Tax issues add up to new business for preparers

Accountants and lawyers who handle tax issues in California report they have seen a bump in business since 2010 due to changes in how the Internal Revenue Service treats same-sex couples.

Two years ago the federal agency agreed to recognize the community property rights of registered domestic partners or married same-sex couples in a number of Western states. But as a story in last week's Bay Area Reporter pointed out, the rule change has been anything but easy to implement.

The result, say tax experts, has been more LGBT couples seeking out professional assistance in figuring out their tax returns. While a financial drain for the tax filers, it has been good for business for preparers and tax attorneys.

"Certainly, helping taxpayers get their tax issues worked out is good for business, but it is a double-edged sword for taxpayers," acknowledged Aubrey Hone, who left Ernest and Young a year ago to open her own firm, Hone Tax Law, in downtown San Francisco.

Hone, who worked with the LGBT Community Center to set up its free tax help for low-income LGBT people, said she has worked with many same-sex couples that have encountered issues with the IRS.

"I handle a lot of controversies and disputes," said Hone. "I represent taxpayers in audits."

Since last year Jeff Johnston has advertised his tax group's services to LGBT people through a marketing campaign in the B.A.R. As soon as city inspectors sign off on his permits, which he hopes will occur this week, Johnston will open a second location in the Castro.

"A lot of business has come to us from registered domestic partners because of the change in the way the IRS processes federal returns since 2010," said Johnston, whose staff has been working out of a temporary location near the new Castro office. "Certainly, it is a big part of our business. It is one of the areas we specialize in."

The cost of using a tax professional is usually balanced out by the economic benefits from the recognition of a couple's community property rights, said Johnston.

"Almost always we can find where it saves a couple money," said Johnston, especially when one partner makes considerably more than the other. "Once in a while that is not true."

Elisha Wiesenberg, an L.A.-based certified public accountant, hired a new staffer last year due to an uptick in business since 2010.

"We are growing. I would say the fastest growing segment is LGBT couples," he said.

To help LGBT couples figure out the new IRS tax rules, Wiesenberg issued a list of the top five tax tips they should observe. Chief among them is not to rely on computerized tax filing services.

"At-home software programs are great for simple tax situations, but registered domestic partners can have enormously complicated returns," Wiesenberg said. "The new federal guidelines obligate RDPs and same-sex married couples to combine their income and split it, and at-home tax software just isn't capable of handling these situations."

Couples need to discuss each other's incomes and debt obligations, said Wiesenberg, and share their financial documents with each other. They also should keep copious notes when talking with the IRS or a tax preparer.

He also suggests same-sex couples fill out forms 8821 and 2848 so that either partner can discuss tax issues with the IRS.

"Even though you're filing as a couple, the federal government and IRS don't permit you to talk about each others' taxes or make decisions without the proper forms," noted Wiesenberg.

One area causing confusion is self-employment income. Tax preparers have been arguing with the IRS over how to ensure a self-employed person receives the full Social Security benefits from their income, even though half of it is being designated as their partner's income.

"People who are self-employed want full credit for social security purposes, but the IRS says you only get half," said Santa Clara University law professor Patricia Cain, who blogs about tax issues same-sex couples encounter at http://tinyurl.com/7wd7o2l. "It is very complicated. Whatever positions the IRS takes, there are winners and losers."

Cain has advised a number of couples that received notices from the IRS saying they miscalculated their self-employment taxes last year.

"Even though the full self-employment tax has been paid by the earner, they are saying, 'No, it's got to be paid by the non-earner.' We may have to go to court to challenge it because the IRS said it is not going to change its mind," said Cain. "I would be willing to litigate it pro bono for anyone who wants to challenge it."

Asked to articulate the IRS' stance on the issue, a spokesman pointed the B.A.R. to the agency's Q&A on the subject at http://tinyurl.com/66n5ahk.

Until the federal government treats same-sex couples the same as heterosexual married couples, LGBT partners with complicated tax returns should seek professional help, said Wiesenberg.

"So many people want to do it themselves and do it themselves every year. Now all of a sudden they can't do it themselves," he said. "They are stuck going to a tax preparer and it is costing them money. That is the biggest area where it is unfair."