As tax season approaches, tax accountants are preparing to tackle their busiest time under unprecedented circumstances. COVID-19 has changed the way we work, and disrupted the economic landscape for our firms and clients. Firms already have experience working in a COVID-19 environment but, amid a resurgence and continuing uncertainties, it’s safe to say that we could be facing a very challenging season ahead. Here are some of the issues that practitioners should be considering, and some of the steps they can take to address them.
COVID-19’s impact on tax and financial planning clients. The past year has certainly proven that accountants are well suited to meet the need for trusted advisors in uncertain times. Clients have turned to us with concerns about changes in their own circumstances that have impacted their day-to-day finances; tax situation; and college, retirement, and estate planning. That will undoubtedly remain the case as the economic impact of COVID-19 continues to evolve. As a result, accountants should be prepared for a wide range of taxpayer uncertainty and factor it into their busy season planning. To help you gear up for the kinds of client situations and questions you may be seeing, the AICPA Coronavirus (COVID-19) Resource Center contains a wealth of information, including special sections on tax and financial planning issues.
IRS operations and support. The IRS, which has been challenged by resource issues in the past, has been affected by COVID-19 as well. One-half of the IRS’ staff is working remotely, and 40 percent of taxpayer assistance centers remain closed. The mail backlog reached as high as 11 million pieces early in 2020, and although it is down to 3 million, it could rise again given current lockdowns. The IRS has said it is seeing delays in processing paper returns and other mail; in general, practitioners should assume there may be some hurdles in working with the service in 2021. To anticipate and potentially abate issues, practitioners should be aware of several potential problem areas:
- Returns involving net operating losses, in light of changes made by the Coronavirus Aid, Relief and Economic Security (CARES) Act.
- Late payment penalties: If a payment has not been processed, the client should not cancel any checks, but instead allow the IRS time to get to their payment. The IRS is providing relief for bad check penalties for many payments caught in the backlog, but penalties and interest may still apply.
- Penalty abatements: Given the wide range of reasons that clients may need to file for a penalty abatement this year, the AICPA has created a custom penalty abatement letter available free to AICPA members.
- Limits on many activities: At the outset of COVID-19, the IRS ceased opening most examinations, and suspended in-person meetings and new automatic, systemic liens and levies. In any event, clients should still be advised to respond to any examination notices they receive.
What tax problem areas still need to be addressed? The AICPA works tirelessly to advocate on behalf of sound tax policy. In light of COVID-19, the AICPA is asking the IRS for relief for the impacts of COVID-19 that are beyond the control of accountants or their clients. Our recommendations include:
- An expedited and streamlined penalty abatement process.
- A dedicated call center.
- The ability to make abatement requests orally without a power of attorney.
- The need for IRS guidance that includes examples of COVID-19 impacts on the taxpayer and the practitioner.
PPP loan considerations. Practitioners have played a major role in helping clients qualify and account for Paycheck Protection Program (PPP) loans. As clients move to apply for PPP loan forgiveness, the issues that should be top of mind include whether:
- The borrower has spent the full amount of the PPP funds, since this will have an impact on forgiveness.
- The borrower is trying to merge or sell the business. There may be complications in receiving sale proceeds, or if one or both parties in the deal have PPP loans or have benefited from other relief programs.
- Tax planning has taken into account the fact that expenses paid off with loan proceeds are no longer deductible.
- PPP loans or loan forgiveness has an impact on existing loan covenants.
Tax and accounting firms have already proven their ingenuity and resilience during this time, but in the battle to avoid a meltdown this tax season, forewarned is forearmed. Firms can meet the challenges ahead if they anticipate potential hurdles, and use their agility and innovation to adapt to changing client needs and economic circumstances.