insight magazine

Is the New IRS Form 1040 Still too Taxing?

Billed as a “postcard-sized” sheet that’s more user-friendly, does the revised IRS Form 1040 make a difference for taxpayers and preparers? By ERIC SCOTT | Fall 2018

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Shorter, faster, a time-saver that’s easier to fill and file. Those are just a few of the IRS’ selling points regarding its new “postcard-sized” IRS Form 1040 that’s being introduced for the 2019 tax season (for the 2018 tax year).

The first thing you should know is that the new form is not really a postcard — you can’t stick a stamp on it and toss it into your mailbox for delivery to the IRS. In fact, doing that is sure to get your, or your client’s, identity stolen as the form is still chock-full of sensitive personal information.

The postcard reference merely refers to the form’s smaller appearance. Considering the IRS received more than 152 million returns last tax season, including more than 132 million electronically filed returns, one must wonder if the paper form change is going to make much difference in today’s increasingly mobile, paperless, get-it-done-on-the-go culture.

Around 90 percent of all tax returns filed each year are received electronically, according to the U.S. Treasury Department and the IRS, which means paper tax forms are edging closer to extinction. So, the big questions heading into tax season may be: Are we putting too much emphasis on the look of a paper tax form? Further, will the new 1040 actually add complexity to the filing process?

WHAT’S CHANGING?

The new form updates and replaces the current Form 1040, 1040A, and 1040EZ. While the current 1040 has 79 lines to fill out, the new form has just 23. So, by appearance, it looks like it would take much less time to fill out and file, but that’s not the only change.

Many of the items taxpayers report on their 1040s will now move to six new Schedules that will need to be filed along with the new 1040:

Schedule 1, Additional Income and Adjustments to Income – This covers items such as business income, capital gains or losses, alimony received, unemployment compensation, farm income, and earnings from rental real estate, royalties, partnerships, S corporations, and trusts, among others. Of course, many of these will still require additional Schedule filings in certain cases.

Schedule 2, Tax – This includes the Alternative Minimum Tax and taxes on a dependent child’s unearned income or “kiddie tax.”

Schedule 3, Nonrefundable Credits – This covers credits that can help reduce your tax bill to zero, but that you won’t get a refund for, including credits for child and dependent care and education.

Schedule 4, Other Taxes – This accounts for other taxes you might owe, like self-employment tax, Social Security and Medicare taxes, household employment taxes, retirement plan taxes, net investment income tax, and the ACA penalty tax.

Schedule 5, Other Payments and Refundable Credits – Here you’ll include items like estimated tax payments, amounts paid with a tax filing extension request, and premium tax for health insurance marketplace users.

Schedule 6, Foreign Address and Third-Party Designee – This is where taxpayers must list any foreign addresses or third-party designees who may discuss a tax filer’s return with the IRS.

So far, no changes have been announced regarding existing Schedules, including Schedule A for itemized deductions, Schedule C for listing profits or losses from business income, and Schedule D for capital gains and losses, which all may still be required depending on the circumstances.

So, only taxpayers with the most basic, straightforward tax returns will file the new top page of Form 1040 — too bad that scenario only pertains to about 25 percent of all individual income tax filers, according to recent Treasury Department and IRS estimates. Job security for CPAs, right?

THE TAX PRO’S PERSPECTIVE

Since the IRS released its draft version of the new Form 1040 in June, tax professionals have been weighing in with commentary.

“The form isn’t materially changing how I gather and file income taxes for my clients,” says Daniel Rahill, CPA, JD, a Chicago-based tax partner with BDO. Rahill, who is also a former Illinois CPA Society chairman, stresses that when it comes to preparing taxes, the information needed isn’t any different, it now just needs to be listed in different places. “It’s essentially going to be the same process. I’ll ask the same questions and will need the same information. It’s not a significant event to me — or any of us.”

For other tax preparers, the bigger concern is about those different places where information that used to be listed on Form 1040 will now be reported.

“The shorter form is not the issue, the sub-Schedules my clients will still need to pick through will be the problem,” says Deborah L. Kurtzke, CPA, MST, of DK Tax & Accounting Inc. “I am anticipating they will attempt to do their return and get frustrated with the Schedules and call for an appointment or to drop off their returns.”

The introduction of the new Form 1040 coincides with the implementation of new tax reform measures specified in the federal Tax Cuts and Jobs Act of 2017, including higher standard deduction levels, which may be more advantageous for tax filers who usually itemize their deductions. But while the upcoming tax changes are designed to make filing easier, the one-two punch of combining new tax reforms with a new Form 1040 is likely to land a few blows this tax season.

“Was it a good idea to also make the first significant changes to the tax form at the same time new reforms are taking hold? I don’t know about that,” Rahill says.

Once the new Form 1040 and accompanying Schedules become official, the clock also starts ticking for tax preparation software companies to update and test all their products for quality assurance. So, the most anxious people awaiting the IRS’ official releases may not be tax practitioners but the software developers who make it possible for everyone, from the largest accounting firms to the do-it-yourselfers, to e-file tax returns.

“You don’t want to have to call your software help desk and explain that you put a number in the box and it didn’t carry over to the Schedule and then hear, ‘Oh, yeah, we have a coding error,’” Rahill explains.

That technology update cascades to all 50 states — every state and U.S. territory must make sure their own tax forms align with the new federal guidelines and Form 1040. For example, Rahill points out that the current Illinois Form 1040 begins by instructing preparers to list adjusted gross income from line 37 of the current IRS Form 1040. But the new, shortened form doesn’t include an adjusted gross income line — that’s moving to one of the new Schedules.

GETTING HELP

As we head into what may be one of the more memorable tax seasons in recent years, quick guidance and resources are available. Updates from the IRS can be found online, and specific information about the new Form 1040 is at www.irs.gov/forms-instructions. The IRS is also encouraging everyone to make sure their payroll withholding taxes are in line with new tax reforms. Their paycheck check-up withholding calculator can be found at https://apps.irs.gov/app/withholdingcalculator/.