Tax practitioners face heightened litigation and traps for the unwary.

Editor's note: This department is written by the AICPA Tax Division's professional staff. It is designed to heighten awareness of the Division's work and keep readers apprised of Tax Division activities involving tax policy, technical issues and other practice support matters.

The environment within which AICPA members practice today is characterized by heightened litigation against CPAs. According to AICPA professional liability statistics, approximately half of all claims filed against CPAs during the past six years involve tax matters. As CPAs in tax practice face growing risks and uncertainty, they must constantly watch for traps for the unwary. One place where CPAs need to play closer attention is in the area of professional standards of conduct. Currently, there are no separate enforceable standards for AICPA members relating to tax services. The Statements on Responsibilities in Tax Practice (SRTPs), which were developed by the AICPA Tax Division Responsibilities in Tax Practice Committee and issued by the Tax Executive Committee, provide a body of advisory and educational opinions on appropriate standards of tax practice. These statements delineate members' responsibilities to their clients, the public, the government and the profession, and are advisory in nature.

While the SRTPs are not enforceable standards of the AICPA, increasingly, courts of law, state accountancy boards and other bodies are effectively treating them as enforceable and holding CPAs to them. These bodies consider the SRTPs to be proper and well-reasoned standards of conduct to which CPAs should be held accountable. As this trend continues (and in all probability accelerates), members may increasingly find themselves in very undesirable and unexpected legal positions, with the SRTPs being cited as authority by opposing counsel or expert witnesses in court proceedings.

There is considerable support for these statements being treated as enforceable:

In all tax engagements, and especially in situations that challenge the accountant's judgment and integrity, the accounting firm should look to the AICPA's Statements of [sic] Responsibilities in Tax Practice (SRTPs) for guidance. SRTPs, which have been issued periodically since 1964, are intended to establish standards for tax practice and to define the CPA's responsibility to the client, the public, the government, and the accounting profession in this area. Since these Statements are often referred to by plaintiffs' attorneys in prosecuting a tax malpractice action, from a liability standpoint, it is imperative that an accountant be familiar with these Statements and follow them when performing tax services. (Spellmire, Baliga and Winiarski, Accountant's Legal Liability--Prevention and Defense (1993).)

When reviewing standards of practice management, the practitioner will find references such as "...violation of a Statement will not trigger AICPA disciplinary action. Of course, this does not mean that the Statements are without practical importance. The courts and the IRS are likely to demand of the CPA no less than that demanded by his professional organization. Thus, although not subject to direct discipline, a violation of the Statements may be `enforced' by the courts or the IRS." (Wolfman, Holden and Harris, Standards of Tax Practice, 2d ed.)

There is evidence that the Service is influenced by the SRTPs in disciplinary proceedings against CPA preparers. They have also been cited frequently in practice management publications, such as in the AICPA Tax Practice Management guide: "Practice Tip. It has been reported that the office of practice of the IRS views the SRTPs as extensions to and interpretations of the duties and restrictions set out in Treasury Circular 230. In addition, a plaintiff's attorney in an action charging a practitioner with negligence might cite these standards, along with Circular 230, as constituting the generally accepted standards of tax practice."

In addition, CPAs practicing in certain states need to use added caution; a number of state boards of accountancy have adopted the Statements as enforceable standards. Those states include: Arizona, Colorado, Florida, Idaho, Kentucky, North Carolina and Washington. Other jurisdictions which, while not explicitly adopting the Statements, can arguably be viewed as having done so include: Maryland, Tennessee and the District of Columbia. See the chart below.

CPAs need to become better informed about the rules under which they practice and need to be more aware of the standards to which they will be held. The current environment of heightened litigation is not likely to slow down anytime soon.