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TRA '86 -- its impact on tax practitioners.

Over the last 40 years, the increasing complexity of the tax rules has made the services of accountants and other tax practitioners indispensable for many taxpayers. This trend appears to have continued when Congress passed the Tax Reform Act of 1986 (TRA '86). This act resulted in some of the most sweeping tax law changes in history, and it was anticipated that the increased complexities of TRA '86 would dramatically affect the tax practitioner.

What has been the effect of TRA '86 on the tax practitioner? Some maintain that the major impact of TRA '86 was to force practitioners to take on more work in a shorter time period. This was primarily caused by the required December 31 year end for most partnerships, S corporations, trusts and personal service corporations. Beyond these anticipated effects, has TRA '86 had a significant impact on the operations of existing tax practices?

To answer this question, a study was undertaken to determine what impact TRA '86 had on the tax practice of accounting firms. The main areas of interest were client turnover, fee structure and time devoted to tax practice.


A questionnaire was developed to obtain the data needed for this study, primarily focusing on client turnover, fee structure and hours devoted to the various areas of an accounting practice. The first part of the questionnaire asked the respondent for certain demographic information. This information was used to identify the basic characteristics of the accounting firms surveyed. The questionnaire was pretested through personal interviews with accountants in Texas and Arkansas.

Analysis of Results

From a random sample of accounting firms, a total of 180 usable responses were received. The responses came from 40 states with each region (Northeast, Midwest, etc.) of the country being represented. The number of questionnaires returned was considered adequate for this study. There was no reason to believe that individuals who respond to the questionnaire were significantly different from individuals who did respond.

Of the 180 respondents, there were 96 sole proprietorships, 27 partnerships and 57 professional corporations. The average accounting firm surveyed was an established, experienced firm which has been providing tax services nearly as long as it has been in business. Also, the accounting firms are relatively small, averaging 3.4 professionals and gross billings of $279,715.

Client Turnover

One of the areas of interest in this study was the effect of TRA 86 on client turnover. While some tax forms actually became easier to prepare, others became much more complex. Would the client whose tax return became simpler try it himself or perhaps shop around for a better price?

What about the client whose return became more complex? Would he have enough confidence in his accountant to retain his services or would he look for a larger firm that may have more expertise?

To address this issue, four situations were identified that might affect both clients gained and lost. Clients could be lost because:

1. Client's return was simpler and the client changed firms,

2. Client's return was simpler and the client prepared his own return,

3. Client's return was more difficult and the client changed firms, and

4. Client was lost for undetermined "other reasons." Also, clients could be gained


1. Client's return became too difficult to do without tax help,

2. Client's return became more difficult and the client changed firms,

3. Client's return was simpler and the client changed firms, and

4. Client was gained for undetermined "other reasons."

Each respondent was asked for information concerning client turnover for two time periods: (1) 1986 to 1987 tax filing season and (2) 1987 to 1988 tax filing season. It was believed that two time periods would be adequate to properly judge the impact of TRA 86 on client turnover because 1987 was a transition year and the full impact of TRA '86 was not felt until 1988.

It appears that overall, TRA '86 has had a positive impact on client turnover. Average net gains of approximately 45 and 42 clients were reported in the first and second time periods, respectively. Additional inspection revealed which situations identified earlier had the most impact on clients gained and lost. First, the major causes of client loss were: (1) client's returns were simpler and (2) "other reasons" not specifically identified.

A further investigation of clients lost because of simpler returns appears to indicate that the client was about as likely to change firms as he was to do it himself. This trend appears to be slightly greater in the second time period than the first. It was anticipated that clients lost for "other reasons" would be significant because tax practitioners normally would not have the ability in most situations to follow up with lost clients to determine why they left. On the bright side for tax practitioners, the increased complexity of the tax laws did not cause major client losses when compared to the total losses for the time periods. In addition, the clients lost for more difficult returns indicated a decrease in the second time period.

The increased difficulty of the tax return was the major factor influencing the number of clients gained, followed by "other reasons" not specifically identified. It appeared that when tax returns became more difficult, the tax practitioner was more likely to pick up clients who had been doing their own returns than clients who were changing firms.

Clients gained from unspecified "other reasons" were also significant, probably due to a combination of the changes in the tax laws and normal business activities. Finally, it does not appear very likely that a tax practice would gain a significant number of clients because of simplified tax returns. However, the trend indicated a slight increase. Fee


The second area of interest was the effect of TRA 86 on fees charged by the accounting firms. Did practitioners meet with client resistance to steep fee increases caused by the increased complexity of TRA '86? To investigate this issue, each respondent was asked to provide information concerning two aspects of his or her fee structure. First, the questionnaire requested information about the average fee increase for certain types of returns for three tax filing seasons: (1) 1985 to 1986, (2) 1986 to 1987, and (3) 1987 to 1988. The second question requested information about the percentage of revenue generated from various parts of their practice before TRA '86 and after TRA '86.

As expected, the average fee increase was higher after TRA '86 than before. Specifically, the accounting firms had fee increases that averaged approximately 40% (range 32% to 50%) greater between 1986 to 1987 than between 1985 to 1986. Also, the fee increases were fairly consistent among the various types of returns with the 1040s having the largest increase. It should be emphasized that the evidence was inconclusive as to whether TRA '86 was the major cause, but this appears consistent with general expectation that the increased complexity brought about by TRA '86 would allow for fee increases. It was also interesting to note that the accounting firms were able to raise their fees approximately the same percentage between 1987 to 1988.

Although the accounting firms were able to raise their fees for tax returns, the percentage of revenues generated by each area of practice remained substantially the same both before and after the effects of the tax law changes. It could be suggested by people outside of the accounting profession that accounting firms used TRA 86 not only to justify tax fee increases but also to increase other fees as well. Again, the evidence was inconclusive and there may well be other economic factors that caused the revenues to be substantially the same both before and after TRA '86.

Practice Area

Finally, the last area of interest was what effect the increased complexity of TRA '86 would have on the hours devoted to the various areas of practice. Were accountants forced to take on more work in a shorter time period? Each respondent was asked to indicate the approximate percentage of hours devoted to four areas of practice (audit, write-up, tax and MAS) before and after TRA '86.

The results indicate that the hours devoted to the various areas of practice remained fairly consistent before and after TRA '86. A small increase in the hours devoted to tax was indicated, but the increase was not as significant as might have been expected because of the increased complexity of the new tax laws. However, this analysis was based on the assumption that the total available hours would be constant and there would be a shift away from the other areas to tax. This does not rule out the possibility that the total available hours increased while each area retained its basic same proportion.

In conclusion, it appears that some of the fears caused by TRA 86 were not justified because the impact in the areas investigated were either neutral or positive for the tax practitioner.

Jack R. Ethridge, PhD, CPA, is associate Professor of accounting at the Stephen F. Austin State University in Nacogdoches, Texas.

B. Douglas Carter, PhD, CPA, is associate professor of accounting at the University of Central Arkansas in Conway, Arkansas.
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Title Annotation:Tax Reform Act of 1986
Author:Carter, B. Douglas; Ethridge, Jack R.
Publication:The National Public Accountant
Date:Jan 1, 1991
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