AICPA CEO Melancon wants IRS to reduce tax underwithholding penalties
American Institute of CPAs president and CEO Barry Melancon sees parallels between the problems the Internal Revenue Service is experiencing this tax season in the wake of the 2017 tax overhaul and the Tax Reform Act of 1986.
“Actually this is not new,” he said during a speech Wednesday at the Accountants Club of America in New York. “It happened in 1986, 1987 as it related to the last major tax act. The exact same situation happened.”
The AICPA has been asking the IRS to waive tax penalties for taxpayers who didn’t withhold enough from their paychecks last year or pay enough in estimated payments. The IRS agreed to lower the threshold for charging the penalties, but the AICPA wants it to go further (see AICPA wants more penalty relief for underpayments and late payments by taxpayers).
“We’ve been telling the IRS you need to change the penalty system because you’re going to have a problem this year,” said Melancon. “So with the safe harbor issues on penalty relief, they have made some modifications. We’ve taken some positions that have gone further than what the IRS had as to what the safe harbor is because there are going to be unintended consequences from that standpoint.”
The AICPA is anticipating problems from the backlog of correspondence with the IRS during the partial government shutdown. Once the shutdown ended, there were approximately 5 million pieces of unopened mail that the IRS needed to address (see Taxpayer Advocate sees continuing impact on IRS from shutdown). During the shutdown, the IRS’s computer systems were sending out automated collection notices, but taxpayers and practitioners weren’t able to reach IRS employees to discuss them.
“We were pretty direct with the IRS that they’re going to pay the price for some backlog issues because of some things that they allowed to happen during the shutdown,” said Melancon. “The automatic notice system was just chucking out all these notices during the shutdown, and you couldn’t respond to certain notices. You had four weeks of automatic notices from the IRS. Even if you honestly had a way to try to address it as a CPA when a client brought it to you, you couldn’t resolve it. Then they have automatic penalties that come if there’s not sufficient response, and there’s not sufficient time to respond. One of the things we said is that they needed to change their penalty and interest calculations off of those automatic notices extended to 90 days from when the government reopened, as opposed to 90 days from when the notice might have been automatically generated. Those things feel like they’re in the weeds. Probably they are, but they’re real, substantive issues.”
Melancon believes the many uncertainties associated with the Tax Cuts and Jobs Act will help prompt conversations between taxpayers and tax professionals. “The news is different every day on whether we’re going to have a shutdown or a compromise,” he said. “I don’t think we will have a shutdown again, but there is going to be significant catch-up. On top of that there are literally thousands of unanswered questions on the tax reform act from the beginning of 2018 that I think will put CPAs and other tax professionals in a different set of judgments they have to make, different conversations they will have with their clients and a degree of uncertainty. I actually think all of those things are good and prove the value of professionals in that space, I think that there's a huge opportunity for professionals to change the relationship with clients, when you start to talk about a much greater number of gray area aspects.”
He believes the tax penalties will become more of a concern later in tax season. “I think the penalty issue will be later because it's going to be the more sophisticated tax returns,” he said. “All of our members who are volunteering on our tax committees believe that will be the case, and that's why we have been so vocal from that standpoint. We think the more sophisticated taxpayer, with more complex [returns], more uncertainties in their tax situation, are likely to face those types of issues, and that's why the safe harbor issues for families or the calculation rules need to be addressed. They did make some changes, but we think they need to go further.”
The IRS released statistics last week on the first few days of filing season showing lower tax refunds on average from early filers, but Melancon pointed out that most of those weren’t filers from CPA firms. But if the complaints continue, they could ultimately lead to Congress passing a technical corrections bill to fix some of the problems in the Tax Cuts and Jobs Act.
“A lot of CPA firms’ clients have not filed yet because of the level of sophistication there, but we are hearing the data points that were reported, like a 25 percent reduction in refunds, and the size of the refunds are about 8 percent less on average,” said Melancon. “We’ve heard that basic feedback from our members, maybe not quantifying it exactly the same. What are the ramifications to that? There have been no hearings scheduled on any technical corrections to the tax bill. Ways and Means are going to have hearings on Donald Trump's tax return, but there’s also going to be hearings because of the response on the refund issue. People obviously paid less tax. They may have owed tax, but on net paid less tax, but that's not how people are going to perceive the issue. And I think that will lead to some discussion of what technical corrections Congress can address in a bipartisan way. I still think it's a long shot to get a bipartisan tax corrections bill.”
During his wide-ranging talk, Melancon also discussed a number of other issues affecting the accounting profession. He compared the changes to the situations facing companies like Sears and Kodak that had to compete with newer entrants leveraging the latest technology in fields they had once dominated. He pointed to the need for smaller firms to use the kinds of sophisticated audit technology used by the larger firms. The AICPA has been developing technology that is able to leverage artificial intelligence for doing compilations and reviews and other assurance types of work for private company clients.
“We already have a tool that is out there from last June that brings that technology into play,” said Melancon. “Firms are already using it. That allows artificial intelligence to drive quality into different approaches into those types of engagements. That is about disruption of our core services from that standpoint. There are things that have to change in tax and other services as well. But this is a focal point because audit and attestation is what we are truly licensed to do.” The AICPA is also continuing to develop technology for doing audits and is in what Melancon referred to as a “third sprint” in testing it. Melancon also discussed the pace of merger activity at firms, with an increasing number of CPA firms merging with non-CPA firms.
“When you look at the top 400 firms, there are record numbers of mergers and acquisition activity of non-CPA firms,” he said. “We are seeing those firms having to diversify skill sets and technology platforms and capabilities, and they have been doing that through acquisition of other types of business enterprises to diversify within their own environment. About a third of the mergers and acquisitions that occurred in 2018 actually were non-CPA firm acquisitions by CPA firms.”
The AICPA is also seeing the business model and structure of CPA firms starting to change. “What we think is evolving is what we call a ‘fat middle’ firm, with less-entry level positions, which has a lot of ramifications to human capital management from that perspective,” said Melancon. He believes there are still going to be plenty of entry-level positions, but not in the same structure they have been.
“The war for talent would be in that fat middle,” said Melancon. “Certainly firms in the top 500, the top 1,000, are really going to hire a lot, and we're already seeing it from industry, into their fat middle, as they have the need to apply certain knowledge about an industry vertical to multiple clients. They're not going to have the same opportunity to grow that resource, to grow that competency from their entry-level people. They’re going to hire from a bank, from a health care institution, from a manufacturing enterprise, and then they're going to have that skill set. They are going to be able to deploy that to multiple clients because of the economic efficiency of that model. There are ramifications to that about what the profession looks like to university students, and how people who do grow up in the firm have the same opportunities.”