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Reflections on 2021 Tax Season

In this week’s blog, Tom O’Saben reflects on 2021 Tax Season and highlights key takeaways – such as people with investments need later appointments and tax practioners need to communicate to clients that K-1 is not a 1099, and much more. Then it will be your turn to post your own reflections in the comments section of this blog.

By Tom O’Saben, EA
Assistant Director, Professional Development & Outreach
U. of I. Tax School
Tom O'Saben, EA

LINKS REFERENCED IN VIDEO:

Reflections on 2021 Tax Season

Hello everybody, Tom O’Saben from the University of Illinois Tax School coming to you with our blog in the week. We’re going to take some time and reflect on the 2021 tax season. Here again, is my information for those who want to know more about me and don’t know me already and there is a link in the materials for you to see and go to the page that has my bio and everything to describe what I do at Tax School.

So, from kind of an overview perspective, what we’re going to do is we’re going to talk about some tax season takeaways while it’s still fresh in my mind, because I’m a practitioner, just like you are. Then, I’m going to ask you to post your reflections on the 2021 filing season in the comment section that you’ll see after you enjoy the video, or at least listen to it. So, let’s talk about remembering 2021.

Number one takeaway – People with investments need later appointments

If people have investments, they need later appointments. Those 1099 consolidated statements that come from the various brokerage firms, listen, it’s not the broker’s fault. It’s not probably even the firm’s fault. It’s probably the underlying investments that must be kind of rebalanced before the information can be sent off to the client. I know that doesn’t help with the frustration level. And I’ll give you my own war story to go along with that, I’m having a Zoom meeting on April 7th with a client. And as soon as we get on, they say, well guess what we just got today, we got it corrected to 1099. So, I literally had them hold it up to the camera so I could pick out what was changed. So, the moral of the story is, unless you want to do a lot of amended returns, it’s probably in the best interest of the client to not have those appointments with those clients that have a lot of non-qualified investments, meaning non-IRA, and wait till about the end of March or so maybe even early April before filing those returns. Because if you meet with them early, you’re going to end up doing two appointments or you’re going to have to revisit everything because the likelihood of them receiving the corrected statement is good. So, keep that in mind.

Number two takeaway – K-1 is not a 1099

I also think we need to educate our clients on the fact that a K-1 is not a 1099. I can’t personally count the number of times a client has called and said, I’m going to turn this estate or this partnership into the IRS because they didn’t get me my information out by the end of January. And we know that a K-1 is not a 1099. And I tell them listen, that K-1 could come sometime after March 15th, it could come after April 15th. Heck, we could have a situation where they file an extension, and we don’t see them until September or October. So, you must have a discussion with the client, again, a war story that I just had. Client contacts me on Friday the 15th. We know that the filing deadline was Monday the 18th and said, you know what, I’m still going to have the K-1 from my grandma’s estate, and I can’t get anybody to even take my call. And what’s your advice? I said, why don’t we go ahead and file and then when you receive the K-1, we can amend, you might also tax but maybe we can appeal penalties based on when the K-1 was received.

Number three takeaway – “I didn’t receive anything” is not an answer

I also want to mention my third bullet point on this page, “I didn’t receive anything” is no longer an answer. You know, I believe that you probably do much the same that I do. And that’s when you’re preparing this year’s return, you’re looking at last year, or maybe you’re even perhaps looking at a couple of years. So even that new client, we want to see last year’s return. And for example, we might ask about unemployment or distributions from a pension and the clients will say “I didn’t get anything.” Or how about mortgage interest? You know, last year the client had $15,000 of mortgage interest, this year, they have $1,500. What’s going on? Something’s not right. So, the answer is “I didn’t receive anything” is one we really should take to heart because many times today, and I get the same kind of of offerings. We have circumstances when we’re on a website and it says to opt out of paper reports or paper statements and a lot of times when we do that there’s no paper at all, including government paperwork. So I think prodding and asking the client questions and then saying, you know, you’re probably going to have to access this online. Or maybe it would be that something to put into your newsletter, or your organizer to say if you have investments or deal with unemployment for example, online. Or even I had one situation where the only way the client could get her W-2 was to go online and get it and believe it or not, there was a fee from the service to do that I thought that was crazy. But the old statement of “I didn’t get anything” doesn’t hold water anymore. The government certainly got it, so that could be our warning to our clients when they want to say that perhaps they don’t have income to report, for that matter deductions to report. And I’ll talk about that a little bit later when it comes to holding their hand.

Number four takeaway – Clients need a refresher on claiming dependents

I really believe after the last couple of years with the stimulus payments that we’ve had, taxpayers need a refresher on claiming dependents. You know, I was going back and forth with a new client, who on last year’s return, there was one son, now they sent an organizer to me and enlisted two children with a little sticky note on there, which said they both work for themselves and are filing their own returns. I think all of us would make a reasonable assumption from that takeaway, that they are not going to be claimed on return. So, I get kind of preliminary numbers, and I share it with the client to their outcome and they come back and say, well, we want to we want to claim the education expense for our older child. And I said, well, you can’t claim the education expense if you didn’t claim the person as a dependent. Well, then we want to claim our younger child. Okay, last year, I’ve seen they do an education expense, do we have education expense for this year? They come back and say no, there was no education expense for the younger child. And I said, well, that child is over the age of 18, did they make more than $4,300, if they made more than $4,300, we can’t claim them as a qualifying relative. So, when all was said and done, we were right back to where we started from and my assumption was based on what they had put in the organizer, and going back and forth, that we’re not claiming the kids. You’re really not kids anymore, they’re adults. But we’re right back to the balance due that I came up with originally. And by the way, the client came in to pick up their stuff and when they were at the front desk, I introduced myself to them. And they’re like, oh, I hope you know, we’re not as bad as we appear. And I said, no, I don’t mind doing education. You never challenged me on anything, but at the same time, I apologize for always throwing up roadblocks to what you thought were good ideas. But educating our clients is is very important.

Number five takeaway – What do you charge for children’s returns?

Now, the second bullet point I have on this slide is to ask you, and you could put in the comment section, what do you charge for children’s returns who were transitioning to adulthood? Now some of you who know me know that I don’t own my tax practice anymore. And Sue Voth who does at the very least used to always charge dependents who need to file return at least some nominal charge like $10. Well, I had the mistake for many years of just throwing in the returns at no charge. Well, now we find a situation that unfortunately, when you’ve been around as long as I have, you’re on to the next generation, I’m sure there’s some of you out there that are on to the grandchildren of your original clients. And it’s wonderful that they come to us. But the difficulty of what I’m asking you to put into the comment section is, what do you do with those children who now become adults, that maybe two years ago, mom and dad said, well, Tom only charged 10 bucks to do this return. And now they are fully independent working at, I don’t know, Boeing, and they’re making $80,000 a year. Are you going to do that return for $10? Well, I’ll tell you what Sue came up with and I think it was a really good idea. She’s showing us a rule which says, we’re going to show the client that what our full fee is, but for that first year, when they transition from being a dependent to being on their own, we give them a 50% discount to kind of bring them into the fold, so to speak, instead of shocking them all at once. I think that’s good advice. I’d like to hear what you think out there, as well in this transitioning from a child being a dependent to an independent person and being subjected to our normal fee schedule.

Number six takeaway – Starting a business to lose money is not advisable

Another takeaway I have, and I’ve had this several times this year, and I think over my experience, it’s happened many times is that people will want to start a business just so they can lose money. And I always say, listen, that’s not a business, that’s a tax scam. If you look at our materials from 2021, we talked about Schedule C, we’ve talked about the nine factors at nauseam over the years, the nine factors that indicate whether an activity is engaged in for profit. And those are the questions to ask the client, not just going to make an investment so they can lose money and then create a loss to offset other income. Well, I think it’s important that we have the discussion with the client about what is your motivation. Again, just this past Saturday, the last Saturday of filing season, I’m in a Zoom call with a client. And you know, they’re doing well income-wise. And they said, well, what can we do to reduce our taxable income? Of course, I mentioned 401k max funding it, maybe even if the company would allow a deferred comp plan, etc. But nonetheless, what I’m getting at is they said, what if I would buy a rental property so I can have some losses? Or what if I was to go buy some land in the country? My first question, or my first statement, I should say, that I came back with is, you need to demonstrate to me that you have a profit motive, you know, we can lose money. And that may be the result of you investing in property, plant and equipment. But we have the expectation that we are planning to make a profit, not just have a tax loss. So let’s keep that in mind. Again, I’ll refer you to our 2021 materials, you can go to the U of I Tax School website to see that information and look at what may work for the nine factors to determine whether or not a taxpayer is even entitled, for example, to file a Schedule C for that “business.”

Number seven takeaway – How much is too much when it comes to hand-holding clients?

You know, I’m reflecting on this on Monday, the 18th and asking how much hand-holding is needed. I listened to Betsy calling people and say your returns have been here, they’ve been here for several weeks now, you need to pick them up, today is the day. For our clients who don’t meet one on one, they may be all over the country, we have a portal, and we also have the ability to online signatures. I’m sending reminder, after reminder, after reminder, after reminder, sign these forms. We cannot file your tax return until these forms are signed. And I’m wondering when you just say, look, you’re all adults, I’m tired of holding your hand. I mean, how much leading do we have to do with them? I know that speaks from a level of frustration of being exhausted, but I’ve seen you post these things on our Facebook page, and you have that same level of frustration. How far do we have to go with these clients? How about the clients who also contacted you on Friday the 15th or Saturday the 16th and said, hey, I’m uploading my documents today to your portal? Well, Lottie-da, I think you’re going to get an extension. So, I’m wondering again, just how far we need to go before I say, you know what, I’ve sent six emails, I’m not sending seven. You know, and if they want to come back and say they never heard anything, I will show them all the reminders that were sent to them. So, I know that speaking from a degree of frustration and I know most of our clients appreciate what we do. But nonetheless, I’m curious what your comments might be as to how much hand holding is necessary.

Number eight takeaway – Clients need our expertise

But I’ll tell you this, as kind of a takeaway, more than ever clients need us, they need our expertise. I’m so honored by some of the things that clients said to me this year. My gosh, I understand things better than when I came in the door. Or you’ve shown me for example, year over year comparison, and things I can think about for the future, or how the tax system works, or what I can expect in the future. So we get away from being just number crunchers to planners. And I think that’s what our clients are striving for. I know this year was a big year to do a comparison of married filing jointly versus married filing separately, you may have an opinion about that. John Richmann here in the Tax School did a blog on it several weeks ago, showing where there could have been benefits this year for clients filing separately. In the ones that I did, most clients thanked me for that analysis. Only one said, and I had to come back and do it a little bit later, I hadn’t thought about it when they were there. I said, well, you should have known this from the beginning. Well, I’m sorry, but I hope in your job your customers, or your patients never want to punish you for learning a new procedure. Anyway, our clients need us and they need us to give them more than just here’s the bottom line and that’s what it is. I also say can you receive too much education? I’ll say no to that. I know that may seem somewhat self-serving. But I’ll tell you that education and being on the Facebook page, and attending webinars, in depth study, self-studies, Fall Tax School, all of those are part of a multi legged education platform that you need throughout the year. I think about the days when I was able to go to the U of I Tax School, we called it farm school at the time. I go to two days in the fall, I always tried to go as late as I could because I figured the presenters would have the latest and greatest of what’s happening. And I was ready to begin the new tax season other than my mentor, Rose Cuca, would say I put a pillow that rose would tell me to look at Pub 17 in the “what’s new” section. And we would have a new Quick Finder or the tax book, I’m not putting a plug in for those folks, I’m just saying those were by reference tools. I can’t imagine today, ladies and gentlemen, that any of us would be ready to face a filing season with just two days of education. Education is an ongoing process. And furthermore, our clients need us to be on top of what’s going on. So, I’d like to know what your takeaways are, you can post them on the Tax School Facebook Group, you can post them as comments down here at the bottom. And that will be something that we can share, and you can share with all of the rest of our friends here at the U of I Tax School.

So, remember that we’re here for you. Education is an ongoing process. And no sooner do we get to take a little bit of downtime to recharge, but we’re going to have to face correspondence, we’ve got the second quarter estimated tax payments are right there on the horizon. You’ve got a lot of extensions, maybe it would make sense and listen to me preaching to you, I am the king of procrastination. Would it make sense to get on those extensions and get them off your plate so maybe you can have a little bit of a relaxing summer and a relaxing fall before you start gearing up for another round of taking care of our clients. So, for all of us here at the University of Illinois Tax School, you made it, pat yourselves on the back. This is Tom O’Saben, saying we’ll say goodbye, but just for a while.

Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact taxschool@illinois.edu if you have more up-to-date, supported information and we will create an addendum.

University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.

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