American Institute of CPAs president and CEO Barry Melancon is warning of the backlog at the Internal Revenue Service that threatens to make this tax season a difficult one for tax professionals and their clients.
During an online meeting with the Accountants Club of America on Tuesday, Melancon described the impact of the cascade of increasingly threatening notices that the IRS has been sending out to taxpayers despite the ongoing pandemic as millions of pieces of correspondence go unopened.
On Monday, the IRS itself warned of delays this tax season due to the pandemic, as the IRS deals with employee staffing constraints, and the complexities of issues like the enhanced Child Tax Credit, even as it announced the season will nevertheless begin on Jan. 24 (
“The service area of the IRS is a huge problem for every one of the 44,000 firms because essentially all of them do tax work,” said Melancon. “It’s a huge problem for enrolled agents, it’s a huge problem for any other kind of tax preparer, and by the way it’s a huge problem for taxpayers. The level of service was not great pre-COVID. It has certainly gotten worse during the COVID environment, and there is not a lot of light at the end of the tunnel.”
There were more than more than 35 million unprocessed tax returns at the end of last tax season, according to the
However, the unopened correspondence and automated tax notices are making it difficult for taxpayers and tax practitioners to deal with the IRS, especially when the phone lines often go unanswered, even on the Practitioner Priority Service.
“We do believe there are some things the IRS can do to improve service issues,” said Melancon. “It’s not that the IRS is made up of bad men and women who want to do poor service. There are certainly long-term technology issues in play. There are certainly funding issues in play, but there are also some things that the IRS is doing that are continually self-inflicted wounds. For instance, the incredible backlog that exists and the inability or unwillingness of the IRS to turn off its penalty notice process, I call it the penalty machine, that just continues to generate penalty notices to taxpayers, thus affecting tax preparers, is just out of hand, and there is a huge backlog of responses. You can’t really get to them very easily on the phone to resolve issues, so it’s a written communication that grows into a backlog.”
The automated notices keep coming even if the tax preparer has written back to the IRS when the letter hasn’t been processed.
“Taxpayer responses are in the backlog and in the meantime more threatening notices have come out, and there’s just this whipsawing that goes along in this process that is very counterproductive to creating a better service element,” said Melancon.
The AICPA is backing a piece of bipartisan legislation in Congress that could help with the issue of penalty notices, and the AICPA is encouraging its members to contact their representatives about it.
“The first thing is that they have been unwilling to do away with the penalty notices as it has to do with this COVID environment,” said Melancon. “They all say there are abuses in this process and we don’t want to give a free pass to abusers. We all get that. But the vast majority of penalty notices are actually [going to] people who are well meaning. Our tax system is a voluntary tax system and the lack of service creates questions about people wanting to participate in the system in an honest and ethical way. COVID obviously created certain problems for people. So getting rid of all these penalties and just [generating] all these notices, yes, there is a revenue impact, but the fact of the matter is it’s really creating a backlog. So getting rid of those would clean up that process to a large degree.”
The AICPA would also like to have the IRS extend the amount of time for responding to the notices. “Typically a taxpayer’s account is put on hold for one week or two weeks until something can be cleaned up, materials and information provided, and the like,” said Melancon. “Well, that’s a problem. They ought to move to a 90-day period or something like that period of time because you can’t actually get the responses to the IRS in a one-week or two-week period of time because it all gets back to the backlog problem. If you don’t elongate those hold periods, then we’re not really fixing anything, or we’re not letting real problems get resolved in a meaningful way. And after a two-week period, notices, threats, all those things come into that process. Those two things would not fix the problem, but they would improve the problem.”
He is skeptical that the legislation will pass on its own unless it’s part of a larger legislative package. For now, the Biden administration’s Build Back Better Act appears to be stalled in the Senate, with Sen. Joe Manchin, D-West Virginia, refusing to lend his support in the evenly divided chamber, and with unanimous opposition to the tax and spending package from Republicans.
In the long-term, technology fixes may help the IRS, but that’s not going to improve the backlogs this tax season. “I get that it’s difficult managing the IRS in this situation,” said Melancon. “I have been publicly saying it’s probably the federal agency most impacted by COVID so we have respect for that and the commissioner’s work in that space, but they can take some steps to improve it. They have been unwilling to do so, and frankly Congress has been focused on a whole bunch of other issues. So that is the lay of the land. Just yesterday the IRS had a news conference and said be prepared, it’s going to be a terrible tax season. And what was missing from that was any elements of saying, well, these are some things we can do to make it less bad. Our proposals are not a panacea, but they do make it better. Implement those, IRS, and then I think we can start to see a bad tax-preparing season be a little bit more manageable.”
ESG issues
Melancon also discussed a number of other issues affecting the profession during his wide-ranging talk, including the recent move to establish an International Sustainability Standards Board under the auspices of the International Financial Reporting Standards Foundation, at the United Nations COP26 climate conference last November in Glasgow, Scotland. The Sustainability Accounting Standards Board and the International Integrated Reporting Council, which merged together last year to form the Value Reporting Foundation, have agreed to become part of the ISSB in June, as will the Climate Disclosure Standards Board (
The IFRS Foundation also oversees the International Accounting Standards Board, and the new ISSB will be sitting alongside the IASB. “It's going to have a multi-location approach,” said Melancon. “The International Accounting Standards Board is sited in London. That is not going to be the case with the Sustainability Board. There’s going to be a big footprint in the U.S., initially in San Francisco, which is where SASB was. There will be a big footprint in Montreal, there’ll be a footprint in the U.K., there will be a footprint in Frankfurt, Germany, and there will be an Asian footprint. And the notion of this is a market engagement and process to create a baseline of standards that are going to be used for accumulating data, reporting that data in a consistent, reliable way on sustainability, and ultimately that will be attested to. The integrated reporting concept will be a conceptual framework that sits over the two boards. So it’s not the accounting standards board that’s setting sustainability. They're going to be brother and sister boards sitting next to each other under the IFRS [Foundation] trustees to be an independent organization, to set accounting or sustainability standards that are measurable and ultimately consistent and reliable through attestation. That’s not going to all happen overnight, but there are going to be standards issued or at least exposures issued by this new ISSB in 2022, hopefully by the third quarter of 2022.”
Recruitment in the profession
Melancon also talked about the issue of attracting young people to the accounting profession and the need to provide more diversity and inclusion.
“Clearly, enrollments in accounting programs are down after more than a decade, almost two decades, of essentially full enrollment in accounting and accounting programs,” he said. “There are a couple of things that began to happen. In the couple of years preceding COVID, we actually had an excess supply over demand of accounting graduates and that demand coming from public accounting. Collectively, all of the public accounting firms in this country, about 44,000 of them, were hiring less than what was being produced out of the colleges and universities of this country. Clearly, you could get regional differences in that. And the primary driver of that was not firms hiring less people, but firms hiring different people. They were hiring data analytics and technology into their practices to a much different degree than they had previously done. Now what happens when demand goes down? Well, when demand goes down and it’s less than supply, salaries are affected, and salaries were affected at the entry level in our profession pretty dramatically because if they get basically frozen for a couple of years, then the market in other areas moved above that prior to COVID.”
Students found other professions more attractive when they heard the starting salaries would be higher. “You can find many examples of graduates with general business degrees or just management degrees or just marketing degrees getting paid entry-level salaries that exceeded offers from accounting firms in this country to accounting graduates,” said Melancon. “And that produced a dampening effect of people’s interest in accounting because for 20 years — and social media has an effect on this — the sort of hallway talk about accounting on the college campuses of this country was about if you want to be assured of getting a job in unpredictable job markets, if you want to get a good starting salary and you want to have likely strong employment for the rest of your careers, go get an accounting degree. Now that started to shift when the supply and demand equilibrium changed and also when salaries got out of sequence from the standpoint of starting salaries.”
To deal with the shortfall, the AICPA and the National Association of State Boards of Accountancy have developed a CPA Evolution initiative to update the CPA Exam and the accounting curriculum to make them more relevant and attractive to prospective students and employers.
“We have a significant amount of work to do to repair that pipeline as it relates to high schoolers coming into college [and their] interest in accounting,” said Melancon. “One of those elements is the technology component. We are evolving the definition of CPA, which we call CPA Evolution. This was approved in the early stages of COVID, both by the state regulators and the profession, to change the CPA Exam process to go to what we call a three plus one. It’s still a four-part exam, but three core education processes and then you pick one based on what you study.”
Melancon wants the profession to do more outreach to young people, especially in high schools. “This generation of young people will make their decisions very early, and part of it is the economic changes,” he said. “COVID has had an impact on it as well. We have major initiatives that we’re bringing forward and that are being piloted right now. It’s very important that working with the state CPA societies and firms, that role models, young professionals, are literally in every high school on career days and things of that nature multiple times, if possible, in this country.”
He cited the New York State Society of CPAs as one place where this is being done. “Firms need to support that process by making young staff available to be there as role models,” said Melancon. “The messaging has to be honed as to what’s really important. There’s some pilot testing on what’s the most important messaging to young high schoolers and what they want to major in that’s going on as we speak. It is going to be a very human capital challenge world. We are not alone. It feels like we’re alone because we’re only in the accounting profession. But each of the major professions, in different fact patterns, different job tracks are facing different challenges in these particular areas.”
The profession also needs to be more diverse to attract young people from varied backgrounds. “There are role models in our profession that are diverse and we need to have them be front and center, providing leadership environments or role model environments for them,” said Melancon. “One of the big issues we have, frankly, is that we need to make sure we have inclusive environments. We understand what inclusivity really means and that we actually retain the people that come into our profession. Because what happens is that minorities come into our profession, they get educated, let’s say, in a large firm or mid-sized firm. In getting experience, they become very attractive, monetarily and career wise, to many other people because other people are addressing diversity as well. And so retention becomes very, very important. And it’s one thing to retain people on the basis of economic reality. But if you don’t have an inclusive environment, it’s much easier for that person to leave. Everybody says they have an inclusive environment, but the reality is that inclusivity is in the eye of the beholder. It’s not in the eye of the person who thinks they have an inclusive environment. And the reality is that any type of entity, including accounting firms, is susceptible to not having nearly as inclusive an environment as they think they do. And I think active management of that is really, really critical. So keeping the people that we do attract is very important.”
Melancon was also asked about private equity and other investment firms buying stakes in accounting firms or acquiring parts of their practice, as recently happened with EisnerAmper, RSM US, Schellman & Co., and Warren Averett (
“It’s not a new phenomenon,” said Melancon. “It started in the late 1990s and 2000s. There were some flaws in some of those models and very few of those survived. I think this go-around, it’s about different technologies. It’s about diversification. The question we have before us is: is it about different opportunities for young people as well? And I think the structures are being done in a different way that at least changes the probability of success in that environment. You have to protect the independence of the audit and other independent service areas. Those firms are doing that in their design, and they obviously will. I think we’re going to see further consolidation in that space. Today, not counting the Big Four, we probably have nine or 10 firms right at a billion dollars of revenue. There’s this healthy next tier of firms. I think we’ll see even more cross that $1 billion level as the consolidation occurs and that produces more choice in the end in the economy and I think it produces very vibrant career opportunities.”
Overall, he believes there are opportunities ahead for the accounting profession, even as it deals with the many challenges of the pandemic. “I do think the profession has done extraordinarily well,” said Melancon. “We have lived up to our mission as trusted advisors. Whether we work with companies or whether we work with clients, to be really the go-to people to help millions of small businesses navigate unprecedented times. Small business, by and large, survived pretty well in today’s economy, and that relationship with CPAs as a trusted advisor is a really critical component to that. I think all members of the profession should be proud of that. I do think that when the history books about COVID are written, there should be a very significant chapter written about how important the profession was in helping making sure that the 6 million plus small businesses in this country were able to weather the storm, so to speak, because they are a very significant part of our economic prosperity.”
