New law leaves IRS, tax pros scrambling

SANDPOINT - When Republicans in Congress flexed their muscle for new tax changes and President Obama signed the bill into law in mid-December, the deal appeared to be a classic political fait accompli.

Now that the dust has settled in Washington, D.C., around what has been laboriously titled the "Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010," the reality is that implementing the bill will be more complicated and time-consuming than the partisan rhetoric and top-level deal-making that led to its signing.

In fact, the complexities of enforcing the new changes have caused the Internal Revenue Service to push out the official start of tax season - the date when the IRS begins accepting filings - for at least a month and possibly longer, according to the agency's web site.

Also left in the lurch are the software developers who now have to update tax programs for CPAs, financial planners and tax accountants across the country, leaving those professionals in limbo until the updates have been finalized.

"It's a tangled web they weave," said Robert Boyle, a partner in the Sandpoint CPA firm of Boyle, Platte & Kee, LLP. "There is a huge disconnect between the people who legislate tax law and those who administer or enforce it - including the IRS. Now they're stuck making all of these changes to the IRS computers."

According to Bev Kee, the entire industry had been programmed for the existing tax structure, a landscape that was completely altered when the new law was enacted on Dec. 17.

There could be an additional trickle effect on state taxes, according to Kee, who said the states usually align with federal tax statutes, but have some discretion in making changes to particular items. If the Idaho Legislature makes its own changes, such a move could further compress an already tight filing deadline.

"So we had Congress making decisions in December and now Idaho legislators will get together in January and February to make their decisions," Kee said. "If I can think of one job I wouldn't want right now, it's the tax software programmers who have to deal with all of this."

Although tax professionals are left cooling their heels for now - literally, in the case of employees at Boyle, Platte & Kee, who have been spending some of their down time ice-skating on frozen Sand Creek, just outside the firm's offices in the Power House building - their time in the hot seat is just around the corner. Once the IRS gives the green light, an estimated 140 million individual tax returns and several million corporate filings will still have to be completed by the middle of April.

"Most people itemize and they won't be able to file until mid- to late-February, which means that any early tax returns won't happen this year," said Andrew Platte. "(The IRS) wants everything to be right and they want their money on time, but they keep pushing back the changes."

What looked and sounded reasonably simple when lawmakers took to the microphones to trumpet their political victories last month turned into an administrative maze as soon as the sound bites faded away. Underneath the extension of the so-called "Bush-era tax cuts" there are layers of other changes that will impact employers and workers alike.

In one instance, the employee tax rate for Social Security has been revised downward for 2011, from 6.2 percent to 4.2 percent. And while workers might be happy to see a few more bucks in each paycheck over the next 12 months, payroll service providers and bookkeepers have been left with the headache of adopting those changes in short order. By the time they get fully up-to-speed on the revision, they will need to turn around and change it right back again, as the temporary drop in Social Security employee tax pops up to its former rate in 2012.

A change that promises to rock the business boat surrounds updated regulations for 1099 filings - the forms given to independent contractors to document income they received during the prior year. New for this year, businesses must file a 1099 for all payments they make over $600.

"So now you have to send a 1099 form to Wal-Mart for supplies you bought?" Boyle asked rhetorically. "It adds another enormous layer of complexity to the process."

For Platte, a more worrisome scenario is that of a federal agency already burdened with more complicated tax laws without sufficient staff to do the job.

"I can't imagine the IRS even thinks they can handle all this new documentation without any additional people," he said.

Also affected under the new law will be estate taxes, capital gains taxes, child tax credits, earned income credit, alternative minimum tax exemptions, higher education tuition deductions and educator expense deductions.

"So essentially, everything," said Platte.

Some of the changes will tilt to the positive side for taxpayers, but according to local CPA Kevin Kluender, this year's returns will require a new perspective and a sharper eye on the part of everyone involved.

"They changed the tax code retroactively and we had programmed for the way it was," Kluender said. "People need to be aware of those changes, because things you took as a deduction last year might not be available this year."

In past years, the IRS would have begun accepting returns by the end of this week, on Jan. 15. With so much up in the air due to the code changes, the agency has informed tax professionals that Feb. 15 is a best-case picture, with the possibility of that window moving closer to the end of February.

The tax season floodtide has not yet started for most firms - the CPAs at Boyle, Platte & Kee, for instance, said they have only small number of returns waiting to be processed at this writing - but within a couple weeks, corporations will begin to hand over their paperwork, followed in short order by individual filers.

"The software companies are scrambling, the IRS is scrambling and we're going to be scrambling to learn all the changes," Kee said.

"This is how political decisions trickle down," Boyle added. "We're all watching the IRS to find out when they'll start accepting returns. And we can't do anything until they say so."

For updates on IRS filing timelines and more detailed information on tax code changes for 2011, visit: www.irs.gov.