Advocacy that Counts – TXCPA on Capitol Hill to Discuss the Accounting Profession’s Agenda

It has been four years since TXCPA’s AICPA Council delegation has participated in a Capitol Hill fly-in. We were excited to be back to tell our stories, make crucial asks and form and renew long-lasting relationships.

 

Last week, 15 TXCPA members—AICPA Council representatives and federal key persons—participated in 30 Capitol Hill meetings with our Texas congressional offices in Washington, D.C. We met with key legislators of the House of Representatives and both Senate offices. These visits allow TXCPA to foster important existing Hill relationships, forge new connections and use our collective voices to be heard on issues key to the CPA profession.

 

During these visits, our members encouraged Texas lawmakers to cosponsor or support several very important issues to the profession:

 

• H.R. 3541, Accounting STEM Pursuit Act (and S. 1705, STEM Education in Accounting Act), is a step toward expanding accounting into the Science, Technology, Engineering and Math (STEM) curriculum, specifically in the technology field. The legislation allows federal funds to develop and enhance accounting programs in K-12 grades.

• H.R. 1477, S. 722, Freedom to Invest in Tomorrow’s Workforce Act, would amend the Internal Revenue Code to broaden the allowance use of 529 savings plans to cover the cost of certain workforce training, credentialing program, certification exams, maintenance of certificate credentials and testing review courses. The bill would allow greater flexibility for accounting professionals to gain and maintain professional certifications, including the CPA licenses. We appreciate that Reps. Nathaniel Moran (R-1) and Beth Van Duyne (R-24) are early cosponsors.

• H. Con. Res. 46 and S. Con. Res. 10, Fiscal State of the Nation Reconciliation, which calls for the Government Accountability Office (GAO) Comptroller General to make a presentation to a joint session of the House and Senate Budget Committees on the GAO’s auditor’s report of the U.S. government’s financial statements. Enacting this resolution will ensure Congress is made aware of the information contained in the financials and better understands how current or future policy may affect the nation’s long-term fiscal health. Reps. Dan Crenshaw (R-2), Monica De La Cruz (R-15), Colin Allred (D-32) and Michael Cloud (R-27) are cosponsors.

• H.R. 3566, Simplify Automatic Filing Extensions (SAFE) Act, would allow taxpayers the ability to calculate and rely on a safe harbor of 125% of the prior year tax to be paid in by the original due date to avoid penalties when filing an extension. It would reduce burdens on practitioners and individuals preparing their own returns, minimize the processing of penalties by the IRS and simplify the work surrounding the filing of federal tax extensions.

 

These bills have bipartisan support and are not controversial. We are hopeful that there is some momentum to push these issues across the finish line.

 

Capitol Hill visits are the lifeblood of our federal advocacy. TXCPA members provide insight on legislation, serve as a resource to Capitol offices and ensure that the accounting profession is heard loud and clear. We appreciate the work of all those who participated in these meetings.

 

If you have not had an opportunity to advocate on behalf of the profession, reach out to TXCPA and we will get you involved in our Key Person program to participate on the federal or state level.

Beneficial Ownership Reporting

In January 2024, FinCEN will begin requiring small businesses to file beneficial ownership information (BOI) into a central database for use by local, state and federal law enforcement to facilitate their anti-money laundering activities. The purpose of filing this information is to identify who acts as a beneficial owner in so-called shell corporations. CPA firms and their clients with fewer than 20 full-time employees and earning less than $5 million in gross receipts will need to file. 

 

FinCEN estimates about 6.6 million BOI reports will be filed in 2024, and about 14.5 million annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

 

AICPA has joined a coalition of organizations to ensure taxpayers and tax professionals are aware of the BOI reporting requirement that applies to most companies created in or registered to do business in the U.S.

 

AICPA joins coalition to increase awareness of new BOI requirement (thetaxadviser.com)

FinCen’s new FAQs aim to clarify beneficial ownership information reporting requirements (rsmus.com)

Surprise! Surprise! 1099-K Changes for 2023

By Janet Hagy, CPA-Austin

 

Third-party payment networks, like PayPal and credit card providers, are required to track and report monthly totals for goods and services sales via an annual Form 1099-K. TXCPA has been advising that many taxpayers will be caught unaware in early 2024 when a 1099-K arrives reporting small amounts of income from sales of goods and services. The changes originally scheduled for 2022 by the provisions of the American Rescue Plan Act of 2021 go into effect for 2023. Prior to 2023, Form 1099-K was only issued if the third-party network made annual payments of more than $20,000 and there were over 200 transactions. For 2023, if gross receipts exceed $600, Form 1099-K is required regardless of the quantity of transactions. Can we just take a moment and ask, “What were they thinking?”

 

The gross amount reported can include sales tax collected, fees or reimbursements that may not be taxable. It may also include duplicated income if the taxpayer received Forms 1099-MISC or 1099-NEC from a customer or client reporting the same gross receipts. Taxpayers with no reportable business income may receive an erroneous Form 1099-K if the payer identified the payment to the taxpayer as business related.

 

If a taxpayer does not receive an expected Form 1099-K for the business from a third-party network, the taxpayer needs to contact the third-party and obtain a copy. The IRS will be matching the reported gross receipts to the tax return. Reconciliation of Forms 1099-K to reported gross receipts during the tax preparation process is even more important for 2023 than in the past due to potential IRS inquiries for relatively small differences.

 

Preparers will be guiding taxpayers through the reconciliation and tax return reporting processes. Due diligence requirements will necessitate inquiries about previous years’ activities if unexpected Forms 1099-K arrive with 2023 tax documents. Ethical dilemmas about amending prior year returns for previously unreported business activities could arise. More professional time will undoubtedly be spent.

 

Due to this change, the 2024 tax filing season promises to be filled with surprises. Notifying clients and their accounting/bookkeeping professionals now about this change in 1099-K reporting threshold and the related increase in expected tax preparation costs may eliminate some 2024 headaches.

 

TXCPA and AICPA believe that a $600 1099-K threshold is overly burdensome to taxpayers and tax professionals. TXCPA is communicating closely with AICPA on any sound legislation before Congress that would raise the threshold. A pending bill, H.R. 190 Saving Gig Economy Taxpayers Act, would modify requirements for third-party settlement organizations to eliminate their currently untenable reporting requirement with respect to the transactions of their participating payees. This is moving in the right direction, but it does not go far enough. Unfortunately, Congress may want a “pay-for” to increase the new threshold.

 

What Online Business Owners Should Know about IRS Form 1099-K - TurboTax Tax Tips & Videos (intuit.com)

AICPA Comments on 1099-K HR 190

Requirements for 1099-K Expanded - TXCPA Federal Tax Policy Blog (typepad.com)

IRS Announces a Pilot Program for a Direct File System for Filing 2023 Returns

By David Donnelly, CPA-Houston

 

On May 16, 2023, the IRS announced a pilot program for a limited scope Direct File system for 2023 returns to be used in the 2024 filing season. In this program, taxpayers would be able to use a web-based self-preparation tool provided by the IRS. Similar systems are used in many countries around the world. In the announcement, IRS Commissioner Werfel stated that the pilot program will not include the IRS pre-populating any taxpayer information.

 

The cost of the program to the IRS is estimated to be about $10 per return, which compares favorably to the current cost of about $40 per return to the IRS for other efiled returns. 

 

The cost to the taxpayer would be free; this program would compete with the existing Free File programs.

 

Publication 5788 (5-2023) (irs.gov)

IRS submits Direct File report to Congress; Treasury Department directs pilot to evaluate key issues | Internal Revenue Service

Some Grantor Trusts Not Eligible for Stepped-Up Basis

In Revenue Ruling 2023-2, the IRS distinguished two types of grantor trusts, one of which is not eligible for a stepped-up basis at the date of death of the grantor. The ruling takes the position that regardless of whether the grantor retains control of the investments of the trust, that “control” is not sufficient for the grantor’s estate to include the trust in the estate. Rather, the ruling takes the position that the stepped-up basis under IRC Section 1014 is only available where the grantor had the legal authority to completely repeal the trust altogether. 

 

Accordingly, in the most common circumstances where it is expected the trust assets will appreciate in value over time, it is important that the trust documents clarify that the grantor has the legal authority to repeal the trust. That will enable the basis of the trust assets to appreciate to fair market value at the date of the grantor’s death.  

 

No basis step-up for grantor trust assets if not in grantor’s estate (journalofaccountancy.com)

Revenue Ruling 2023-2 Got It Wrong? The Case For A Stepped-Up Basis When The Grantor Dies (forbes.com)

Employment Tax Audits Likely to Increase

IRS Commissioner Daniel Werfel announced on April 6 that the IRS would be utilizing a significant portion of the earmarked $80 billion received through the Inflation Reduction Act to increase their surveillance of employers’ compliance with the requirement to withhold employment taxes. 

Employment taxes required to be withheld include federal income, Social Security and Medicare taxes and the taxes imposed by the Federal Unemployment Tax Act (FUTA).

This initiative to increase the review of employee tax withholding was in response to a report by the Treasury Inspector General of Tax Administration (TIGTA) that found the IRS has not been adequately reviewing employers’ compliance in this area. TIGTA identified the primary concern was that the IRS did not have the technology necessary to prioritize and efficiently review employers’ withholding documents. 

In accordance with the TIGTA’s report, Commissioner Werfel has indicated that over the next couple of years, the IRS will allocate a significant portion of its $80B to business system modernization and operation support that will permit a more effective surveillance of employer withholding of employee taxes. It is anticipated that they will begin to use high technology, presumably artificial intelligence computer programs, to review employers’ employee tax withholdings and identify those that appear to require further personal review. 

Although for many tax practitioners, compliance with clients’ withholding of employees’ tax was not necessarily a high priority, this new IRS focus shows enforcement activity on the horizon and emphasizes the importance to carefully review your clients’ employee tax withholdings to ensure correctness. 

ChatGPT—Your Firm’s Best New Employee

By William Stromsem, CPA, J.D.

Assistant Professor, Department of Accountancy, George Washington University School of Business

 

You need to learn about ChatGPT. It is likely the greatest opportunity and greatest threat to your practice. ChatGPT is smarter and writes better than anyone in your firm and it is getting exponentially smarter by the day. Many firms and clients are probably already using it, and those CPAs who adopt and learn to use its power will outcompete those who don’t. Some firms are now adopting the technology and your practice will be radically changed in the next two years.

Some of the practice implications of the technology include:

• Clients who use AI may not need as many hours of service from your firm. There will be fewer work hours because of less client needs and because AI will do the work faster and more efficiently. We sell time and expertise, and these may become less valuable.

• With fewer hours, accounting firms may not hire as many entry-level staff members. With fewer entry-level accountants, it will be harder to develop the type of experience that can direct and review AI work. We may need fewer junior and senior accountants, but where will we get the managers and partners? Recruiting will have to be re-directed to attract those with skills in directing and reviewing AI work.

• With automated processes for serving clients, large firms may be able to easily take on smaller clients whose fees were not previously worth the overhead.

So, what is ChatGPT; how can it help you; what risks are involved; what are the implications for your practice and what are the steps to adopt it. 

What is ChatGPT?

ChatGPT is Chatbot Generative Pre-trained Transformer artificial intelligence program that consults a vast database and communicates results in human terms. It can be used in conjunction with other programs like PowerPoint, Word, Excel and various accounting software programs. From November 2022 when it was launched to the public, it attracted over 100 million users by January 2023. It allows you to direct research into a vast database and receive communications that are well-written and tailored for specific audiences. All large tech companies are developing competing or specialized versions of this Microsoft product, and this will undoubtedly result in more innovative and creative applications. It can access websites, books, articles and material that you provide to it. 

Using ChatGPT is like hiring an extremely knowledgeable robot who can help with a variety of accounting tasks such as training, research, client communications and data analysis. In competition with humans in professional endeavors, it beat law students in taking the bar exam, beat medical doctors in patient communications and although students did better on university accounting exams, it only did better where there were unique fact situations and the machine won on concept questions. The robot has better grammar and composition structure than most college-grad writers and can be set to reach audiences with varying levels of sophistication. It is available in various languages and can even produce output in various formats, including Shakespearean English to rap to poetry. The Writer’s Guild of America is striking on various issues, but one of them is to limit the use of ChatGPT in replacing writers of dialog and jokes.

How can it help CPAs?

Uses for ChatGPT are myriad, often limited only by the creativity of the person who uses it. It improves client relations through faster and better communications; performs statistical analysis including data scrubbing; it can help train your staff; and it can free you and your staff from many repetitive and time-consuming tasks to spend time on strategy and implementation of plans. It can prepare emails, memos or client newsletter items and can prepare presentations for clients, complete with scripts, PowerPoint slides and references. It can find the words to simply explain more complex issues, something that often takes a great deal of your writing time. It can clearly explain FASB or IRS rules in terms that are understood by clients. Your communications will likely be better if you use ChatGPT for drafting of almost anything. Each presentation is unique and not copyrighted. You just submit a few prompts on what you want and how you want it to be tailored and the draft comes instantaneously, like a song from a smart speaker.

It can be used to analyze financial data to identify trends and make more informed decisions. It can analyze market data to help identify industry trends and competitor moves. It can also be used to predict future results based on past performance. It can simply perform multi-step complex processes, like transfer pricing analysis. With virtually instantaneous results, real-time analysis will be more valuable for swift action.

Costs decrease and staff job satisfaction may improve as more repetitive and mundane work is performed by AI. 

Risks

In 2014, Steven Hawking, the renowned English theoretical physicist and futurist said, “The development of full artificial intelligence could spell the end of the human race.” He envisioned that, “It would take off on its own and re-design itself at an ever-increasing rate." And we all remember the murderous robot Hal in “2001: A Space Odyssey.” We may not have a Hal taking over our world yet, but there are some very practical current risks.

As we increase our reliance on AI, CPAs may lose their own analytical skills. This is common with reliance on technology—few people under age 40 can read maps or navigate without the use of GPS. At some point in the future, we may not be able to drive with improved self-driving car technology.   

ChatGPT relies heavily on the internet and is prone to garbage-in/garbage-out errors. There are undoubtedly errors in the database being used by ChatGPT. Also, if not properly queried, it may respond to a question that is different from the one you meant to ask. ChatGPT sometimes misunderstands technical terms of the accounting profession. These problems can be corrected by a knowledgeable reviewer and ChatGPT can provide a bibliography for its work so that the reviewer can evaluate the quality of the output. If you are not satisfied with the response given, you can redirect the research—the revision results are produced immediately.

ChatGPT may not know the context or history of a particular client issue. In its present iteration, it may not understand nuisances and subtleties of human communications, and it is important to remember that ChatGPT is not a human being when you are communicating with it. For erroneous ChatGPT information passed along by a CPA firm, the firm has potential liability and must perform due diligence in communicating with clients on action items. 

ChatGPT may be inappropriate for highly personal communications, particularly with attribution to ChatGPT. In a widely distributed email, Vanderbilt University expressed sincere sympathy over a campus shooting at another school with the email signed “warmly” by the staff members. A small note at the end of the text said that ChatGPT had been used to draft the email, giving the impression of either a lack of feelings or lack of ability to express them. 

In the past, ChatGPT was not as careful as we might have wanted on issues of political correctness. This has been greatly improved, but products should be reviewed for sexism, racism and other “isms” that reflect items found in its database. Earlier versions also resulted in occasional fantasizing when presented with an ambiguous question that it was not equipped to answer.

Because of the potential for greatly increased communications as a result of ChatGPT, there is an increased risk of sending out erroneous or inappropriate communications to a wide audience, risking professional reputation for mass-distributed erroneous information.

Occasionally, ChatGPT will answer a question with dated information that more closely responds to the query than more updated information. The database is constantly developing, but currently requires careful review of sources used—this can be done in part by requesting a bibliography of sources used in preparing an article.

Practice implications

Clients who use AI may not need as many hours of service from your firm. There will be fewer work hours because of less client needs and because AI will do the work faster and more efficiently. We sell time and expertise, and these may become less valuable.

With fewer hours, accounting firms may not hire as many entry-level staff members. With fewer entry-level accountants, it will be harder to develop the type of experience that can direct and review AI work. We may need fewer junior and senior accountants, but where will we get the managers and partners?  Recruiting will have to be re-directed to attract those with skills in directing and reviewing AI work.

By automating and streamlining certain aspects of client service, large firms can serve smaller clients whose fees may not have been sufficient to cover the cost of manual service.

Other CPAs who are nimbler in adopting and using AI will outcompete you. 

Because ChatGPT products appear well-written and authoritative, it will require more critical expertise to be able to recognize its errors. “Seems reasonable” will no longer work in evaluating research—ChatGPT will almost always appear to be reasonable. Firm-developed products and items received from clients, staff and others will need to be reviewed before being relied on. Note that some staff are already using ChatGPT to complete assignments.

New skills will be needed to communicate with AI. What questions should be asked and how should ChatGPT be prompted to produce the desired results? Firms will need to learn how to communicate with ChatGPT—a badly tailored prompt can elicit an answer to the wrong question. Ambiguous questions will be answered by ChatGPT based on its understanding and that may not give you the answer to the question that you sought.

Employees will be impatient with firms that do not use AI and instead use them to perform routine, repetitive and mundane tasks. Firms must train staff and show that they are embracing AI.   

New guidelines for employees may be needed to document and control the use of AI. 

As use of AI becomes more widespread, clients will expect a higher quality product.

Accounting education will change with answers to routine questions asked on exams not needing to be learned because they are easily accessible online. Education will be more skewed to using and reviewing AI and to strategy and implementation issues.

Your value may be more strategic than compliance-oriented services as more functions are automated.

How to adopt

Many CPAs eschew the idea of using a robot to write their professional communications or analyze client data, and we all like to feel that our expertise and personal style are the hallmarks of our practices. AI is not intended to take from these, but to augment them. It can research and write better than you can, and it can analyze data more powerfully and faster than you can. You will be freer to focus on strategy and implementation and to work on more personal and rewarding services to your clients.

It is important to understand that we are already using basic forms of AI in bookkeeping and tax return programs where the computer auto-fills the other side of a journal entry or asks intuitive questions and identifies possible errors in a tax return preparation and even some more basic spell-guard and grammar-guard in word processing software. These have strengthened our practices and freed us to work on more rewarding tasks. ChatGPT just takes this to a radically higher level.   

Download the software, give it a test drive and you will want to use it more.    

To ease your way into AI, you might consider a firm ombudsman who will be charged with learning about applications, briefing others and facilitating adoption by the firm. Take cues from younger staff who are more technology-based in their approach to problems.

This article was written by ChatGPT.  (Just joking … or am I?)

Penalty for Failure to Report an Interest in Foreign Corporation

By Tom Ochsenschlager, JD, CPA

 

A person who controls a foreign corporation must file a Form 5471, Information Return of U.S Persons with Respect to Certain Foreign Corporations, each year to disclose the taxpayer’s ownership and various details of the foreign corporation that, among other disclosure requirements, include the country of its location, its balance sheet, its undistributed earnings and any transactions between the entity and the taxpayer. In the past, under Section 6038(b)(1), the IRS has assessed a substantial penalty for failure to timely file Form 5471.

 

The penalty is an initial $10,000 plus an additional $10,000 for each additional 30-day period that the failure to report continues.

 

When Alon Farhy, who controlled two foreign corporations, failed to file Form 5471, the IRS assessed substantial penalties. In an effort to avoid the penalties, Farhy took his case to the U.S. Tax Court (Farhy v Commissioner, 160 T.C. No. 6 (April 3, 2023)). The Tax Court concluded that the IRS does not have statutory authority to assess penalties under Section 6038. The court decision found that while Section 6021(a) generally permits the IRS to make assessments for penalties related to Sections 6671-6725 and 6654-6751, it does not include penalties related to Section 6038.

 

Therefore, the court found that the IRS did not have the statutory authority to enforce the penalty by merely issuing an assessment. It must do so through litigation, not a mere assessment.

 

Tax Court IRS lacked authority to assess Section 6038b penalties: PwC

IRS First Friday Hot Issues Summary - April Edition

   

TXCPA Committee Still Concerned with Proposed Regs on RMDs of Inherited IRAs

Today, the TXCPA Federal Tax Policy Committee issued its second letter to Treasury and the IRS addressing proposed regulations REG-105954-20 (February 2022) on the tax treatment of required minimum distributions (RMDs) of inherited IRAs. Although IRS Notice 2022-53 issued last October provided some transition relief, the committee recommends more action. It is concerned the position in the proposed regs is contrary to statutory language related to the changes made to RMDs in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. If the proposed regs are not reconsidered, the committee seeks more permanent guidance and relief to help taxpayers come into compliance with the new IRS requirements.

See letter.

https://www.tx.cpa/docs/librariesprovider15/advocacy/tax/2023/inherited-iras-required-minimum-distributions-4-11-23.pdf?sfvrsn=12cbabb1_3