Tax Practice: Keeping Pace in a Changing World

A Panel Discussion led by James A. Woehlke

The tax practices of CPA firms are in a state of tremendous change. The computer is revolutionizing the way CPAs prepare tax returns, do tax research, and approach their practice overall. CPAs in tax practice are experiencing increased competition from outside the profession. Curriculum changes affecting the education of entrants to the CPA profession will greatly impact the sources of future tax personnel. The CPA Journal gathered nine tax practitioners from large and small firms to discuss trends in the profession and where they see tax practice heading. The discussion was moderated by The CPA Journal's technical editor for taxes, James A. Woehlke, JD, LLM, CPA.

Restructuring Tax Functions

The CPA Journal: I recently read of one or more Big-Six firms opening negotiations with H&R Block to handle their tax compliance business. Other firms are setting up compliance centers where their tax returns are churned out. Where do you see the tax practice moving in the larger firms?

William L. Raby: At least two of the firms are building compliance centers for the processing of the bulk of all the firm's tax returns. It makes a lot of sense. The preparation of tax returns has different levels to it. You can ship information to a central location just as you used to send input sheets to service bureau type preparers somewhere in Texas. You might say the computer service is preparing the return for the client.

William M. Grooms: The Big-Six tax departments will be dividing into two groups, compliance and consulting. There is a great question in my mind as to whether that's appropriate. I see compliance people becoming second-class citizens and consulting people becoming heroes earning big bucks.

Raby: The real question is not how the tax function is structured, but who is interacting with the client. We are reaching the point where anything that can be done by a computer is becoming a commodity and not a professional activity. The client interview at the moment is still a professional activity. Tax preparation programs may well develop enough artificial intelligence (AI) that the client interview could become an interactive process with the computer.

CPAJ: Under this scenario, is the CPA interacting with the client or the program?

Raby: That's going to depend. Bear in mind that AI is a way of capturing an expert's know-how. But it can't anticipate every possible situation. Frequently, unanticipated matters crop up with specific clients. AI only takes you so far with these clients. It generates a rough draft return that must be reviewed with the client, at which time answers to the questions that weren't asked or items it was unable to handle are answered and clarified.

A second point is that a tax return is increasingly a connection point with the client for rendering a variety of services that we generically call personal financial planning. To achieve the full benefit of that contact point, it will have to be probed by a human being, not a piece of software. The client is not concerned about taxes as much as his or her whole financial well-being and is looking to the CPA for help in a much broader sense than just getting a tax return done.

Alan E. Weiner: Accounting has always been a very "personality based" profession. Many high-net-worth taxpayers and executives want to have direct dealings with a partner and know that partner is taking an active role in the preparation of their tax returns--to them one of the most important work products the accounting firm will produce. Others will want direct access to the person actually preparing the return. The latter point is even more relevant when a question arises and the preparer, generally with the partner's permission, needs to contact the taxpayer-client. A close working relationship among the taxpayer, the partner, and the preparer is a strength of the medium-sized and smaller single-office firms, which depend on personal service to distinguish themselves.

Non-CPA Firms Providing CPA Services: Regulatory Impact

CPAJ: Accounting Today recently issued its list of the top 100 accounting firms, which for the first time included H&R Block, Jackson Hewitt, and American Express Business and Tax Services, Inc. (AmEx). How do you see these types of firms impacting tax practices and the profession in general?

Raby: I have wrestled a lot with this question as a member of the Arizona State Board of Accountancy. The CPA credential is being transformed from a license to provide services to the public into a designation comparable to an MBA or CFP. It is becoming something you tack on after your name to give you credibility, as opposed to something granting you power by a state.

Take AmEx. What it is doing is buying up CPA practices. The former partners become directors of the AmEx office. The issue for the state board of accountancy is that, under state law, a general corporation with public, non-CPA ownership cannot practice as a CPA firm. Can a corporation that is offering services also offered by CPA firms list employees as such on its letterhead and business cards? This, in my opinion, is essentially the issue in the Florida case involving AmEx and its point man Steve Miller. Clearly under Florida law, AmEx cannot submit compiled financial statements to its clients using the language CPAs would use. And, to my knowledge, they don't. Instead they produce "for client use only" statements, which, I might add, a lot of CPAs would like to issue too. It's a fairly narrow question: Can Florida say employees of AmEx cannot use the title CPA while performing duties typically performed by licensed CPAs if in fact they've earned it?

Steven E. Pascarella II: I believe the issue may be a little different. I believe it may revolve around the question: What are the powers of the state to regulate the CPA profession? I serve on the ethics committee of the Rhode Island Society of CPAs. We have accounting firms that have sold all but their auditing practice to AmEx. The accounting firms practice as a shell and AmEx may be practicing accounting through that shell. The former partners and employees still do auditing under the selling practice's old name. For its use of personnel, AmEx charges the firm roughly what it costs to perform the audit. What we are saying, in effect, is that the employees of AmEx are practicing public accounting and accordingly must be licensed by the state board of accountancy. I believe the Florida case involves this issue as well.

Raby: What about where AmEx purchases a practice with only tax and accounting services, but does not issue financial statements purporting to comply with AICPA standards? Would you still have a problem with that?

Pascarella: I don't see how you can stop that.

Weiner: Although I cannot cite a specific study, I believe that the CPA has always been viewed as having a high degree of integrity. Many of the so called "commercial" tax preparers do tax preparation as an entrée for their ancillary services such as giving investment advice or selling investment and insurance products. We cannot compete on a price basis with the non-CPA who uses tax preparation as a loss leader. The CPA needs to continue to stress objectivity as well as the profession's continuing professional education requirement.

Non-CPA Firms Providing Tax Services: Competitive Impact

Raby: If you look back 30 years, in the public mind, CPA equaled tax. Now, more and more, H&R Block is the name associated with taxes. We have had a dilution of the public image of CPA equals tax. Now we are running into people who are CFPs and EAs who advertise expertise in tax.

Grooms: You do not have to be licensed to do tax; nor to do noncompiled financial statements. A lot of the tax preparation at the low end of the fee scale is eroding, particularly for small firms that predominantly do tax practice. There are many firms that will not touch an audit. They want to avoid the liability associated with audits and still have a comfortable living. Many small firms currently provide an important service for small businesses providing them with tax and compilation services. But if these services can be provided by unregulated firms, the CPA designation loses value in the marketplace and erodes public confidence in what CPAs do.

Steven M. Bullard: What we are discussing here are symptoms of a fragmentation of the accounting profession, practice, and business. It's not due just to external forces; we have done it to ourselves. We are the ones who insisted that we are the financial advisers to all small businesses. And we are the personal financial planners. And we are the investment advisers. And we are the auditors. And we are the tax people. And we have, in essence, fragmented our own profession into subparts. Then along comes a very smart, savvy company like AmEx and "cherry-picks" some of the services that don't require licensure.

Raby: There's one additional element to your analysis. AmEx doesn't necessarily want the tax return practice. What they want is the entrée to the client to provide services and sell products.

Bullard: Absolutely. But lets face it, compliance work, properly done, can be profitable. It is not a loss leader.

Grooms: Anyone with a personal computer and $30 can purchase tax preparation software. That tells me that in the next few years the whole profession is going to change. The H&R Blocks of the world will be preparing all the unsophisticated returns with more and more individuals doing their own on their PCs. CPA firms will be left to do the work for people with more sophisticated returns and no time to prepare their own.

IRS Tax System Modernization

CPAJ: How do you think the IRS's tax system modernization, or TSM, program and electronic filing will impact the profession?

Bullard: You cannot come away from reading the IRS's TSM plan without feeling that electronic filing has to occur. It's a question of when. I've been telling the people in my firm, "It's coming folks. We have to be ready when it gets here, so that we're not in a position of being dictated to." That way we will have some flexibility, not because we think there's a benefit to the client. That way we won't find ourselves waking up some February 1 with the requirement to file returns electronically and not know which way to turn.

CPAJ: When you say get ready for electronic filing, what sort of thing are you doing to get ready?

Bullard: The main thing is to set expectation levels. It's not so much a matter of playing with the computer system to handle electronic filing. We can hire computer professionals for that. It means talking to clients about it so it's not a surprise when it comes down the line. We do not want clients taking a return we have prepared down the street to have it electronically filed by H&R Block.

Registering Commercial Tax Return Preparers

CPAJ: I want to turn your attention now to a project recently finished by the IRS Commissioner's Advisory Group to register commercial tax return preparers. They would be called "Registered CTRPs" and have a continuing education requirement of 24 hours per year. In addition, the proposal calls for a second level of registration called "Advanced Registered CTRPs" that would meet a 36 hour annual CPE requirement and involve an examination. People who have been in business for a while could be grandfathered into the Advanced Registered CTRP status by simply taking the higher level of continuing education for three years. I see this as a two-edged sword. On the one hand it will weed out incompetent preparers. But on the other, it introduces a credential to compete with the CPA. Any thoughts?

Weiner: It is my understanding the IRS has had a concern about certifying these people. I think that guns should be licensed and tax return preparers should be licensed, both for the public good. I wouldn't restrict someone from practicing if they could show that they were competent to prepare tax returns. The public deserves competent tax preparation.

Raby: Also, there is a law of unexpected consequences. The unexpected result you get may be far worse than the expected results you had hoped for. Additional entrants into the tax preparation field who have holy water sprinkled over them dilute the uniqueness of the CPA designation. And I think we will reach the point where it will become difficult for the public to see we are unique any more.

I haven't seen credentialing of the type the IRS is now doing accomplish that much in the tax area.

Bullard: Accepting a federally registered tax preparer program flies in the face of years and years of efforts at the state level to oppose the creation of a second level of licensed accountant. You can't do anything about a self-designation such as one from the financial planning community, but a government sponsored designation is different. I think the perception of the public will be that CTRPs are registered, and "certified," and charge less than I do. This will create a real problem.

Finding Future Tax Personnel

Raby: The Big Six have been a training ground and a source of good tax people for local firms. They have, however, been putting on some pretty valiant efforts to cut their turnover. I don't believe you're going to have the same fallout to fill local needs. Also, you're not going to have the same opportunity to let people evolve over five to seven years into competent tax professionals. Where will you get tax people from in the future? Does it require a change in the way you recruit and train people?

Douglas P. Stives: Yes, but we already have a problem. I have people coming to work for me who don't understand tax. They prepare a return, send it in to the computer, and when it comes back ask, "Alternative Minimum Tax! How did that happen?" How do you make that person a consultant later on?

Weiner: My experience is just the opposite. I find my staff are becoming better tax people than when we were using service bureaus. The difference is that back then the staff was just filling out input sheets. Now the input resembles a tax return. The numbers they input must make sense. They are starting to learn what the forms are all about.

Pascarella: But do they rely on the computer to compute the AMT and then just accept it, or are they able to understand what caused the AMT and how to avoid it?

Bullard: Steve, is the right answer to have the person that prepares the return, the same person that does tax consulting? The firm I grew up in started its people preparing returns and grew them into consultation. I'm not sure that's true any more. I think it's entirely possible to have a group of employees who prepare tax returns and another group of professionals that render consulting services. They aren't necessary the same people.

Debra Cameron: Finding good people is a major concern in our firm. Despite a strong economy and an influx of people to Denver, finding qualified and experienced professionals who want to carve out a career in public accounting is difficult.

The profession generally must develop a work environment that provides flexibility to manage the stress produced from client service. The explosion of technical resources is already creating a cottage industry of "consultants" working for themselves. These consultants are often the best and brightest. We need to develop a structure that allows the same flexibility that these individuals seek while maintaining the benefits provided by working together as a team to service clients' needs.

Coping with the Inverted Triangle

Raby: Here is a further twist on the problem; what some people call the inversion of the triangle. Traditionally, CPA firms were seen as a triangle with the wide part at the bottom. That's how we achieved leverage. Now we are starting to see the triangle turn. You now see partner-manager types who aren't using staff. They now ask, "When I interview a client, why don't I just input the data in the course of the interview. It takes longer to explain it to a staff member than just do it myself. It's cheaper for the client. It's more efficient. And it's a lot less of a headache for me."

Bullard: But there's a finite limit to your profitability that way. One person can only do so much. Leverage is still how you improve the bottom line in a service business.

Richard D. Thorsen: I think Bill is talking about an inevitability in the profession. I think the reduction in leverage is going to cause a lowering of income across the board. We're just kidding ourselves if we think firms are going to be as profitable as they were in the past.

Bullard: You can leverage consulting work. It's just not as easy as leveraging compliance work. You have to have the right people at the top and the right people on the bottom.

Raby: That's right. You have to have people on the top fostering what people call "bag-carrying." It's essential. People will learn to become tax professionals by being exposed to those that are good tax professionals. You teach them by example. And then you transfer the client relationship over time. You see it in good law practices all the time. This creates a practice with durability. It isn't being done as much in CPA practice these days.

Weiner: That's because clients are more portable these days. When I started, you left them behind when you left the firm. Now you try to take them along, which is somewhat like biting the hand that fed you all those years.

Bullard: Not if you have noncompete covenants in place.

Weiner: Covenants don't work.

Bullard: They do if you expend the effort to enforce them.

Raby: You're both right. Covenants do work. They work because they establish an understanding. And if you're going to leave and you're wise, you will go in and talk to the partners about how to work out an amicable arrangement. Firms that try to enforce a covenant often end up losing the client anyway.

Bullard: I agree. The real key is to compensate your staff so that they are not motivated to leave.

Raby: What the professional staff person wants is an environment that promotes maximum productivity. This gets into the collegiality of the atmosphere, the networking opportunities, the technological state of things. What we are doing is competing to make these people more efficient. They have to feel they are better off staying. The words "One day you will be a partner so kill yourself today" are becoming less and less meaningful, especially in the smaller firms. My question remains: Where are these people going to come from?

Grooms: Your question is timely because within five years every state is likely to require 150 semester hours just to take the exam. A lot of entrants will have master of tax degrees and move right on to the tax staff.

Thorsen: But the 150-hour requirement may well harm the master of tax degrees. There will be fewer hours in tax under a 150-hour requirement than currently with a bachelor's degree and a master of tax degree.

Computers in Tax Practice

CPAJ: The computer is radically changing tax practice currently in any number of ways. Where do you see it taking us?

Cameron: I think it is helping us to become more efficient, but a number of firms aren't keeping up with the technology available. Sufficient resources must be budgeted annually to keep up with the technological advances in software and hardware capabilities that proliferate each year. Without a commitment of dollars reinvested into the firm for hardware and software, a firm can fall quickly behind the technological bell curve.

Bullard: True. But achieving efficiency is best done by hiring computer expertise. The dumbest thing in the world for my firm to do would be to expect me to learn how to run my computer. By running I mean being involved with things such as maintenance, deciding which machine to purchase, how it should be configured, and what network it should be attached to. I use the computer all the time, and it's a great productivity tool, but I don't run it.

Raby: I wrote a piece in the Raby Report once to the effect that one of the stupidest things some of the law firms I work with have done is to eliminate secretaries. It's one thing to have a professional rough draft things and then turn it over to someone else to polish it up. It's another thing altogether to expect the professional to put out the perfect product that will go to the client. I have seen people take hours fine tuning something that should have taken twenty minutes to do in the first place.

Julian D. Berlin, Jr.: I see small and medium-sized CPA firms moving rapidly from the use of input sheets and a centralized key punch operation to staff keying in the returns. The review will be done on the computer. The result should be a very good trail of information for the reviewer to follow, but should result in more efficiency in the long run.

Tax Libraries

CPAJ: How do you see the tax library of the future: primarily books or electronic?

Weiner: I think you need both paper and computer at this point. Right now computer research tools are proliferating. After a while, I think it will level off and people will use both books and the computer. You just can't do a heavy research project staring at a computer screen. I intend to maintain computer and paper copies of the Tax Management portfolios and CCH service.

Raby: Many of the services will no longer be published. The cost of the printed service will just skyrocket. There is no earthly reason to keep letter rulings around. They are almost unworkable in their paper form and are a very useful tool when electronic research techniques are used.

Weiner: I did an informal survey of firms in our association (DFK/USA Inc.) on this subject that resulted in a Journal of Taxation article. There were 10 to 15 questions asked, the key one being, "Do you think print services will be around for five years, 10 years, forever for people over the age of 35." Most of the people answered 10 years.

Bullard: The one concern I have after I roll out electronic research tools for my firm is that it creates a false sense of security. If you were a bad researcher before, you remain a bad researcher, maybe even worse. There is one problem with all current electronic research tools. A letter ruling, revenue ruling, and a Supreme Court case all look the same on the screen. There is a good chance the people coming out of school today have not really worked with paper documents.

Raby: If that sort of handicap is a problem, a good research course would correct it.

Berlin: Most of the tax research in our firm is done by the principals or staff with experience. As the principals become more comfortable with electronic research, the paper product will be used less and less. The key is to familiarize the researchers with the use of the computer for research and then get them to commit using it.

Voluntary Tax Practice Review

CPAJ: The last topic I want to cover is the AICPA's Voluntary Tax Practice Review (VTPR) program. Bill Raby helped write it. Steve Pascarella's AICPA committee stewards it. Debbie's association of firms requires it of its members. Of what tangible benefit is VTPR?

Pascarella: The quality review and peer review programs were introduced in reaction to external pressures. Since their introduction, we have noticed an increase in quality and a decline in malpractice claims in the A&A area. When I talk to people about VTPR, they eventually ask what it will do for them. The answer is, if they really want to increase quality and reduce malpractice exposure throughout their practice, they need VTPR.

CPAJ: Debbie, I know that when your association initially made the decision to impose the tax practice review requirement on its members, you met some resistance. Have the doubters come around?

Cameron: I would say they have come around. They all know how to do it. None of the firms have dropped out of the association. And some of the skeptics have been won over. Personally I believe a program of peer review in a tax practice provides a wealth of benefit to firms that might otherwise live in a vacuum of "we have always done it this way." The synergism, provided by discussions with peers that are inherent in the VTPR process is invaluable to both the seasoned veterans and neophytes of a firm. Ideas are generated that enhance the value of the services that are provided to clients, increase the profitability of a practice unit, and enhance the quality and efficiency of the services that are provided. These benefits are good for the firms participating in such a program and for the profession as a whole.

Thorsen: The first year the VTPR program was developed, I took it and adapted it for internal use in our firm. I found it to be a good training device because our interoffice reviewers had to study good methods of practice in preparing to do reviews. Also, we used the review to educate the people in the practice offices. I have found it to be very, very helpful.

Pascarella: This was a project taken on by the AICPA to benefit smaller firms like mine. Larger firms have had tax practice review programs for years, where partners from other offices come in and look over how the tax practice is conducted. Smaller firms did not have that advantage. I ought to note there has never been an intent to impose VTPRs on smaller firms. A member vote would, I believe, be necessary to do that, and there have been absolutely no plans to take the issue to the membership and make VTPR mandatory.

Bullard: We have been conducting internal tax practice reviews for a number of years, and I am convinced that the day-to-day quality of our tax practice has benefitted. VTPR also adds a degree
of personal responsibility that is tough to do without some form of policing mechanism.

Berlin: When we were members of an association some years ago, I helped conduct a tax practice review, which was voluntary at that time, for one of the member firms. It was a positive experience not only for the firm but for the reviewers. We were able to give the firm suggestions not only in its tax procedures, but also in the area of marketing and billing. As we were winding up our review, the managing partner asked us to look over a number of returns prepared under the management of one of his partners with whom he had billing problems. He wanted to know what we would charge for the work. The other reviewer and I looked over the files and each arrived at an amount we would charge. In each case, our number was substantially more than what the clients had been charged. When we gave the managing partner our numbers, he exclaimed, "Damn, I just paid for your expenses.

Raby: This question of quality is an important one. Many times our concept of quality is tied to technical standards. But what we tried to build into the VTPR program, and it is clearly stated in the introduction, is the focus on the client. If we properly focus on our client's needs and expectations of us, through meaningful communications we will have a quality focus. But more important is that we will have a practice that is responsive to change. Our strength lies in our adaptability and our biggest asset is client confidence. I think quality in a tax practice means cultivating that client trust and confidence.

CPAJ: Well said. *

Julian D. Berlin, Jr., CPA, is a vice president with the accounting firm of Yount, Hyde & Barbour, P.C. Within the company, Berlin's responsibilities are in the income tax and estate tax areas. A past president of the Virginia Society of CPAs, he has served as a member of the Executive Committee of the AICPA tax division, chaired its Tax Forms committee, and served as a member of the Tax Practice Guides Committee

Steven M. Bullard, CPA, is the firm-wide director of tax services for Baird Krutz & Dobson in Springfield, Missouri. He is responsible for the firm's tax quality control programs. Prior to joining Baird Krutz & Dobson, he served in the national tax office of KMG Main Hurdman.

Debra Cameron, CPA, is the director of the tax department for Lehman, Butterwick & Company, P.C. in Denver, Colorado. Ms. Cameron has had extensive experience in real estate taxation. This experience has included the design of the economic and tax structure for syndicated partnerships organized to develop commercial and residential rental property and owner-occupied property. She is a member of the tax practice management committee of the Tax Division of the AICPA and Chairman of the Real Estate Committee of the Colorado Society.

William M. Grooms, PhD, CPA, operates his own firm in Columbia, South Carolina. A former partner of Ernst & Young LLP, Grooms has co-authored textbooks for Arthur Young and the IRS, as well as articles for Money and Inc. magazines.

Stephen E. Pascarella II, CPA, is the managing partner of Pascarella & Trench of Providence Rhode Island. Pascarella is a member of the AICPA Federal Tax Division and chairman of the Tax Division's Management of a Tax Practice Committee.

William L. Raby, PhD, CPA/PFS, CFP, is a retired partner of Deloitte & Touche and emeritus professor of accounting at Arizona State University, and a past chairman of the AICPA Tax Division. He publishes the monthly newsletter Raby Report on Tax Practice and writes weekly articles for Tax Notes. Mr. Raby has written eight books, including The PPC Guide to Successful Tax Practice.

Douglas P. Stives, CPA, is partner and tax department director of Curchin & Co. and past president of the New Jersey Society of CPAs. Stives is currently chairman of the Tax Communications Committee and a representative to Council of the AICPA. In 1993 he was a member of New Jersey Governor Christie Todd Whitman's transition team.

Richard D. Thornsen, CPA, is president of Richard D. Thornsen Ltd. and retired director of tax services for Charles Bailly & Co. He specializes in litigation support, business valuations, tax consulting, and financial and accounting consulting. Thornsen was also an adjunct professor in the graduate tax program at the University of Minnesota.

Alan E. Weiner, JD, LLM, CPA, is the senior tax partner in Holtz Rubenstein & Co., LLP. Mr. Weiner frequently lectures before professional and business organizations, has written for several local and national publications, is a former editor of the Federal Taxation column for The CPA Journal, and was named by Money Magazine as one of the nation's best tax practitioners. He is treasurer of the NYSSCPA

DECEMBER 1995 / THE CPA JOURNAL