American Institute of CPAs president and CEO Barry Melancon spoke Wednesday about changes at the Internal Revenue Service and Congress, the prospects for the upcoming tax season, the evolving CPA licensing model, recruiting young people to the profession and more during a wide-ranging presentation to the Accountants Club of America.
He also referred to the global role of the AICPA as the Association of International Certified Professional Accountants. “We do a good bit of international advocacy today,” said Melancon. “There are a lot of things that happen in different places in the world that affect us here, and things that we do here affect other places in the world, international tax being very high on that [list], which will get even more complex going forward. We are the most global profession that operates all throughout the country, but is state regulated.”
Other countries have been closely following the midterm elections in the U.S., which may have an impact on the tax laws and the funding of the IRS. Earlier this week, House Republicans passed their first piece of legislation now that they are in the majority, and it involved rescinding the $80 billion in enforcement funding allocated to the IRS in last year’s Inflation Reduction Act. The bill is not expected to go far in the Senate, which is still controlled by Democrats. However, the omnibus spending bill that passed last month did include some cuts to the IRS’s usual annual appropriation. Melancon expects to see the recently nominated IRS commissioner, Daniel Werfel, who ran the agency as acting commissioner 10 years ago, testifying on Capitol Hill, as well as Securities and Exchange Commission chairman Gary Gensler, who proposed new rules last year on climate-related disclosures.
“From a macro perspective on the IRS, the new commissioner, Danny Werfel, who was an interim commissioner in the past, is going to spend a significant amount of time testifying before the House,” said Melancon. “They’ve already passed a bill that takes away all the funding that the IRS has. It’s not going to go anywhere, but the fact is that they’ve already done that. There’s going to be this immense notion of venting that’s going to go in just two issues that affect our profession: ESG and the Internal Revenue Service. Let’s go back to the $1.7 trillion year-end bill and talk about some things that didn’t get in, and a couple of things that got in that are really important to our own profession. There was a small budget cut that took a little bit of the funding for enforcement out of the IRS.”
He disputed the notion that the IRS funding in the Inflation Reduction Act would lead to the hiring of another 87,000 IRS agents to audit middle-class taxpayers.
At the end of the year, the IRS announced a delay in implementation of the lower threshold for filing a Form 1099-K under the Inflation Reduction Act, which would have triggered filing the forms for transactions of $600 or more by third parties such as eBay, Etsy, Venmo, PayPal, Cash App and Airbnb, as opposed to the earlier $20,000 threshold. The provision was supposed to help reduce the tax gap by uncovering sources of income often not reported by taxpayers. The AICPA lobbied Congress to reverse the lower reporting threshold as part of the year-end omnibus spending bill, arguing that the reports from the third parties didn’t reflect the full circumstances of the transaction. Ultimately it wasn’t included in the bill, but the IRS offered a temporary reprieve.
“There was support for fixing it,” said Melancon. “We tried to explain to Congress, ‘Look, we get what you’re trying to do, but you’re gonna get killed by your constituents when this comes through because this is going to be very complicated.’ A company is going to issue a 1099 and they don’t know if you had a loss or gain, so you’re going to get a 1099 grossed up at the high level. Part of that is not reportable because you had a loss on it. Part of it is reportable because you had a gain on it.”
The IRS would have to try to match the amount reported on the Form 1099-K from the third party against what the individual taxpayer is reporting. Then if the IRS sends a notice to taxpayers asking them to explain any discrepancies, clients would be coming to their accountants asking to fix the problem.
“The reality is the digitization of commerce is going to cause all those things to come into the tax system anyway,’ said Melancon. “That is going to be the case, whether there’s a 1099-K or not in that process, but the way it was going to be implemented and with the backlogs that exist at the IRS today, it was going to be a colossal mess. The IRS has voluntarily said they’re suspending that for a year, which is a good decision. And Congress will decide during the year if they pass anything whether they will address that or not. Tax extenders and other areas that expired were intended to be in the year-end bill and they were not so, particularly in the areas of child [tax] credits and R&D, but those are the big ones.”
The AICPA has also been advocating for legal protections for accountants with cannabis business clients.
“We have been supportive of some clarification of cannabis to be in a piece of legislation at the federal level because cannabis is widely legal in many states,” said Melancon. “Well over a majority of the American public lives in a jurisdiction in which cannabis is legal in some form or fashion, yet technically as a licensed professional — because it’s still illegal at the federal level — you’re creating a problem for yourself under federal law. There’s language that gives banks and professionals clarity that we have been supporting, not just for CPAs but other professionals as well.”
The AICPA is also continuing to advocate with Congress for regulation of the tax preparation profession by the IRS and for mobility for CPAs to work across state lines, but right now the IRS seems to be overwhelmed. An annual report released Wednesday by National Taxpayer Advocate Erin Collins found the IRS making progress on catching up with the backlog of unprocessed tax returns and correspondence, showing some cautious signs of hope for this tax season (see story).
Melancon believes the IRS is mostly well intentioned, but it failed to communicate about problems like the shredding of old tax documents in an effort to clear its backlog.
“It’s not that the men and women at the IRS wake up every day and say we want to do a bad job,” he said. “That’s just not fair.”
However, outdated technology, retirements of aging workers, ongoing turnover, newer and younger staff, and the need to train them to take over from more experienced employees have probably been contributing to the backlogs. Another contributor may have been a flood of amended returns claiming the Employee Retention Tax Credit. Melancon believes the IRS needs to upgrade its technology and sees potential with Werfel taking on the job of commissioner if he is approved.
“He was interim commissioner for a while in the past,” said Melancon. “He’s gone off into the consulting world. He’s run some big technology projects. I think you’re seeing some things there that point to a very positive situation. It just looks like it will take some time.”
During the wide-ranging talk, Melancon also discussed other issues facing the accounting profession, including the pipeline of students entering the workforce. He pointed out there are over 1 million fewer young people in four-year colleges in this country than there were pre-COVID, not just in accounting, but in all majors, out of a population of 15 million in that age range. Community college enrollments are also down about 22%. More young people are questioning whether they want to go to college or can afford to take on the student loan debt to get a four-year degree.
“One of the selling points of our profession historically has been that we’re an incredibly stable and solid profession,” said Melancon. “If you come to work in our profession and you major in accounting, you pretty much can guarantee yourself a job. And if you continue to work in our profession for 20, 30 or 40 years, you’re gonna have a great career and you’re gonna make a good living. Generation Z folks, when you talk to them about 40 years or 35 years, they say I’m not sure the world is going to exist. You can’t blame them.”
He noted that while there is a talent shortage now, there was almost an excess supply of young accountants in the three years leading up to the pandemic, reducing the level of demand as well as starting salaries, compared to some other jobs.
Other factors come into play as well, including the stiff educational requirements for obtaining a CPA license.
“Just the fact that you have to pass a very difficult exam is an entry barrier,” said Melancon, “The image of the profession, and the hard work you have to do when you first go in, the image that to go into public practice for two or three years and then you leave and you go someplace else, our lack of success in the diversity elements, the underrepresented minority populations, you can go on and on and on. It’s a complex web.”
He took issue with calls for reducing the education requirements. “No other profession is reducing the education requirements,” he said.
One audience member asked about reducing the 150-semester-hour requirement for the CPA license.
“I prefer to look at it as saying can we find other ways to get to the 150 with academic credits that are part of different types of learning processes that bring some of the price point down, but not take a step back as a profession,” Melancon responded. “The standing of our profession is at an all-time high.”
He pointed out earlier that there are already huge challenges on licensing regimes, with groups in some states challenging the idea of licensing altogether, whether it applies to CPAs, doctors or hair stylists. “You do not want a headline that says the profession supports lowering its education requirements,” said Melancon. “When we throw in things like FTX recently, that’s not where we want to be. We have some plans on how we bridge the education requirement. There’s an eight-point plan out there.”
Firms, state boards of accountancy, colleges and universities would need to be involved in providing academic credit to students who want to attend school for just four years and begin working at a firm while meeting the 150-hour requirement.
Edward Mendlowitz, CPA, an emeritus partner at Withum and Accounting Today columnist, reacted to Melancon’s presentation. “Barry Melancon has been speaking each year since 1996 at the Accountants Club of America and each year he provides a new look at things we think we know ‘everything’ about,” he said. “Some of his views were a strong belief that the 150-hour education requirement is essential to maintaining the high standards of our profession and the trust people outside the profession have for us, but that ways of achieving the extra 30 hours need to be examined and perhaps made more relevant to how the profession is growing and what skill sets will be required going forward. He also expressed his belief that there is a need by clients for the smaller accounting firms and their role will only grow, but that growth will include collaboration with a network of specialist firms that could be drawn upon when a client has that need. The changes that are occurring in the profession will not cause partners in the smaller firms to be displaced from their role as the primary advisor to their clients but only strengthen it.”