdictions to make their own laws, especially tax laws. Whether it’s conformity or de-conformity with the U.S. code really can keep you on your toes is the best way I can say it.

For instance, Virginia has been the same way the last probably five to seven years. I will say that Virginia conformed for the most part. It was the first bill that was signed in the General Assembly every year. And [as] someone who’s championed a number of bills and got patrons and gone through the committee testimony and got things pushed through, that worked except when you had a changing General Assembly.

If you’ve watched the political side of Virginia, it’s changed. Something that to us professionals is supposed to be routine and that we’d think would be an easy passage has all of a sudden become a bargaining chip. We’re waiting five to six months after the year-end to even know what the prior tax laws are going to be, which is what we’ve been waiting on the past five years. Even right now we’re still waiting. We don’t know what Virginia law is.

I think that as a practitioner doing the federal side, there’s not retroactive treatment at the federal level unless it’s beneficial. They’re usually not going to do something that’s negative on a retroactive basis. But if you’ve got a multistate practice, you have 50 states and that’s where you realize like every state can write its own rules when it comes to income taxation for the most part. That is a struggle. You have to have a team that’s dedicated to following it. What you try to do is get a sense of the clusters of your clients so that you can monitor those clusters on a daily basis or definitely weekly basis.

Now, on the international front, it’s a little different. There are entirely sovereign countries that have really no obligation to U.S. law. When you get clients that have assets abroad — and whether those are business assets or certain types of investment vehicles — a lot of times you’re at the mercy of a number of different people. It could be foreign trustees, foreign brokerage or investment advisors, foreign chartered accountants, or foreign tax attorneys. Or it might be having to really push your client to advocate and persuade them to meet the U.S. deadlines because they have their own separate deadlines and business cycles.

In the international piece, we have to take into account other countries’ finalization of tax returns and financials and provide that information on time so we can do the conversions to U.S. tax principles. On the domestic side when you miss the international filings, there’s a lot of statutory, huge civil fines under sections 6038 and 6039 of our code.

It’s not just a matter of, “We just missed a deadline and it’s going to be a slap on the wrist.” Many times there’s an automatic penalty in the realm of $10,000 or more and then you’ve got to fight to get it removed. Then the question is how do you bill that? How do you collect it? How do you communicate? That’s kind of the struggle when you’ve got cross-border reporting for clients.

William Hoffman: Has the conformity problem gotten worse with COVID-19 and economic contraction of the last couple of years?

Ryan Losi: In the decade of the 2000s it seemed like Congress passed a major bill every single year. Finally after 2010 there was a little breathing room. It was only every two or three years.

I think what happened is COVID-19 demonstrated if you couldn’t work and be productive in a remote setting, then your customer and clients would see it. It stood out and in particular at the IRS and all of its different departments. Just having people available to man phones or departments to process [powers of attorney] jumped out dramatically.

The amount of time that we’re spending just trying to get the service or tax authority to address our issue — not fix it, just address it — so that we can communicate to the client that it’s actually going to be resolved has dramatically gone up. But it was going up at the federal level anyway because of the reduction in workforce at the IRS over the past decade.

William Hoffman: Phyllis, what do you think?

Phyllis Jo Kubey: I would agree with what Ryan said about the pivoting of the IRS and the state tax agencies to a teleworking environment. That was a huge, heavy lift, particularly for the IRS where so many of the phone operations come out of Wage and Investment, which was one of the least teleworkable business operating divisions prior to COVID-19. How they got that up and running was just astonishing.

I do think it’s kind of fun when I call the practitioner priority service now and get to ask where people are. They sound just snug as a bug in a rug in their basement working from home.

William Hoffman: I’m really glad that we’ve got two longtime tax professionals here on the podcast to compare and contrast their experiences. I want to call a lightning round. I’m going to call on each of you by name in turn, and I’m going to mention 10 issues of what we believe are of current interest or concern to tax preparers and practitioners during the 2021 filing season.

I want your first impressions, thoughts, anecdotes, ideas, or insights about those things either for yourself, your clients, the IRS and tax administration, the tax profession, or the whole universe in general. 

Phyllis, IRS Practitioner Services.

Phyllis Jo Kubey: IRS Practitioner Services is one of our most beloved and hated resources. Beloved because we really need that level of service that’s particular and more specialized for practitioners, and hated because of the IRS resource limitations that often equates to long hold times.

William Hoffman: Ryan, IRS Practitioner Services?

Ryan Losi: Efficient at addressing simple complex matters. Very inefficient at addressing complex tax matters.

William Hoffman: Ryan, IRS processing backlogs.

Ryan Losi: The commissioner needs to know what the frontline are experiencing because the message externally is not the same that I hear internally when I speak to the agents.

The commissioner stated on January 21 that all of the mail had been opened. In the two weeks after that, I had a number of IRS calls. Many of the amended tax returns that were filed during that period leading up to July and even thereafter, although the mail may have been opened, were not processed.

We need processed tax returns to have the final result that we’re doing for our clients, which is finalizing their tax year and that account, and any carryforward attributes that go into effect a subsequent tax year.

William Hoffman: Phyllis, IRS processing backlog.

Phyllis Jo Kubey: I would echo what Ryan said. Kudos to the IRS for getting all the mail out of the trucks in the parking lot and into the service centers, but that does not mean that those returns payments correspondence has all been processed.

William Hoffman: Phyllis, fraud.

Phyllis Jo Kubey: Yikes. The balance between ease and efficiency of various programs and stopping fraudulent actors is really tricky. It’s all over the place. It’s been for years with the refundable credits. Now we have economic impact payments, which probably is not as open to fraud.

But a big one is fraudulent unemployment claims. When people have stolen legitimate taxpayers’ identity and filed unemployment claims, it’s often in states where the taxpayer has never lived. If they’re lucky, the state unemployment agency did a little bit more probing and said, “Hey, is this really you?” and were able to cut it off at the pass.

But in many cases I have a lot of clients now who are receiving Forms 1099-G from Ohio They’ve never lived or worked in Ohio. At least Ohio is sending the 1099-G forms via the mail. Many states don’t. You could be a victim of this kind of fraud and never know about it until a year or so down the line when you get an underreporter notice from the IRS. It’s a mess.

William Hoffman: Ryan, same one word: fraud.

Ryan Losi: Vigilant. For many years, the fraud was focused on the taxpayer and trying to obtain taxpayer information, which is a 1 to 1 ratio. You have to go to each taxpayer. There’s been a shift the last couple of years of focusing on tax preparer firms where there’s a one to many relationship. They can go to one firm and obtain a lot of information about many clients.

You have to be vigilant. On a personal level it’s monitoring your credit, having locks on your credit, and understanding transactions in various accounts. It’s also for your clients. It’s your firms having cybersecurity audits periodically by outside independent firms that can tell you honestly what your threats are and weaknesses and reporting on that. You’re not going to ever eliminate it entirely and so what you can do is be vigilant about minimizing it.

William Hoffman: OK. Ryan, your tax practice on COVID-19 in 2021.

Ryan Losi: Will likely be just as strong as 2020.

William Hoffman: Same question to you, Phyllis: your tax practice on COVID-19 in 2021.

Phyllis Jo Kubey: I’d say it’s kind of the tax professional full employment act. I don’t think we’re going to suffer for lack of business. In my practice I have a fairly one-to-one relationship with my clients because I am the chief cook and bottle washer. I don’t have staff. Many of my clients I’ve known for years and I do have a little bit more of an individual relationship and a lot of them need a lot of hand holding. I anticipate that that hand-holding is going to be on steroids this year.

There will be a big issue even for the individual filers of when do you file. Do you wait? It’s going to be really weighing the checks and balances on that because many taxpayers have other reasons that they need their 2020 returns yesterday whether for it’s financial aid, for a Paycheck Protection Program loan, or for shuttered venue operations grants.

We have some significant proposed legislation. One thing in particular that caught my eye was a bill that was proposed to exempt the first $10,200 of unemployment from federal taxation on the 2020 returns. That could be a big game changer for many of my clients. I have a lot of people in the performing arts. Almost all of them have collected both regular and pandemic unemployment benefits, and that could really make a difference for them.

William Hoffman: Lightning round five. Phyllis, PPP.

Phyllis Jo Kubey: Boy, we had the first PPP, which had its own set of rules. We had guidance that if you applied for loan forgiveness through the PPP, you couldn’t deduct the expenses on your tax return and that created a big brouhaha. Then we had the Consolidated Appropriations Act of 2021  that clarified that you could deduct the expenses that you used for the PPP loan. Before you couldn’t apply for PPP and the employee retention credit, but now you can. But you can’t use the same expenses and there are all sorts of other things.

I’m looking at smaller businesses whether or not they use a tax practitioner and thinking: what resources are they having to pull away from other business operations to learn about, implement, and comply with these provisions that have changed pretty dramatically over the past several months?

William Hoffman: Ryan, PPP?

Ryan Losi: Complex for all the reasons Phyllis said earlier. It was simple in 2020; you either claim the credit or applied for PPP. It was one or the other. It’s not both. It made it pretty simple and the majority of our clients went with PPP loan applications.

Now you have something that’s retroactive. It applies for the first two quarters of 2021, but now you have something that’s retroactive regardless of whether you took PPP. Now you’re having to bifurcate qualifying wages during the time period, but not only on a decrease in revenue, but even if there was a partial or full shutdown, which definitionally that’s challenging and in certain lines of businesses.

We’re also still waiting on guidance that our main trade association, the American Institute of Certified Public Accountants, has asked specifically the commissioner and Treasury to address: Can you claim ERC on not the same dollar that you use for PPP forgiveness, but the excess? Because there was a limit on what you could claim for PPP expense forgiveness. It wasn’t unlimited. It was based on presumed $100,000 annualized salary. If someone was paid more than that, could that excess? And what did they use for their testing period? Was it the eight week or 24 weeks?

That question has not been answered, which means clients or taxpayers have to delay, pause, and wait until we get that answer.

William Hoffman: Ryan, ERC.

Ryan Losi: Who pays for it?

William Hoffman: Understood. Phyllis, employee retention tax credit.

Phyllis Jo Kubey: Complex. Ryan, well put.

William Hoffman: Ryan, $3,000 child tax credit.

Ryan Losi: It seems excessive unless you reduce the income threshold for qualification. Again, there’s an acute section of the country that really has been devastated by this. I think it’s more in the travel, leisure, retail industry, and obviously the employees that are employed by those establishments.

But there’s also a lot of businesses that have actually performed well, as have a lot of individuals because they’re not paying commuting costs. They’re not entertaining and doing leisure activities. All of that is cash flow. At what point do you really need to continue to basically exhaust the Treasury or the U.S. balance sheet? That’s my concern.

William Hoffman: Understood. Phyllis, $3,000 child tax.

Phyllis Jo Kubey: Yes, I do have a client base where more of my clients would be underneath the phase-out limits and able to take advantage of this. It’s a big change and it will require being paid for as Ryan said.

William Hoffman: Ryan, eighth round. A third round of economic impact payments, $1,400 each.

Ryan Losi: If you’re going to do a fourth round, make it very acute and really narrow who can qualify whether it’s a business or an individual. My thought is if you’re coming out of pandemic, just like the natural process of coming out of a recession, things are going get better. You should be experiencing that. That’s typically when the government eases off the accelerator.

William Hoffman: OK. Phyllis, third round of economic impact payments.

Phyllis Jo Kubey: I agree with a lot of what Ryan said. It’s very difficult to determine someone’s need simply from numbers on a tax return. I think that’s always been the case. There are people who have very low adjusted gross incomes and taxable incomes who actually are doing quite fine and are probably putting these payments into savings. There are other people who look on paper like they would not qualify and who are so-called higher income that are actually suffering greatly.

It’s really tough. I know that there’s not a way to exercise more judgment than that from the IRS or the Treasury’s perspective because they simply don’t have a lot of the information.

William Hoffman: Fourth round of economic impact payments. Phyllis?

Phyllis Jo Kubey: I would probably repeat my answer. I think maybe we really do have to look at lowering the thresholds, but again, you’re never going to be able to have a simple answer that’s going to apply to everyone fairly.

William Hoffman: Final round. Ryan, April 15.

Ryan Losi: Will it get extended again? Last year’s extended deadline was moved to July 15.

William Hoffman: You believe it will be that way again?

Ryan Losi: No, I don’t. There probably would have been guidance by now or at least some kind of indication in addressing the public that they were at least contemplating it. I haven’t seen that, so I don’t know whether it’s going to be done. But if I were hedging, I would lean towards it’s probably not.

William Hoffman: OK. Phyllis, April 15.

Phyllis Jo Kubey: A date etched in my forehead. I would not be surprised if we had another extension of the April 15 deadline. Last March they announced the extension of April 15 for the 2020 season. I think it was right before the March 15 business filing deadline and everybody was kind of laying odds on whether that business deadline would be extended or not.

I would not be surprised if we had an extension whether it’s until July 15 or June 15. I wouldn’t venture a guess on that, especially if we have new tax legislation and other things that impact the IRS in terms of programs that they have to implement and administer.

The filing season, which has always quite short, seems to have gotten shorter with the February 12 starting date. I think extending that deadline past April 15 will give a lot of practitioners and taxpayers breathing space and allow them the “automatic extension” without having to do additional filing to achieve it.

William Hoffman: OK. Ryan Losi, Phyllis Jo Kubey, thank you very much for joining us. 

Phyllis Jo Kubey: It’s been a pleasure. Thank you. 

Ryan Losi: Bill, thank you again very much.