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Roger Harris: [00:00:07] Well, hello and welcome to another Federal Tax Updates podcast. I'm Roger Harris and I'm joined, as always by Annie Schwab. Annie, welcome. Hello.
Annie Schwab: [00:00:18] Good to see you.
Roger Harris: [00:00:19] Good to see you. And as we record, we have, I was going to say completed another tax season. But I think what's better to say is we've gotten through the first big deadline of a tax season and it seems like they're lasting longer and longer and stretching more and more through, say, October. But it is a good time, I think, to kind of reflect back on, you know, part of what we're going to do today is kind of reflect back on what we just worked through. And then we'll always, as always, look forward. So so Annie, what's your opinion? Again, I don't know when you're listening to this, but it's definitely after April 18th because we didn't record it till after that. So what's your opinion of tax season and what should we do to look back and try to I'm sure we want to find ways to make it better. So what do you think?
Annie Schwab: [00:01:11] Exactly. I suggest every year and some years are harder than others to go back and sort of evaluate how tax season went. I think it's really important for firms to consider, you know, where are the bottlenecks were things that they could have done better. Things that worked or didn't work, staffing concerns, you know, what does that look like? Client concerns, your client list, for example. We always suggest kind of considering technology. If that was the bottleneck, was it tax law? I mean, I know who we had a lot of late things coming from the IRS that Form 8915 was a headache for everyone. I think we still had some issues with the K2 and K3 and of course we still had like the SALT implementation for a lot of states. So that kind of caused stuff to get delayed, be a little bit more difficult. Clearly any type of lack of knowledge from your staff on any of these new items would have made tax season kind of hard. So I always think regrouping, even sending a survey to your clients for some feedback, sending a survey or talking with your staff or feedback. Because if you don't address it now, you're going to forget it. The next thing you know, you're just going to be back into another tax season and what struggles you had then you're just probably going to have again. So it is important. I know everybody just wants to take a break, go on vacation, and you certainly should do that. But I think taking a couple of days to sort of brainstorm is is important, too.
Roger Harris: [00:02:45] Well, it's still fresh in your mind because this was supposed to be the first normal tax season in a while because a lot of the normal is COVID. Yeah, whatever. The COVID stuff was pretty much gone. And yet I've been on a couple of calls with with people in the industry since Tuesday and we're still hearing a lot of the same things. I'm working too hard. I've got client problems. So, you know, while it's fresh on your mind, while you still can remember the the challenges, sit down with your staff, find out from their perspective and let's see what. You don't have to accept a bad tax season, but you do have to make changes to change it. And this is the best time to kind of look back. As you said, there's going to be tax law changes. There's going to be potential client issues. There may be do you have the right clients? Do you have too many clients of charging? Right. Yeah. Are you charging the right amount? Are your internal procedures what they need to be? You can't control when the IRS sends out a form, but you can anticipate those kinds of problems and plan for them. Who gets extensions? Who doesn't? You know, if you know you're going to be getting a K-1 on the due date, then why don't you go ahead and extend that return in February and take the pressure off? Well, why sit around and act like it's going to magically show up in time for you to do the return? So there's a lot of reflection that we need to do and we need to think about. And now's the time to do it, because, boy, I know it's fresh on your mind and and hopefully you all had great tax seasons. You don't have to do anything. But, you know, if you've got changes to make, at least the ones that you control, now is the time to step back and say, What could I do better to make next tax season easier?
Annie Schwab: [00:04:34] And I really, really encourage a client feedback form survey of some sort. Because if you don't capture what the clients are experiencing or thinking, are they happy or are they satisfied? Are they planning to return next year? Do they want more from you? I mean, they may have something they they want you to help them with. Is there an advisory service or an opportunity there for you to do more for that client, maybe even ask them, like, what are their priorities? What are their personal goals, their financial goals for their business? All of those types of things is wonderful feedback. And you know, maybe they'll say, you know, I wish you would have communicated earlier or I think I could this could have been done better. Well, I mean, all of the any feedback from a client is good feedback to have. So, you know, and you can encourage them to give you referrals, testimonies. You can use it as a marketing tool if you're trying to grow your practice and also a training tool for your staff. So if you get feedback from a client that so-and-so in the office could have done or should have done this or that. I mean, all of those are good training tips as well. So you might learn that you don't even want this client. Well, that's what.
Roger Harris: [00:05:49] I was going to say. You might look back and say that the fee that you earned from a client versus the time that was expended to earn that fee, the right answer might just be those clients need to go somewhere else. And in fairness to them and to you, the sooner you tell them that, the better for them. Because again, if you're spending three times the hours on a client that's not paying three times the fee, then maybe that's just not the right client for you. So it's a it's just something we need to do. We you need to decide who's going to control your tax season, you or the clients or the IRS. You probably can't do anything about the client. I mean, the IRS controlling it if they decide to make changes or something like that. But you should be in control of your practice, not your clients.
Annie Schwab: [00:06:39] Exactly. And when you get this feedback.
Annie Schwab: [00:06:41] If you don't do anything with it, then it's pointless. So, you know, having like an after action report or, you know, identifying what's going well, what's not going well, what you should continue to do, what you know, maybe don't want to do anymore. What needs what needs to be implemented, what new things need to be implemented. And like Roger said, like. If your goal is to only work 50 hours or 40 hours, whatever that number is, then you have to put into place a plan to make that goal happen. So measurable goals are important there and.
Roger Harris: [00:07:15] Something will have to change and you'll have to be willing to change it. It's not going to just change automatically. You're not if you work 80 hours a week this tax season, you want to work 50 next tax season, guess what? Something's got to change because it's not just automatically going to be cut by 30 hours if you do things the same way. How'd the IRS do this tax season?
Annie Schwab: [00:07:32] Well, compared to last year, the IRS did wonderful.
Annie Schwab: [00:07:37] Let's see.
Annie Schwab: [00:07:38] I have a couple of stats here. They gave the IRS a report card. That's what I was looking for. The term the report card. And the IRS achieved 87% in the level of service. So that's like their rating, which is way up, I think it was in the 20 seconds. In the previous year, they answered 2 million more calls through the live assistance. So all that money going to hire people did make a difference. We had better call service for that. And they cut the phone wait times by 85%. So I think it went to like 27 minutes if I'm recalling Roger. But I mean, I saw improvement. I've seen various articles indicating improvement. What do you think? Did you did you notice?
Roger Harris: [00:08:21] Well, yeah, I think, you know, again, one year doesn't make a pattern, you know. So hopefully this is the beginning of consistent improvements. I know it was a big emphasis at the IRS, I think, where a lot of our frustration came with the IRS and you referenced it earlier, was we all thought we had a very simple transaction to report this year, that third year of a deferred distribution from a retirement plan. And for the last two years, we had, what was it, 89, 15 form, and we just filled it in. And then all of a sudden we were waiting and we were waiting. And we're not we can't do it. And we don't know when we're going to do it. And all of a sudden we're hearing that we got 35 pages of instructions and we're we're yelling at the IRS and the software people. And really, what you don't probably know is it's probably Congress's fault because we did a webinar on security. Blame it on them. Yeah, we did a webinar on the Secure Act 2.0. And what the Secure Act did was adapt some of the COVID benefits of deferral for other disasters besides COVID.
Roger Harris: [00:09:27] And we've had a lot and we've had a lot, and we'll talk about some of them and some extended due dates later, I don't know. And so it wasn't that third year that was holding everything up. It was the changes necessary to adapt the Secure Act, which was passed, I believe, in December before the end of tax season. Is that correct? I think so. So we don't realize that when Congress puts a piece, a late piece of legislation on top of the IRS and the software companies in December, that it's probably going to take them 2 to 3 months to design a new form, new guidelines, new instructions and all of those sorts of things. Now, could they have figured out a better way to do it where we could go ahead and deal with just the third year if that's all we had? But that's so it's a case of understanding the impact of changing tax legislation at the last minute. And that's really what caused all this, because had there not been the secure act, I don't think the 8915 problem would have existed this year.
Annie Schwab: [00:10:28] Well, and.
Annie Schwab: [00:10:28] When it came out, it was worksheets after worksheets. I know our software took them a couple of days to just get it ready to go, although we were being told, you know, this is draft do not mean the IRS came out and suggested that you do not file the return until the final versions and the final forms and instructions are available. So I hope I really hope most most practitioners just went ahead and filed extensions for their clients. And I know, I know people wait till the last minute and cross their fingers and try to get those returns out. But that's stressful. That's stressful on you. It's stressful on your staff and you know that that did make it make it hard. I will say the backlog, there is no backlog. They took care of the backlog.
Roger Harris: [00:11:11] They did say they got. Yeah, well, I got caught up in some sort of backlog, but it's.
Annie Schwab: [00:11:15] Not like it for sure. But millions.
Annie Schwab: [00:11:18] Of pieces of mail are not sitting there waiting to be opened, which is progress, I.
Annie Schwab: [00:11:24] Suppose.
Roger Harris: [00:11:25] And they did start this year and we'll see how effective that is. Doing some scanning of paper documents to get it into the system quicker. So hopefully that'll pay some benefits again and we'll talk a little bit later. You know, we're beginning to get an idea of how they're going to spend the funds that they got from the Inflation Reduction Act and what they're promising to do with them and how it will impact our lives as tax preparers and hopefully our clients lives as taxpayers. So yeah.
Annie Schwab: [00:11:51] And I think there's.
Annie Schwab: [00:11:52] Seven or I don't know, 7 or 8 notices now that you can respond to via the web. Right? So and. Think their goal is like 72 different notice forms or something. So that also helps out clear some of that backlog and reduce the amount of paper that needs to be needs to be opened.
Roger Harris: [00:12:13] Yeah. So if you're hearing this podcast in some form or fashion, you survived the April 18th deadline. As we said earlier, that doesn't mean it's over. We have seen and this is a constantly evolving list, but any for a lot of states or parts of states tax season is still going on. So I think it's like about.
Annie Schwab: [00:12:35] 12 states that got.
Annie Schwab: [00:12:37] Disaster relief extensions. Some were may I think a handful were June, most were July. But I mean, the amount of extensions that are probably being filed, not just from like the 8915 being coming out late, but just due to these disaster disaster relief feeling like tax season is over for many. It's just still going. Right. So you know, keep an eye out for that, especially if it's you have a client in a state that you're not familiar with because not all the states are the exact same time. But it is important. I mean, it could have been late information. It could have been waiting on k-1s. It could have been revised forms. It could have been a lot of things that would, you know, need an extension for. So there are going to be clients out there, just regular old clients that you just need to get done. And taking the time and doing it correctly and accurately is is really the benefit of having the extension. And we spent, I don't know, multiple hours on webinars talking about IRC and if you recall during the tax preparation, there's a good chance that clients came across, you know, clients who got the IRC or could have gotten the IRC, didn't need to amend, had an error. You know any of these scenarios which would have caused either you now to have to go back into amendments or maybe you put them on extension so you could see a handful of extensions due to just IRC. And that's clearly a big issue. I don't know if we'll ever have a podcast that we don't mention the.
Annie Schwab: [00:14:10] Drc, but.
Roger Harris: [00:14:12] We'll probably talk about it some more on this one. But yeah, and I think Annie, there's one point you bring up and we need to focus on it. Extensions can also be a good tool to manage your practice better. You know, as you run into people who have extended due dates, have have unique issues, require more research, know they're missing documents or they're going to get them at the last minute. There's no harm in you. And I may have already said this once, but I'm going to say it again if I have you recognizing that and going ahead and getting those people off the table, get them on an extension, remove them from the stress of your day to day life, because you know where this game ends with them. They're going to get one. There's nothing that says you have to do all your extensions. The last three days of tax season. You can file an extension in January if you want to, and you should in some instances. And just balance out the work. Again, getting through tax season is a lot about managing the workload within the time that you have allotted to do it and extensions need to be a part of that instead. I think too many of us think about it as kind of this last minute Hail Mary when the last two days of tax season just aren't going to be enough time.
Annie Schwab: [00:15:23] And talking to your clients about it's not a bad thing, it doesn't mean you're going to get audited. Filing an extension is not something I guess communicating to the client, setting client expectations, letting them know that, you know, if by this date we don't have all of the information, you're going to get an extension and we'll get to your return when we get done, you.
Annie Schwab: [00:15:45] Know, when we get it.
Roger Harris: [00:15:47] And in some cases saying, and I know you're not going to get AK1 until probably the April 15th if that's the deadline. So we're going to go ahead and file the extension now because I'm not staying down here on until midnight on the 15th typing in your extension. So if you know, that's been the case, because if it's been the case, the last five years, you know what? It's probably going to be the case this year. It's not going to change.
Annie Schwab: [00:16:08] And I mean.
Annie Schwab: [00:16:09] There's still some other things you can focus on right now that are, you know, that will generate opportunities for billings. I mean, maybe during you can run data mining or some sort of client, prepare a client list of people who maybe owed a lot. Now they need some tax planning for estimates or, you know, I am certain that at least one client will get a revised 1099 or a revised K one. And now you have to go back and amend that return. Or maybe you don't maybe you let the IRS make the changes. I mean, that's something that, you know, you'll have to weigh the cost of amending the return and reopening the return or just waiting for the IRS to make the correction on their end and then send it to you. But but all of these things are billable and all of these things are important for the client, the client relationship. So just because tax season's over doesn't mean you're not you're not going to be busy, right?
Roger Harris: [00:17:00] No. Well, and. Kind of leads to now that tax season is over. We're kind of in the stage now. You send the return in and maybe this isn't the right way to say it. You hope it sticks. You hope that's the last you ever hear about it. You don't get a notice about it. You certainly don't get an audit about it. But the IRS is looking for certain things on these returns. We're into this post filing world of did I do it properly? Did I miss some information? Is it going to get audited? Any what what are the things that the IRS has already told us they're looking for and that maybe we need to make sure we are prepared for or are discussing going forward because the ship may have already sailed on the return you've already sent in, but that doesn't mean you don't need to have it. So what are some things the IRS is kind of told us some things that they had.
Annie Schwab: [00:17:47] I mean, they came.
Annie Schwab: [00:17:48] Out pretty pretty clearly indicating that they were going to be looking at those claims. I think it was number one on on their list. And I imagine that we will continue to see that. So I would not be shocked to hear some some stats on how many they've audited regarding IRC results, you know, that kind of thing. There's always like the common matching notice, you know, the client didn't give you a 1099 or an interest statement or A W-2 or something like that where it just doesn't match what's on record at the IRS. And so you get a notice. Those are fairly easy to, to handle, but those are common. There's other things like reasonable compensation for shareholders, treating employees, treating your your workers either as employees or independent contractors. You know, did you file those 1099 should have should have they been classified as an employee versus an independent contractor? So, I mean, there's some common things, large fluctuations from year to year. Those sort of set off red flags. But but the common notices, they you know, just the the common letters and notices that clients get can easily be addressed in general. So I know, Roger, we were talking about what's going to happen with all these audits. And, you know, there's talk of armed men coming to your business.
Annie Schwab: [00:19:13] Right.
Roger Harris: [00:19:14] The army is invading.
Annie Schwab: [00:19:16] Yeah.
Annie Schwab: [00:19:16] I mean, if you want to go into sort of what's the difference between like an IRS letter that you get in the mail and then actual audit?
Annie Schwab: [00:19:23] Right. Because they're different.
Roger Harris: [00:19:25] Yeah. One of the problems and we've got some stats that we can share with you about how much the IRS actually is auditing people. And I think what we what the IRS calls an audit, what you or I may call an audit, what a politician calls an audit and what a member of the media calls an audit. Unfortunately, they're not always the same. I think we look at audits is where the IRS questions our return, not because something was necessarily missing, but hey, prove to me that you made those charitable donations You said you did. Or in a business case, let's let's prove that the income that you reported is is accurate. Those are what I call an audit. Now, if I get a letter from the IRS, because as you mentioned, I forgot to include a 1099 and the IRS has that information. So they just say, hey, we got this 1099. We don't see it on your return. If we're right, here's what you owe us. I don't consider that an audit. Now, I don't know that that's the case with the media or politicians or taxpayers. They probably put everything from a communication standpoint, from the IRS in the audit bucket when it's not earned income credit. There's a lot of notices that gets sent out where it's proper. It wasn't properly calculated, and the computer has determined that you got too much or too little of the Earned income credit. And here's what we believe. I don't believe that's an audit, but some people believe it is, because.
Annie Schwab: [00:20:57] To me, that's like an.
Annie Schwab: [00:20:58] Adjustment.
Annie Schwab: [00:20:59] Letter or like a right. Because if you consider that an.
Annie Schwab: [00:21:03] Audit either.
Roger Harris: [00:21:04] If you look at the percentages and I think, Annie, we've got some somewhere here that came out just the other day, the audit what's interesting about the percentages of audits is that the IRS, because the statute stays open for a while, is basically reporting on three years ago and their audit percentage. But if you look at the percentage of taxpayers that get audited, it can't possibly include all the notices that get sent out and all the other things. So the first thing we all need to be is on the same page of what is an audit and what's not an audit because we're going to talk in a minute about how politics have crept into the IRS and how that term now is going to become very important from a planning and policy and tax administration standpoint. But do you have any of those numbers from from the IRS about audit?
Annie Schwab: [00:21:58] I don't think I have them. I do. I. Did want to make a point, though. You know, we talked about these red flags and things that could generate an audit. Sometimes it's just a random selection, a computer screening. So just because someone gets identified or selected for an audit doesn't mean that something on that return, you know, set the IRS heading their way. Sometimes it is just a random selection. And then there are some some audits that are based on the types of transactions, the types of numbers, fluctuations. Those are more of like an examination and and some are just there could be an audit where it's just back and forth via just mail. So that's like a correspondent audit or it could be an examination audit, which is done in person, whether at the IRS office or the place of business or the residence or something like that. So there's different levels of audits that we that we've seen. So just keep that in mind, too. I don't I don't know how they like Roger said, categorize all this, but I can see him looking for stats.
Annie Schwab: [00:23:06] Let's see.
Roger Harris: [00:23:06] I can't find my stats either, but I can tell you, I know I remember enough to know that the audit rates are declining. Shouldn't be a surprise. Now that we're talking about 2018 returns. That's why I mentioned that you can't come up with a full set of stats for audits, you know, until there's been a few years after the returns have been filed. But we're seeing this huge decline in what the IRS calls rate of audit. And so the first question is, how does that impact overall compliance? If the general public knows that their chance of getting an audit and in many instances it's less than 1%, does that enhance compliance? Does that encourage compliance? Because that's really what audits are supposed to be about, is to verify that we have compliance. So we have declining audit rates. Now, the IRS just was given all this money, 80% of it for enforcement. And yet what we hear is that none of this money will be allocated to audits, auditing people who make less than $400,000.
Annie Schwab: [00:24:16] Where they got that number out of the air.
Roger Harris: [00:24:18] Well, that's politics. That's a political statement. The IRS didn't come up with that number. This was something that came up in the discussion about the Inflation Reduction Act. Unfortunately, when politics creeps in now, if you go listen to the new IRS commissioner, Danny Werfel was at a Senate Finance Committee hearing yesterday, and what was apparent was that we were having a political discussion with the IRS commissioner and him being forced to reiterate that. They would not be increasing audits on people under $400,000. The Republicans, of course, are forcing him to say that because that's the promise. And the Democrats are forcing him to say that because that's what they promised. So what happens now? Let's go back to Iraq. A lot of that money was given to businesses who made a whole lot less than $400,000. So does that mean that you can have rampant noncompliance with the IRC program as long as you don't make $400,000 and the IRS won't come after you?
Annie Schwab: [00:25:26] I'm sure that was not the intention.
Annie Schwab: [00:25:27] Because we know.
Annie Schwab: [00:25:28] They're targeting IRC claims.
Roger Harris: [00:25:30] Right. So you've kind of tied the IRS in a knot of saying they're trying to close the tax gap. They want to close the tax gap. And yet a lot of that tax gap exists in businesses or individuals for that matter, who make less than 400,000. But we've kind of sworn them off as being the target for political reasons. So. It's going to be something we're going to have to watch as practitioners, because if you ask the IRS, they're not going to say if you make less than 400,000, you're not going to get an audit because guess what? Everybody in the country will make $390,000.
Annie Schwab: [00:26:06] I was about to say that's just begging for some some manipulation there.
Roger Harris: [00:26:11] But if they don't, then they get hammered by one side or the other. So we're in an interesting time here, is that the IRS has more resources to theoretically do more audits.
Annie Schwab: [00:26:21] They'd have done a.
Annie Schwab: [00:26:21] Lot of hiring.
Roger Harris: [00:26:23] And they're hiring more people and they're training them. And if you're tired of doing taxes and you want a job at the IRS, they're hiring and they've got plenty of openings.
Annie Schwab: [00:26:31] You're going to do a background check, but you.
Roger Harris: [00:26:33] Got to make sure you paid your taxes. But then then you're saying we're not going to go where the you know, what was the old Al Capone said? Why do you rob banks? Because that's where the money is. Well, if the noncompliance is under 400,000 and you tell everybody, I'm not going to audit those people, then what good are these hiring? There's just so much money you can get. So we've got an interesting messaging problem, at least my sense is they're going to audit where they believe there's noncompliance and they'll leave. And that was the.
Annie Schwab: [00:27:00] Goal of an audit.
Annie Schwab: [00:27:01] Right. I mean, that is essentially the goal of the audit.
Roger Harris: [00:27:04] Right. But we're going to have it's going to be interesting to watch how you balance the messaging that has to be consistent from the administration. They control the Treasury, controls the IRS. Treasury is controlled by the White House. That means today the Democrats. We're going to talk in a little bit about this next election. But if the Republicans control the White House, we'd get a different message. We might, who knows? But there is this challenge now that the IRS has. They have the resources to do more audits. They have a rampant non potential non compliant problem with the employee retention credit and other things that are that are more likely to be happening or as likely to be happening in the below 400,000. And yet politically, they're told we can't increase our audits there. So we'll be interesting to see how that works. And is that 400,000 before the audit or after the audit? So if I reported 200,000 on my tax return, but I really made 800,000, which bucket does that count? You know, So it's going to be interesting to watch. But it's the IRS and the new commissioner. That's one of the things that if you listen to their discussions about how they're implementing the Inflation Reduction Act, you're going to hear that $400,000 number a lot. But remember, that's political. The IRS didn't set that number. They're being told what to do and you already know what's going to happen. Then five years from now when there's rampant noncompliance for people under $400,000, the next administration is going to criticize the IRS for not catching it. So that's consider that, too. If you want to apply for a job at the IRS.
Annie Schwab: [00:28:39] You know, maybe not stick where you are, it's probably better off.
Roger Harris: [00:28:42] So So we're in we're in interesting time. And that's, again, a part of the Inflation Reduction Act and the politics to get it passed and whether or not that's that's the right threshold. And I don't think anybody says go audit somebody that's cheating, but you can only get $10 from them because that's a waste of resources. But but I think it's hard to start setting income limits for audits as opposed to judging it based on compliance. But we'll see. It's going to make for an interesting next few.
Annie Schwab: [00:29:10] I mean, there's been a lot.
Annie Schwab: [00:29:12] Of good things come.
Annie Schwab: [00:29:14] Out of.
Annie Schwab: [00:29:14] Of the resources like we mentioned. I mean, the online systems the they got rid of the backlogs, the the phone answering service, the callback feature. I mean, we're seeing progress. And I think that's really important to note going forward.
Roger Harris: [00:29:30] The IRS is committed to doing a lot better with their technology and giving us more tools like we're used to seeing in the private sector. So I don't question it all. The IRS is desires to spend this money properly. I think you're seeing consistent messaging that it's going to focus on customer service before enforcement, despite the money going more to enforcement than customer service. But it's just more expensive to hire a human being to go audit than it is to automate A answering the phone or something like that. I think it's going to be an interesting few years, but there's going to be some challenges and they are hiring and they're they're aggressive in hiring, but they've committed to a lot of technology improvements and a lot of ways to deal with them without having to wait on the phone. So, yeah.
Annie Schwab: [00:30:17] All right. So we looked we.
Annie Schwab: [00:30:18] Looked at a bunch, kind of looking at the past.
Annie Schwab: [00:30:22] Kind of looking for a little bit.
Annie Schwab: [00:30:24] So there are some some some items that are coming up. And I think we've mentioned this one before, Roger, the E filing requirement for information returns, it's going to 1010 returns from 250. And that's on a on an aggregation basis. So if you do five W-2s and six, 1099, it's not you're at 11, so you're over the threshold, it's not per type of return. So and that that's comes into effect. In 2024. So it's something that's on the horizon, something that needs to probably be addressed because there could be some process changes in your practice, something you need to communicate to the clients. So that's definitely on the forefront.
Annie Schwab: [00:31:08] Yeah.
Roger Harris: [00:31:09] And again, now's the time. You're through tax season. You've got to start communicating through any of these clients that you do 1099 or W-2 for. You know that you're probably going to have to make some changes. So start working on that and we apologize if we're repeating some of this. But we figured during tax season, you probably didn't remember. We told you this already. So we're going to be repeating some things because now's the time to really focus on some of these things that are going to be coming in the future. So if you are in the, I guess, the payroll or form filing business with 1099 and W-2s, start getting your clients engaged in what's going to take to to update to meet these new requirements because it's starting in January.
Annie Schwab: [00:31:49] Starting in January down to ten. So that's.
Annie Schwab: [00:31:51] A and doesn't.
Roger Harris: [00:31:52] Take long to get to ten.
Annie Schwab: [00:31:54] Not at all. Roger, Our last podcast, we talked about something that.
Annie Schwab: [00:32:01] Is is approaching quickly, even though it's been.
Annie Schwab: [00:32:04] Around a long time. And that's what we call the Corporate Transparency Act of 2020. And I know 2020 seems so long ago, but here we are without complete guidance. We're still awaiting some instruction, but it is going to affect a lot of small business owners. You want to talk about it, Roger?
Roger Harris: [00:32:24] Yeah, just briefly. I mean, this is something this is part of this whole fencing thing of chasing down money laundering, all that sort of thing. And and the one thing that we mentioned on our podcast and again, if we're not going to spend obviously much time on it today, but if you want to go back and listen to that podcast, you can can get a lot more details and we're going to spend today covering it. But. It's not one of these things where you say, Well, my clients are too small. Actually, the exemption from this act is if you're big enough, it's not if you're small enough. But in a nutshell, if your company was set up with a state so typically is going to be LLCs and corporations, then there will be a reporting requirement starting January 1st of 2025. Correct. If you are already in business, you've got to report before the end of the year information about who are they calling or who they define as beneficial owners. And it's some it's obvious and simple. It's you own a certain percentage. In other instances, it's what duties or responsibilities or actions you control within the company. If you form a new company starting after January of 2025, you only have 30 days to file the report, and the penalty for failing to do either of those two is $500 a day, and I believe it caps at $10,000. 10,000? Yeah, it's probably some jail time in there too. But yeah, so it's going to impact almost all of our businesses that aren't sole proprietors or partnerships. And it's not that we just have to go do something once. We all have that 30 day clock ticking if we have a change in a beneficial owner. And again, this.
Annie Schwab: [00:34:07] Is something.
Annie Schwab: [00:34:08] That needs to stay in the business owners forefront going forward. Right.
Annie Schwab: [00:34:13] And we don't even have the form yet.
Roger Harris: [00:34:14] So now they're getting they're finally getting around to giving us more information. I know there's there's a group we're a part of that's trying to come up with some awareness campaigns. And, you know, as more comes out because again, when you talk about a $500 a day penalty, that impacts a lot of our businesses, particularly on the small end, there's a massive lack of understanding and our awareness. Maybe it's a better way to put it about this and yet it's substantial. And then you guys, you've dealt with FinCEN before. You know how they are. So we got to take it seriously. So let's watch for that. Go back and listen to our podcast where we spend a little more time on the details, but don't, don't let this slip up on you.
Annie Schwab: [00:34:56] Because unfortunately.
Annie Schwab: [00:34:57] You're right. There's a huge awareness gap.
Annie Schwab: [00:34:59] Yeah, I.
Annie Schwab: [00:35:01] My focus was not on it until just several months ago. And like I said, you know, this was something that was established in 2020.
Roger Harris: [00:35:07] So yeah. And again, I mean, it's not like it's just a small amount of money. It's $500 a day is a lot of money. It's really going to be critical for for those of you. And we can have this whole discussion about whether helping someone form an LLC is practicing law. But one of the key things that you need to remember if if part of your practice is helping people form entities, corporations, LLCs, whatever, two things you need to be aware of. First of all, it's that 30 day period when you set up a new entity that has to be done within 30 days. Secondly, you're going to be considered a disclosable party in this transaction because you're setting up the company. So you you are subject to some responsibility here. So if you continue and want to continue to set up entities as we go forward, you really better understand this law and make sure you're you're following its rules because they're going to know who you are or they're supposed to know who you are. If you know what you're doing right. And if you don't, then you might get in trouble. So it really impacts those of you. And and some of the attorneys are starting to say this really does define that this may be as a practice of law as opposed to something that accountants shouldn't do. I mean, any time you tread on somebody's income, they get kind of upset with it. So I think a lot of attorneys have been concerned for a number of years about accountants, CPAs, enrolled agents, setting up companies. Even though you can go online. What is what's the company that you can go online, legal Zoom or something and set.
Annie Schwab: [00:36:47] Up your own? You can set it up. Yeah. You just get the.
Annie Schwab: [00:36:50] Forms right there.
Roger Harris: [00:36:51] You get them right there. But you know, they want to say, Well, you're practicing law, you don't have a law license and all that. Well, that may not have scared you off now, but this might. So you might want to make sure you're you're aware of this, you know, and and comply with it. So yeah that's that's. That's coming down the track.
Annie Schwab: [00:37:08] And there's more on the.
Annie Schwab: [00:37:09] Horizon.
Annie Schwab: [00:37:11] Yeah, we have. We'll do a we'll.
Annie Schwab: [00:37:14] Do a future podcast on this topic. But it's, it's big and it, it's something that seems kind of far away. But if you think about it, the Tax Cuts and Jobs Act, there are 30 no 23 provisions that will expire at the end of 2025. So we've been sort of in this environment of what's the new norm, What are what are the common deductions or credits or or those kinds of things. And all of a sudden it could revert back to 2017 just like that in a blink of an eye. Although, I mean, I can't predict the future here, but, you know, we've got elections in 2024. So, Roger, this is your cup of tea here. So I'll let you kind of explain what you think.
Roger Harris: [00:37:57] Well, I think, first of all, for those of us that have maybe started in this business in the last few years, we just assumed that the tax law we have is the tax law we've always had and we'll always have. And yet, if you've been in this business for any length of time, you know, there were substantial changes in 2017 with the Tax Cut and Jobs Act. Some common ones is the increased standard deduction came from this piece of legislation, the qualified business deduction QBO that came. That's a big one. Cuts and jobs.
Annie Schwab: [00:38:27] Lower tax changes.
Roger Harris: [00:38:29] Rate changes came from this. So everything that we've been dealing with and has kind of become what we view the tax system to be is scheduled to repeal. I think Annie said 20 something parts of it at the end of 2025. Now, you'd have to go back and see what were the rules in 2017, because if nothing happens, we just go back to the law that we had in 2017. You'll see things like personal exemptions. You know, you won't have the salt cap of $10,000, you know, So there's some good things perhaps in there. Moving expenses that went away would come back, come back. Miscellaneous itemized deductions that went away would come back. So those are all things that were normal to us in 2017 that that went away with the Tax Cuts and Jobs Act that now will repeal at the end of 2025 unless Congress acts. So what does that mean? It means that, first of all, they were smart enough when they passed it to put it beyond an election. So we have an election in 2024. And who controls Congress and the White House will be who decides which of those pieces of legislation or pieces of the tax code survive? You're already hearing change, right?
Annie Schwab: [00:39:48] Or I mean, it doesn't have to be one or the other.
Annie Schwab: [00:39:51] They could just.
Roger Harris: [00:39:52] Throw it out and come up with something completely new. Yeah. Yeah. And you know, that's going to happen because the Tax Cuts and Jobs Act has now been defined as the Trump tax cuts. So this next election is going to determine who makes the decisions of about what the tax code is going to look like. So it may present some opportunities for people to plan in a time of certainty as opposed to gambling of what the tax law will be after post election. And depending on who is in control of making the decisions about the tax law. There was an interesting thing. It's not part of this, but there's some estate tax changes in the Tax Cuts and Jobs Act. And there was there was literally a time a few years ago where we had one year of no estate and gift tax.
Annie Schwab: [00:40:48] That's right. That was the year to die, Roger. That was the.
Roger Harris: [00:40:51] Year we actually had discussions about whether to pull the plug on grandma before the end of the year. Oh, right. You know, and I mean, because of, you know, the politicians created this one year where if you die, there's no estate tax. So keep them alive in January but kill them in December became like tax planning. You know, it's just just it's horrible. It's amazing how horrible and how taxes get in our life. But we're going to have the potential for another major piece of changes to our tax code that is going to be driven in large part by the next election in terms of who gets to decide and make whether we have to come to a compromise or whether one party on either side gets complete control, which would give you some indication of which.
Annie Schwab: [00:41:39] Direction they're going.
Roger Harris: [00:41:40] Yeah, but I think it's something that maybe not this year, but certainly next year we might want to look for clients that, you know, are thinking of selling something or doing something that could be dramatically impacted one way or the other and and start looking for ways to get ahead of the curve because I have no idea what it's going to look like.
Annie Schwab: [00:42:03] Well, we can't, but it's going to be important who you vote for.
Roger Harris: [00:42:07] Yeah, Yeah. Well, we may be voting for taxes for no other reason than that. Because it's just because that's what it's been doesn't mean that's what it will be. And we got to be prepared for it. And just knowing that and it's easy to do Google, you know, what's repealing and we'll spend more time on this and we'll do some of our podcasts and we'll go into better detail. But if you're curious, just Google, you know, the expiring provisions of the Tax Cuts and Jobs Act and you're going to be shocked at some of the things that right now you deal with every day is like, this is the way it's always been, the way it'll always be. And that's not the case. I mean, it could be, but there's no guarantee it will be, Right.
Annie Schwab: [00:42:45] Right. Exactly. So.
Roger Harris: [00:42:47] Interesting times. It's an opportunity for us to to show our worth, you know, and to talk about things in the future as opposed to just reporting on how somebody did in the past, which is kind of what a tax return does.
Annie Schwab: [00:43:03] Exactly. Well, Roger, we have come.
Annie Schwab: [00:43:07] To the end of our.
Annie Schwab: [00:43:08] Podcast today. All right.
Annie Schwab: [00:43:11] So hopefully everyone is gotten some rest, gotten some time with family and friends. Tax season's always hard, but it is.
Annie Schwab: [00:43:20] Go back and evaluate.
Roger Harris: [00:43:22] Now is the time to look back and try to make it better. We tried to go a little light on details with you today because we figured your is probably still on fire from from tax season. But again, now's the time to start making next tax season better. Start figuring out what you didn't like about this one and what you can do different and better next tax season where you have to engage your clients because you're not, you know. You got to have clients that are willing to do what you need them to do to make your life easier. So. Exactly. So we'll be back in a couple of weeks. We hope that you'll send us some ideas for future podcasts. We hope you'll let us to your your friends. Hopefully you find this a good way to spend an hour while you're on the treadmill or whatever you're doing out running or something. Run an extra mile for me while you're out, by the way. Yeah. Yeah. Because I'm the one sitting here talking and I need to be running. But we will. We will have some. We'll come back with some more details on some of the things we touched on today as we go forward. And we look forward to your ideas and hope you'll tune in to all the federal Tax Federal Tax Update podcast and refer your friends. And Annie, thank you as always. Any parting words from you or why don't you take us home and we'll.
Annie Schwab: [00:44:38] No, this was great. I hope you enjoyed it. Like Roger said, you know, send us some ideas. What do you want us to talk about? What do you want to know more about? We're happy to to do so. So enjoy your post tax season, RESTful days.
Roger Harris: [00:44:52] And hopefully you'll listen to this as you walk on the beach somewhere.
Annie Schwab: [00:44:55] Yeah, Yeah.
Annie Schwab: [00:44:56] Take take a walk on the beach. So. Thank you, Roger.
Roger Harris: [00:44:59] Thanks, Annie.
