Speaker: Regulatory Slowdown Means More Work for CPAs

Chris Gaetano
Published Date:
Dec 7, 2017

While the administration's freeze on new federal regulations might seem, on its face, to mean less work for CPAs, a speaker at the Foundation for Accounting Education's Tax Planning for Individuals Conference  on Dec. 6 said that, paradoxically enough, it will actually mean the opposite. 

Shortly after assuming power, the new administration issued a freeze on most new federal regulations. This means that, without the exception of emergency situations or other urgent matters, federal agencies are instructed to send no regulations to the Office of the Federal Register until a department or agency head reviews and approves it. A regulation, in this sense, was defined as any substantive action by an agency normally published in the Federal Register that promulgates, or is expected to lead to the promulgation of, a final rule or regulation. 

Although the freeze was intended to make things more simple, Jonathan Horn, a senior manager on the American Institute of CPA’s Tax Policy & Advocacy Team, based in Washington, D.C., said that, at least as far as tax planning go, it actually makes things more complicated. Horn explained that this freeze exacerbated an already growing hesitance on the part of the IRS to issue new regulations. He pointed out that the IRS has recently lost a number of prominent court cases, such as Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, in which the U.S. Tax Court decline to follow the IRS's longstanding position that a non-U.S. partner is subject to federal income tax on gains from the sale of a partnership interest. The regulatory freeze, combined with its recent string of procedural defeats, will make it more difficult for the IRS to issue new regulations, which he said "makes everyone's job harder." 

Horn said that, "like them or not," official IRS regulations provide a measure of certainty and consistency as to how tax preparers should proceed on particular issues. Without this certainty, he said, people will just have to guess when faced with a complicated issue. 

"When there is no regulation, you're guessing, and when you guess, your guess will probably be different [from] the auditor's guess, which costs you and your clients time and money. And you don't always win!" 

Horn noted that the IRS's Priority Guidance Plan, which the agency issues as a guide to what sort of matters it plans to issue over the coming year, has been reduced by close to 50 percent compared to prior years. He did not believe that the IRS would just stop issuing new regulations entirely, he said, but they will be in a form different from what CPAs are accustomed to. He anticipated that the IRS will instead start relying more on "sub-regulatory guidance," such as revenue rulings, revenue notices, publications and even FAQs. These forms of guidance, however, are only a partial fix, as they are not considered authoritative, he said.

"You can't depend on those! You can't even depend on the instructions! Just because the instructions said to do something, if the IRS can convince a judge that that's not what the law says, the judge doesn't care if the IRS told you to do it that way, which makes your job that much more difficult," he said. 

Another development making CPAs jobs more difficult is changing client expectations, according to Horn. He pointed to four changes that he has noticed over the years that make life as a tax preparer even more trying than before. 

The first he called "The WebMD effect." Many clients he said, thinks they're experts nowadays, because of websites with information that's either misleading or too specific to apply to them. 

"They Google something and say, 'Someone told me I could transfer money to this account and therefore I wouldn't be ..." He groaned before the sentence ended. 

The second he called "The Amazon Prime effect." Everyone, he said, wants things right away, and they want it for free. He noted that his wife has Amazon Prime, and she loves that she can get so many things so cheap so fast. This attitude, though, has spilled over into tax planning. 

He provided as an example a client who says, "So, OK, I'll pay you the same $300, $500, $1,000 to do my simple 1040, same as last year, but I also want you to do X and Y and Z, and could you also do my son's return? You want more money for that? And you can't do it today? Gee, H&R Block would do it for me."

The third change he dubbed "the TurboTax effect." Basically, he said, more people think they can do things themselves but get totally confused in the process. He noted that a colleague, an intelligent person who knows tax law, was doing her own return for the first time (she had previously been employed at a Big Four firm) and was completely and totally lost. After looking at her situation, Horn noted that TurboTax was improperly factoring in a health savings account maintained by her employer into taxable income. 

"You actually have to calculate that it's nontaxable. TurboTax in their questionnaire system doesn't flag that properly. But this is an intelligent woman, and she was being screwed up by TurboTax! She knows tax law and couldn't find it!" he said. 

Finally, he talked about "the Yelp effect." Clients have always griped, but before it was always in their preparer's office. Today, he said, that griping tends to happen on social media. 

"Ever go to Yelp and see if there's a rating for your firm? Don't!" he said. 

In the face of these changing expectations, Horn said that CPA firms need to change to stay relevant. He exhorted preparers to expand their service offerings to include personal financial planning and reminded his audience that they don't need certification if their planning is strictly within the realm of taxes. 

"If that's all you're doing, preparing tax returns, you need to do more or else you will be a dinosaur," he said. 

Tax reform, he said, will offer a great opportunity for CPAs to expand their practices, but he grimly noted that they will unfortunately have to relearn most of what they know. But, then again, he said, their clients will know even less. 

He also suggested expanding into bookkeeping and payroll services. Software has taken most of the work out of it these services, and Horn said that the job can be done by a single person at the firm now. It's an easy value-add to the client and costs very little to do. But he warned that if a firm decides to add these services, it will need to seriously beef up its cybersecurity controls because the firm will have far more access to personal data than before. 

Finally, Horn noted that changes to the partnership audit regime (partnerships will now be audited and assessed as a whole entity) mean that there are many tax-planning opportunities for clients who are partners in companies, and those who are invested in partnerships. 

"So your clients who are invested in partnerships, will need protection, and your partnerships will need protection. So there's an opportunity [in the fact that] there are some really scary implications of the partnership audit regime," he said. 

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