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Kate Prouty Committees working in audit, accounting and taxation expect to produce at least 23 comment letters this fiscal year, more than tripling their annual activity from two years ago, when they released only six letters over the course of fiscal year 2001–2002. Many institutions—both public, like the Internal Revenue Service, and private, like the Financial Accounting Standards Board—have adopted open decision-making policies, welcoming comment letters from external stakeholders in the industries they service. As it turns out, their invitations are genuine. “The IRS is definitely interested in receiving constructive comments from the general public, particularly comments that not only say ‘you’re doing something wrong,’ but also ‘here’s how you can go ahead and fix it,’” said Leon Metzger, chair of the Taxation of Financial Institutions and Products Committee. Metzger has been involved in submitting comment letters to the IRS and the Department of the Treasury for roughly 10 years. Not only do institutions like the IRS read the letters, they often seek further information from the drafters. On one such occasion, Metzger received a direct call from Horace Howells of the IRS’ Office of Associate Chief Counsel requesting more information on the letter he had drafted with Israel A. Press, another Taxation of Financial Institutions and Products Committee member, last September. The IRS said instances like this are not rare. “Part of our burden reduction effort,” which falls under Michael Chesman’s direction of the IRS’ Office of Taxpayer Burden Reduction, created three years ago, “is to acknowledge and respond to comment letters,” said Ellen Murphy, area director for the IRS Small Business/Self-Employed Division. “The fact that we’re seeing a lot of comment letters, and particularly a high level of expertise in those letters, is indicative of the improving relationship between practitioners and the IRS,” she added. Murphy, who works with 11 CPA state societies from Maine to Maryland, noted that the IRS is particularly grateful for NYSSCPA practitioners’ expertise on issues that CPAs in other states might not come across as frequently, such as complex tax and foreign issues, or those that arise from working with a large group of clients. Of the six comment letters the Society released in April, the Accounting and Review Services Committee submitted one to the American Institute of CPAs; the International Accounting and Auditing Committee submitted one to the International Federation of Accountants; and the Financial Accounting Standards Committee submitted four to FASB. Committees from the accounting and auditing divisions, like the ones listed above, submit comment letters regularly. But recently, three comment letters—on tax simplification (see story on page 1), Schedule K-1 forms and anti-terrorist funding guidelines for nonprofits—have drawn attention to the taxation division as well. Society Plants Stake in Schedule K-1 Revising Schedule K-1, which reports income from partnerships, S corporations and some trusts, has been a hot topic ever since the IRS introduced a K-1 matching program in 2002, to less than favorable reviews. Practitioners complained that correctly reported items were flagged as incorrect due to mismatches of complex reporting items in a K-1 to the reporting items in a personal income tax return—a mistake that led the IRS to issue unnecessary notices. “The K-1 matching program was going to fail because the IRS was not collecting enough detailed information,” said Metzger, one of the principal drafters of the Society’s comments to the IRS on the K-1 matching program. “Because the program did not account for all items, it would be impossible to try to electronically match the lines in the Schedule K-1 to those in a taxpayer’s return.” The Society proposed a redesigned form K-1, drafted in principle by Metzger, Relations with the IRS Committee Chair Gerard Borod and Tax Division Oversight Committee liaison Bob Goldstein. (See the proposal at www.nysscpa.org/commentletter/model_letter.doc.) Following the release of the letter, the IRS invited Metzger to Washington, D.C., in March to further discuss the K-1 redesign. Metzger did not meet with the IRS as a representative of the Society, but did bring the committee’s proposal along with him. Metzger felt that, among other things, the meeting made the IRS sensitive to broader issues with the K-1. For one, he learned that the K-1 matching program only looked at line 1, which Metzger guesses represents only about 5 percent of the form that many practitioners don’t even use. Although it suspended the program in August 2003, accurate filing of Schedule K-1 remains an issue because the IRS continues to match income from Schedule K-1 to other tax returns. The IRS is currently circulating drafts of a redesigned K-1 among practitioner focus groups and expects to release this draft, or perhaps a final version, in one month to six weeks, Murphy estimated. Because Schedule K-1 accounts for so much total income paid to partners, shareholders and trust beneficiaries—over $1 trillion for tax year 2002—using a matching program to ensure that all Schedule K-1 income is reported “is critical to the IRS’ tax administration policies,” the Service reported on April 9, when it issued tips to tax payers and professionals to avoid errors related to matching items. An Invitation to the Treasury The Treasury Department responded in April to a comment letter that the Exempt Organizations Committee submitted on July 17, 2003, regarding charitable groups’ international grant-making activities. The comment letter recommended education to raise awareness to stop unintentional funding of terrorists, and cited the need for the charitable community to report factual information so the IRS can identify charities that fund terrorism, either directly or indirectly. (See the letter at http://www.nysscpa.org/commentletter/irs_2003-29.doc.) Work on this particular issue, which extends well beyond the realms of audit, accounting or taxation and outside the state lines of New York, shows the committee’s, and the accounting profession’s, impact on the community at large. Having considered the Society’s comments, the Treasury Department sent Exempt Organizations Committee Chair Martin S. Cantor and Society Director of Committee Services Ernie Markezin a letter inviting a Society representative to join discussions of the matter at its Initial Outreach Event on April 28 in Washington, D.C. At the time of press, Paul E. Hammerschmidt, Exempt Organization Committee member and one of the letter’s principal drafters, planned to represent the Society at the April meeting. Brian P. Wheeler and Brian N. Raeter drafted the letter along with Cantor and Hammerschmidt. |
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