TAX PRACTICE REVIEW AND SSTSs.
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The adoption of the initial eight enforceable Statements on Standards for Tax Services (SSTSs) (see the October 2000 issue of Journal of Accountancy) makes it important for CPAs to examine their tax practices' quality control procedures and tax practice review (TPR) process. The standards now make it necessary for firms to document "best practices." Once they establish best practices, firms can enhance and monitor tax practice quality control, using the AICPA's Guidelines for Tax Practice Review (Guidelines).
Guidelines is a road map for monitoring a firm's tax practice, either through a self-assessment or on a firm-on-firm basis. If a firm does not have a tax practice quality control document (TPQCD) in place, Guidelines has tools that make it easy to establish one.
Benefits of TPR
Beyond the fact that enforceable standards now exist, firms can receive many additional benefits from a TPR.
Increased quality. A TPR is not a direct review of profitability items. However, it indirectly improves profitability through a focus on quality. While CPA tax practices vary in style, they all seek high-quality performance. Quality is the common thread found in all tax practices and is multi-dimensional. It means one thing to clients; it means something different to fellow professionals. The TPR program attempts to focus on quality on both these levels. A TPR introduces a systematic approach to quality control in tax practice. Improved quality of work increases efficiency in delivering services. A good system of quality control helps to maintain and improve quality and thereby improve profitability.
Increased quality in tax practice means adopting as normal operating procedure (when feasible) what the industry considers best practices.
Malpractice avoidance. For several years, tax malpractice claims have out-numbered accounting and auditing claims. In fact, tax claims have represented approximately 60% of all claims against CPAs. Guidelines emphasizes quality and quality control and should have a direct impact on malpractice exposure, to the extent the program is used. The quality of a firm's work reduces the risk of error and, thus, exposure to legal action.
Most malpractice insurance carriers, including the AICPA Professional Liability Plan, inquire about TPRs. Often, a firm that undergoes a TPR can qualify for a peer-review credit or other additional discounts.
However, more importantly, if a firm has a tax malpractice claim, participation in a TPR program (including the establishment of a TPQCD) is useful as a possible defense in certain legal actions.
Preparer penalties and sanctions.
The IRS first added return preparer penalties to the Code in 1976 and amended them in 1989. The return preparer penalties fall into the following groups:
1. Sec. 6694--Negligent or Fraudulent Return Preparation;
2. Sec. 6695--Standards of Return Preparation;
3. Sec. 6103--Confidentiality and Disclosure Issues;
4. Sec. 6107--File Maintenance;
5. Sec. 6700--Promoting Abusive Tax Shelters;
6. Sec. 6701--Aiding and Abetting Understatements;
7. Sec. 7407--Injunction for Improper Conduct or Deceptive Practices; and
8. Sec. 7206--Fraud and False Statements.
Treasury Circular 230, Regulations Governing Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries and Appraisers before the IRS (which is in the process of being updated by Treasury), also contains disciplinary proceedings:
* Section 10.50--Authority to Disbar or Suspend;
* Section 10.51--Disreputable Conduct; and
* Section 10.52--Violation of Regulations.
Additionally, Circular 230 is currently under review to add new disciplinary actions in the tax-shelter area.
Also, every CPA should be concerned about state Board of Accountancy disciplinary actions that include suspension or loss of license.
Again, as in the discussion on malpractice claims, participation in a self-assessment or firm-on-firm TPR or use of a TPQCD (similar to the samples included in Guidelines) can help to avoid sanctions.
What else does a TPR accomplish? Besides improving quality and efficiency, TPRs also can:
1. Help in choosing quality control procedures that will establish "best practices" and insure compliance with the SSTSs;
2. Identify areas of weakness;
3. Identify quality control procedures already in place that are not being carried out in practice;
4. Strengthen firm morale by improving reliability of work;
5. Help staff formulate suggestions for improvement;
6. Provide a basis for receiving quality feedback from staff (by using a staff interview questionnaire); and
7. Encourage self-evaluation.
Design Features of a TPR Program
Voluntary. The AICPA Tax Division acknowledges that TPRs are voluntary. There are no objective standards by which a tax practice can be evaluated; however, the industry, over the years, has developed best practices.
Privacy. Guidelines contemplates two types of TPRs: internal self-assessments and external firm-on-firm reviews. Everything about a self-assessment is internal to the reviewed firm. Self-assessments include decisions about whether to do a review, choice of reviewer, determination of applicable review procedures, communication of the conclusions, and decision about acting on which to follow. In addition to all written notes, an oral exit interview may allow a reviewer to provide more detail about items in the letter of comments.
In a firm-on-firm review, Guidelines suggests "... this is subject to the agreement between the reviewed firm and the outside reviewer as documented in the engagement letter--that all work-papers generated in the course of the firm-on-firm review be turned over to the reviewed firm at the conclusion of the review"
The AICPA will have no access to records created during any TPR. The firm may receive a letter from the outside reviewer acknowledging its participation in a firm-on-firm TPR. The TPR can be performed at any interval, but is best used with an annual self-assessment.
What Wall Be Needed for a TPR?
Developing a quality control document. A TPQCD is necessary to serve as a standard or benchmark against which to compare the behavior of a firm's professionals against its work requirements. Many firms only have quality control documents applicable to their accounting and audit practices and need to start from scratch in developing their TPQCD. Guidelines contains three different sample TPQCDs:
1. Appendix A--Sole Practitioner CPA with Limited Staff;
2. Appendix B--Local CPA Firm Without A Structured Tax Department; and
3. Appendix C--Local CPA Firm With A Structured Tax Department.
Appendix A is based on the five elements of a quality control system. The sample points out general parameters for operating a tax practice.
Appendix B provides a lot of detail. Also based on the five elements of a quality control system, the document concentrates on establishing responsibilities for tax matters within a firm. It discusses specialization within the tax area without a structured tax department.
Appendix C incorporates policies and procedures into the document. Still based on the five elements of a quality, control system, it provides detailed information, especially in the personnel management area.
Without samples, the development of a TPQCD is slow going. It is much easier to "tweak" a model developed from the samples--adjust it to the firm's specific circumstances, its environment, size and structure--than to start from scratch.
Developing a tax procedures manual. A procedures manual can be an appendix to a TPQCD, and can include tracking procedures, checklists, tax return review procedures, etc.
Completing a tax procedures manual is time-consuming. The best way to develop a manual is first to put down in writing the firm's tax procedures and why they were developed. In addition, a firm could also identify better ways of rendering tax services, which might result in changes to current procedures. One goal of developing a tax procedures manual is to build consistency in how all the firm's members provide tax services. There may be administrative issues and procedures of which all people in a firm need to be aware; if these issues and procedures are not in one place, it is difficult to ensure that everyone will comply. This manual is not only necessary to communicate procedures to tax professionals and new hires, but also to a firm's nontax personnel.
Identifying necessary qualities of a tax practice reviewer. Criteria that might help a firm determine if a tax practice reviewer meets qualifications include:
1. Years of experience in tax practice;
2. Honest and forthright approach in identifying tax practice issues, combined with an ability to tactfully communicate the issues; and
3. Creativity in identifying new services that could be rendered to the firm's clients.
Depending on need, a firm may also want a reviewer to have the ability to give feedback on:
1. Pricing of services and engagements;
2. Marketing to clients, both current and potential;
3. Timeliness of service;
4. Developing new services; and
5. Using staff, both professional and support.
Getting the support of nontax firm members. The support of nontax professionals is important. They all have tax issues with clients they serve and, to the extent these clients use tax services, the firm should involve its nontax professionals in developing and understanding a TPQCD.
As for nontax staff members, it is helpful for them to know the types of tax services the firm offers and how the firm renders these services. This is a good cross-marketing tool.
Reviews and comments on a TPQCD from nontax professionals build consistency with the accounting and auditing quality control document, and also enlist the support of nontax principals in the TPR process. A firm's nontax principals need to buy into the need for a TPQCD, just as tax principals have faith in the accounting and auditing QCD.
Contents of Guidelines for TPR
Statement on guidelines for tax practice quality control. Although it is the last document in Guidelines, Appendix J, Recommended Framework for Establishing a Required or Voluntary Quality Control System, is probably the most important, because it sets the foundation for a quality control system, either accounting or tax.
Prepared in May 1996 by the Joint Task Force on Quality Control Standards as a recommendation to applicable AICPA Senior Technical Committees, the framework was the basis of "Statement of Quality Control Standards (SQCS) No. 2," effective Jan. 1, 1997 (which replaced SQCS No. 1, originally published in 1979). The new standard also replaced the nine elements of quality control with five elements of quality control:
1. Independence, integrity and objectivity;
2. Personnel management;
3. Acceptance and continuance of clients and engagements;
4. Engagement performance; and
Since independence is an auditing concept, Guidelines replaced the first element with "Advocacy, Integrity and Objectivity."
Section A of Guidelines, "Statement on Guidelines for Tax Practice Quality Control," is based on these five elements and discusses each element and how it applies to a tax practice. In particular, it discusses objectives within each of the five elements, as well as establishing policies and procedures to help accomplish the objectives, thereby complying with the overriding element of quality control.
Tax practice review guidelines and checklists. The general instructions for Guidelines include Section B, which sets out three main objectives of a review:
1. Comparison of the firm's TPQCD and related procedures with the AICPA's TPQCD guidelines;
2. Determination of whether the reviewed firm complied with its TPQCD and procedures; and
3. Test of the quality of the firm's tax practice by examining a sample of the firm's tax work.
It also sets out four goals that consider whether the tax work performed by the firm:
1. Responded directly to a client's needs;
2. Was substantively correct;
3. Was documented in the files; and
4. Was communicated to the client in understandable form.
Section B discusses the tools within Guidelines to achieve these objectives and goals. These tools are set out in Section C, Instructions for Reviewed Firm, and in Section D, Instructions for Reviewers, as well as in related appendices. Additional sections provide detailed guidance for the reviewer and the reviewed firm for carrying out the TPR.
This overview of a TPR using the AICPA's Guidelines for Tax Practice Review is meant as a starting point for tax practices and their quality controls and procedures. In particular, it focuses on what a firm has to establish as its "best practices," to ensure that it has all the tools in place to comply with the new SSTSs. A firm's decision to institute a TPQCD and have a TPR will help ensure that its tax practice is of high quality and meets industry standards.
JOSEPH E SCUTELLARO, CPA, JUMP, SCUTELLARO AND COMPANY, TOMS RIVER, NJ, AND T. CHRIS MUIRHEAD, CPA, PORTER, MUIRHEAD CORNIA & HOWARD CASPER, WY
Steven F. Holub, CPA Aidman, Piser & Co. Tampa, FL
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|Author:||Holub, Steven F|
|Publication:||The Tax Adviser|
|Date:||Dec 1, 2000|
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