SRTPs to become enforceable.

The AICPA Tax Division issues Statements on Responsibilities in Tax Practice (SRTPs). The SRTPs are advisory opinions on ethical standards of tax practice, which were codified in 1976 and have been modified and revised several times since. The AICPA's Council recently approved the Tax Executive Committee of the Tax Division as a standard-setting body, so that the SRTPs can become enforceable standards. An updated and edited version of the SRTPs will be available on the AICPA website (www.aicpa.org) shortly after April 15, 2000.

Within the AICPA, there has been considerable debate and comment for several years about the advisability of making the SRTPs enforceable standards. However, three compelling reasons exist for elevating the SRTPs from advisory opinions to enforceable standards.

First, as evidenced by the Congressional enactment of a "realistic possibility of success" (RPOS) standard (Sec. 6694(a)) in 1989, it is clear that CPAs could, in significant part, "self-regulate" by establishing reasonable standards of ethical conduct such as SRTP No. 1--Tax Return Positions. Treasury and the IRS promulgated Regs. Sec. 1.6694-2 to define an RPOS after both the AICPA and American Bar Association recommended the new ethical standard in place of the old "reasonable basis standard."

Despite this, the Tax Executive Committee recognized that, without the ability to enforce the SRTPs, they would not become familiar authoritative guidance to all CPAs. Professional training will be spurred by the new standard-setting development in the Tax Division, in order that all CPAs can become familiar with ethical standards of conduct in tax practice.

Second, for many years, SRTPs have been cited in texts, treatises and the courts as evidence of ethical conduct in tax practice by CPAs. If CPAS are to aspire to these standards, it makes sense that the standards be subjected to the rigorous review process for setting standards.

Thirdly, although the SRTPs have been educational in nature, several state boards of accountancy have explicitly made the statements enforceable, and there have been reported cases in which state boards have disciplined licensees for failure to comply with the SRTPs.

Why Are the SRTPs Important to CPAs?

The eight SRTPs address issues that CPAs commonly face in tax practice. In fact, the SRTPs are so practical, they have required little revision since original issuance. A brief description of each SRTP follows. (Future issues of The Tax Adviser will discuss the SRTPs more fully, in the context of examples and scenarios from tax practice.)

SRTP No. 1--Tax Return Positions. A CPA is an advocate for a client in tax matters, but he should not recommend that a position be taken on a return unless the CPA has a good faith belief that, if challenged, the position has a realistic possibility of being sustained administratively or judicially on its merits. Alternatively, a nonfrivolous position may be advanced, as long as it is adequately disclosed. A CPA should also advise clients about possible exposure to penalties.

The Tax Division voluntarily adopted the RPOS standard in lieu of the old "reasonable basis" standard--an arguable position or colorable claim. SRTP No. 1 has become the ethical threshold for recommending a tax position. Further, a CPA should not recommend a tax return position based on the likelihood of a return being selected for examination.

This statement has a significant explanation and interpretation, including 15 illustrations set forth in Interpretation 1-1.

SRTP No. 2--Answers to Questions on Returns. A CPA should make a reasonable effort to obtain appropriate answers to all questions on a tax return before signing the return as a preparer. The statement recognizes that reasonable grounds may exist for omitting an answer to an applicable question.

SRTP No. 3--Certain Procedural Aspects of Preparing Returns. A CPA may in good faith rely without verification on return information that a client or third party provides. However, the CPA should not ignore the implications of information provided and should make reasonable inquiries if that information appears to be incorrect, incomplete or inconsistent.

While a CPA should exercise due diligence to ensure that this requirement is met, it would be an unreasonable burden to require the CPA to examine or verify all supporting data. This fact is recognized in Treasury Circular 230.

SRTP No. 4--Use of Estimates. It may not be practical for a CPA to obtain exact data under certain circumstances. In those instances, the CPA may use a taxpayer's reasonable estimates. In some cases, the use of estimates may need to be disclosed to avoid misleading the Service.

SRTP No. 5--Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision. If a CPA follows SRTP No. 1, the CPA may recommend a return position, prepare or sign a return that departs from the prior return treatment of an item in an administrative proceeding or court decision. However, the taxpayer may be bound to a specified treatment of an item under a closing agreement or court decision.

SRTP No. 6--Knowledge of Error: Return Preparation. On becoming aware of an error in a filed return, a CPA should immediately inform the client of the error and recommend corrective action. If the client refuses to correct the error, the CPA should consider withdrawing from preparing the current year's return. The CPA may not inform the IRS unless required by law or the client has consented to the disclosure. The CPA may prepare the client's current year return, but must take reasonable steps to ensure that the error is not repeated.

SRTP No. 7--Knowledge of Error: Administrative Proceedings. When representing a client in an administrative proceeding, a CPA should inform the client immediately on becoming aware of an error in the return under examination. As in SRTP No. 6, the CPA should recommend corrective action, but may not inform the Service without the client's consent.

It may be necessary for a CPA to consult with legal counsel before making recommendations to a client. If the client does not permit disclosure to the IRS, the CPA should consider withdrawing from the representation.

SRTP No. 8--Form and Content of Advice to Clients. In rendering advice to clients, orally or in written form, a CPA should follow the RPOS standard of SRTP No. 1. CPAs should use cautionary language in noting a lack of a duty to update. Subsequent developments could affect previous conclusions.

What Can We Expect from Enforceable SRTPs?

The eight existing SRTPs will likely form the core of the enforceable standards. The Member Tax Practice Improvement Committee (MTPIC) of the Tax Division is currently evaluating the need to modify the language of the SRTPs, to take the form of enforceable standards. It is the MTPIC's intent that the statements apply to local, state and foreign tax matters, in addition to IRS matters.

The MTPIC and the Tax Executive Committee have the responsibility to monitor emerging issues in the tax profession (such as corporate tax shelters and multi-disciplinary practices) and assess the need for additional or revised guidance. Similarly, if Congress chooses to raise tax-reporting standards or enact new disclosure requirements, guidance may be needed.

As we have grown accustomed to seeing ethical considerations in many tax education programs, the emphasis on the SRTPs as enforceable standards will also be enhanced.

Conclusions

The SRTPs do not need to be revised with every change to the Code and regulations; they have proven to be remarkably durable. The new enforceable SRTPs will probably not differ materially from the advisory ones. The enforceability of the SRTPs will likely have a positive effect on the CPA profession, by promoting the ethical standards of tax practice. This is based on the attention already being focused on the new standard-setting authority and related AICPA educational programs.

Through its standards-setting authority the Tax Division can enable CPAs to effectively regulate themselves. The Service is constantly seeking suggestions for improving tax administrative rules and regulations. Carefully crafted, responsible and judicious guidance from the Tax Division can have a significant impact on regulators as the best evidence of professional standards for CPAs.

FROM DAN L. MENDELSON, CPA, J.D., LL.M., PARTNER, AND NATIONAL DIRECTOR, TAX RISK MANAGEMENT AND QUALITY, PRICEWATERHOUSECOOPERS LLP, WASHINGTON, DC, AND ED SWAILS, CPA, J.D., PRINCIPAL, NATIONAL TAX DEPARTMENT, ERNST & YOUNG LLP, WASHINGTON, DC