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Legislative Update

Week Ending May 12, 2006

• Week in Review
• Political News & Notes
• May 16: Time to Go to the Polls
• PICPA Opposes Efforts to Weaken Peer Review
• Special Committee to Look at Interstate Practice
• AICPA Raises Concerns About Circular 230 Changes
• Electronic Filing Sets Record
• Countywide EIT Collection Gaining Momentum
• Tax Bill Goes to President
• U.S. Senate Debating Small Group Reform

Week in Review

The Capitol was quiet this week with many legislators camped in their home districts preparing for the May 16^th primaries. Newspapers are fraught with predictions, speculations, editorial commentary and candidate profiles in anticipation of a potentially landscape-altering election year. A major upset in one of a handful of high profile races is widely anticipated. Legislative Update will carry complete elections results next week.

Shots are still being volleyed across the aisle and between the chambers following last week's surprise announcement from the House that they would not be voting on property tax reform, as packaged in the report proposed by the joint legislative Conference Committee.

Political News & Notes

Rendell, Casey Hold Leads. Two different polls released this week gave Gov. Rendell and U.S. Senate candidate Bob Casey, Jr., reasons to be looking in their rearview mirrors. A IssuesPA/Pew and the Pennsylvania Economy League poll puts Gov. Rendell's support at 30 percent, with 29 percent for his opponent Republican Lynn Swann. A poll by Strategic Vision gave Gov. Rendell a 49 to 41 percent lead over Swann. The Strategic Vision poll also showed that likely Democratic U.S. Senate candidate, Bob Casey Jr., leads his opponent, incumbent Republican Sen. Rick Santorum, 49 to 41 percent. It wasn't the first time, and certainly won't be the last time this election year, that different polls showed different results.

May 16: Time to Go to the Polls

Pennsylvania's Primary Election takes place on Tuesday, May 16. As a reader of PICPA's Legislative Update, you are no doubt aware of the importance the results of this year's elections will have on the future of state government in Pennsylvania. There are 30 Pennsylvania "open" legislative seats - seats for which the incumbent is not seeking re-election - and another 63 state House and Senate primary challenges. Every vote counts, and now is the time to make your voice heard.

However, it is important to go to the polls informed. This can be difficult when there are so many candidates and so much subjective information in circulation. Primary candidates are listed on the Pennsylvania Prosperity Project (P-2) Web site. The P-2 site provides a picture and a brief biography for almost every candidate you'll find on the ballot on May 16 - simply click the "2006 Primary Election" tab on the left side of the homepage.

Remember, the polls open at 7 am and close at 8 pm. If you are unsure of your polling place, you can determine the location by visiting the state's Pennsylvania Voter Services Web site.

Make a difference by casting your vote on May 16!

PICPA Opposes Efforts to Weaken Peer Review

The PICPA is strongly opposing efforts to exempt CPA firms that perform five or fewer review engagements from the peer review requirement. The proposal would establish a dollar threshold for client engagements with $6 million or less in revenue.

The proposal is being drafted as an amendment to Senate Bill 251, the PICPA's proposal to revise and update the Pennsylvania CPA Law, which has not been amended since 1996. The PICPA does not support this provision for several reasons.

First, the CPA Law already contains several provisions to exempt some firms from peer review. CPA firms that perform only compilation engagements are not subject to the peer review requirements for relicensure. Also, the CPA Law exempts firms with less than three licensees from undergoing a peer review more frequently that once every five years.

Second, peer review statistics for the firms with less that three licensees that are not required to undergo a peer review more frequently that once every five years are disappointing. The AICPA peer review program issues four categories of reports - unqualified, unqualified with a letter of comment, modified, and adverse. More than 55 percent of these peer review reports are unqualified with a letter of comment or worse.

Lastly, and perhaps most importantly, professional standards for audits and review engagements have become more rigorous in the past few years as standard setting bodies to improve the audit and review process and to ensure accuracy of financial information. A further reduction to the already-mandated peer review requirement, when financial reporting standards are becoming more complex, would be counter-productive to the profession's commitment to quality service and transparency of financial information, as well as to the CPA Law.

Although some small firms across the state might look agreeably upon the proposed change, it is important to take the overall protection of the public into consideration. For example, it would not be reasonable to suggest excluding a surgeon from review because s/he only performs a handful of operations each year - it would be counter-intuitive, as s/he would be the individual least practiced and most in need of a review. Similarly, PICPA values the use of peer review as a tool to assess our members and ensure the safety of their clients.

The PICPA urges members to contact the Government Relations Team with your thoughts on this issue.

Special Committee to Look at Interstate Practice by CPAs

The AICPA has created a new volunteer committee to identify unnecessary burdens and requirements that do not contribute to protecting the public interest and block CPAs from easily practicing across state lines.

Under the "substantial equivalency" concept, which was developed by the AICPA and the National Association of State Boards of Accountancy as part of the Uniform Accountancy Act (UAA), CPAs with a valid license from a state with CPA licensing criteria that are "substantially equivalent" to those outlined in the UAA can practice in another state without obtaining a license from that state. However, "substantial equivalency" is not working as effectively as was envisioned because many of the 34 states that have enacted it have modified the provisions to fit their states' own unique policies, diluting the impact of the UAA provision.

Senate Bill 251, legislation amending the Pennsylvania CPA Law, would provide for substantial equivalency. The PICPA is urging the House Professional Licensure Committee to report the bill, which passed the Senate last year by a vote of 50 to 0.

AICPA Raises Concerns About Circular 230 Amendments

The Treasury Department and the IRS have proposed amendments to Circular 230, the regulations governing practice of certified public accountants, attorneys, enrolled agents, enrolled actuaries, and appraisers before the IRS, to generally enhance standards of tax practice for all tax practitioners.

The AICPA has a longstanding track record of establishing high professional standards for our CPA members, including the AICPA Code of Professional Conduct and our enforceable Statements on Standards for Tax Services (SSTSs). These standards provide meaningful guidance to CPA members in the performance of their professional responsibilities. These standards also provide the foundation for many states' ethical rules for CPAs which, as a practical matter, extends the application of our rules to many CPAs regardless of AICPA membership.

While the AICPA supports the goals of the Treasury and IRS in revising practitioner standards, the proposed changes reflect a lack of balance that may undercut both the goal of enhanced standards and compromise fundamental fairness. The proposed regulations also create additional grounds for sanction without any explanation of why the additional provisions are necessary or when they might be satisfied in a particular case. The net effect of these changes, if adopted without elaboration or examples, unfortunately may be to unnecessarily subject practitioners to discipline and sanction. 

Electronic Filing Sets Record

Forty-eight percent of all taxpayers now file their state income taxes electronically, according to the Department of Revenue. More than 2.7 million taxpayers, or nearly half of all individual taxpayers, filed their 2005 state personal income tax returns electronically this year, setting an all-time record for electronic filing.

Taxpayers who file using an electronic method can have their refund deposited directly into their bank account or pay a balance due electronically. This tax season, more than 491,000 taxpayers chose to directly deposit their refund; about 172,000 chose to pay their taxes using the ACH debit/credit option; and more than 22,000 chose to pay their taxes by credit card.     

Countywide EIT Collection Gaining Momentum

On Wednesday, May 10, PICPA was invited to participate in a meeting to discuss proposed legislation that would consolidate and reform the current process of collecting the earned income tax collection system. The Department of Community and Economic Development's Governor's Office of Local Government Services (DCED) proposal would reduce the number of EIT collectors from 560 to 66 with a countywide or regional system.

Last year, Rep. Gordon Denlinger, CPA, introduced House Bill 1427, which was based upon the recommendations found in a report released by DCED in September 2004. HB 1427 would require consolidation of collection at the school district level; strengthen auditing and reporting requirements; and require that DCED establish uniform rules and regulations, including standard forms and returns. House Bill 1427 is currently pending in the Senate Finance Committee.

The DCED amendment requires uniform withholding of income taxes and remittance to a single local collector, uniform process for distributing and tracking income tax monies, and changes to the EIT Register. The proposal could be offered as an amendment to HB 1427.

Tax Bill Goes to President

The U.S. House and Senate passed a $70 billion tax reconciliation package-H.R. 4297. President Bush is expected to sign the bill into law.

The two largest pieces of the bill are an extension of the lower tax rates on capital gains and dividends through 2010 and an extension of the alternative minimum tax (AMT) protection.

The bill costs $70 billion over five years and $69 billion over 10 years due to some revenue offsets viewed with concern in the business community, including a paring back of export tax repeal benefits enacted two years ago, and a housing exclusion for U.S. taxpayers working abroad.

U.S. Senate Debating Small Group Reform 

The U.S. Senate began debate this week on legislation to allow Small Business Health Plans (SBHPs), but had to sideline the debate to consider the $70 billion tax reconciliation conference report.

The bill (S. 1955) would allow trade and professional associations to pool their members together across state lines to purchase group health coverage, increasing their buying power and lowering the cost of health insurance for small businesses and their employees. The bill would also create uniformity among the various state health insurance regulations, while maintaining state oversight and administration of insurance for new SBHPs.