Tax standards update: circular 230, due diligence and AICPA Tax FAQs.
Kerr said, "The more things change, the more they are the same." One of the first sentences in the preamble to Circular 230 reads, "Treasury and the IRS have consistently maintained thai individuals subject to Circular 230 must meet minimum standards of conduct with respect to written tax advice, and those who do not should he subject to disciplinary action, including suspension or disbarment."
They are pointing out that, while there have been several changes to the written advice standards, the core ethic has not changed.
The updated Statements on Standards for Tax Services (SSTSs) became effective in January 2010. The AICPA has published- and continues to publish- FAQs related to these standards and similar items. The U.S. Treasury released the most recent revisions to Circular 230 regulations in June. Less formally, Office of Professional Responsibility Director Karen Hawkins has recently been speaking on the issue of due diligence.
Again, the core ethic embodied in the AICPA Code of Professional Conduct is unchanged; however, how we document, communicate or practice continues to evolve. This article addresses in summary several of these areas.
AICPA SSTS FAQs
During the exposure period for the updated SSTSs (2009), the AICPA received a number of questions and comments from CPAs and others. In response, the AJCPA has continued publish responses in an FAQ section of its website. Topics include such items as use of estimates and answering questions on tax returns, as well as specific issues like home office deductions ancl casualty losses. Also, the AICPA is working on what to do when you discover an error.
These FAQs are not official statements or authoritative guidance, but represent the opinions of experienced CPAs. CPAs are advised to consult the official guidance in conjunction with the FAQs. The official AICPA guidance is found at this same location.
Circular 230: Competency Sec. 10.35
For CPAs, there is not really anything new in this replacement section of Sec. 10.35. This new rule is similar to the AICPA Code of Professional Conduct, Sec. 56: Article V-Due Care. This section, in part, reads: 'A member should observe the profession's technical and ethical standards, strive continually to improve competence ... ." As CPAs, we already had a "competency" standard. Circular 230 applies this requirement to all covered individuals. If you are competent under the AICPA standard, then Circular 230 has not changed that for you.
Procedures to Ensure Compliance: Sec. 10.36
Sec. 10.36 was amended and expanded to cover all of Circular 230, not just covered opinions. This means practitioners must take steps to develop and implement reasonable procedures and appropriate staff supervision to ensure compliance with Circular 230 for all firm members, associates and employees.
CPAs have a long-standing ancl well- established principle of quality control. Recently the AICPA produced detailed guidance for a quality control system.
Sec. 10.36 does not require a quality control system; however, a tax practice quality control system is a good way to provide reasonable assurance of compliance with Circular 230. See the AICPA Tax Practice Quality Control Guide at www.aicpa.org, which is available to AICPA Tax Section members.
Hawkins was quoted as saying "OPR often learns about the potential violations through court cases and will send the firm's inquiry letters asking them to clarify what procedures they have in place under Section 10.36." OPR uses that inquiry to ensure that whatever it saw in the public record won't happen again, she said. "We have done that with several major law firms ancl accounting firms in this country and we've gotten an incredibly positive response, although they do lawyer up."
In summary, OPR is serious about practitioners implementing Sec. 10.36. CPAs have a long history of employing reasonable procedures of quality control. The difference now is a more formal documentation of who is responsible ancl the steps they have taken.
Written Advice Sec. 10.37
Hawkins also indicated that the new See. 10.37 is designed to give taxpayers leeway in interpretation. "This is a principles-based regulation; it is intended to fee very broad," she said, and "is intended to leave a lot of leeway, both on your end ancl on our end with how we analyze this."
The preamble in the release of the updated Circular 230 states "See. 10.37 provides practical, flexible rules that are well suited to the issuance of quality written tax advice, provided in an ethical manner, in today's practice environment ... The comprehensive, principlcs-based approach of these amendments is more straightforward, simpler, and can be applied to all written tax advice in a less burdensome manner. Overall, Treasury and the IRS have determined that these written advice rules strike an appropriate balance between allowing flexibility in providing written advice, while at the same time maintaining standards dial require individuals to act ethically and competendy."
Email Disclaimers (Not Circular 230 Disclaimers)
One of the most talked about changes resulting from the removal of what was previously Sec. 10.35 is the elimination of the "Circular '230 Disclaimer."
The Circular 230 preamble states that the changes to do not prohibit "an appropriate statement describing any reasonable and accurate limitations of the advice rendered to the client." The disclaimer can be used to advise the reader of limitations regarding reliance on the content, such as: the information may be confidential, it is not intended to be a contract or the advice in the email is not intended to be a formal opinion unless expressly stated. All of those arc acceptable reasons for a disclaimer.
So, add a disclaimer to your email, but don't blame it on Circular 230.
"Many practitioners continue to use the Circular 230 disclaimer in their emails even though the IRS finalized regulations that remove die covered opinion rules," said Hawkins. "My only concern and my message is, if a disclaimer says 'The Internal Revenue Service says' or 'I am required under Circular 230,' ... you will get a letter from my office asking you to cease and desist using that kind of language because I don't want taxpayers to be misinformed."
Sec. 10.22, Diligence as to Accuracy, was amended to require practitioners to exercise clue diligence in verifying the accuracy of information in all IRS matters. A practitioner may not rely on the work product of another employee unless the practitioner has exercised reasonable care in engaging, supervising, training and evaluating that individual. Practitioners should consider die skills and experience of a person when they are relying on the advice of that person.
OPR Tracking Practitioner Penalties
In Tax .holes Today, Hawkins says, "OPR has a database of penalties that field agents apply in exams that should be referred to OPR." Agents are required to refer penalties under sections 6700, 6701, 6694(b) and 6695, but they are not consistently doing so, she said. Hawkins encourages agents to refer discretionary referral penalties, such as those under Sec. 6694(a), becausc that may expose a practitioner's pattern of behavior.
"This is an area where OPR will start triggering its own inventory because the field hasn't gotten the message," she said.
There are a number of amendments to existing rules within Circular 230, but the core principles that have guided CPAs are consistent. The two most significant shifts are from a rules-based approach to a principles- based approach, and die related need to document the CPA's and practitioner's compliance with these principles.
It's recommended that CPAs review Circular 230 changes, monitor die AICPA's website for commentary and FAQs, and put procedures in place to monitor and document compliance.
Conrad Davis, CPA/CFF, CFE is a partner at Crowe Horwath LLP. You can reach him at Conrad. Davis@crowehorwath.com.
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|Title Annotation:||regulatory update|
|Author:||Davis, Conrad M.|
|Date:||Dec 1, 2014|
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