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The search for enforceable tax practice standards.

Where should CPAs look to find tax practice standards? The search begins with the Internal Revenue Code. It continues with circular 230 and other Treasury and IRS pronouncements, case law, the AICPA Code Professional Conduct, applicable state ethical rules and regulations and "voluntary" standards such as the AICPA tax division's statements on responsibilities in tax practice (SRTPs). This article discusses each of these as it applies to the search for enforceable tax practice standards.


The tax code imposes technical standards via its civil and criminal penalty provisions. Several of these provisions apply to tax return preparers as defined in IRC section 7701(a)(36). In general, anyone who prepares an initial tax return or a later amended return or claim for refund may be classified as a return preparer. Regulations explaining this tax code definition also stress that an individual can be a preparer "without regard to educational qualifications and professional status requirements."

Several of the tax code's penalty provisions apply directly to tax return preparers. IRC section 6694(a) imposes a $250 fine on a return preparer if any part of an understatement on a return he or she prepared results from a position "for which there was not a realistic possibility of being sustained on its merits."

An exception to this rule exists if the position is not frivolous and is disclosed on the return.

Under IRC section 6694(b), a $1,000 penalty may be imposed on a tax return preparer (1) if there is a "willful attempt" to understate tax liability or (2) for any reckless or intentional disregard of rules or regulations. Proposed regulations under section 6694(b) provide a tax return position contrary to rules and regulations will not be penalized if it is not frivolous, as long as the position is disclosed.

Other practices standards found in the penalty provisions of the tax code include

* Knowingly aiding or abetting in preparation of any document for any tax matter leading to an understatement of tax liability (IRC section 6701).

* Promoting abusive tax shelters (IRC section 6700).

* Disclosing taxpayer information (IRC sections 6713 and 7216).

* Aiding or assisting in preparation of a false return (IRC section 7206).


CPAs, attorneys and enrolled agents, who ar epermitted to practice before the IRS, are governed by circular 230, which is included in Treasury Department regulations sections 10.01-.98. According to section 10.2(a), "'Practice before the [IRS]' comprehends all matters connected with presentations to the [IRS] ... relating to a client's rights, privileges or liabilities under [Internal Revenue] laws or regulations...." This includes representation of clients at IRS conferences and preparing and filing documents with the service.

Circular 230 establishes four broad standards all tax practitioners must follow.

* A tax practitioner is required to "submit records or information in any matter before the IRS, upon proper and lawful request...." (section 10.20).

* If a CPA is aware of any client omission, noncompliance or error in any document that has been filed with the IRS, the accountant "shall advise the client promptly of the fact of such noncompliance, error or omission" (section 10.21).

* Practitioners are required to exercise due diligence (which itself is not defined) in assisting or preparing a tax return, in determining whether verbal and written communications to the IRS are correct and in determining whether written or oral advice given to a client is correct regarding "any matter administered by the IRS" (section 10.20).

* Practitioners are expected to avoid "disreputable conduct," which includes such activities as giving false or misleading information to the IRS, using false or misleading information to attract clients and using abusive language with IRS agents (section 10.51).

A definition of due diligence may be included in future changes to circular 230. According to IRS personnel, this definition is likely to track closely with the regulations interpreting the tax preparer penalty regulations.

A tax practitioner who violate sthe provisions of circular 230 may be suspended or disbarred from IRS practice. In addition, under section 10.74, the IRS director of practice may furnish information about practitioners disciplined by the IRS to proper state authorities. Currently, this information is given to authorities in 13 states and the District of Columbia.


The professional conduct of all AICPA members is governed by the AICPA Code of Professional Conduct. Variations of the ethics code adopted by state CPA societies and board of accountancy govern CPAs who are members of those societies or regulated by those boards. Under the ethics code, CPAs are bound by broad ethical strictures such as the responsibility to

* Be independent (Rule 101).

* Exercise integrity and objectivity (Rule 102).

* Perform in professionally competent manner, exercise due professional care, adequately plan and supervise work and base decisions on sufficient relevant data (Rule 201).

* Maintain client confidentiality (Rule 301).

* Avoid acts that discredit the profession (Rule 501).

In addition, Rule 202 and 203 require CPAs to abide by "technical standards." However, not all technical standards are enforceable under these rules. The SRTPs are examples of uneforceable technical standards. For purposes of this article, standards under the aegis of Rules 202 and 203 are called enforceable technical standards.

Currently, the only enforceable technical standards are accounting and auditing standards issued by the Securities and Exchange Commission, the AICPA and the Financial Accounting Standards Board. CPAs are not currently bound by any specific enforceable technical standards of tax practice.


Originally issued between 1964 and 1977, the SRTPs were subsequently revised in 1988 and 1991. Their main goal is to educate the public and practitioners as to what might be termed minimal tax practice standards. Although the SRTPs are not enforceable technical standards, they do represent a consensus of the AICPA tax division about what constitutes good, ethical tax practice.

The introduction to the SRTPs says they "are not intended to establish a code of conduct in tax practice that is separate and apart from the general ethical precepts of the Institute's Code of Professional Conduct." The topics covered by the SRTPs include the following:

* The standard a CPA tax practitioner must follow when recommending a tax return position to a client, the "realistic possibility standard" (SRTP no. 1, Tax Return Positions).

* Procedures for answering questions on tax returns (SRTP no. 2, Answers to Questions on Returns).

* Procedural aspects of tax return preparation (SRTP no. 3, Certain Procedural Aspects of Preparing Returns).

* Using estimates (SRTP no. 4, Use of Estimates).

* What to do when departing from a tax return position as concluded in court decision (SRTP no. 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision).

* Recommended procedures when an error is discovered in a prior year's tax return or during an administrative proceeding (SRTPs nos. 6, Knowledge of Error: Return Preparation, and 7, Knowledge of Error: Ad inistrative Proceeding).

* The form of tax advice (SRTP no. 8, Form and Content of Advice to Clients).

Frequently, an SRTP will parallel practice requirements found elsewhere. For instance, the language in SRTP no. 1 was the basis for the "realistic possibility" language in IRC section 6694(a). On this instance the SRTP can help practitioners by providing more detailed guidance than is found elsewhere.

Other guidance contained in the SRTPs parallels that found in IRS rulings and procedures or in court cases. For example, in Brockhouse v. The United States, the Seventh Circuit Court of Appeals upheld a negligence penalty (under former IRC section 6694) against a CPA who did not inquire about certain interest payments between a physician and his wholly owned professional corporation. When viewed in conjunction with SRTP no. 3, IRS revenue procedure 80-40 and the proposed regulations under section 6694, this case provides additional guidance on the level of care required of CPAs in tax. practice.

Occasionally and SRTP will suggest a practitioner go beyond standards established elsewhere. For instance, SRTPs nos. 6 and 7 go beyond the requirements of circular 230 by advising CPAs not only to notify clients of errors or omissions but also to "recommend the measures to be taken" to remedy the error.

To ensure SRTPs are relevant and up-to-date, the tax division responsibilities in tax practice committee continuously monitors and revises them.



CPA tax practitioners should consult all of the above sources (including any related regulations) to maintain the highest possible practitioner standards. In today's dyanamic and competitive business environment, adherence to such minimal practice standards will ensure that CPAs are not subject to penalties or other sanctions.

Mr. Woehlke is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
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Article Details
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Author:Woehlke, James A.
Publication:Journal of Accountancy
Article Type:Column
Date:Jan 1, 1992
Previous Article:Sparing no expense.
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