Not Loving Tax Preparer Regulation: A Court Challenge by CPA Firms

Three Small Preparers Sue IRS Over Tax Preparer Licensing

A Biography of the Plantiffs

The libertarian Institute for Justice and three small tax preparer businesses brought suit against the Internal Revenue Service in regards to the new regulations for paid tax preparers. The three, based in Illinois, Wisconsin and New Jersey, argue that the new regulations exceed the authority of the IRS, are applied unevenly (based on the exemptions for CPAs and attorneys) and are unduly hard on small tax preparers. To the best of my knowledge, the IRS has yet to respond.

I, while lukewarm at best on the new regulations, do not expect this suit to be successful. This looks like the equivalent of one of the taxpayer lawsuits about paying taxes with gold, perhaps with some technical merit but no practical chance to succeed. The one difference--the gold issue has been adjudicated so frequently in the past to become frivolous now, while at least this suit bring a new application of issues to the court.

First Round of TPIN Competency Exams Are Now Graded by the IRS

IRS Returns First Set of Competency Exam Results

The IRS recently began notifying tax preparers who took the Tax Return Preparer Competency Exam as to whether they passed or failed. Preparers who passed the exam (which required 350 out of a possible 500 points (presumably 70%) must also pass a tax compliance check (which should be completed within a month of notification of passing the competency exam); if all goes smoothly, the preparer will receive a certificate from the IRS which designates them as a Registered Tax Preparer. Tax preparers which have not passed the Competency Exam or separately the Enrolled Agent/Special Enrollment Examination, CPA Exam or bar exam (for attorneys) will not be legally able to prepare tax returns for fee after December 2013.

Unless you were one of the paid tax preparers who took this round of the competency exam, the most useful information out of this IRS announcement is the 70% pass criterion. If you plan to take the competency exam, make sure to remember that the exam will NOT be available during the first two weeks of March.

Dan Adams of AIM: Maximizing Customer Satisfaction May Lead to More Success than Maximizing Shareholder Value

A New Management Strategy from AIM

Since the mid-1970s, maximization of shareholder value (based on a Jensen and Meckling journal article) has generally been sancrosanct as a motto for top executives, MBA programs and other business commentators. Dan Adams, President of AIM, likes value maximumization as a RESULT but not nearly as much as a goal. Instead, Adams recommends emphasizing understanding and satisfying customer desires. Adams provides six reasons for his perspective: investors (especially short-term investors such as mutual funds) are more concerned with your apparent health than your actual health; an emphasis on share price maximization lends itself to excessive consideration of short-term vs. long-term issues; share value maximization has NOT worked during the last 35 years (this one can be questioned--the 35 years prior to 1976 were arguably among the greatest growth years in U.S. history), tangible goals are more likely to be met (Adams considers share maximization somewhat etherial) and employees need something inspiring to work for (perhaps Adams' strongest argument) and finally, understanding customer needs and desires can make you more successful not only with a specific customer but with other customers as well.

At minimum, Adams has written a thought-provoking article well worthy of management accountants, managers, financial specialists and a host of business academics. At most, Adams may have started a paradigm-shift in management which could lead to a better understanding of how to succeed in business. Already in value-added analysis, we look for activities which make a product or service more beneficial to users--why not extend this to the overall management of a business or organization?

Canada: "You Can Have NHL Teams--We Would Rather Have Corporate HQs"

Corporations Headed North?

An Obama administration proposal to reduce the maximum corporate rate to 28% while eliminating numerous deductions left Dr. Nathan Oeistreich of San Diego State University unimpressed. Said Dr. Oeistreich: We are cutting the rate to 28% when Canada cut its rate to 15% and we are even considering raising oil taxes. Why should we not be surprised if corporations chose Hamilton over Buffalo, Windsor over Detroit, Winnipeg over Minneapolis or Vancover over Seattle? Roger Russell of Accounting Today also criticizes the increased taxation of dividends and the continued efforts to extract taxes from foreign subsidiaries of U.S. companies; though he is willing to back off somewhat if the Obama administration is putting the proposal out simply for political reasons.

Tax proposals during a Presidential election year deservedly are generally considered with a "grain of salt;" there have been so many past promises regarding taxes during campaigns that never reached fruition (many times, thankfully the case) that it is hard to take any proposal seriously except as an attention-getter (example: Herman Cain's "9-9-9"). Oeistreich and Russell DO make one valid point: too much tax legislation ignores second-order consequences.

Another Full Year of the 5.65% FICA Tax for Employees Seems Assured

Democratic and Republican negotiators appear to have worked out a deal to continue the 2% payroll tax cut for the rest of 2012. The deal drops the maximum jobless benefit span from 99 to 73 weeks and requires federal workers to pay an additional 1.5% of their pay into the federal pension plan. Republicans dropped their position of making the payroll tax cut revenue-neutral while Democrats scrapped plans to include a provision along the lines of the "Buffett" plan in the legislation. The legislation also continues extended unemployment beneifts (albeit for the shorter period mentioned above) and adds a provision postponing certain cuts in Medicare reimubursements to physicians.

The Republicans had allowed themselves to be placed in an awkward position on this legislation and probably felt that they escaped in the compromise with relatively little damage. The Democrats on the other hand get a campaign issue ("we saved the payroll tax cut") and weakened the Republican stand on revenue-neutrality for at least tax expenditures.

The Chartered Global Management Accountant: A Necessary Professional Credential or an Unncessary Irritant Between the AICPA and IMA?

The IMA View

The AICPA View

My View Nine Months Ago

The AICPA announced two weeks ago that it was initiating a new credential, the Chartered Global Management Accountant (CGMA) effective January 31. Members of the AICPA are allowed to "test drive" the designation through July 31; thereafter, experience requirements (generally three years in a management, consulting or finnacial management setting) and annual dues of $150 ($100 if a member of a state CPA society) will be required to maintain the CGMA status. No specific testing of technical skills is presently required; an omission which the IMA vigorously criticized in its review of the designation.

Perhaps the AICPA is trying to use the CGMA to increase its international presence; perhaps there was significant demand within the AICPA which I was unaware of for a management accounting designation. On the surface, however, it is hard for me to see this as anything but an unnecessary irritant in AICPA--IMA relations. As an academic who took two weeks of thought before publishing this, an AICPA-IMA feud does little good for anyone; especially college accounting faculty who want student post-graduate workplace options to be as inclusive as possible in an iffy economy.

Agility is for CPA Firms, Not Just Sports Teams or Dog Shows

Agile CPAs

Rebecca Ryan, proprietrix of Next Generation Consulting and motivational speaker, describes "the agile CPA firm" as the CPA firm most likely to thrive in the future. She points out that agile CPA firms go beyond social media such as Facebook, Twitter and LinkedIn to empower junior employees, to look beyond traditional answers for struggling clients (one example: an Ohio firm which found non-traditional financing for cash-strapped manufacturing clients), to reduce office rent by finding inexpensive properties to rent and replace physical client contact with e-mail and other electronic communication and to save costs by avoiding traditional perks for top management. Additional features of agile CPA firms include an emphasis on innovation and continuous improvement, searching for market niches, transparency in business relationships, an emphasis on value added rather than time spent and some level of ruthlessness with underperforming or vexing clients and employees. The end result: MIT research indicate on average that agile firms increase revenue and profit by 30-40% more per year than non-agile firms.

The fact that Ms. Ryan points out issues probably also raised by Michelle Golden's Golden Practices or Rick Telberg's CPA Trendlines does NOT mean that they should be ignored. Certainly, the expansion of technology in accounting practice is an issue that can seem overwhelming by itself to practitioners my age (55) or older, but the empowerment of younger staff, transparency and value added emphasis and greater use of electronic communication to save rental fees (and possibly commute time) are also well worthy of consideration.

Tax Traps to Traverse

New Tax Minefields

Yahoo's Market Watch reports on a number of changes in the tax law that could lead to heartburn, unexpected tax costs or worse for unwary preparers. Probably the biggest lurking headache comes for taxpayers with sizable overseas investments; a new Form 8938 must be filed--if not, the MINIMUM penalty is $10,000. Among past tax moves that could come back to bite this year are use in 2008 of the first-time homebuyer tax incentive (a loan rather than grant that year) and conversion of traditional IRA to Roth IRA in 2010 (remember that there was a TWO-year spread of tax on the conversion). Additional dangerous changes include confusing W-2s from employers regarding the FICA 2% credit (in part because its extension was short-lived and occurred very late in 2011), more detail from brokers on basis of financial assets sold for potential capital gains or losses, a new provision in gift and estate tax law to allow carryover basis instead of the traditional step-up basis (this could lead to higher than expected taxable gains on property received by beneficiaries of decedants) and reduction of the available credit for installing energy-efficient home improvements.

Seriously consider using a professional preparer such as a CPA, tax attorney, enrolled agent or an experienced registered tax preparer (ask the registered preparer for proof that they have passed the new competency exam if you have not had them previously prepare a return for you) if you have one or more of the tax events listed above, particularly the homebuyer provision from a 2008 home purchase or sizable foreign investments. Also, particularly if President Obama is re-elected, be ready for new tax complications related to 2010's Affordable Health Care Act in 2013.

Romney Releases Two Years of Tax Returns

Romney Tax Return Analysis

Major Republican Presidential contender Mitt Romney, under considerable pressure, released two years of tax returns this morning. Important features include income of about $20 million per year, annual taxes of about $3 million or 15% and giving to his Mormon church of about 10%, consistent with Christian teaching about tithing (the issue of whether Mormonism is or is not part of Christianity will be left for other bloggers to address). Romney, whose wealth approaches one quarter BILLION dollars, explained his hesistancy in releasing the records as an accomodation to the manager (trustee) of family trust funds.

There is no obvious evidence that Mr. and Mrs. Romney and their tax preparers were anything other than upright on preparation of their tax return. Regarding their wealth and income, a lot of people are uncomfortable with Wall Street these days (and probably with at least some cause), but nothing to date has come to light that indicates that Romney has done anything illegal or even clearly unethical while working for Bain. None of this means that Romney automatically deserves support--there are still reasons such as disagreeing with his political positions, concern about depth of commitment to present positions on social issues, concern about his ability to connect with everyday voters or belief that Romney, like John McCain, will not hold up well in the street fighting of a general election campaign to support other Republican candidates and certainly plenty of political issue reasons for Democratic-leaning voters to support President Obama.

The Santorum Slash: Rick Does NOT Tell Taxes to Take a Hike

Scoring Santorum's Tax Proposals

Rick Santorum, whose campaign has had highs and lows in January (but comparatively speaking, much better highs than bad lows) has made a variety of statements in regard to the federal income tax while speechmaking and debating. The Tax Policy Center, associated with the presumably left-leaning Urban Center and Brookings Institute, estimated that if all Santorum's proposal were to be enacted; tax revenue losses would be $1.3 trillion or 40% of present tax revenue. Among former Senator Santorum's tax proposals are continuation of the "Bush" tax cuts early in the prior decade; collapsing tax brackets to two (10% and 28%), eliminating the alternative minimum tax, cutting capital gains and dividend taxes to 12%; the elimination of the estate tax and elimination of new taxes associated with "Obamacare."

A 40% drop in tax revenues would be a major shock to the U. S. Treasury; but two things to consider: [1] there is almost no chance that Santorum would everything he proposes through Congress; especially controversial provisions like the capital gains/dividend rate cut; [2] there probably would be some offsetting revenue from greater economic activity (though who knows if such an offset would reach Lafferian levels). Republican base voters should be excited about Santorum's tax proposals; moderates probably not so much.