Taking Control of Tax Season: How Tax Practices Are Evolving in Response to Tax Reform
Oppenheimer, Jack S., Person, Stanley, Journal of Accountancy
TAKING CONTROL OF TAX SEASON
How tax practices are evolving in response to tax reform.
The Tax Reform Act of 1986 radically changed the tax terrain for CPAs. Initially, the TRA created new business for tax practitioners. Now that three years have passed, CPAs can better assess the damages. A key result is the alterations in how CPAs run their tax practices and approach planning.
The TRA's most significant effect was to force CPAs to take on more work in a shorter time period. This was caused in part by the requirement that most partnerships, S corporations, trusts and closely held personal service corporations (PSCs) adopt a December 31 yearend. CPAs' time-honored strategy of balancing their work loads by staggering clients' fiscal years throughout the calendar thus became almost useless. In addition, the TRA's compliance provisions created an even more pressured January 1 to April 15 tax filing period.
This article is based on the authors' discussions with practitioners from all regions of the country on how they have adjusted to cope with tax reform. Of the 35 CPAs interviewed, two were from national firms and the rest ranged from sole practitioners to partners in midsized firms. Although not a scientific survey, the article does identify the issues and offers guidance on handling the overloaded tax filing season.
THE TRA's EFFECT ON TAX PRACTICES
Our interviews showed these tax reform provisions had a major impact on practices of all sizes across the country:
* The mandatory use of calendar years by partnerships, S corporations, trusts and closely held PSCs. The benefits of exceptions to this provision, such as the special section 444 election, were offset by provisions such as advance estimated tax deposits, amonng others.
* The creation of the modified accelerated cost recovery system and the revision of the corporate alternative minimum tax (AMT). These provisions introduced two new sets of depreciation records to maintain. In states that don't follow federal guidelines and for regulatory agency requirements, it may be necessary to keep four or more sets of depreciation records.
* The kiddie tax. The need for information from parents' returns to compute children's tax liabilities interfered with the timely preparation of returns. New provisions permitting taxpayers to include children's income in their returns have mitigated the problem somewhat.
* Restrictions on the use of the cash method. This provision added many hours to what was formerly a routine yearend closing for most clients.
* The increase in corporate rates to more than the top marginal individual rate. CPAs have totally redesigned tax planning strategies because of this change. In fact, in many instances there were no beneficial options available. Some planning was reduced to the mechanical job of determining the money available for distribution and how best to pay it to the client's shareholders and employees.
* Passive loss rules, accompanied by a series of new regulations. At press time, all the regulations had not been issued. The potentially enormous recordkeeping requirements for compliance with the PAL changes will affect CPAs for years to come.
* New rules on interest deductions and the burden of related tracing rules.
* The expansion of the penalty provisions. CPAs increasingly are becoming Internal Revenue Service "police," which could damage client relationships.
* Uniform capitalization rules and changes in the AMT (corporate and individual).
A POSITIVE SIDE
CPAs were able to find some bright spots in tax reform. For example, the effective elimination of uneconomic tax shelters reduced the time spent reviewing poorly constructed syndications. CPAs also spend less time explaining to clients why questionable investments recommended by friends are inappropriate. Many of these arrangements had offered only temporary tax relief anyway, since IRS task forces uncovered frequent abuses before the TRA and ultimately collected not only the taxes saved but severe interest and penalties along with them. …