Last year, CPAs had plenty of reasons to pay attention to policymakers’ proposals. Legislation under consideration has the potential to improve tax practices, alter audit practices, and even pave the way for greater competition.
AICPA VP Testifies Before Senate Panel on
International Accounting Standards
Last fall, the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment invited the AICPA to present its view on International Accounting Standards. The hearing, led by Sen. Jack Reed, D-R.I., the subcommittee’s chairman, focused on International Accounting Standards and convergence with GAAP. Chuck Landes, AICPA vice president–Professional Standards, testified on behalf of the profession. His testimony supported convergence, but noted the challenges ahead and the need for education and advance preparation.
Treasury Advisory Committee on the Auditing
In May 2007, Treasury Secretary Henry Paulson established the Treasury Advisory Committee on the Auditing Profession. Paulson named former SEC Chairman Arthur Levitt Jr. and former SEC Chief Accountant Don Nicolaisen as its co-chairmen. Then, in October, he announced 19 prominent appointees to serve on the committee, including: AICPA President and CEO Barry Melancon; KPMG Chairman and CEO Timothy Flynn; former Federal Reserve Chairman Paul Volcker; and former SEC Chief Accountant Lynn Turner.
The committee was established to encourage a more sustainable auditing profession as part of the president’s effort to enhance U.S. capital market competitiveness. The committee is charged with developing recommendations, taking into consideration the issues impacting the sustainability of the auditing profession.
The committee has laid out an ambitious schedule. The panel held an inaugural meeting on Oct. 15, in Washington and conducted a full day of hearings on Dec. 3. To handle the committee’s far-reaching agenda, it has subdivided its membership into three subcommittees: Human Capital; Firm Structure and Finance; and Competition and Concentration. The subcommittees will gather data, hold hearings on their respective portfolios of issues, and report back to the full committee.
To fulfill its mandate, the committee has also requested a large amount of information from the profession, and we have been actively working to comply with that request. Numerous hearings and meetings are scheduled throughout the year, culminating in a final report currently scheduled to be completed in late summer.
The AICPA is committed to doing all we can to ensure the committee’s final report best reflects optimal and constructive solutions to challenges facing the profession.
Changes to Farm Credit System Lending
The Farm Credit System is asking for changes in its lending authority that would allow a wide expansion of its charter to offer loans and other financial services to businesses that weren’t previously included in its lending mandate. By becoming eligible borrowers in the Farm Credit System, these additional businesses could become recipients of tax, accounting, and other financially related services.
Examples of these newly eligible businesses would include hardware stores, truck and farm equipment dealers, transportation companies, small manufacturers, and similar businesses that sell their goods and services to farmers. Given the government tax and funding advantages that the Farm Credit System institutions enjoy, private sector accounting firms would find it difficult to compete with Farm Credit System institutions in this broad sector of business clients. The AICPA strongly opposes this change.
The House passed a farm bill that eliminated the expanded lending authority the Farm Credit System requested and received at the committee level. The Senate also passed a farm bill that did not include any expanded lending authority for the Farm Credit System.
The conference on the farm bill is scheduled to begin soon. We will work in conference to ensure that the FCS will not receive authority to offer financial services to newly eligible borrowers.
Mobile Workforce Bill
The Mobile Workforce State Income Tax Fairness and Simplification Act of 2007, HR 3359, would limit state or local taxation of the compensation of any employee who performs duties in more than one state or locality to: (1) the state or locality of the employee’s residence; and (2) the state or locality in which the employee is physically present performing duties for more than 60 days.
The bill’s sponsors, Reps. Hank Johnson, D-Ga., and Chris Cannon, R-Utah, held a hearing on the bill in the House Judiciary Commercial and Administrative Law Subcommittee in November. The AICPA submitted written testimony for the record. As a result of the hearing, the state tax administrators and the coalition of businesses supporting a change in the law are currently negotiating the terms of an agreement. If agreement on an acceptable compromise can be reached, the committee is likely to report out a bill containing that compromise. The AICPA supports this legislation and will work with Congress to enact a strong bill this year.
Federal Housing Administration (FHA) Financial
The credit crisis has fueled heightened interest in Congress on legislation to revamp the Federal Housing Administration’s (FHA) mortgage insurance program, to improve the availability of credit in the home mortgage market.
In December, the Senate passed the FHA Modernization Act of 2007 (S 2338). Earlier in 2007, the House passed the Expanding American Homeownership Act of 2007 (HR 1852).
The House FHA bill contains a provision strongly opposed by the AICPA because it would unwisely lower broker standards and result in higher FHA defaults and greater taxpayer risk. The provision would allow a correspondent lender or mortgage broker to post a surety bond, in lieu of any requirement to provide audited financial statements or meet a minimum net worth requirement. The bill would require a General Accountability Office study of the provision’s effects on mortgage defaults, and sunset in five years unless reauthorized by Congress.
The Senate bill does not include an audit provision. Sen. George Voinovich, R-Ohio, introduced legislation to make improvements in the FHA program (S 2325), which includes the surety bond provision, but this bill is not expected to be considered.
This year, a House-Senate Conference Committee is expected to iron out the differences in the two bills and send a compromise bill to the president. The AICPA will continue to work to ensure that the House provision is not part of the final FHA bill.
Attempts to Amend the Sarbanes-Oxley Act of
Eight pieces of legislation were introduced in 2007 in the House and Senate to modify section 404 of the Sarbanes-Oxley Act. These ranged from an exemption, to a postponement, to an election whether or not to comply. In the House, Rep. Scott Garrett, R-N.J., introduced an amendment to the SEC appropriations bill that would have withheld funds from the SEC for enforcement of section 404 for non-accelerated filers. No comparable language was in the Senate version of the appropriations bill.
Additionally, the banking industry raised the issue of the “conflict” between the Federal Deposit Insurance Corporation Improvement Act (FDICIA) internal control requirements for banks and section 404.
The SEC and the PCAOB both had rulemakings to “right-size” section 404 compliance. These rules are intended to alleviate the unnecessary burden on small businesses. The AICPA submitted official comments on the proposals.
Throughout the year, the AICPA worked to educate members of Congress about the usefulness of internal controls.
The bills that were introduced included:
Small Business SOX Compliance Extension Act, HR 2727, sponsored by Rep. Garrett. This bill was offered successfully as an amendment to the SEC funding bill, HR 2829, which passed the House. No action has been taken in the Senate.
Competitive and Open Markets That Protect and Enhance the Treatment of Entrepreneurs (COMPETE) Act, HR 1508, sponsored by Rep. Gregory Meek, D-N.Y.
COMPETE Act, S 869, was offered by Sen. Jim DeMint, R-S.C., as an amendment to an unrelated education bill on the Senate floor and was defeated, 62–35.
Small Business Tax Flexibility Act (“Workload
The Small Business Tax Flexibility Act, S 270, was introduced in January 2007. It was scored by the Joint Committee on Taxation at $6.8 billion over 10 years. Alternatives were also scored, including a proposal that limited the scope of the ability of partnerships and S corporations to adopt a fiscal year that is other than a calendar year. The major provision of the alternative is that it would sunset in five years. Since the cost of S 270 as introduced is merely a deferral of the payment of taxes, having a sunset within the budget window reduces the cost to a negligible amount—$24 million over 10 years—because the deferred taxes are all ultimately recovered.
This alternative is a demonstration project. We believe it will show that the benefits that will accrue to small businesses and to small CPA firms are real and significant. Also, we believe that the actual cost to the Treasury will prove to be far less than the $6.8 billion that has been scored.
The AICPA is working to get the demonstration project offered as an amendment to any feasible legislation that is moving through Congress this year. Last year, the AICPA grass roots was activated to highlight the workload compression issue with eight key members of the House and Senate.
Rep. Nydia Velazquez, D-N.Y., the chairwoman of the House Small Business Committee, has introduced a bill outlining her view of necessary tax breaks to aid small businesses (HR 46). Included in her bill is our Small Business Tax Flexibility Act.
Tax Strategy Patents
Early in 2007, the AICPA worked on coming up with an appropriate fix to the problem caused by the issuance of patents on tax strategies. This resulted in HR 2365, introduced by Reps. Rick Boucher, D-Va., Bob Goodlatte, R-Va., and Steve Chabot, R-Ohio, in May. The bill would allow the patenting of tax strategies, but prohibit the patent holder from enforcing the patent. A Key Person Alert was sent to Key Persons for House Judiciary Committee members asking them to support the bill. Ultimately, the bill had 40 co-sponsors.
In July, the House Judiciary Committee marked up a major patent reform bill. Our bill was included in the major bill voted out of committee, but our bill was modified to prevent the patenting of tax strategies. On Sept. 7, the House passed the bill (HR 1908), 220–175.
In November, Senate Finance Committee Chairman Max Baucus, D-Mont., and Ranking Member Chuck Grassley, R-Iowa, crafted a bill (S 2369) specifically designed to ban tax strategy patents. It was co-sponsored by Sens. Carl Levin, D-Mich, Ron Wyden, D-Ore., Barack Obama, D-Ill., Jeff Bingaman, D-N.M., and Norm Coleman, R-Minn. The bill largely follows the House-passed language and is expected to be offered as an amendment to the comprehensive patent reform bill (S 1145) when it is considered on the Senate floor sometime this year.
More Likely Than Not
In May, the tax preparer standard was raised to “more likely than not” (or 51% probability) that a position taken about an item on a tax return is correct. If the tax preparer can’t reach that standard in his or her judgment, he or she must make disclosures to the IRS about that tax position.
The AICPA has engaged other professional associations to participate in a coalition focused on solving the MLTN issue including: the ABA Tax Section, the National Association of Black Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals, the Tax Executives Institute, and the National Society of Accountants.
The AICPA, along with 28 state CPA societies, contacted members of Congress on the House Ways and Means Committee and the Senate Finance Committee. The AICPA told Congress that the problem that was created by the new disparate standard should be fixed by equalizing the Internal Revenue Code section 6694 tax return preparer standards and the taxpayer standards at the “substantial authority” level for non-tax shelter (“non-tax avoidance”) items instead of at the “more likely than not” level.
In November, Reps. Joe Crowley, D-N.Y., and Jim Ramstad, R-Minn., introduced HR 4318, which would place the tax preparer standard at the “substantial authority” level. A companion bill is expected to be introduced in the Senate very soon.
Lisa M. Dinackus is manager of congressional affairs on the AICPA’s Congressional & Political Affairs Team. For further information on these legislative issues and congressional-related inquiries, write to 1455 Pennsylvania Avenue, NW, 10th Floor, Washington, D.C. 20004, e-mail firstname.lastname@example.org, or call 202-434-9276.