Form 3115, Application for Change in Accounting Method, likely provided the most headaches for practitioners this tax season. Now that the rush of tax season is over, it is time for a postmortem on this critical issue.
This column addresses the concerns of small CPA firms dealing with a business client base with assets of less than $10 million and the final regulations on tangible property or the "repair regulations." Most small firms deal with businesses that have annual revenue under $5 million—the "mom and pop" shops striving for $1 million of gross receipts.
This tax season was frustrating for small CPA firms. The firms were following the rules from the IRS, and then the IRS changed the game in mid-February.
The small CPA firm took the rules and implemented them. Why? It is who we are. CPA firms, large and small, have a responsibility to clients, the IRS, and the profession.
Small business owners (hair dressers, auto shops, laundry businesses, rental properties, etc.) look to CPAs as their trusted advisers. These businesses cannot afford in-house accounting and tax departments. They look to CPAs to help them interpret and follow the laws.
The IRS requires CPAs to follow the rules and standards of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). The AICPA requires its members to follow additional standards. These include the AICPA Code of Professional Conduct and the AICPA Statements on Standards for Tax Services.
According to the principles of professional conduct in ET Section 0.300.010, CPAs "express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct."
The AICPA code also embodies the following principles:
- Responsibilities (ET Section 0.300.020): Members "have responsibilities to all those who use their professional services."
- Public interest (ET Section 0.300.030): Members "should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism."
- Integrity (ET Section 0.300.040): Members "should perform all professional responsibilities with the highest sense of integrity. . . . Integrity is measured in terms of what is right and just."
- Due Care (ET Section 0.300.060): Members "should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of service, and discharge professional responsibility to the best of the member's ability."
This is what we do as CPAs.
The Repair Regulations
The "repair regulations" were first introduced to CPAs on Dec. 27, 2011, when the IRS issued temporary regulations relating to amounts paid to acquire, produce, or improve tangible property and dispositions of property depreciated using the modified accelerated cost recovery system (MACRS) with an effective date of Jan. 1, 2012. In November 2012, the applicability date for these temporary regulations was postponed until Jan. 1, 2014. In September 2013, the portion of the regulations relating to amounts paid to acquire, produce, or improve tangible property was finalized with an applicability date of Jan. 1, 2014; however, the IRS also at this time issued new proposed regulations related to dispositions of MACRS property. The proposed regulations were finalized in August 2014, again with a general applicability date of Jan 1, 2014. The rules were set.
What do CPAs do? CPAs follow the Statements on Standards for Tax Services (SSTSs). According to paragraph 9 of the introduction to the statements, "Members are encouraged to assess the adequacy of their practices and procedures for providing tax services in conformity with these standards." SSTS No. 1 deals with tax return positions and tax planning. SSTS No. 3 pertains to certain procedural aspects of preparing returns. Due diligence is a guide.
The explanation of another key provision in SSTS No. 7, Form and Content of Advice to Taxpayers, provides that "[t]axpayers should be informed that (a) the advice reflects professional judgment based upon the member's understanding of the facts, and the law existing as of the date the advice is rendered and (b) subsequent developments could affect previously rendered professional advice."
The result for the CPA was implementation of the final "repair regulations" published in August 2014. It is what we do . . .
First, firms educated their staff on the regulations. The AICPA provided members with several informative webinars. Webinars were also offered by CPA insurance carriers, whose main concern was to prevent litigation. These webinars emphasized the need to inform clients in writing and have the clients sign documents signaling their agreement as to which procedures they wanted to implement. A CPA bore the specter of litigation by a client if the CPA missed an important election or an opportunity for additional deductions in the past, currently, or in the future.
One small CPA firm in Texas told the author that its CPAs spent about 40 hours on additional reading and online seminars about the issue. Each time an announcement was made, more time was devoted to reading about and analyzing its impact. Another small firm in Minnesota spent more than 100 hours in CPE and meetings inside and outside the firm to figure out what was going on with this issue.
Next, firms searched their databases to determine potentially affected clients. One CPA told the authorthat she "spent another day and a half going through all of our depreciation schedules for clients with Form 8825 [Rental Real Estate Income and Expenses of a Partnership or an S Corporation]. We identified two clients (out of about 50) who really need to file Form 3115."
The next step was to communicate with clients. The timeline for many firms fell between the fall of 2014 and January 2015. The threat of malpractice lawsuits for not filing and informing the clients was weighing heavily on small firms as one lawsuit can put a small firm out of business. Informational letters were sent to clients explaining the importance of following the IRS regulations. This was based on the reputation of the CPA as the trusted adviser. The clients were being prepared for the additional forms and expenses. For example, hairdressers who file Schedules C, Profit or Loss From Business (Sole Proprietorship), (with income between $15,000 and $40,000) were told in the December–January period they had to stop by the CPA's office to sign Form 3115. The clients were relying on the CPA to be alert to the additional cost they would incur, but they would follow the advice if necessary. Everyone was trying to follow the IRS procedures.
What does a CPA do? CPAs have no choice but to abide by Circular 230. It is the regulation that includes strict enforcement/disciplinary proceedings (Subpart D). A few of the key sections concern due diligence and standards with respect to tax returns.
Circular 230, Section 10.22, Diligence as to Accuracy, states that "[a] practitioner must exercise due diligence in preparing or assisting in the preparation of, approving, and filing tax returns, documents . . . and other papers relating to Internal Revenue Service matters."
Circular 230, Section 10.34, Standards With Respect to Tax Returns and Documents, Affidavits and Other Papers, describes the responsibilities of the tax practitioner signing the return. In the process of having the client sign the return, the practitioner has advised the client of positions taken and the possible outcomes of those positions.
Both of the sections and others in Circular 230 guide the CPA. It is what CPAs do.
On Feb. 13, 2015, the IRS announced a new simplified method of complying with the repair regulations effective for tax years beginning on or after Jan. 1, 2014. Rev. Proc. 2015-20 is only 16 pages long, but to small firms, it was a novel. The revenue procedure provides an exception that allows small businesses to make certain tangible property accounting method changes under the repair regulations with a Sec. 481 adjustment that takes into account only amounts paid or incurred, and dispositions, in tax years beginning on or after Jan. 1, 2014, and permits small businesses to make certain tangible property changes without filing a Form 3115. This was an enormous change to the existing rules, which forced CPAs to determine the best course of action for their clients without adequate time to analyze the implications of using the simplified method.
The reaction from small firms was a deep sense of frustration. Additional study was required to understand the safe harbor while in the midst of intense tax return preparation. A few of the comments from CPAs at a March 4 meeting of the Twin Cities Tax Professionals Discussion Group in Minnesota included the following:
- Why so late? It takes the same amount of time and resources to make a decision late as it does to make it timely.
- Timeliness is expected of the taxpayers; it should be expected of the rulemaking.
- With these retroactive changes, how can CPAs encourage clients to comply with the rules? Taxpayers are going to question the usefulness of a CPA's judgment when the IRS changes the rules after the taxpayer has complied with the rules as they existed.
One CPA in a single-member firm told the author at the end of the Tax Discussion Group meeting:
As professionals, we take seriously our obligation to get things right. For the small practitioner, that was especially difficult considering the complexity and scope of the regulations. Whereas larger firms and businesses were able to dedicate considerable resources to understanding and implementing the law, small practitioners had to disengage from billable projects in an attempt to master the requirements, many of which did not apply to their clients . . .
The whole experience was like that of a student in school who worked hard to complete all the assigned work only to have the teacher summarily dismiss the homework assignment the next day. The students who didn't do the work enjoy the experience of no homework without any penalty for not completing the assignment. Conversely, the students who complied with the assignment receive no tangible benefit for their efforts.
CPAs honor the public trust. CPAs recognize their responsibility to the public, clients, government agencies, and colleagues. CPAs perform with the highest sense of integrity. This is who we are. This is what CPAs will do. They ask for the same courtesy from the rulemakers.
|Ruth Ann Michnay is the owner of Ruth Ann Michnay PA in Oakdale, Minn. She is a member of the AICPA IRS Advocacy & Relations Committee. For more information about this column, contact Ms. Michnay at email@example.com.|