The American Institute of CPAs has sent its tax reform wish list to the half dozen Republicans who are leading a rewrite of the tax code.
The so-called Bix Six—House Speaker Paul Ryan, R-Wis., House Ways and Means Committee Chairman Kevin Brady, R-Texas, Senate Majority Leader Mitch McConnell, R-Ken., Senate Finance Committee Chairman Orrin Hatch, R-Utah, Treasury Secretary Steven Mnuchin and White House National Economic Council Director Gary Cohn—have been meeting in recent months behind closed doors to put together one of the Trump administration’s and congressional Republicans’ main priorities, a tax reform bill.
Last month, they drafted a broad outline of their tax reform plan, entitled a Unified Framework for Fixing Our Broken Tax Code. They have also been negotiating the details for the actual legislation, which may emerge as soon as next week according to some reports. Much uncertainty remains, however, about key details such as what income levels will be in which tax brackets, whether the state and local tax deduction will be preserved, whether there will be a fourth income tax bracket for high-earning taxpayers, whether the tax break for corporate debt will be preserved, and whether the 401(k) contribution limit will be scaled back.
The AICPA letter is asking the Big Six to take a “holistic approach that is both equitable and meaningful to drive economic opportunities for individuals and families while leveling the playing field for American businesses not only in the United States but also abroad.”
“We need a tax system that is fair, stimulates economic growth, has minimal compliance costs, and allows taxpayers to understand their tax obligations,” wrote AICPA Tax Executive Committee chair Annette Nellen. “These features of a tax system are achievable if principles of good tax policy are balanced in the design of the system.”
Over the past five years the AICPA has written over 100 comment letters, position papers and statements for the record on tax reform, Nellen pointed out. Wednesday’s letter summarizes some of the AICPA’s main tax reform priorities:
• IRS regulation of tax return preparers: The AICPA noted it has always been a steadfast supporter of the IRS’s goals of enhancing compliance and elevating ethical conduct and fully backs the use of a preparer tax identification number for all signing tax preparers, and subjecting all tax preparers to the reach of Treasury Circular 230. However, the AICPA added that it has serious concerns about granting the IRS unlimited authority to regulate tax preparers. It was Congress to mandate that the IRS enact a testing and continuing education program similar to the Registered Tax Return Preparer program in effect prior to the ruling in the case of Loving v. IRS that would apply exclusively to so-called “unenrolled” tax return preparers who aren’t licensed by states.
• Tax simplification and administration issues: The AICPA said it supports a new, simplified income tax rate structure. The institute wants Congress and the Trump Administration to avoid and eliminate all surtaxes that are complicated, confusing, and lack transparency, including the alternative minimum tax. The AICPA also urged policymakers to use a consistent definition of taxable income without the use of any phase-outs. It suggested Congress should provide enough time and flexibility to implement transition rules, such as AMT carryovers and suspended and passive losses. The AICPA also recommends Congress permit pass-through entities to choose fiscal year ends for tax purposes, enabling tax advisors to spread out their workload during the year and improve the tax compliance process.
• Pass-through entities: If Congress lowers the income tax rates for C corporations, the AICPA believes all types of business entities should receive a rate reduction, including pass-through entities such as S corporations and professional service firms such as CPA firms. “Professional service firms, such as public accounting firms, are an important sector in our economy and heavily contribute to the nation’s goals of creating jobs and better wages,” said the AICPA. “An additional provision that would further disadvantage pass-through entities vis-à-vis corporations—changes to the federal deduction for state and local taxes—could have a distortive impact and dull the job-creating and economy-boosting effects of tax reform.” Mnuchin suggested last month that accounting firms perhaps should not get as low a tax rate as manufacturing companies (see Mnuchin proposes not cutting taxes for accounting firms).
• Permanent disaster relief: The AICPA encouraged Congress to provide victims of natural disasters with more certainty by enacting permanent disaster relief. That would reduce the administrative burdens on disaster victims and the IRS, which needs to issue guidance each time a disaster like the recent hurricanes and wildfires occurs to provide relief such as extended deadlines for filing tax returns and making tax payments.
• Cash method of accounting: The AICPA is concerned with, and opposes, any new limitations on the use of the cash method for any business, including those businesses whose income is taxed directly on their owners’ individual returns (such as, partnerships and S corporations).
• Modernize the Internal Revenue Service: The AICPA is asking Congress and the Trump Administration to address IRS taxpayer services, suggesting that any effort to modernize the IRS and its technology infrastructure should build on the foundation created by the Report of the National Commission on Restructuring the IRS. On top of that, the AICPA suggests that Congress tell the IRS to create a new dedicated practitioner services unit to centrally manage the many current programs, processes and tools that have an impact on tax practitioners.
• Distinguishing compensation income: The AICPA recommends determining compensation income by codifying traditional definitions of “reasonable compensation” supplemented, if needed, through guidance from the Treasury Department and the Internal Revenue Service.
• Centralized Partnership Audit Regime: The AICPA is asking Congress to pass legislation to delay by one year the effective date of the new Centralized Partnership Audit Regime, which was enacted by the Bipartisan Budget Act of 2015. The AICPA believes it’s unlikely that all the procedures and guidance that taxpayers need to make informed decisions regarding the provisions of the new regime for auditing large partnerships will be set before the current effective date at the end of this year. The new regime aims to make it easier for the IRS to audit large partnerships such as Big Four firms as a whole, rather than auditing each individual partner,
• Mobile workforce: The AICPA said it supports the Mobile Workforce State Income Tax Simplification Act of 2017, S. 540 and H.R. 1393, which offers a uniform national standard for non-resident state income tax withholding and a de minimis exemption from multistate assessments of state nonresident income tax.
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