I came across a great article online this week by Mark Murray, J. D., Tonya K. Flesher, CPA, Ph.D. and Dale L. Flesher, CPA, Ph.D. The article outlines the history of how the CPA came to be. Here’s a summary:
The First Taxes
No discussion of the milestones for CPA tax preparers would be complete without addressing tax software’s key role. Tax specialists took their first significant step into the technology era in the early 1960s and since then have continued to achieve new levels of speed, efficiency, information sharing, and collaboration with employees and clients alike.
The very first federal income tax laws was signed by President Abraham Lincoln in 1862 to help finance the Civil War. It was actually repealed several years later, after the war ended.
The next significant piece of legislation came in 1894 with the Wilson-Gorman Tariff Act. It imposed a 2% income tax to fund reductions in tariff rates. The Supreme Court later declared that tax to be unconstitutional because it violated the prohibition against unapportioned direct taxes.
The modern individual income tax law was enacted in 1913 after the 16th Amendment made unapportioned direct taxes legal. The Underwood-Simmons Tariff Act created a new income tax law that was designed to more fairly tax those across income brackets and geographic regions.
The Corporate Income Tax Act of 1909 was the first corporate income tax law. The American Association of Public Accountants (AAPA), a predecessor of the AICPA, objected to the law’s requirement that companies use a cash-based, calendar-year system, and campaigned to get the law changed in 1913 so that it made allowances for the accrual method and fiscal year. These 1909 and 1013 laws created a more widespread need for CPAs and created a market for tax-preparation specialists. Income taxes were still primarily paid by the wealthy however.
Taxes for All
the 20th century saw the monumental shift in income taxes being paid by the masses, due to World War I and World War II. The need to pay for World War I led to higher tax rates and an excess profits tax. World War II was even more significant. The existing tax revenues could not pay for the war effort, so the Revenue Act of 1942 was passed, which increased individual and corporate income tax rates. A year later, The Current Tax Payment Act requiremed that employers withhold taxes from their employees’ wages and pay them to the government.
In 1939, only about 5% of workers paid income tax. By the end of World War II in 1945, approximately 90% of American workers submitted income tax returns. Theh need for CPAs and tax preparation assistance had firmly solidified.
Once the Revenue Act of 1942 was passed, tax services were in high demand and people were starting to pay attention to the new market, including attorneys. CPAs had long outnumbered attorneys in the income tax preparation specialty, but attorneys now wanted in on the market. Attorneys declared that CPAs did not have the right to offer tax-preparation services and were, in fact, committing unlicensed practice of law.
The controversy lasted for more than 20 years, and the court system finally declared that both parties were allowed to continue offering the same range of tax-preparation services. In 1965, a law was passed that established that any person who is qualified to practice as a CPA may represent clients before the IRS or Treasury. Now that the controversy has settled, significant progress has been made in the relationship between CPAs and attorneys.
CPAs have always seen themselves as an advocate for their clients. As tax laws become more complex, CPAs saw their role not only as representing their clients and assisting them in filing their returns, but also in advising them. The need to respond to constant changes in tax law has made CPAs a valuable partner with their clients. CPAs set themselves apart by providing reliable and experienced guidance