In the first-ever visit to Congress by the American Institute of CPAs’ Major Firms Group, CPA executive leaders from 81 of the nation’s top 100 accounting firms visited Capitol Hill just prior to summer recess.The firms, representing more than 54,000 employees and their clients, discussed with lawmakers those legislative issues that are important to the accounting profession, including tax patents and uniform non-resident tax standards.
“International, national and regional accounting firms outside of the Big Four have grown very significantly in recent years. They’re a critical part of the U.S. economy and they are geographically dispersed throughout the country,” said AICPA president and chief executive officer Barry Melancon. “We think it’s important for Congress to understand their role in our capital markets and hear about the issues that are of concern to this group.”
Members of the institute’s Major Firms Group consist of the top five to 100 largest accounting firms outside the Big Four. The firms are headquartered or have offices in all 50 states and serve a diverse group of clients, including public companies, small and large private businesses, partnerships and nonprofit organizations, and individual taxpayers.
Where possible, the members of the group met with their own representatives and senators, according to Leroy Dennis, a partner in the Minnesota office of McGladrey & Pullen and chair of the group. “We arranged for Minnesota firms to meet with Minnesota representatives, and those from other states met with representatives from those states,” he said.
Altogether, the Major Firms Group held more than 70 meetings with House and Senate members.
“The point of the meeting was to introduce ourselves and let them know about us,” said Mark Peterson, AICPA vice president of government and public affairs. “We felt it was important for lawmakers to know that we represent not only ourselves, but our clients. It’s a very important group for the profession and for the economy, and it’s important from the policy-maker standpoint, since entrepreneurs and small business are the engines for the economy.”
WHAT’S ON THEIR MINDS
The group focused on three main issues in its talks with lawmakers, Dennis said. “We decided to focus on banning the patenting of tax-planning strategies, equalizing the discrepancy between taxpayer and preparer responsibility, promoting uniform interstate income tax requirements, and workforce mobility between states,” he explained.
The patentability of tax strategies is a growing concern among tax practitioners and taxpayers, according to the AICPA. It all began a decade ago, when the U.S. Federal Circuit Court of Appeals held that business methods could be patented. Since then, 68 patents for tax strategies have been granted and over 100 patent applications for tax-planning methods are pending.
Tax-planning patents have been granted in a wide variety of areas, including the use of financial products, charitable giving, estate and gift tax, pension plans, tax-deferred exchanges, and deferred compensation. One patent is for the process of computing and disclosing the federal income tax consequences involved in converting a standard IRA to a Roth IRA.
The patents limit the ability of taxpayers to use the interpretations of tax law intended by Congress. Therefore that may create unfairness by causing some taxpayers to pay more tax than others who are in similar situations, may mislead taxpayers into believing that a patented strategy is valid under the tax law, and potentially preclude tax professionals from challenging the validity of tax strategy patents, according to the Major Firms Group.
“This is simply bad policy,” said Dennis. “It’s bad for taxpayers and bad for practitioners.
We received a positive response from lawmakers. There are a number of legislative fixes pending, and we’re hopeful that when it gets to a vote, the problem will be corrected.”
The group also discussed the problems created by a provision enacted in the May 25, 2007, U.S. Troop Readiness, Veteran’s Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007. The provision increased the standards applicable to tax return preparers under Internal Revenue Code Section 6694 for all undisclosed positions, including non-tax-avoidance items, from the “realistic possibility of success” standard to the “more likely than not” standard.
The group noted that in addition to creating the potential for conflicts of interest between preparers and their clients, the higher standard results in a fundamental change in the role of the preparer from that of an advocate to that of an advisor. Moreover, it would be impossible to determine the probable correctness of the treatment of some routine items, and a disclosure made under such a system could be viewed as a concession on the merits, according to the group.
“The discrepancy in standards must be equalized to the same standard it is for the taxpayer,” said Dennis. “There are bills in both the House and Senate that would correct this. We sensed pretty good support for these bills — no one came back and said they were against it, although some were not aware of the problem. That was part of the process, to make them aware of it.”
A third issue that the group advocated was the Mobile Workforce State Income Tax Fairness and Simplification Act, which seeks a uniform national standard for state non-resident income tax withholding. This would preclude the need for an employer to become familiar with state law requirements on withholding in the various states where it does business, according to Dennis.
“Now, there is no uniformity among states as to how long you must work in the state to be subject to tax. This is a burden to CPA firms and small businesses that have to comply with different requirements in each state. Some states have a de minimus rule, but one is 10 days while another is 50 days.”
The bill, if enacted, would set a uniform standard that an employee must work in a non-resident state for 60 days before taxes would have to be withheld and paid. “We want to minimize any impact on state income tax revenues, but still make it administratively simpler,” Dennis explained. “The administrative cost should at least equal the revenue gained.”
The issue has been discussed in the House, where the act originated, but not in the Senate, he noted. “It was an education mission in the Senate.”
