Professional Issues Webcast

1. Professional Issues Webcast Fred Timmons, TSCPA Chairman John Sharbaugh, TSCPA CEO Bob Owen, TSCPA Managing Director, Regulation & Legislation

2. The 83rd Texas Legislature TSCPA Results

3. What a Difference 2 Years Makes • Money to spend • More new legislators • More conservative legislators • More bipartisanship • Republicans in charge, but more benevolent • Democrats still opposed, but less disruptive • House vs. Senate distrust

4. TSCPA Legislative Agenda • Changes to the Accountancy Act • SDSI Sunset Renewal • Margin Tax Recommendations • Oppose Sales Taxes on Professional Services

5. Accountancy Act Changes • Senate Bill 228 (House Bill 608) • Authored by CPAs Sen. Williams and Rep. Otto • Strengthen accountant-client privilege by requiring a judge to sign a subpoena • Make an exception to client confidentiality for PCAOB, Texas Securities Act and practice merger or acquisition negotiations • Strengthen investigation confidentiality, including changes to the Texas Open Meetings Act • Repeal exam provisions no longer relevant to the current computerized examination process • Repeal the prohibition against waiver of fees and penalties

6. Progress to Passage • Cleared Senate committee Feb. 5th • Passed Senate Mar. 13th • Cleared House committee Mar. 19th • Passed House Apr. 25th • Sent to the governor May 1st • Signed by the governor May 10th

7. SDSI Sunset Renewal • House Bill 1685/Senate Bill 208 • Authored by Rep. Price and Sen. Whitmire • Fifth-year scholarship issue • SDSI Reforms – modeled after TSBPA • House committee hearing March 26th • Passed House committee April 2nd • Passed House April 23rd • Passed Senate committee April 30th • Passed Senate May 9th • Signed by the governor May 24th • Effective date September 1st

8. THE BONUS TSBPA SUNSET POSTPONED UNTIL 2019! Sunset Model Development

9. Bill Monitoring “Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.” From Pericles (430 BC)

10. Bill Monitoring • 1,047 bills reviewed • 514 bills monitored • Bill monitoring process • Legislative Advisory Executive Committee • Bill intervention – Key Persons

11. Monitored Bill Action • HB 1756 by CPA Stephenson – Eliminates peer review for Compilations and restricts what TSCPA can charge non-members • Committee hearing • Died in committee • HB 1757 by CPA Stephenson – Mandates two solo practitioners on TSBPA and requires all CPA positions on the board to be CPAs in public practice • No committee hearing – died in committee

12. Monitored Bill Action (Cont’d) • HB 3488 by Burkett – GAAP exception for governments – died in committee w/o hearing • SB 176 by Carona to require public disclosure of all reports by state agency contractors – fixed and passed • HB 798 by Thompson to prohibit licensing agencies from denying a license due to a Class C Misdemeanors – passed

13. Monitored Bill Action (Cont’d) • HB 87 by Callegari that would give non-certified and non-licensed accountants the opportunity to practice accounting • We opposed and testified against at the hearing • We worked with Callegari on extensive revisions • Revisions were not completely satisfactory • Bill voted from Committee • We agreed to disagree • Bill died in Calendars

14. Other Stuff • Infrastructure: water runs; roads blocked • Public education – funding and fundamentals • Gun bills were debated all day on Saturday • Prohibiting Medicaid expansion • Texting while driving ban – died in the Senate • Transparency for political groups – Perry veto • Gambling loses again • Craft beer distribution liberalized • Payday lending regulation defeated

15. The Important Stuff • Pecan pie is the official State Pie of Texas • Feb. 16 is Texas Homemade Pie Day • Peach Cobbler is the official State Cobbler of Texas • Shamrock St. Patrick’s Day celebration is the official St. Patrick’s Day Celebration of Texas • Nacogdoches is the official Garden Capital of Texas • The City of Canton is the Walking Capital of Texas • The Small Town Christmas celebration in Bellville is the official Small Town Christmas Event in Texas • The first week in May is Texas Bison Week • Gregg County is the Balloon Race Capital of Texas • The Kemp’s ridley sea turtle is the official State Sea Turtle

16. CPAs on Capitol Hill AICPA Council Meeting May 19-21, 2013 Washington, D.C.

17. Texas Council Delegation • Currently 15 TSCPA members serve on AICPA Council • One of the largest Council delegations in the country • Council normally meets in full session twice a year in the Spring & Fall • Every other year the Spring Meeting is held in Washington, DC and Council members conduct visits with their Members of Congress • Our group met with 24 Congressional offices during our two days

18. This Year’s Issues for Hill Visits • Tax Reform • Federal Financial Responsibility • Mobile Workforce State Income Tax Simplification • Tax Return Due Date Simplification • Amending Municipal Advisors Registration Requirements • Texas specific item – TSCPA Federal Tax Policy Committee’s Analysis of proposals to repeal tax treatments of domestic oil and gas exploration & development

19. Tax Reform Guiding Principles of Good Tax Policy

20. Tax Reform • AICPA and TSCPA do not take a position on what is the “best solution” for reforming the federal tax system • We aim to provide unbiased facts and analysis to foster informed discussion • We have consistently supported tax reform simplification efforts because we are convinced it will significantly reduce taxpayer’s compliance costs, encourage voluntary compliance through an understanding of the rules, and facilitate enforcement actions

21. Guiding Principles of Good Tax Policy • Equity and fairness. Similarly situated taxpayers should be taxed similarly • Note: Equity is best measured by considering a range of taxes paid, not by looking just at a single tax • Certainty. Tax rules should clearly specify when and how a tax is to be paid and how the amount will be determined. Certainty may be viewed as the level of confidence a person has that a tax is being calculated correctly • Convenience of Payment. A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer • Economy of calculation. The costs to collect a tax should be kept to a minimum for both the government and the taxpayer • Simplicity. Taxpayers should be able to understand the rules and comply with them correctly and in a cost-efficient manner

22. Guiding Principles of Good Tax Policy • Neutrality. The tax law’s effect on a taxpayer’s decision whether or how to carry out a particular transaction should be kept to a minimum • Economic growth and efficiency. A tax system should not impede productivity but should be aligned with the taxing jurisdiction’s economic goals • Transparency and visibility. Taxpayers should know that a tax exists, and how and when it is imposed on them and others • Minimum tax gap. A tax should be structured to minimize noncompliance • Appropriate government revenues. A tax system should enable the government to determine how much tax revenue it likely will collect and when—that is, the system should have some level of predictability and reliability

23. What's at Stake? The U.S. Government’s Financial Statements and the Country's Fiscal Health

24. The role of CPAs • Serve as trusted advisors to a variety of organizations • Help businesses and individuals achieve strong financial standing • Protect the public interest • Explain complex financial issues

25. Federal budget

26. Federal financial statements

27. 2012 financial statements

28. 2012 financial statements

29. U.S. financial statements differ from other organizations • Most financial statements show obligations or liabilities on balance sheet • U.S. government’s financial statements do not include Social Security and Medicare • Footnote disclosures • Not reflected as liabilities

30. Reality of Future Obligations These Future obligations equal: Additional social insurance deficit - $52 trillion Cumulative deficit - $16 trillion Total Deficit - $68 trillion

31. Key data in publicly traded company’s financial statements

32. Accumulated federal deficit $16.1 $14.8 $13.5 $11.5 In trillions 2009 2010 2011 2012

33. Resources for the Public

34. Federal Tax Issues

35. Tax Preparer Registration with IRS

36. Court Rules Tax Preparer Registration Invalid • IRS began an initiative in 2009 to require tax return preparers to register, prove their competency and take CPE to maintain their registration • Also required all tax return preparers to obtain a PTIN (Preparer Tax Identification Number) and provide it on returns they prepare • AICPA, TSCPA and other state societies lobbied to have CPAs exempted from the testing and CPE provisions of the new registration scheme

37. Court Overrules IRS • In January, a federal judge in the U.S. District Court for the District of Columbia granted a permanent injunction to stop the IRS tax return regulatory program • Suit was filed by three independent tax preparers from Chicago, N.J. and Wisconsin and the Institute for Justice, a conservative civil-liberties advocacy group • They accused the IRS of enforcing the requirements without Congressional approval • The Court agreed with the plaintiffs and said the program affected their livelihood

38. IRS Appeal Fails • IRS appealed the decision to the United States Court of Appeals • But in March the District of Columbia Circuit Court of Appeals three-judge panel upheld the earlier decision • So the mandatory testing and CPE components of the program are suspended, although preparers could pursue those on a voluntary basis • The registration piece is still in place so all paid tax return preparers (including CPAs) still need to have a PTIN • IRS is appealing again, but there has been no court date set and this process will take time

39. Legislation Proposed • H.R. 1570: Taxpayer Protection and Preparer Fraud Prevention Act of 2013 introduced on 4/15/13 in U.S. House by Rep. Cedric Richmond (D – LA) • Basically would give the Secretary of the Treasury the authority to license and regulate tax return preparers • No co-sponsors and not much chance of passing

40. Mobile Workforce Legislation

41. Mobile Workforce Legislation • Provides a 30-day threshold before a state may impose a tax on, or require withholding from, the wages of nonresidents working in the state • TSCPA, AICPA and other state CPA societies are supporting this legislation • Legislation in the last Congress had support and was passed in the House but did not get passed in the Senate • Then Senator Kay Bailey Hutchison was the lead Republican sponsor in the Senate last year

42. Legislation Back This Year • HR 1129 – same legislation as last year has been introduced by Reps. Howard Coble (R-NC) and Hank Johnson (D-GA) • Rep. Blake Farenthold (R-TX) and Rep. Steve Stockman (R-TX) are co-sponsors • We expect Senator Sherrod Brown (D-OH) to reintroduce legislation in the Senate sometime soon • TSCPA sent letters a few weeks ago to Texas House members • We are hopeful that this legislation will pass this year

43. Tax Return Due Date Simplification

44. Tax Return Due Date Legislation • The delivery of K-1 Schedules close to tax return filing deadlines makes it nearly impossible for taxpayers and their tax advisers to prepare and file timely, accurate returns  • Schedule K-1 information is a component of millions of tax returns of individuals, S and C corporations, trusts, estates, partnerships and other entities • Taxpayers and their CPAs need the information included in the Schedules K-1, which are issued by partnerships, S corporations, some trusts and estates, so that the owners and beneficiaries can file personal and business tax returns  • However, the information returns often arrive just days before either the original or extended return due date

45. House & Senate Bills • Legislation in the Housed and Senate last Congress but was not successful • Reintroduced again this year • H.R. 901 sponsored by Rep. Lynn Jenkins (R-KS) and S. 420 by Sen. Mike Enzi (R-WY) • TSCPA and AICPA are working to see this legislation passed • TSCPA sent letters requesting from Texas members of Congress • Rep. Mike Conaway (R-TX) and Pete Sessions (R-TX) are co-sponsors

47. Marketplace Fairness Act

48. Marketplace Fairness Act • Senate Bill S. 743 passed recently • Will have a tougher time in the U.S. House (H.R. 684) • Grants the states the authority to compel online and catalog retailers, no matter where they are located, to collect sales tax at the time of a transaction • States must simplify their sales tax laws • There is an exemption for small businesses with less than $1 million a year in online sales.

49. States Must Simplify • Two options for simplifying their sales tax laws: • Join the 24 states that have already voluntarily adopted the Streamlined Sales and Use Tax Agreement (SSUTA) (note: Texas is not currently part of SSUTA); • or • meet five simplification mandates listed in the bill. They are: • Notify retailers in advance of any rate change within the state; • Designate a single state organization to handle sales tax registrations, filings and audits; • Establish a uniform sales tax base for use throughout the state; • Use destination sourcing to determine sales tax rates for out-of-state purchases; • Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.

50. Bi-partisan Support • The legislation has bipartisan support, including sponsorship from: • 96 members of Congress (30 senators and 66 representatives) • 27 governors (15 Republican, 11 Democrat and one Independent) • Large number of national and state trade associations including the Texas Retail Association • Businesses of all sizes, including Amazon and Wal-Mart