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Ethics in Tax Practice Co-Editors: T. Chris Muirhead, CPA
Editors note: Mr. Holub is the former chair of the AICPA Tax Divisions Tax Practice Management Committee. Mr. Muirhead is the Chair of the AICPA Tax Divisions Tax Practice Improvement Committee. The editors thank Valrie Rispoli for her contribution to this column. Ms. Rispoli is a member of the Tax Practice Improvement Committee. For more information about this column, contact Mr. Holub at (813) 2228555 or stevenh@apcpa.com, or Ms. Rispoli at (956) 5442706 or vsrispoli@aol.com.
Many tax advisers think they know all there is to know about ethics: do not lie, cheat or steal. They sit through required ethics courses every couple of years, but often feel that the material on independence and objectivity applies only to attest engagements, not to income tax returns. However, the AICPA Code of Professional Conduct (CPC) applies to all members. In fact, the membership adopted it to provide guidance to its members, whether in public practice, government, industry or education, in the performance of professional responsibilities; see www.aicpa.org/about/code/preamble.htm. The CPC has two sectionsthe Principles, which provide the frameworkand the Ruleswhich govern professional service performances; see www.aicpa.org/about/code/comp.htm. The Rules generally apply to all professional services performed by AICPA members within the U.S. Rulings and interpretations have been added over the years for clarification and further guidance. The CPC is available on the AICPAs website, at www.aicpa.org/members/div/ethics/index.htm.
Section 52Article I: Responsibilities Article I calls on practitioners to recognize their responsibilities to the public, clients and colleagues, and to commit to honorable and ethical behavior, as well as to exercise professional and moral judgment; see www.aicpa.org/about/code/article1.htm. These responsibilities include maintaining confidentiality of client information and restricting acceptance of contingent fees. Confidential client information (Rule 301): Generally, CPAs do not disclose confidential information without a clients specific consent. However, this does not prevent them from (1) complying with a validly issued and enforceable summons or subpoena, or a review of their practice under a professional monitoring program or in conjunction with a proposed sale, purchase or merger or (2) cooperating with an ethics investigation; see www.aicpa.org/about/code/et301.htm. This means that practitioners have to secure a clients written consent before giving copies of returns to bankers, lawyers, stockbrokers, real estate agents, etc. Also, just because a client had no objection to giving his or her banker a copy of last years return, this does not necessarily apply to the current year. Practitioners can share confidential information on a need to know basis with employees and service bureaus. Their privacy policy and engagement letter should inform clients about these arrangements. Contingent fees (Rule 302): Practitioners cannot prepare an original or amended return or a refund claim for a contingent fee; see www.aicpa.org/about/code/et302.htm. A fee cannot depend on the finding or result of tax preparation. Tax advisers fees often vary, depending on the complexity of services. Fees are not contingent if fixed by courts or other public authorities or if determined by judicial proceedings. Interpretations of Rule 302 give some examples of circumstances that would allow or disallow contingent fees; see www.aicpa.org/about/code/et302.htm#rule.
Section 53Article II: The Public Interest By adhering to Article II, practitioners accept the obligation to act in a way that serves the public interest, honors the public trust and demonstrates a commitment to professionalism; see www.aicpa.org/about/code/article2.htm. Auditors of public companies who keep this principle firmly in mind may be less likely to find themselves in the media. Practitioners always try to do their best for clients; however, this does not mean taking a incorrect or illegal position.
Section 54Article III: Integrity Article III requires honesty and candor, to do what is right and just; see www.aicpa.org/about/code/article3.htm. For example, if a married couple wants to file separate returns, with each taking head of household status for better tax effect, the tax adviser should explain the rules for determining filing status. If the clients do not concur, integrity would lead the practitioner to question whether to retain them. Integrity requires observation of the form and spirit of technical and ethical standards (and of tax law interpretations). Honesty and candor are often constrained by the need for client confidentiality. For example, if a client requests details about his or her parents estate plan, a tax adviser obviously could not reveal this without the parents consent. In such a situation, the practitioner could candidly say that he or she needs the parents written consent first, and could mitigate any affront by adding, just as I would not disclose your personal financial situation without your consent.
Section 55Article IV: Objectivity and Independence Article IV is of prime importance in attest engagements. However, it applies to tax practice as well: CPAs should be objective and free from bias in judgment, and should apply the tax law fairly, while striving for the best legal tax result. Integrity and objectivity prevent CPAs from knowingly misrepresenting facts in a financial statement or making materially false or misleading entries in financial records. Likewise, they should not misrepresent facts on a return or take materially false or misleading positions; see www.aicpa.org/about/code/article4.htm. Does independence matter? Tax advisers can certainly prepare returns for related parties, without having to disclose this to the IRS. For example, if a client wants to sell his or her business and a CPA is helping to structure the best possible tax result, the client would have some leeway in assigning sales price to building, land, equipment, inventory, accounts receivable and goodwill. The client might also want to know the pros and cons of a cash sale versus an installment sale; a sales structure would significantly affect the clients tax bill. Thus, in the case of tax practice, it is appropriate for the practitioner to become an advocate for his or her client. Suppose, however, the potential buyer is also a client and wants the CPA to structure the purchase. Would this be a conflict? In a perfect world, the tax adviser could get both parties together and present all the potential scenarios. He or she could help the clients to understand the benefits and drawbacks of each situation to each client. In theory, at least, the practitioner could guide the parties to a mutual agreement. While this is theoretically possible, the appearance of independence is as important as the fact. Also, if the practitioner does not advise one or both parties to seek a second opinion, one of them might return later and allege favoritism. For example, if the buyer is stressed in coping with his or her new business, or if he or she is burdened by having to face a long write-off period due to the value assigned to a building and land (which the seller enjoys as long-term capital gain), he or she might try to blame the CPA. On the other hand, the seller might feel that the price assigned to the equipment was higher than it should have been, once he or she pays tax on the recaptured depreciation. Other situations that can compromise independence and objectivity might include:
These examples are hardly all-inclusive; see www.aicpa.org/about/code/sec300.htm. In summary, the keys to ethical professional behavior are honesty, candor, responsibility to clients, objectivity and independence.
Section 56Article V: Due Care Article V requires practitioners to exercise due careto perform their duties with competence and diligence and to strive for excellence; see www.aicpa.org/about/code/article5.htm. This is often a stumbling block in the rush to meet the April 15 deadline. Before accepting an attest engagement, CPAs have to possess the requisite degree of education and experience or plan to acquire them. This applies to tax practice as well. Tax law is so complex that few practitioners are likely to be expert in all the facets and would have to spend some time doing research.
If the tax adviser agrees to take on the client, she will spend a lot of time on research, conferring with colleagues or both. This may mean accumulating many unbillable hours, if the pastor is expecting a discount. Further, all the newly acquired knowledge is virtually useless for preparing other kinds of returns. If the practitioner declines, she can explain that the return would be out of her area of expertise. In so doing, she is being honest and candid, not incompetent. It is better to turn down the engagement initially, rather than later, or to refer the pastor to a colleague with the right experience, if possible. In addition to maintaining expertise in a chosen practice area, tax advisers who exercise due care are diligent in carrying out their responsibilities to clients, employers and the public. They render their services carefully, thoroughly and promptly, observing applicable technical and ethical standards. Other important aspects of due care are planning and adequate supervision. If practitioners own the business or sign returns, they have to supervise those preparing the data, whether employees or service bureaus, and ensure that every return is the best it can be. To do this, tax advisers can establish quality control procedures, use checklists and increase scrutiny as April 15 nears. The due care principle of obtaining sufficient relevant data does not carry the same weight as it would for an attest engagement. In preparing a return, practitioners are not conducting an audit (as pointed out in the engagement letter). Rather, they are reviewing a clients summary of income and expenses and requesting clarifications if, for example, too many entries seem estimated. An engagement letter should remind the client to be responsible for retaining documentation.
Section 57Article VI: Scope and Nature of Services Article VI charges CPAs with observing the CPCs principles, to determine the scope and nature of service to be provided. Integrity requires CPAs not to subordinate service and the public trust to personal gain. Through objectivity and independence, members can remain free of conflicts of interest, and should take due care to provide services with competence and diligence. Just as attest engagement letters clearly define the services nature and scope, so should tax engagement letters. When a client is new (and sometimes with an established client), CPAs should review the engagement letter to ensure that the client understands the coverage. This gives the client the opportunity to acknowledge the coverage and to suggest revisions. For example, if services are not spelled out in the letter, some clients might assume that the CPA will handle an IRS audit at no extra charge. Discussing the engagement letter may even give tax advisers the opportunity to uphold responsibility to colleagues, an often-overlooked aspect of the CPC. Another concern is a new client who complains about his or her former tax adviserhe or she may criticize the current practitioner to others. If the CPA decides to retain such a client, he or she must be certain that the client understands the nature and scope of the services, as well the responsibility to provide the data needed to timely complete the engagement. Once tax advisers have clearly defined the services and carried them out, they should not stray outside the agreed scope. For example, return preparation does not normally include counting inventory or verifying accounts receivable. If CPAs also provides these services, they could be accused of performing an audit. All specific functions requested should be included in the engagement letter. If the engagement is going to include additional work, tax advisers should use another engagement letter. A common example of expanding the scope might be amending a prior-years return to carry back a net operating loss, or assisting with payroll or sales tax returns. Advertising and other forms of solicitation (Rule 502): Other responsibilities and practices include guidance on matters such as forms of organization and firm name, referral fees and commissions, and advertising; see www.aicpa.org/about/code/sec500.htm. These must not be false, misleading or deceptive. Acts discreditable (Rule 501): The catch-all for all the Principles, Rules and examples might be Rule 501, Acts Discreditable: A member shall not commit an act discreditable to the profession; see www.aicpa.org/about/code/et501.htm. Specific examples, under Interpretations Under Rule 501, are (1) retention of client records after a demand for their return; (2) discrimination and harassment in employment practices; (3) negligence in the preparation of financial statements and records; (4) failure to follow requirements of governmental bodies or other regulatory agencies; (5) solicitation or disclosure of CPA examination questions and answers; and (6) failure to file a return or pay a tax liability. This last discreditable act is one that no CPA should ever overlook: the failure to timely (1) file a personal or firm return, (2) pay taxes or (3) remit all payroll and other taxes collected on behalf of others, is committing an act discreditable to the profession. Nothing could be more embarrassing.
Conclusion The CPC is available on the Web for CPAs perusal, and applies to all professional services performed by AICPA members in the U.S. Rulings and interpretations provide additional guidance. The CPC is to be ignored at a members peril. |
