Hurricanes a 'wild card' for predictions of tax preparers

Friday, February 3, 2006

KANSAS CITY, Mo. -- Almost five months after Hurricane Katrina chased Yolonda Prevost from her East New Orleans neighborhood to her sister's place in Kansas City, she spends her days trying to get back home -- searching for apartments and arranging for repairs to her drowned house.

The last thing Prevost wants to worry about is doing her taxes.

Taxpayers like Prevost are a big question mark this year as tax preparers ranging from the nation's leader, H&R Block Inc., to mom-and-pop accountants, gear up for tax season.

Some in the industry predict the hurricanes will cause a flood of new clients as victims and those who contributed to recovery efforts wrestle with the myriad exemptions and refund programs put into place following hurricanes Katrina, Rita and Wilma.

"I'm too overwhelmed with what's going on," Prevost said.

John Hewitt, chief executive of Virginia Beach, Va.-based Liberty Tax Service, estimated his company will add a quarter-million returns to the one million returns it filed last year, partly because of the crush of Katrina-related returns.

Others say the increase won't be that dramatic, but the complexity of returns will skyrocket. And it won't be limited to the Gulf Coast.

"The spreading out of clients that we experienced from the New Orleans area is probably a negative net because it's hard to know exactly where those folks are," said H&R Block Inc. CEO Mark Ernst at a recent analyst meeting. "The offset is there are very targeted tax incentives for people who are affected by the hurricanes, which may cause people [to look] for more personal assistance. That is probably the biggest wild card in our internal look at the upcoming tax season."

The Internal Revenue Service this year expects taxpayers to file 134.9 million individual income returns, a 1.6 percent increase from 2005. The IRS won't guess how many returns will be affected by the hurricanes but said it expected many returns would be delayed until next year.

The most recent IRS statistics show that in 2004 tax professionals prepared 60 percent of all returns, up from 55 percent the year before.

Whether that number will greatly increase this year is unknown, although experts in the field said changes in the tax laws almost require professional tax help.

Within days of Katrina, the federal government began implementing tax benefits for people living in parts of Louisiana, Mississippi, Alabama and Florida affected by the hurricane. Similar changes followed the landfalls of Rita in Texas and Louisiana and Wilma in Florida.

The regulations mainly allowed taxpayers to declare property losses on prior-year tax returns so they could get immediate refunds and lifted the limits on declaring losses as a deduction. They also let people write off demolition and cleanup costs and provided expanded benefits for college students forced to relocate to other schools.

The rules also raised charitable contribution limits, allowed homeowners exemptions for housing hurricane evacuees and offered tax credits for businesses looking to invest in the stricken areas.

Tom Ochsenschlager, vice president of taxation for the Washington, D.C.-based American Institute of Certified Public Accountants, said tax rules are complicated enough, let alone divining such questions as how to determine property losses and whether government aid provided in the storms' aftermath is taxable.

"Someone who is quite comfortable doing their own taxes probably should not feel comfortable doing their own taxes in a disaster situation because the rules are not what they would normally run into," Ochsenschlager said.

In a release, Parsippany, N.J.-based Jackson Hewitt said it too expected questions on determining property and casualty losses to drive more filers to its offices.

Considering the large number of low-income people affected by the storms, Ochsenschlager's group and many of the national chains are providing some free tax services.

In addition, tax preparers face the burden of preparing returns for people who, like Prevost, may not be able to provide current W-2s tracking their income, tax returns for prior years or records showing the worth of their homes or other property.

The IRS can usually provide copies of W-2s, if employers have been able to file them, and prior-year tax returns. Tax preparers can estimate a client's 2005 income based on what they made the year before.

And when all else fails, the IRS has made it easier for taxpayers to request an extension.

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