Establishing quality control in a tax practice

By Joseph F. Scutellaro, CPA; Kathryn Clymer-Knapp, J.D., LL.M.; and Nick Preusch, CPA, J.D., LL.M.

When managing a tax practice in a CPA firm, one of the primary goals is to establish and comply with best practices by operating with due professional care. Tax practices come in all shapes and sizes, where best practices may be interpreted and implemented differently. However, whether a solo practitioner or a multipractitioner firm, all CPA tax practices are obligated to adhere to established quality-control and professional standards. Many firms accomplish this goal by implementing policies and procedures in a quality-control (QC) system that helps communicate the firm's best practices to partners and staff.

Treasury highlighted the need to establish and maintain a formalized system of quality control for tax services by first adding aspirational Section 10.33, Best Practices for Tax Advisors, in June 2005, to Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and then later adopting Section 10.36, Procedures to Ensure Compliance, in August 2011. The latter of the two relatively recent additions to Circular 230 places responsibility on the individual who has principal authority for overseeing a firm's tax practice (for Circular 230 purposes) to take reasonable steps to ensure that the firm has adequate procedures in place for all personnel to provide their tax services with the requisite measure of due care. Because Section 10.36 is an enforceable provision of Circular 230, a responsible individual may be subject to sanctions by the IRS Office of Professional Responsibility for any violations. These sanctions can include censure, suspension, a financial penalty, and even termination of rights to practice before the IRS (Circular 230, §10.50).

If the AICPA Code of Professional Conduct's "Due Care" rule (§0.300.060) and the provisions of Circular 230 are not enough to prompt a firm to implement a QC system, then professional liability risk may provide an additional incentive: Every year, 65% to 75% of CPA professional liability claims are related to tax services, and more than half of those tax-related claims relate to improper tax treatment or advice, according to statistics released by CNA Financial Corp. from 2012 to 2016. Unlike the relatively high thresholds applicable to Circular 230 sanctions (willful, egregious, etc.), the threshold for malpractice is the relatively low standard of negligence. Negligence is defined as the absence of due care (i.e., the lack of diligence), and due care in professional liability cases is often evaluated in accordance with AICPA standards.

TAX PRACTICE QUALITY CONTROL GUIDE

To help practitioners and firms in their quest to successfully implement best practices, the AICPA recently updated its Tax Practice Quality Control Guide, which includes a sample tax practice quality control (TPQC) document for its members.

The TPQC Guide focuses on six elements that are essential to any QC system: (1) leadership responsibilities for quality within a firm; (2) relevant ethical requirements; (3) acceptance and continuance of client relationships and specific engagements; (4) human resources; (5) engagement performance; and (6) monitoring.

A TPQC document should be the go-to source for tax personnel to understand their firm's basic workflow and system processes. These workflow and system processes help a firm to comply with the relevant ethical requirements while promoting an efficient and effective tax practice. That said, every firm's tax practice will have a slightly different composition of size, structure, and focus; therefore, as a way of making the TPQC system more flexible, a scalable TPQC document has been developed to assist firms with identifying the targeted areas above and providing more detailed considerations to be adopted by their own practice.

Ultimately, the goal of the AICPA's TPQC Guide is to assist firms in establishing a successful quality-control system within their tax practices, and to help members understand and implement the basic policies and procedures necessary to comply with relevant professional and ethical requirements, while also promoting efficient and effective tax practices.

For a detailed discussion of the issues in this area, see "Tax Practice Responsibilities: Best Practices for Firms to Promote a Culture of 'Due Professional Care,'" in the May 2018 issue of The Tax Adviser.

— Joseph F. Scutellaro, CPA; Kathryn Clymer-Knapp, J.D., LL.M.; and Nick Preusch, CPA, J.D., LL.M.


The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.

Also in the May issue:

  • A look at counterintuitive tax planning for scholarships.
  • An analysis of claiming casualty losses under Sec. 162 vs. Sec. 165.
  • A discussion of incorporating big data into the tax classroom.

AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year.

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