Tax practice issues in the age of COVID-19

Editor: April Walker, CPA, CGMA

COVID-19 has upended the world, and its impact will likely be visible throughout society and the economy for years to come. The immediate impact on tax professionals was significant with myriad extensions of tax return filing and payment deadlines. Payments for 2019 taxes were delayed, along with 2020 estimated tax payments. Payments were also suspended for prior-year taxes pursuant to installment agreements and offers in compromise.

The pandemic also changed the way many practices operate due to stay-at-home orders. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, created the Paycheck Protection Program (PPP) and caused many tax practitioners to suddenly become experts in U.S. Small Business Administration (SBA) funding options. These are just some of the changes CPA firms have experienced.

In the new coronavirus environment, accounting firms should consider the following items related to tax compliance and advisory matters.

Cybersecurity issues

One aspect of governments’ response to COVID-19 was to prohibitnon-essential businesses from operating and to issue shelter-at-home orders for large segments of the population. While most jurisdictions classified CPA firms as essential services and allowed them to continue professional service operations, many firms chose to close offices or limit employees’ coming into the office, transitioning instead to remote working from home. Even when offices could remain open, health care or child care concerns may have made remote work the best option for many employees. For some firms, this may have been the first time that client work was performed outside of an office setting. Home laptops or desktops might have been the only alternative for working outside the office in some cases. Communication with clients likely converted from primarily office phones to personal cellphones.

This became a prime time for device hackers eager to exploit turmoil and chaos. The conversion to different devices and manners of communication created opportunities for cybercriminals to steal and manipulate personal financial information and particularly to engage in identity theft.

Due to the continuing expected effects of the pandemic, there is an urgent need to carefully review cybersecurity protocols. CPAs should review the AICPA’s Privacy Management Framework (PMF), which is designed to assist management in creating an effective information privacy program that addresses privacy obligations and risks, while facilitating current and future business opportunities. (The PMF is available for download with an AICPA member login at www.aicpa.org.) Consider hiring outside consultants to ensure that all protective protocols and security requirements are met to secure clients’ and the firm’s information of any type.

Due dates and statutes of limitation

The IRS used its discretionary authority to shift the original due dates of many tax returns, payment requirements, and other filings. CPAs must be mindful of statute-of-limitation issues surrounding those extensions and the impact of return filing extensions on subsequent taxpayer filings. Practitioners should carefully review their firm’s due-date monitoring processes to ensure that mandatory action dates are properly noted.

Independent contractor issues may surface

Some states, particularly California, have enacted legislation that essentially transforms into employees vast numbers of individuals who were previously treated as independent contractors. An individual could conceivably meet federal requirements for independent contractor status but still be classified as an employee for state income tax purposes. Under the California rules as written, a CPA working per diem during tax season is likely characterized as an employee despite the appearance of an exception under the law (see California Assembly Bill No. 5). Practitioners should carefully monitor state legislative bodies to identify legislation that may affect independent contractor status for themselves and in order to advise their clients.

PPP loan forgiveness

PPP loans that are used to pay employees and certain other operating expenses can qualify for forgiveness. The loans are funded by private-sector financial institutions but are guaranteed by the SBA. The borrower is required to maintain and provide documentation to support the forgiveness criteria. Practitioners should be aware that preparing or assisting with preparation of the documentation may be considered the performance of attestation services rather that tax services. CPAs will need to comply with professional requirements, standards, and guidance for those functions. For assistance with this determination, consult the AICPA’s PPP Loan Forgiveness Services Matrix (available for free at www.aicpa.org), which can help practitioners determine which service is appropriate to provide in connection with PPP loan forgiveness. Practitioners should ensure that they meet the applicable compliance and licensing requirements if attestation services are performed. This will help practitioners avoid the possibility of regulatory inquiries and disciplinary actions.

Tentative NOL carrybacks

The CARES Act temporarily restored net operating loss (NOL) carrybacks that had been eliminated under the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Because of the coronavirus’s devastating economic impact, many entities will incur NOLs for 2020 and potentially 2021. Economic recovery will depend on many factors, including the duration of business shutdown orders and reduced economic activity due to the continuing effects of COVID-19.

Under the CARES Act, NOLs from the 2018, 2019, and 2020 tax years can be carried back five years, and any unused excess is carried to the succeeding tax year until fully utilized. A taxpayer with an NOL in one of these years may want to apply under Sec. 6411 for a tentative carryback adjustment of their tax liability for a prior tax year, which allows the taxpayer to obtain a quick tentative tax refund based on the carryback of the NOL. Corporations make this application on Form 1139, Corporation Application for Tentative Refund, and individuals on Form 1045, Application for Tentative Refund (including for losses from passthrough entities such as partnerships and S corporations).

Taxpayers with NOLs arising in a tax year beginning on or after Jan. 1, 2018, and ending before March 27, 2019, generally will be able to file amended returns to claim refunds or credits resulting from the change in the law. However, they would not be able to take advantage of the expedited Sec. 6411 tentative carryback adjustment procedure without an extension of time to file Form 1139 or Form 1045. To provide relief for these taxpayers, the IRS in Notice 2020-26 granted a six-month extension of time to file Form 1045 or Form 1139, as applicable, to taxpayers that have an NOL that arose in a tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

The tentative carryback is processed for internal accuracy, and, if the request appears correct on its face, the IRS will usually process the refund requested within 90 days of receipt. It is important that CPAs advise clients that this type of refund — as opposed to a formal refund claim, which is generally filed through an amended income tax return — is labeled “tentative” for a reason. If the IRS later examines the tentative refund claim and endeavors to recover all or a portion of the refund, it may do so using the mathematical error procedures under the assessment statutes. Normally, Sec. 6213(b) permits a taxpayer to dispute a mathematical error assessment by requesting that the Service abate the assessed amount and then reassess under normal deficiency procedures, which would allow bringing a case to Tax Court. However, under Sec. 6213(b)(3), that exception does not apply to amounts assessed regarding a tentative carryback adjustment, so the IRS can proceed immediately to collection of the amount it seeks to recover.

In this situation, CPAs should also inform clients that the IRS can examine the return for the carryback year and all intervening years to make adjustments that reduce the carryback’s benefit. However, if IRS adjustments produce additional taxes (that is, the refund is eliminated and the adjustments produce a tax deficiency), the normal statute of limitation may prohibit the assessment of a deficiency.

Finally, CPAs need to inform taxpayers that, upon examination, the IRS may challenge a taxpayer if accounting records for the earlier years are not available to support the amounts claimed on those returns.

Engagement letter considerations

The coronavirus environment is likely to provide CPAs with service opportunities in many areas beyond normal tax preparation, including PPP loans, NOL carrybacks, collection assistance on behalf of taxpayers that have suffered devasting financial consequences, examinations that arise from returns impacted by the coronavirus, and a variety of tax planning matters. To ensure the appropriate understandings with a client, a separate engagement letter is advised for each discrete service.

Be mindful of risks

Challenging times present many opportunities, but hand in hand with that come additional risks to practitioners. Be mindful of these important considerations for your practice in order to mitigate those risks.