Envisioning the future of tax practice.

Editor's note: Mr. Holub chairs the AICPA Tax Division's Tax Practice Management Committee. Mr. Woehlke is a member of that committee.

If you would like additional information about this article, contact Mr. Woehlke at [phone] or [e-mail].

Both the CPA profession and tax practice are in tremendous flux. Envisioning the future in this environment takes uncommon foresight. Developing that foresight for the CPA profession is what the CPA Vision Project is all about. At the same time, in developing a strategic plan for the AICPA Tax Section, the Tax Division went through its own visioning process. This column discusses the author's view of the tax profession's future and reconciles it to the CPA Vision Project and the Tax Division's envisioning and strategic planning efforts.

Visioning is a strategic process through which a company, industry or profession defines and assesses its core competencies and values, develops future scenarios and strategizes for its future vision. A future vision enables the' profession to take appropriate actions that will optimize the future. On the other hand, strategic planning involves identifying activities along specific time lines, as well as matching goals and resources, to bring about the desired future. Within this framework, visioning precedes strategic planning.

Tax Practice Influences

Many factors affect the CPA practice. AICPA members who participated in the CPA Vision Project were exposed to trends in six key global factors: (1) political, (2) economic, (3) social, (4) technology, (5) human resources and (6) regulatory. Clearly, a number of these, such as political (the worldwide spread of democracy) and economic factors (the internationalization of the economy and capital markets) will greatly affect the CPA practice over the long term. In the near future, however, information technology, domestic legislation and practice economics are likely to cause the most rapid change to tax practice, with attendant risks and opportunities.

Information technology (infotech). Technological substitution, disintermediation, and convergence are three factors that will have an obvious impact on tax practice.

Technological substitution is a new word for automation, an industrial age phenomenon that is continuing into the "information age," with enormous effect on service businesses. Former AICPA Special Committee on Assurance Services Chair Robert Elliott noted that while audit revenues have remained relatively flat in recent years, audit staff declined 20%. In tax practice, technological substitution enabled CPAs to eliminate hand-preparation and batch processing of returns, thereby omitting clerical steps. Many firms now combine the client interview with the data input step, allowing tax practitioners to perform tasks previously handled by clerical personnel. To maintain appropriate leverage, some firms permit managers and lower level staff to do client interviews, reserving important client interviews for partners.

Another technology substitution example that directly affects tax practice is IRS alternative filing methods. On March 6,1998, the BNA Daily Tax Report stated, "[IRS Commissioner] Rossotti said, `there is still too much paper involved,' pointing out that IRS is `working very aggressively' to implement a paperless filing system by the 1999 filing season. He predicted `it won't be too long' before a majority of U.S. taxpayers file their returns electronically." In the 1997 filing season, the IRS invited 23 million people to file Form 1040EZ using TeleFile (filing by telephone); as of April 11, 1997, 4.3 million taxpayers had accepted the invitation. A year later, 5.3 million taxpayers used TeleFile--over a 25% increase from 1997. If Form 1040EZ is handled so easily, might telefiling progress to the Form 1040A and the Form 1040? As of the 1998 filing season, the IRS gave taxpayers the opportunity to file electronically, or "e-file" returns using personal computers (PCs). Presently, electronically filed returns must be submitted through an IRS-approved transmitter, but direct transmission is probably not far in the future. From 1997 to 1998, e-filing also rose by over 25%.

Technological substitution is also responsible for the CPA profession's recent market restructuring. A generation ago, a firm's senior staff person could not easily leave the firm and become self-employed, while still offering a similar level of service as his former firm. From a technical resource standpoint, the PC has changed that. Today, an independent-minded staff person can set up a home office that includes a complete line of CPA services.

Disintermediation is the elimination of intermediate vendors or middlemen. In his book The Road Ahead, Bill Gates predicted that

Industry after industry will be changed [by the development of the information highway], and change is unsettling. Some middlemen who handle information or product distribution will find they no longer add value and change fields, whereas others will rise to the competitive challenge. There is a nearly infinite number of tasks left undone in services, education, and urban affairs, to say nothing of the workforce the highway itself will require. So this new efficiency will create all sorts of exciting employment opportunities... There will be dislocations. However, overall, society will benefit from these changes.

A friend tells the story of demonstrating an Internet Website to an insurance broker. After receiving some personal information, the site checked the features and prices of hundreds of products from dozens of companies and almost instantly listed the lowest-priced policies. The insurance agent's mouth dropped open; he could see that his livelihood was in jeopardy. This is exactly the type of change Mr. Gates was predicting.

Tax practitioners need to identify when they are providing services as middlemen, and recognize that infotech will undermine the value of these services.

Convergence is the combining of many functions into a few devices. Every day, people look at dozens of electronic screens, including watches, TVs, computers, telephones, pagers and calculators. Personal computers now perform all of these functions Banks like Citibank and Chase permit customers to perform all of their banking (except depositing and withdrawing) with a computer. In the near future, computers will allow people to deposit and withdraw "cash" from their PCs using smart cards. (This is already happening in Europe.) It is not too hard to imagine a PC the size of a wallet that transfers money while automatically classifying transactions for tax and accounting purposes. Before downloading information to the IRS, practitioners could check output much the same way they double-check personal financial software output today.

All three of these factors come into play with the World Wide Web. CPA firms have already established Websites that offer tax preparation over the Internet (see, for example, http://www.tax attack.com). Infotech is converting compliance into a clerical function, but it is not completely eliminating it. Practitioners can still add value by helping clients determine the relevance of their accounting information to the government (even though compliance generally has a low profit margin in comparison to tax planning and representation).

Conversely, there are tremendous advantages to infotech, because it will allow tax practitioners to capitalize on new service opportunities. For instance, a firm could easily generate from a database a list of clients who might benefit from new tax planning opportunities (such as the Roth IRA).

Legislative environment. While the current income tax-based tax system does the job of raising over $1 1/2 trillion annually, many tax policy professionals and taxpayers question how well it raises that money. In particular, tax policy experts emphasize that the tax system has become so complex that it is inefficient, as shown by the need for relatively ordinary citizens and businesses to seek assistance to comply. Nearly half of individual income taxpayers need assistance in preparing their tax returns; costs to comply have been estimated at $157 billion or higher.

In addition, many believe the tax system has become overly intrusive. At Senate hearings in October 1997 and April 1998, Congress recognized the public's concern with the IRS overreaching its boundaries. Nevertheless, tax administrators have to collect a huge amount of revenue every year. The US. may be at the point of discarding the current tax Code for something much simpler to understand and administer. A few years ago, it was inconceivable that this could happen. In 1998, prospects for fundamental tax reform have shifted from being "inconceivable" to "unlikely" and then to "maybe." The momentum is clearly moving toward some sort of reform.

Popular suggestions for fundamental tax reform remain the flat tax and national sales tax. The flat tax is primarily a tax on adjusted gross income, with interest, dividends and capital gains fully exempt. Business income is computed on a separate business return rather than on a form designed for the legal entity; all businesses, including partnerships and S corporations, would file the same return. Under the flat tax, there would still be a great deal of compliance work, although CPAs might not always need a computer. The sales tax proposal involves collecting a tax at the point of sale; the state, rather than the Federal government, would administrate collections.

If fundamental tax reform does happen, a lot of CPAs' tax compliance work will simply wither away. Are CPA firms prepared for a possible 20% to 40% tax compliance practice loss in a single year?

Economic issues. Two economic issues should be mentioned while exploring the tax practice future. First, competition for tax clients is more pronounced than a generation ago. Infotech is somewhat responsible for this, because it makes it easier for CPAs to start new full-service firms. (Unlike auditing, tax practice is not limited to CPAs, and infotech has also made it easier for non-CPAs to compete as well.) Further, law firms are becoming aggressive at touting the legal privileges available to clients. Some banks' trust and pension departments are offering tax services; American Express Tax and Business Services, competing for middle-market attention, has added new meaning to the concept of a full-service firm.

Second, loosening up restrictions on nontraditional billing arrangements has also become an issue. Under pressure from the Federal Trade Commission, the AICPA removed prohibitions against contingent fees and commissions (except for attestation services and services for filing original and certain other amended tax returns). Many state regulators have followed suit. In states where regulators have opened the door for nontraditional fee arrangements, service design flexibility has expanded.

The CPA Vision Project

With direct, grassroots input from CPAs across the nation and support from the professional organizations that act on their behalf, the CPA Vision Project is creating a comprehensive and integrated vision of the profession's future in 15 to 25 years, designed to:

* Build awareness of opportunities and challenges for all segments of the profession.

* Lead the profession as it navigates the marketplace's changing demands.

* Draw together the profession to create a vibrant and viable future.

* Leverage the CPA's core competencies and values.

* Guide current and future initiatives for professional support and public interest protection.

By focusing on their professional future, CPAs will be better equipped to plan for their own needs, as well as those of clients and employers, in the next century. The project's goal is as simple as it is ambitious--to enable the profession to create its future.

In January 1998, the project's national future forum assimilated the input of over 150 future forums held throughout the country. The resulting draft is currently being reviewed and tested, anticipating finalization later this year. The core purpose and vision statement resulting from the national forum are:

Core purpose: CPAs... Making sense out of a changing and complex world.

Vision statement: CPAs are the trusted professionals who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by:

* Communicating the total picture with clarity and objectivity.

* Translating complex information into critical knowledge.

* Anticipating and creating opportunities.

* Designing pathways that transform vision into reality.

These statements do not target tax practice, but, rather, encompass the entire CPA profession.

AICPA Tax Section Strategic Plan

Where does tax practice fit into the CPA Vision Project's core purpose and vision statement? The AICPA Tax Executive Committee anticipated the answer when, in February 1997, it approved a Tax Section strategic plan. The plan included the following vision of future CPA tax practitioners:

The CPA tax practitioner in 2003 is recognized by the public, the business community, political leaders and other CPAs as the leading tax professional and a key resource in domestic and international business planning. The CPA tax practitioner routinely uses the most appropriate advanced technology and draws upon accounting and many other relevant disciplines including law, economics, valuation, investment management, organizational analysis, estate planning and business planning. There is a trend for CPA tax practitioners to specialize within the tax area and a growing awareness among clients of the value of specialized expertise.

Since the late 1990s, there has been a trend away from routine compliance work for the CPA tax practitioner and toward structuring complex transactions and assessing the tax consequences of alternative courses of action, in both business and personal planning. Business leaders and individuals engage CPAs in preference to others for their tax work reflecting the enhanced value of the designation and the multi-disciplinary skills the designation represents.

In addition to being highly qualified technically and technologically, CPA tax practitioners have become more market oriented, thus better serving existing clients and identifying and attracting clients seeking help in dealing more effectively with the complexities of their business and personal lives with due consideration given to tax matters.

The Tax Executive Committee envisions the Tax Division helping its members to master technological skills and moving into nontraditional tax services. Clearly, the, CPA Vision Project's vision for the profession as a whole encompasses what the Tax Division envisions for tax practitioners. Both CPAs and tax professionals have to develop their visions further in ways that meaningfully change what they do and how they do it.

The Next Generation of Tax Practitioners

What will tax practice be like in the next generation? It is a fair bet that practitioners will spend less effort on tax compliance, because it is exactly the type of intermediate service that computers are either eliminating or turning into low-paying clerical tasks. Tax planning will still be strong, because people will always look for ways to minimize their taxes (whether they are burdened by a sales tax, flat tax, value-added tax, etc.). Tax representation will still be strong, because there will always be problems to solve involving the taxpayer and the tax collector. But these services will not be sufficient to keep the tax practitioner busy. Practitioners will offer other services that tap their competencies; these services will be different than those that CPAs offer. Tax practitioners will tend to specialize in services that have a narrower appeal than compliance services do today.

Some may fear that the CPA practice future looks bleak. It will only be bleak for those CPAs who insist on performing the same services tomorrow as yesterday. The future is bright for CPAs who anticipate future service needs and marshal their formidable competencies to meet them.