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Taking control of tax season: how tax practices are evolving in response to tax reform.


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.


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).


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.

Some practitioners joked that the increase in fees due to the complexity and requirements of the new law was a positive factor. Unfortunately, however, clients often were unwilling to accept steep increases, which forced CPAs to lower some bills or phase in fee hikes over time. As a result, the long-term effect on practitioners' bottom lines is still unclear.


The TRA clearly placed new burdens on staff and associates. While the profession has always been subject to work-load pressures, tax reform brought a whole set of new ones. The problems associated with handling the new law came at the same time as growing concerns about quality of life and family responsibilities.

The necessity of keeping current on the ever-broadening tax laws coupled with additional pressures engendered new attitudes and problems, including some of the following:

* Decisions to retire early.

* Decisions to leave the profession.

* Boredom among staff and associates during longer slow periods caused by the realignment of yearends.

* Problems passing on the added costs of compliance to clients because they didn't understand the magnitude of the changes or were unable to afford the additional charges that accompanied them.

* Increased concerns about the quality of service CPAs were able to provide.

* The need for extra temporary personnel or staff to finish more work in less time.

* Increased competition among firms for nontax work in the off-season. Firms have reduced fees on engagements that keep their staffs busy all year, placing more pressure on earnings.

Although they needed more time to administer the new law, CPAs had hoped the TRA would at least bring an end to major annual tax revisions. Instead, it has become just another step in the never-ending process of change. As the TRA's rules and regulations rolled out, a new technical and paperwork overload followed. And at press time, Congress was still tinkering with items important to CPAs, such as the capital gains rate and structure.


Practitioners were forced to find innovative ways to minimize the new burdens and equalize the work flow. Those interviewed offered the following tips for coping with these problems:

* Increase part-time and per diem help. This strategy worked not only during the heavy compliance season but also helped control costs during slower periods. Several said use of temporary staff will enable them to carry fewer permanent staff.

* Use more paraprofessionals. Firms hired more of these workers and increased their tax season responsibilities, with close supervision. Paraprofessionals were asked to input tax return information on pro forma computer forms and were trained to identify and report omissions or contradictions in tax data.

* Request that staff use accumulated vacation and personal time in the slower periods. One firm, for example, closed on Friday afternoons during the summer.

* Encourage clients to make their records available as soon as possible. For example, inform them of the TRA's complexity or increase fees for clients that submit data after certain dates.

* Reduce fees for delayed filings.

* Schedule client appointments in advance.

* Raise minimum fees for personal tax return preparation. Clients generally accepted increases of 10% to 15%, although such hikes weren't always cost-effective given tax reform's new demands. Some practitioners discouraged these low-profit, time-consuming engagements except for business clients.

* File for extensions on client returns when information isn't submitted on time. Extensions, however, should be used only with client consent and only if in clients' best interests.

* File for automatic extensions for C corporations.

* Perform as much preliminary work as possible during the slow period, particularly for passthrough entities such as partnerships, S corporations, trusts, etc., as part of tax planning. This includes compiling information before December 31; scrutinizing tax projections beginning in September to determine the effect on business clients' personal returns; and checking the correct names of banks and companies that must be included on returns. Firms also can input preliminary tax return information on their own computers or collect pro formas from outside services.

* For firms with significant audit work, perform extensive preliminary procedures in the fall for calendar-year clients. Only final audit procedures and wind-up work should remain until after December.

* Schedule staff continuing professional education in the slow period. In addition to formal CPE, staff should be prepared for the busy season in sessions that focus not only on technical requirements but also on the pressures it will bring. Seminars on time management and setting priorities help prevent the work buildup that causes stress during busy season.

* Arrange social events during tax season to relieve stress.

* Schedule marketing efforts, such as seminars for clients and others, during slow periods.

* Perform intensive reviews of client files during slow periods. This helps identify additional services that can be performed, such as amended returns, financial evaluations and planning. Also, worksheets or procedures can be created during the reviews to be used during the more hectic tax filing period.

* Diversify the practice to make it less captive to the tax filing period.

* Perform all administrative preparations before January 1. Firms should ensure computer systems, manuals and documentation are up-to-date, make preliminary schedules of work load and overtime, check their inventories of supplies and government tax forms and review return delivery procedures. The staff must be briefed on changes in the tax laws and in office procedures. Administrative staff and paraprofessionals should receive additional training to enable them to take on more tasks, such as computer operation and the processing and delivery of final returns.

While these suggestions won't solve every problem, they do emphasize the need for CPAs to take control of the tax season through advance preparation and postponement of nontax work.


Practitioners predicted tax reform's new demands will trigger changes in tax practice management. Here's an overview of what they expect:

* More per diem, paraprofessional and "moonlighting" employees.

* More part-time partners.

* Subspecializations in which CPAs practice within a particular field, such as partnership taxation. While some large firms already use such subspecializations, most smaller ones don't. The practice could encourage more referrals among practitioners, who wouldn't fear losing clients to specialists.

* If tax law changes continue, educate clients about how the work necessary to maintain and provide proper documentation will increase, as will fees.

* Greater reliance on computer technology to handle tax work, such as data gathering, research, preparation and compliance checking. Firms thus will require more computer-trained personnel.

* Organizations such as the American Institute of CPAs taking the lead in attempts to establish stable tax laws. Practitioners believe clients often associate them--and not the government--with the higher costs and disruptions that constant tax changes bring. CPAs also must justify the time and expense necessary to adjust clients' personal financial plans to new tax laws. And they worry about the danger that talented people will leave or choose not to enter the profession because of the added pressures and complexities.


Despite the developments making tax practice more complicated than ever, our investigation revealed that the majority of CPAs remain generally optimistic. They believe that by recognizing the changes in practice and making the necessary adjustments, the problems can be handled satisfactorily. With that positive attitude, CPAs can both prepare themselves for the pressures of the coming tax filing season and plan for the future.

JACK S. OPPENHEIMER, CPA, is a partner of Geller, Ragans, James, Oppenheimer & Creel, Orlando, Florida, and chairman of the American Institute of CPAs tax education subcommittee. STANLEY PERSON, CPA, is senior partner of Person & Company, New York City. The chairman of the AICPA continuing professional education standards subcommittee, he is also editor of the Journal's Practitioners Forum department.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Person, Stanley
Publication:Journal of Accountancy
Date:Dec 1, 1989
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