How tax practice standards affect CPAs

As business and regulatory environments have become more complex, many CPAs have focused their practices heavily or solely on one area, such as business consulting, financial and managerial accounting, tax matters, or information technology and analytics. As professional standards in these discrete areas (e.g., reporting standards, tax rules, etc.) become more complex, however, practitioners who focus primarily on one type of service (e.g., accounting services) might not perceive the risks inherent in providing limited services outside their focus area.

The AICPA recently significantly revised its Statements on Standards for Tax Services (SSTSs) (discussed more fully below). The authors were part of the process that led to these changes. It is important for all CPAs who are subject to the standards to become aware of the expectations that the revised standards impose. However, there is a risk that CPAs who only occasionally deal with tax matters in their practices might dismiss these important changes as irrelevant.

This article summarizes the changes to the SSTSs but does not discuss them in depth. Instead, it suggests practice situations that may not normally be top of mind in a practice but are governed by AICPA and other tax standards. The objective is to increase awareness about the impact of tax-related professional and regulatory standards on providing those professional services.

For a recent article that addresses the SSTS revisions more fully, see Luis Plascencia, “Understanding the Updated Tax Ethical Standards,” 54-11 The Tax Adviser 34 (November 2023). Two earlier articles by David J. Holets, “Proposed AICPA Tax Standards Address New Concerns,” 234-6 Journal of Accountancy 30 (December 2022) and “AICPA Finalizes New Standards on Tax Positions,” 54-8 The Tax Adviser 44 (August 2023), discussed the revision project and the proposed changes prior to approval by the AICPA Tax Executive Committee (TEC).

THE SSTSs AND AICPA RULES OF PROFESSIONAL CONDUCT

These revised SSTSs became effective Jan. 1, 2024. The revisions were developed over several years by both the Tax Practice Responsibilities Committee (TPRC) and a designated task force. Once the task force and TPRC completed their work on the proposals, there was a public comment period, followed by revisions in response to the comments received. The TEC provided input throughout the process and on May 18, 2023, approved the proposed revisions.

The SSTSs were first adopted as enforceable technical standards effective Oct. 31, 2000. At its Oct. 19, 1999, fall meeting, the AICPA Council designated the TEC as a standard-setting body, authorizing it under the “General Standards Rule” (ET §§1.300.001 and 2.300.001) to “promulgate professional practice standards with respect to tax services” as part of the AICPA Code of Professional Conduct (AICPA Code). The TEC developed proposed enforceable SSTSs in the ensuing year, based substantially on the existing Statements on Responsibilities in Tax Practice (SRTPs).

The SRTPs were adopted and revised between 1964 and 1991 to be used as voluntary guidelines for CPAs engaged in tax practice. In the ensuing decades, the types of tax-related services offered by CPAs expanded significantly beyond compliance services at larger firms and gradually by smaller practice units. However, when developing the SSTSs, the TEC determined they should substantially retain the approach of the SRTPs and not create additional disruptions to the norms developed since the mid-1960s.

Tax practitioners and AICPA tax leadership (both volunteers and staff) noted a strategic shift in tax practice from primarily compliance-oriented services to include significant tax-based consultative and planning services. Expanding service offerings, evolving market conditions, international economic conditions, challenges to cybersecurity, growth in legal exposure for tax engagements, increasing complexity in tax law, and other forces led to the realization that, to protect the public and provide increased professional guidelines for tax service providers, changes to the core focus of the SSTSs were needed since they had become enforceable in 2000.

It is important to emphasize several points:

• The authorization by Council of the TEC to promulgate “professional practice standards” as part of the “General Standards Rule,” and the shift in terminology from “responsibilities in tax practice” to “standards for tax services,” clarified the standards the TEC adopted as applying to all practitioners to whom the AICPA Code applies.
• The professional practice standards apply to both members of the AICPA in public practice (ET §1.300.001) and to those in business (ET §2.300.001). They also apply to nonmembers of the AICPA who are licensed CPAs in a licensing jurisdiction that has adopted or incorporated the AICPA Code as its state-level code of conduct (see the sidebar, “State Boards of Accounting Ethics Rules,” at the end of this article).

The most recent revisions to the SSTSs retain much of the standards established in the original and previously revised SSTSs. However, significant changes and additions have been made. Revisions to the existing SSTSs include:

• Clarifying the term “tax position” and specific applications to both compliance and advisory services;
• Reiterating the requirements to exercise due diligence and professional judgment in advising on tax positions;
• Restating the CPA’s right to be an advocate for the client’s position;
• Reiterating the responsibility to advise taxpayers of potential penalties related to tax returns and processes to avoid such penalties;
• Restating the responsibility to advise a client not to rely on “audit lottery” considerations in taking a position; and
• Explaining the ability to rely on positions reached by others, including the client. New standards were added that govern data protection, reliance on tools, and representation services. The data protection standard covers:
• Responsibility to take reasonable steps to safeguard taxpayer data, both in storage and transmission; and
• Importance of compliance with applicable privacy laws in collecting and storing client data. The standard governing reliance on tools says:
• While exercising professional judgment, a CPA may rely on tools (e.g., tax preparation software, databases, tax research databases and programs, expert systems, and artificial intelligence).
• Reliance on tools does not absolve a CPA of professional obligations under AICPA or other ethical standards.

The standard on representation services does not replace the need to comply with Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10) (see below the section “The IRS and Circular 230”), but provides similar standards for representation of clients in nonfederal jurisdictions. Basic standards include:

• Technical competence in the subject matter;
• Compliance with professional and regulatory obligations in representing the taxpayers;
• Integrity and professionalism in all matters of representation;
• After consultation with the client and considering any possible privilege defenses, timely provision of relevant requested information to the taxing authority;
• Evaluation of the client’s behavior to determine if there is a risk the behavior is fraudulent or criminal and, if so, providing advice to the client to retain legal counsel; and
• Review of documents, calculations, representations, and other matters detailing the results of the examination.

Regarding “tax positions,” the new standards add definitions (in the Preface) for “taxpayer,” “tax position,” and “member.” The definition of “tax position” includes the concept derived first from the SRTPs and then from the existing SSTSs that a position is reflected on a tax return on which the member has advised a taxpayer.

A second part of the “tax position” definition, however, broadens the scope of “position” to a matter “about which a member has knowledge of all material facts” and has concluded, based on those facts, “whether the position is appropriate.” The revised SSTSs, as approved, do not contain revisions to the existing two interpretations. It is anticipated that additional working groups will determine the need to revise the SSTS interpretations and propose new formal interpretations as well as to prepare informal guidance and FAQs to assist members in applying this new tax position standard. Members who are interested in participating in developing interpretations and FAQs may contact Henry Grzes, lead manager — AICPA Tax Practice & Ethics.

In addition, expanded guidance will be needed to further explain the scope of the three new standards. Comments received during the exposure period should provide a starting point for working groups to develop either interpretations or FAQs to assist members in complying with these standards.

These standards, however, do not stand alone in a vacuum. Besides the SSTSs, members performing tax services must also look to other binding rules and guidance on ethical tax practice from statutory and administrative federal sources and coordinate their requirements with the AICPA standards. These sources include the Internal Revenue Code and Circular 230.

THE IRS AND CIRCULAR 230

Circular 230 (revised June 12, 2014) creates rules of conduct that apply to certain covered tax professionals (CPAs, attorneys, enrolled agents, and others) who represent a taxpayer before the IRS. The scope of practice covered by Circular 230 is very broad and includes “all matters connected with a presentation to the [IRS] . . . relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the [IRS]” (Circular 230, §10.27(2)).

Circular 230 does not grant the IRS authority to regulate tax return preparers (see Loving, 742 F.3d 1013 (D.C. Cir. 2014)). However, Circular 230 regulates representation activities, including preparing and filing documents, correspondence and communications, representation at conferences and meetings, and written advice with respect to a transaction, plan, or arrangement “having a potential for tax avoidance or evasion” (Circular 230, §10.2(4)). Circular 230 imposes a variety of duties on covered professionals, including diligence, competence, avoiding conflicts of interest, prompt disposition of matters, return of client records, and adhering to best practices.

The IRS had attempted to include otherwise unregulated tax return preparers under Circular 230 until the court in Loving concluded Congress had not given the Service authority to extend its scope of oversight. Unless Congress grants the IRS that authority, tax return preparers who are not covered by Circular 230 should consider much of its guidelines and restrictions as nonbinding best practices regarding their tax return preparation behaviors.

Neither the SSTSs nor Circular 230 distinguishes between CPAs in public practice and CPAs in industry and not-for-profit organizations (the AICPA Code has parallel sets of standards for CPAs in both public practice and industry). The risk for CPAs who do not normally provide tax services is that their work product may be related to representing a taxpayer in a particular tax matter. A related risk is that the authority of the IRS under Circular 230 extends to all matters under laws or regulations administered by the IRS. Since the IRS is the major collection point for most federal taxes, there could be Circular 230 exposure for CPAs who represent taxpayers in payroll tax matters or Medicare filings, or are involved in filings related to unemployment taxes, the employee retention credit, retirement plans reporting (e.g., information returns such as Form 5498, IRA Contribution Information), and excise tax matters, among others.

FEDERAL STATUTORY RULES

CPAs signing tax returns as preparers (e.g., “a person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or claim for refund of tax under the Internal Revenue Code” (Regs. Sec. 301.7701-15(a)) sign the return in the jurat section, where they generally attest that, under penalties of perjury, to the best of their knowledge based on information known to them, the return is “true, correct, and complete.” Any failure to meet this standard could result in tax return preparer liability under Sec. 6694. These penalties are based on an understatement of tax.

The preparer liability exposure does not exist just for income tax Form 1040, U.S. Individual Income Tax Return, and Form 1120, U.S. Corporation Income Tax Return, but extends to many other tax returns and forms, including exempt organization returns, estate and gift returns, employment tax returns, and various excise tax returns. Specific responsibilities to clients for tax compliance work are provided in Sec. 6695. This section creates penalties for failing to sign returns, provide taxpayers with copies of the returns, and similar matters. Fines are imposed on a per-violation basis — i.e., failing to provide a copy of the return to the client results in a $60 penalty per occurrence.

The IRS does not provide a definitive listing of the returns covered by Secs. 6694 and 6695, but a good starting point is Rev. Proc. 2009-11. Section 3 of that revenue procedure lists returns subject to Sec. 6694 penalties, and Section 4 lists those to which Sec. 6695 applies. In addition to income tax returns and information returns (such as Forms 1065, U.S. Return of Partnership Income, and 1120-S, U.S. Income Tax Return for an S Corporation), the revenue procedure lists estate and gift tax returns, employment tax returns, and numerous excise tax returns, among others. For more guidance on preparer penalties, see Bolt and Plummer, “The Preparer Penalties of Sec. 6694 and 6695,” 48 The Tax Adviser 118 (February 2017).

Sec. 7216, enacted as part of the Revenue Act of 1971, P.L. 92-178, imposes financial penalties and possibly incarceration for the knowing or reckless disclosure or misuse of certain information. Responsible parties include any person who is in the business of preparing income tax returns or who provides services to someone else in connection with the preparation of income tax returns, or anyone who for compensation prepares an income tax return, regardless of their trade or business status (see Pittman and Williford, “The Many Implications of Sec. 7216,” 55-1 The Tax Adviser 36 (January 2024)).

The information received must be related to the preparation of the tax return, and a violation can occur if the information is used for a purpose other than tax return preparation. There is no liability under Sec. 7216 for disclosures required by another IRC section, pursuant to a court order, used for estimated taxes and state and local tax returns, and (pursuant to regulations) disclosed with permission from the client.

Some possible scenarios to which Sec. 7216 could apply are:

• Disclosure of tax return information to a specific financial planning or investment firm;
• Use of tax return information to solicit and facilitate health care enrollment services;
• Disclosure of tax return information to a foreignbased preparer; and
• Use of tax return information by the preparer to disseminate firm newsletters, press releases, webcasts, and hiring announcements (other than distributions that focus only on tax return preparation and related tax planning or accounting matters) to individual clients.

APPLICATION OF SSTSs IN OTHER SITUATIONS

As stated earlier, the SSTSs may become relevant even when members might not think of themselves as providing tax services. These activities could include:

• A&A engagements: CPAs engaged to provide accounting and auditing (A&A) services often find themselves proposing A&A adjustments that would lead to knowledge of error that could affect a previously filed tax return. Practitioners should turn to the guidance in the SSTSs as they advise clients on amended tax return situations.
• Natural disasters: The world is besieged with natural disasters at an alarming rate. In the United States, floods, fires, mudslides, hurricanes, tornadoes, ice, and winter storms are just a few that affect virtually every state. The SSTSs provide the only authoritative tax guidance when relevant books and records are destroyed and the use of estimates is the only alternative.
• De minimis tax engagements: Many practitioners may not consider themselves tax practitioners if they generally provide A&A work, advise on valuations, or consult on specific business operations, etc. However, a client might ask the CPA to prepare an occasional federal or state tax filing. CPAs should understand that the SSTSs do not provide de minimis allowances. The preparation of one tax filing, or advising on one tax return position, invokes responsibility to follow the SSTSs.
• “Informal” advice: CPAs should be careful when clients seek an “informal” position. For example, if a client seeks advice regarding the tax ramifications of buying versus leasing a car or large equipment, the CPA can have that conversation — even on the phone — but it is critical that the CPA follows the guidance of the SSTSs. It is also important in informal situations that CPAs consider documenting the conversation through a follow-up letter, email, or notes to the client file.

CONCLUDING THOUGHTS

The revised SSTSs, effective Jan. 1, 2024, recognize the evolution of tax services and the increasingly complex business environment in which CPAs provide services to clients. The shift in emphasis in the standards from the historic compliance-based “tax practice” to the broader “tax services” language also creates an enhanced scope of ethical inquiry by CPAs.

Not only must members analyze whether potential general ethical issues are present under the AICPA Code relating to the service being provided, they also must analyze the service through an additional lens — that of the “tax services” perspective of the SSTSs. This article has identified some of the situations to which this additional analysis might apply, but the authors anticipate that volunteer members will participate with AICPA staff in providing more guidance on how to proceed in this new context.

State boards of accounting ethics rules

The AICPA and National Association of State Boards of Accountancy (NASBA) have been encouraging CPA licensing boards to conform their ethics rules with the AICPA Code. There is broad, but not unanimous, support for linkage to the AICPA Code. Of the 55 licensing jurisdictions affiliated with NASBA (50 states, plus the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands), the results have been that:

• Nine have incorporated the full AICPA Code by reference;
• Twenty-eight have adopted the AICPA Code with some exceptions;
• Eight have retained their unique code with references to the AICPA Code; and
• Ten continue to use their specific rules of conduct without reference to the AICPA Code.

Very few jurisdictions have tax-specific codes of conduct similar to the SSTSs.

About the authors

Thomas J. Purcell III, CPA, J.D., Ph.D., is the John P. Begley endowed chair and Professor of Accounting in the Department of Accounting at Creighton University in Omaha, Neb. Edward S. Karl, CPA, CGMA, was, until his recent retirement, the AICPA’s vice president — Tax Policy & Advocacy. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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AICPA & CIMA RESOURCES

Article

“What Is Your Tax Ethics IQ?,” AICPA & CIMA, Oct. 1, 2023

Resources

Statements on Standards for Tax Services

Tax Section: Practice Management & Professional Standards