AICPA recommends tax reforms as Senate Finance Committee grills Treasury nominee

The American Institute of CPAs sent a set of tax reform recommendations to Senate Finance Committee chairman Orrin Hatch, R-Utah, as the committee held back-to-back hearings Tuesday morning on tax reform and confirmation of an Assistant Secretary of the Treasury who will be in charge of tax policy and came from a firm that promoted controversial tax shelters.

The AICPA’s comment letter Monday came in response to Hatch’s request last month for proposals for tax reform (see Hatch asks for input on Senate Republicans’ tax reform plan). The letter covered a broad range of tax reform topics, including individual and business income taxes, in line with a tax policy concept statement released earlier this year by the Institute. On the individual side, the AICPA suggested a simplified income tax rate structure, along with education incentives, “kiddie tax” rules, permanent disaster relief and other items. On the business tax side, the AICPA recommended reforms in areas such as tax rates for pass-through entities, compensation income, net operating losses, limitations on interest expense deductions and other matters.

On the international front, the AICPA recommended transitioning to a territorial tax system for corporate business income, developing effective anti-base erosion provisions, retaining and strengthening the subpart F provisions, and establishing administrable deemed repatriation procedures. In the savings and investment area, the AICPA recommended changing the required minimum distribution rules for retirement accounts, creating uniform rules for early withdrawal penalties, and modifying the hardship withdrawal rules, among other suggestions.

Cohn, Michael

During a tax reform hearing Tuesday, Hatch stressed his commitment to reforming the tax code. “There is no longer any question as to whether we should reform the tax code,” he said in his opening statement. “The only questions remaining are how and when. For this reason, we are engaged in a long-term effort to fix these problems. And, in my view, the momentum in favor of comprehensive tax reform is stronger now than at any point since the 1986 reform was signed into law.”

During the hearing, lawmakers heard from a panel of four former Assistant Treasury Secretaries for Tax Policy under the George W. Bush and Barack Obama administrations discussing tax reform.

They next held a hearing to consider the confirmation of David J. Kautter as the new official in that post. Kautter is currently a partner in charge of the accounting firm RSM’s Washington National Tax Office. Previously he ran American University’s Kogod Tax Center and also worked at Ernst & Young.

Sen. Ron Wyden, D-Ore., expressed some reservations about the nominee, pointing to his time at EY when the firm got into trouble over tax shelters.

“I have real concerns about work Mr. Kautter did during his time as director of national tax at Ernst and Young,” Wyden said during his opening statement. “The firm did big business setting up tax shelters for wealthy clients, and employees were convicted of fraud and obstruction for covering it up. E&Y also paid more than one hundred million dollars in settlements with the Justice Department and IRS over its tax shelter marketing. In the vetting process for this nomination, it became clear that Mr. Kautter was regularly informed of decisions that allowed E&Y to profit off tax gaming. Even if he had no direct role in the marketing of those tax shelters or in misrepresenting them to federal auditors, it remains troubling that he was at the top of a department that engaged in these practices at all.”

During questioning, Wyden pointed out, “As a partner at Ernst & Young, you benefited financially as the money poured in.”

“Senator, I was not involved in the decision to get involved in designing tax shelters, and I’ve never designed or drafted one myself,” Kautter responded, but admitted, “Every time I think about Ernst & Young’s activity in the tax shelter area, I wish I had done things differently.”

Wyden asked him what he would have done differently.

“At the time, the firm agreed to get involved in the tax shelter business, I was not the director of national tax,” said Kautter. “The firm set up a separate reporting structure with respect to tax shelters, which did not involve the director of national tax. When I took over, that was the system that was in place and continued until the tax shelter group was dissolved. It was not until later when I was designated the primary point of contact for the firm with the [Senate] Permanent Subcommittee on Investigations that I had a chance to really review in detail the email of that group. What I saw greatly disappointed me, and I felt members of the group abused the trust that the firm had placed in them. Looking back, I should have been more active. I think I should have played a bigger role. I think I should have been more vocal. I spoke up whenever I had the opportunity, but I did not speak up as forcefully as I wish I had, and I feel bad about that.”

Wyden pointed out that Kautter was CC’ed on many of the documents involved in the tax shelters.

Sen. Mike Enzi, R-Wyo., praised Kautter for his knowledge of the tax code and accounting. “It’s a thrill to have somebody who has hands-on accounting experience,” said Enzi.

Hatch defended Kautter’s work and pointed out that he had never been charged with any wrongdoing. “Let’s restate the facts,” he said. “One, for three decades David Kautter was a professional at Ernst & Young, and the committee has seen no evidence whatsoever that would call into question his honesty, his integrity or his good work there. Number two, the firm’s tax activities were the subject of Permanent Subcommittee on Investigations inquiry, including hearings and a report. No part of this inquiry found any hint of wrongdoing by Mr. Kautter or reflected negatively on him in any way.”

Kautter will be responsible for tax policy and reforms if he is confirmed.

“At Ernst & Young, I specialized in employee benefits and compensation, and witnessed firsthand the challenge of keeping American companies competitive internationally,” said Kautter in his opening statement. “Comprehensive tax reform is the challenge before us. The current code is unnecessarily complex, anti-competitive and picks winners and losers. Americans need a simpler system when filing their taxes and the middle class needs a tax cut. U.S. businesses need a tax code that allows them to prosper, domestically and in the international marketplace.”