TEC initiatives.

Since the last cut-off date for this column (Dec. 15, 2005; see TFA, February 2006, p. 114), the Tax Executive Committee (TEC) met once (Feb. 1-2, 2006) and exercised its review function on several projects. TEC actions taken after Mar. 15, 2006 will be reported in a future column. The February 2006 column focused on the Tax Division's and the TEC's advocacy efforts. This column will address the standard-setting process. The August 2006 column will describe the tax products and services available to Tax Division members.

Tax Standard Setting

In October 1999, the AICPA Council granted the TEC the ability to promulgate binding ethical standards of tax practice. The TEC collaborates with the Tax Practice Responsibilities Committee (chaired by Eve Elgin), which reports to the TEC, in discharging this significant function, always sensitive to the effect that binding tax standards will have on the AICPA's 350,000+ members. Once the TEC approves a standard or an interpretation, it becomes enforceable as part of the AICPA's Code of Professional Conduct. As with all AICPA ethical standards, the Professional Ethics Executive Committee oversees enforcement.

Currently there are eight Statements on Standards for Tax Services (SSTSs); available at http://tax.aicpa.org/Resources/Professional+Standards+and+Ethics/. SSTS No. 1, "Tax Return Positions" has two interpretations.The SSTSs and Interpretation No. 1-1, "Realistic Possibility Standard," were based substantially on the educational Statements on Responsibilities in Tax Practice (SRTPs), which had provided CPAs with nonbinding advice on how best to practice tax. However, in the years following the publication of the SRTPs, the statutory, regulatory and legal environments changed significantly, resulting in the SRTPs becoming de facto standards rather than merely guidelines. The TEC was convinced that the best interest of the profession, as well as the public, lay in elevating the SRTPs to binding ethical standards. Thus, it reissued the SRTPs as SSTSs Nos. 1-8, with Interpretation No. 1-1 (which became effective on Dec. 31, 2000). Subsequently, it promulgated Interpretation No. 1-2, "Tax Planning" which became effective on Oct. 31, 2003.

The SSTSs cover a variety of topics, but generally fall into standards relating to tax return preparation and certain aspects of tax representation, and the rendering of tax advice. In setting the SSTSs, the TEC was cognizant of the prevailing statutory, regulatory and judicial requirements imposed on tax preparers and representatives. It also recognizes the continuously changing nature of the environment, which demands frequent monitoring of the SSTSs to ensure ongoing recognition of Tax Division members as pre-eminent tax professionals.

After the SRTPs were reissued as enforceable SSTSs, some members expressed concern about the lack of a standard addressing the practical aspects of implementing the SSTSs. The AICPA has an ethical standard dealing with accounting and auditing quality control (Statement on Quality Control Standard No. 2, "System of Quality Control for a CPA Firm's Accounting and Auditing Practice"). However, this rule does not specifically address the tax side of a practice. In 2002, the Tax Division published the Tax Practice Quality Control Guide to assist members in improving the quality of their tax practice.

Other factors also pointed to the need for such a standard. For example, recent changes to IRS Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accounts, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service, which include elevated due diligence requirements coupled with heightened sanctions expanding civil liability for negligence and the resulting more cautious attitude of malpractice insurers, have kept quality control at the forefront of discussions on tax ethical standards.

On Oct. 31, 2005, on the recommendation of the Tax Practice Responsibilities Committee, the TEC voted to expose for comment Proposed SSTS No. 9, Quality Control. Because of the overlap with tax season, an extended comment period will run until Aug. 31, 2006. The proposed standard is designed to facilitate members' ability to oversee both the administrative and technical aspects of their tax practice or function. It would require a firm or employer to establish a system of quality control with five elements:

1. Integrity and objectivity;

2. Personnel management;

3. Acceptance and continuance of clients;

4. Performance of professional services; and

5. Monitoring and inspection.

The proposed standard was written to provide maximum flexibility to firms and employers in how they design and implement a quality control system. It recognizes the uniqueness of practice parameters, especially the size of a practice, and how that will affect system selection and monitoring. Even though the standard is organized around the five elements that should be considered in the system's design, it gives members a certain degree of flexibility in implementing any system. Although the establishment and maintenance of a system is enforceable at the firm or employer level, SSTS No. 9 will encourage members to practice or work for a firm or an employer that is in compliance.

The TEC looks forward to members' thoughts on the proposed standard during the exposure period.

Other Activities and News

The last three months have been particularly busy for the Tax Division. Space does not permit a detailed description of all of the projects. The documents listed below are available online at the AICPA Tax Center at http://tax.aicpa.org/.

* Dec. 23, 2005: the TEC sent a formal response to IRS Commissioner Mark Everson regarding adequate disclosure of information on Schedule D. The TEC continues to have discussions with the IRS on this issue. Also on that date, the TEC provided comments to Congress on certain tax-shelter and IRS procedural aspects of S 2020, the Senate version of The Tax Relief Act of 2005.

* Jan. 5, 2006: the TEC provided comments, prepared by the Tax Accounting TRP (chaired by Christine Turgeon), to the IRS on the proposed regulations implementing the domestic manufacturing deduction (Sec. 199).

* Jan. 19, 2006: the TEC provided comments, prepared by the Tax Accounting TRP, to the IRS on the IRS's intent to issue guidance on the rolling average cost method of accounting for inventory.

* Jan. 30, 2006: the TEC submitted comments, prepared by the Tax Accounting TRP, on Rev. Rul. 2005-42, which requires capitalization of environmental remediation costs. Also, the TEC provided comments, prepared by the Partnership TRP (chaired by Deborah Fields), to the IRS and Treasury on the proposed regulations under Sec. 752 dealing with disregarded entities.

* Feb. 7, 2006: in a joint letter with the AICPA Not-for-Profit Expert Panel, the TEC expressed its opposition to proposed Section 206(c) of HR 4297, the House version of The Tax Relief Act of 2005 that had been adopted by the Senate. That section would require certification by an independent auditor or independent counsel of a nonprofit's unrelated business income. The TEC's comments were prepared by the Exempt Organizations TRP (chaired by Mary Rauschenberg).

* Feb. 16, 2006: the TEC submitted comments, prepared by the Employee Benefits TRP, to the IlLS on proposed regulations under Sec. 409A dealing with nonqualified deferred compensation.

* Feb. 21, 2006: the TEC offered comments, prepared by the International Tax TRP (chaired by Kenneth Wood), to the IRS on proposed rules dealing with certain aspects of common asset reorganizations involving a U.S. transferor, a transferee foreign corporation and a transferred corporation.

Get Involved!

As a senior technical committee of the AICPA, the Tax Executive Committee is authorized to speak for the AICPA on tax matters, and is also designated by governing Council as a standard-setting body. However, numerous other committees, TRPs and task forces initiate and develop proposed solutions to policy issues and technical and tax administration problems, for consideration and approval by the TEC. They also initiate proposals for valuable products and services for members in tax practice, and collaborate with the Professional Ethics Executive Committee to administer the AICPA's tax ethics program (Statements on Standards for Tax Services).

Through its various task forces, TRPs and committees, the TEC continues to monitor numerous projects. The Tax Division is committed to providing the best service possible to AICPA members. Members who would like to volunteer to assist in Tax Division activities by being considered for appointment to committees or TRPs for the committee year beginning October 2006, should register their interest by May 1 at: https://volunteers.aicpo.org/Default.aspx. Members with questions about committee appointments, or tax advocacy or ethics programs should contact Ed Karl at [phone] or [e-mail]. Members having suggestions for new services or products should contact Bill Stromsem at [phone] or [e-mail].

Thomas J. Purcell III, J.D., Ph.D., CPA Associate Professor of Accounting and Professor of Law Creighton University Omaha, NE

Prof. Purcell is Chair of the AICPA Tax Division's Tax Executive Committee. DC Currents heightens awareness of the Tax Division's activities and apprises readers of tax policy, technical issues and other practice support matters.