YOUR TAXES: A SPECIAL REPORT : BIGGER HEADACHES : Changes Are Forcing Accountants to Study More, Work Longer, Hike Fees

The accountants are annoyed by tax reform’s new math. For them, Forms 8582 plus 8598, 8506 and 8615 and a few other four-digit words equal an expectation of lower profits and bigger headaches this year.

Many expect to charge more but earn less for studying and working harder than ever before, because sweeping rule changes passed by Congress in 1986 require them to spend much more time researching and preparing returns than in past years.

Also, they expect a giant increase in requests for extensions because fear about the new laws has caused a kind of paralysis among clients--with as many as 40% waiting longer than in past years to deal with a process they already considered bewildering and too costly. An Internal Revenue Service spokesman confirmed that the filing pattern is “seemingly delayed,” with receipts of returns about 15% below last year at this time.

Encino accountant Ron Pollak said he saw it coming in the fall, and warned his clients.

“We sent out letters saying we are going to charge more money,” Pollak said. “Our clients have read about the complications of the new rules, but they aren’t seeing it. It’s not affecting them; it’s affecting us .”

More paper work means more billable hours, which, accountants say, is a good thing only if you can make the charges stick. Lawrence M. Angen, tax partner in charge of the Beverly Hills office of the firm of Seidman & Seidman, said he suspects that many of his clients will refuse to pay.

“We’re telling clients that their fees may be increased by at least twice,” he said, bringing the office’s average fee from its generally wealthy clients to as much as $2,500 from $1,000. “Whether we’re going to get it or not is another matter. People don’t appreciate how much more time is required this year.”

The Tax Reform Act of 1986 changed rules on hundreds of deductions, schedules and reporting procedures. To practice effectively, accountants have had to spend hundreds of additional hours poring over not just those changes but changes to those changes that were passed just three months ago in the 1987 tax bill. In all, the IRS created 48 new forms and 13 new publications, and it revised 162 existing forms and 96 existing publications, according to a spokesman.

Heaped on that pile are the changes in most state tax codes to conform with federal code and a steady stream of interpretations and opinions. The Treasury Department, for instance, released a 266-page interpretation of its new rules on passive investments on Feb. 22; it was only the first of three such sets known to be on the way.

Angen said his firm has had to double its employees’ training this year at a cost of an extra $3,000 to $5,000 per tax associate. James G. Milner, tax partner at Peat Marwick Main & Co. in Los Angeles, said training costs are up 60% so far this fiscal year and will probably rise to 100% by year-end.

A new sense of resentment toward the system appears to be another cost of compliance. Five tax lawyers from Bryn Mawr, Pa., sent a letter to members of Congress that was reproduced in the February issue of the Journal of Accountancy. In part, it read: “You are about to change the tax law for the 10th time in 11 years. This rate of change exceeds the ability of even the most conscientious tax practitioner to keep up.”

Milner, who expects Peat Marwick’s profitability to fall 5% to 10% this year due to costs associated with the new laws, said he thinks that they were passed without consideration of hidden injury to the economy. “Record-keeping costs are going up exponentially for a complex set of rules that don’t raise that many more dollars,” he said.

A major difficulty this year, according to Pollak, is the “enormous number of questions” the IRS asks now about formerly routine personal finance matters and the “unusually twisted” language in which they are stated.

The new rules in Form 8598 on refinancing a home mortgage are an example. “Prior to this year, it was a one-line item: ‘How much did you pay?’ ” Angen said. “Now it could be a three- to four-page computational schedule.”

Pollak said he knows of one colleague who decided that he was just not going to do the paper work on home mortgages. “It is absolute gobbledygook,” he said. “How anybody could have conceived of it is unbelievable.”

A tangle of new rules involving investment partnerships is also causing problems. Angen said limited partners normally get income reports, called K-1s, in March. But, due to delays in calculating them, clients say they may not get them by April 1. “There’s a snowball effect then,” he said. “If they get the form late, we get it late--and in many cases we won’t be able to file a return on time.”

Angen said he expects that 50% of his clients will need extensions past the April 15 deadline this year, compared to 10% in past years. Milner of Peat Marwick said extension filings could be up to as much as 65% of all clients. That requires more work in itself, since an estimated tax must be paid before an extension is granted, and “that can be a real shot in the dark,” Angen said.

A third area of distress for accountants is the alternate minimum tax. In the past, only rich people worried about this dark closet of the law. This year, Angen said, the AMT is open to many more people and constitutes half of a dual tax system that requires complicated returns to be figured twice: once the usual way, and once under the very different rules of the AMT.

“You can’t figure out which applies until you do both,” he said. “What we’re finding is that many clients refuse to deal with the details. You have to get information that people never used to have to tell you, and they are balking. Most are taking it in stride, but many are mad.”

Most accountants, though, are like psychiatrists: They just ask questions. The dirty work of turning answers into slick, professional-looking returns is done by specialized tax computer firms. And this year, their work is very dirty indeed.

Norman Youtan, president of TACS, the Eagle-Rock based subsidiary of computer services giant Computer Sciences, said he had to hire a new team of programmers to handle the huge increase in new computer coding required to handle the new rules. Normally, he said, their work would be done by Jan. 1 and the company would be turning around each of the 600,000 returns it handles during a season in 24 to 36 hours.

This year, he said, “there is just no comparison to the complexity we have had to add to our software.” Programmers were still writing code in mid-February and, despite the fact that his operation runs 24 hours a day, seven days a week, returns are taking up to three days to calculate. The halfway point in their season has traditionally been March 19, he said; this year it will come later--causing an unavoidable delay in filings.

Accountants are not complaining, however, because they acknowledge the computer firms’ problem. “If you’re talking about a reasonably complicated tax return today,” Youtan said, “none of the practitioners could ever do one by hand effectively.” New depreciation rules alone, he noted, are “massive in their complexity”--requiring equipment bought for a business over the past 10 years to be handled in four to six different ways.

A Westwood accountant who declined to be identified said he fears that the end result will be the unraveling of the tax system. “The voluntary compliance that has been depended on for years is going to break down,” he said. “I think many more people are going to go to cash to conceal their income, as they do already in France, and the ability to enforce these laws is going to break down, too.”