Filing Season 2013: Year of the Extension?

HBS Tax Preparation Services

This year may prove to be a record year for the filing of individual and business extensions.

On January 1st, 2013 Congress passed the American Taxpayer Relief Act of 2012, AKA the Fiscal Cliff Tax Act. This legislation contained 157 pages of Tax Code changes, more than a dozen of which were retroactive and altered the rules for the prior tax year.  These changes were made at the very moment the IRS (and the entire tax-processing industry) was prepared to process income tax returns using the laws that were already in place for 2012.  What this has meant for many taxpayers is delayed filing, delayed refunds, and the increased possibility of filing returns containing errors.

The Good and Bad News: Retroactive tax legislation generally makes the rules more favorable for taxpayers because they usually expand deductions and increases credits.

Taxes, however, are highly complex.  Hence, the Bad News:  Your tax return can be described as an algebraic (I would say logical, but this the Tax Code, after all) expression.  It is a series of mathematic and conditional statements which will fill several pages of a college-ruled notebook for even a simple return.  Add a few deduction or credits and the equation grows several more pages.  The slightest change in this formula will alter the final tax (or refund) due on your return.

The Internal Revenue Service and the tax-processing industry spend each year creating the formula to calculate the tax on returns filed the following year.  On January 1st of 2013, however, just as the equation for 2012 reached near-finalization, congress decided to scrap and replace Tax Troubles and Retroactive Change:  A single retroactive tax-law change results in a cascading series of challenges for the IRS, software firms, tax professional and taxpayers. It can also cause massive delays, impacting taxpayers relying on their refunds to pay bills.

As an example, let’s consider just one retroactive change included in the Taxpayer Relief Act of 2012, the addition of Mortgage Insurance for those who itemized deduction on Schedule A.  What’s the impact of this retroactive change?  Let’s see:

  1. All previously printed Schedule A forms are immediately made useless. They cannot be filed and must be destroyed.  The instructions for those who itemize are incorrect and must be rewritten.
  2. Form 1098, which banks use to inform taxpayers of mortgage interest, must be revised to include Mortgage Insurance paid during the year.  Unfortunately, many lenders initially sent forms which did not include Mortgage Insurance.  These had to be corrected, resent to taxpayers, and re-filed with the IRS.
  3. IRS computers had to be reprogrammed to include a Line 13 for Mortgage Insurance premiums.  Since the numbers on the form changed, it is highly likely that all lines below line 13 had to be reprogrammed as well.
  4. All tax software programs had to be reprogrammed to include the Mortgage Insurance deduction.  Although not specific to the Mortgage Insurance deduction, the mis-reprogramming of retroactive changes caused the filing of erroneous returns for many taxpayers.  Coding issues still linger for many programmers and preparers.
  5. The IRS Electronic Filing System had to be changed to recognize, accept and correctly process the mortgage insurance deductions on Schedule A.  The transmittal portion of tax preparation software also had to be reprogrammed, tested and distributed to users.

The Result: The end result of this and other retroactive tax changes is delayed filing, delayed refunds, errors on submitted tax returns, frustrated taxpayers, and stressed-out tax pros who are caught in the middle. 

Fortunately, for those claiming the mortgage insurance deduction, the IRS started to accept returns including Schedule A on January 31, 2013.  However, many taxpayers were not so lucky.  Taxpayers who own businesses and those claiming certain credits could not file until mid-February, and some even had to wait until mid-March before the IRS would allow them to file.

The Bottom Line - No More Time: The retroactive changes included in The American Taxpayer Relief Act of 2012 caused extreme delays in filing this season.  It did not, however, provide additional time for taxpayers to file their returns.  Tax returns are still due April 15, 2013 unless an extension is filed. 

An extension gives taxpayers an additional six months to complete and file their returns and provide time for the IRS to correct remaining glitches before their returns are processed.  If taxes are owed and paid after April 15, however, taxpayers may still be liable for a late payment penalty. 

It is for all these reasons that Filing Season 2013 will likely be a record for extension filing. 

As always, this article is for informational purposes only.  If you have any question or need assistance with your taxes please feel free to contact our office to talk with a tax professional.

 

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.