The year's end is always a frantic time for tax preparers. This year, it's more frenetic than usual.
The tax-cut bill that gained final approval in Congress late Thursday, coming so late in the year, has whipped up a mild panic for accountants, payroll staffs and anyone else who handles taxes.
Payroll processors say the delay in new tax-withholding schedules means the wrong amounts may be taken out of many workers' paychecks in the first few weeks of January.
Accounting firms are rushing to advise clients, master the tax-code revisions and update software.
Details have been in flux. And nerves on edge.
Jim Bolek, an executive at Basic Payrolls Plus in Grand Rapids, Mich., which processes paychecks at 400 companies, says the delay in the 2011 tax withholding tables is giving him heartburn.
"It's a huge headache," Bolek says. "Just sitting here waiting gives us a ton of stress. The longer we wait, the bigger the headache."
The bill will, among other things, extend income-tax cuts for two years; renew long-term unemployment aid; reduce workers' Social Security taxes in 2011; and let companies increase write-offs for capital investments next year.
The pace of activity inside accounting and payroll offices has intensified because the changes are coming so late in the year.
Yet there's only so much preparers can do as they await updated tax forms and software, and employers wait for the Internal Revenue Service to revise withholding tables. The new withholding tables will determine how much take-home pay ends up in paychecks starting next month.
It typically takes several weeks after Congress changes tax law for the IRS to send out new withholding tables. In most years, payroll processors and tax preparers say, they receive the IRS' withholding tables around mid-November.
"Normally, we would have those specs now," says Harry Buckley, chief executive officer of Jackson Hewitt Tax Service. "It's really coming down to the wire."
Kathy Pickering, executive director of the Tax Institute at H&R Block, notes, "It's not just a matter of, flip a switch and you're ready to go."
Starting next week, Bolek's company must begin to cut January 2011 paychecks for some clients. Because his firm lacks the updated withholding tables, the January checks will probably be processed using the old 2010 tables.
That means too much money could be taken out of many workers' paychecks. Once the new tables are out, refunds would be made to the affected workers.
"People are anxious," says Dennis Danilewicz, senior director of payroll services at New York University's Langone Medical Center and past president of the American Payroll Association.
If employers don't have the withholding tables by Monday, Danilewicz predicts, "it will be the third paycheck of the year before people will get their correct take-home pay."
The IRS declined to discuss how it's managing the coming tax changes. But Commissioner Doug Shulman warned lawmakers earlier this month not to wait until 2011—after taxpayers have begun filing returns—to make retroactive changes. Doing so would pose an "unprecedented and daunting operational challenge" for the IRS and taxpayers, he said.
Shulman's biggest concern was a legislative "patch" that would spare 20 million taxpayers from the alternative minimum tax. The AMT is designed to ensure that high-income people don't use deductions and credits to avoid income tax. Its income thresholds have never been pegged to inflation, so each year Congress fixes the AMT to spare many middle-income people from tax increases.
In 2007, a late fix to the AMT by Congress forced the IRS to delay processing some AMT-related forms until mid-February 2008. The IRS had to scramble to update its computers, and potential refunds for up to 13.5 million people were held up.
This time, the IRS programmed its computers to assume Congress would patch the AMT again. And because the tax-cut plan will do so, the AMT shouldn't pose a logistical problem this year, tax experts say.
Sandra Salstrom, a Treasury Department spokeswoman who handles tax issues, says, "The AMT is really the major issue that affects forms."
Treasury officials wouldn't say how long it will take for the IRS to send out revised tax-withholding tables once President Barack Obama signs the tax-cut bill into law.
Melissa Labant, technical manager for the American Institute of CPAs, says the coming changes have magnified the usual year-end questions from clients:
Do they have enough cash flow for a coming tax payment?
How can they minimize business taxes?
Would it be wise to defer income into next year?
Other clients have fretted about the AMT, Labant says.
"Compressing all the year-end tax planning in the last couple of weeks of the year will be extremely challenging," she says.
The deal in Congress will also extend a temporary cut in the tax on capital gains. The top rate will remain 15 percent.
Many clients had assumed capital-gains rates would rise next year. If they were to increase, investors would have had reason to sell stocks and other assets by year's end to lock in the lower rates.
Congress' decision to keep the lower capital-gains rates means accountants must now rethink the best time for their clients to sell assets.
Don't feel too sorry for time-starved tax preparers. It's true some are scurrying around, counseling clients and biting fingernails. But tax-code changes sow confusion. And that's when clients most need their tax preparers.
Whether taxes change a lot or a little, after all, the accountants always come out ahead.
"All the talk about taxes is confusing to people, and that's good for business," says Buckley of Jackson Hewitt.