Congress Discovers That the Sun Rises in the East: GAO Finds Link Between Tax Complexity and "Tax Gap"

The Government Accountability Office recently released a study which indicated that the voluminous amount of content in the U. S. Tax Code and Regulations can lead to errors and understated taxes. While the GAO said that some of the complexity could lead to properly measuring income or identifying risk areas for noncompliance; they also said that compliance costs were in excess of $100 billion per year, that economic efficiency was doubtlessly damaged by tax complexity; that errors on the IRA deduction ALONE probably led to over $6 billion in underreported income and that, as Senator Hatch pointed out, complexity probably undercuts willingnes to comply. It should be noted that Senator Max Baucus deserves some credit for pointing out the potential kick-start to the economy that a less complex tax system might produce.

Ya think?! Numerous tax bloggers have already discussed tax complexity and its economic and compliance costs; perhaps (or am I being too optimistic again) Congress can be shaken to its senses by the possibilty that tax revenues might be "sitting on the table" while the U.S. reaches devastating levels of debt and deficit. I think that Mike Huckabee's and Neal Boortz' FAIR tax is politically a step too far (though probably not a bad idea theoretically) but certainly the GAO recommendations of eliminating some tax expenditures and standardizing IRS definitions are politically possible (though not necessarily sufficient).

Good Morning America: A Tax Twist on a Murder Mystery

ABC Newswomen Ashleigh Banfield and Robin Roberts recently discussed an IRS tax lien against Casey Anthony as part of Casey's murder trial. Ashleigh was amazed to hear that Accounting Today (one of Tick Marks' favorite news sources) was covering the Anthony story as a result of the IRS lien.

It is almost embarrassing to see the lengths that American news media will go to increase viewership. Imagine, trying to liven up a boring "mother kills child" story with a saucy tax lien angle.

Courting: PWC, Junior Accountants and Overtime Suits

PriceWaterhouseCoopers won a reversal in the U.S. Ninth Circuit (not always business-friendly) regarding whether professional accountants below the rank of senior were entitled to overtime pay under California state law (why was this not settled in state courts?). A U.S. District Court in Sacremento had originally found in favor of a class action suit brought by junior accountants.

For the large majority of CPA firms, I do not believe that there is a lot to be concerned about. Make sure that overtime is fairly assigned and that employees have reasonable opportunities to use "comp" time if applicable (some firms might have to liberalize "comp" time use rules). Promotion practices may also need a look; the most likely employee to bring such a suit is one who believes that he/she was unfairly passed over for promotion. However large CPA firms in the Northeastern and Pacific states might want to talk with an attorney (in-house or otherwise) to evaluate the risk of a comparable suit and possibly adjust firm policy accordingly.

What Will the TPIN Competency Exam Look Like?--A Reasonable GUESS

The IRS has issued Notice 2011-48 asking for comments in regard to the new Registered Tax Preparer Competency Exam. The period for such comments runs through July 7 and IRS emphasized the following issues: approximate length and difficulty, level of disclosure to applicant regarding exam performance, frequency of administering exam, frequency of updating exam, time span between retakes for unsuccessful applicants, elements to include on exam and whether alternate languages to English should be allowed.

I do not pretend to be able to guess time span between exams for unsuccessful candidates, level of disclosure or frequency of updating exam. While I would be somewhat surprised if alternative languages are permitted (except Braille or ASL for disabled candidates); it is possible that there is enough Hispanic influence to have Spanish permitted. Frequency of exam figures to be 2-4 times per year and probably the same as the enrolled agent exam. This leaves appropriate length and difficulty and elements to include. One presumes that the test will not be as rigorous AND comprehensive as the EA exam--otherwise, why not simply require that paid tax preparers be EAs, CPAs or attorneys?

The alternatives that I can see as plausible are: [1] a quite easy exam, perhaps designed on individual topics only. This is the most cynical option which basically says that the whole purpose of tax preparer registration is money grabbing by Uncle Sam; [2] a moderate difficulty exam (but significantly watered down from the EA exam) which would allow registered tax preparers (hereafter RTPs) ability to practice individual income taxes (and possibly or possibly not partnerships, LLC/LLPs and S Corporations on a limited basis as well--probably not C corporations, trusts and gift/estate returns); [3] a similar scope to [2] but somewhat more rigorous (though still less rigorous than the EA exam). Under [3], there would be a higher likelihood that partnerships/LLCs/LLPs/S Corps would included in permitted practice for RTPs; [4] something like option [1] or [2] with a retest requirement (perhaps every five or ten years). Out of these options, I would think that [3] is the most likely probably followed by [2].

Please comment if you see additional reasonable alternatives or believe that my likelihood rating is flawed.

UPDATE: Joe Kristan (thanks for the link) thinks that I am a little naive.

Pondering TPIN Exam

PCAOB Chairman James Doty Philosophises on Auditing and the Future

At the thirtieth SEC and Financial Reporting Institute Annual Conference, PCOAB head Doty pondered ways to make the audit profession more relevant, credible and transparent. Doty addressed the cultural impact of independence and skepticism and yet acknowledged that today's culture often places obstacles toward accomplishing these goals. Doty also hinted that changes may be coming in the style and substance of audit reports after an open meeting by the board this past March; mentioned that a proposal limiting the number of years which one audit firm could audit a specific client was under serious consideration; strongly urged auditors to be more forthcoming with audit committees and suggested that lead partners on audits might soon have to sign these reports in a similar way to how CEOs and CFOs certify financial statements.

Must-read material for anyone in auditing or financial accounting and probably worth the while of managerial and tax accountants as well. While at the University of Missouri as a doctoral student, I had the great opportunity to take a class with Dr. Joseph Silvoso, one-time president of the American Accounting Association. Dr. Silvoso would have been proud of Chairman Doty and his thought-provoking speech.

Did Your Favorite Local Nonprofit Lose Its Tax Exemption Recently?

Over one-quarter million not-for-profits recently have lost tax-exempt status according to a recent IRS report. Most of the affected organizations were small and many may be defunct. The problem is that these organizations failed to file an information return with the IRS during the past three years. The requirement was triggered by a pension bill passed in 2006. The IRS has notified many small nonprofits of their need to file and has provided a $100 filing fee option to satisfactory nonprofits which wish to come good.

I am not a fan of the provision of the 2006 law which affects nonprofits with revenues under about $200-250 thousand; many such organizations simply have to use volunteer help with finances and that help may not understand the need for filing with the IRS. I do, however, give the IRS credit for trying to meet small nonprofits halfway (and in some cases, more than halfway).

IRS: Better Not Call Yourself a "Registered Tax Return Preparer"

IRS Notice 2011 announced to tax preparers that they are not to refer to themselves as "registered tax return preparers" (I would assume that similar phrases like "registered tax preparer" would draw IRS ire as well) until they pass the IRS competency exam (not presently available). The notice also requires a suitability check for those in practice who pass the exam before being recognized as registered and will require those claiming such registration to disclaim special skills compared to other registered preparers (those living in Alabama are familiar with similar disclaimers).

Certainly this last notice does its best to prove Joe Kristan's point that federal oversight of tax preparers is not in the public interest. Banning the use of "registered tax return preparer" until passage of an exam two to three years from its first administration seems ludicrous--and who knows how "suitability" will be defined.