Ethical behavior is one of the basic foundations that our profession is based upon. CPA tax practitioners are subject to many different standards and ethics rules, including AICPA enforceable standards, Treasury Department Circular No. 230 (Circular 230), the Internal Revenue Code, state licensing boards and other regulatory agencies, professional associations and various laws and regulations. With so many rules, it’s sometimes difficult to know what the right course of action is in certain client situations.
How well do you know your way around some common practice dilemmas that tax practitioners face? Even the most knowledgeable of us need a refresher on certain topics.
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Ready to see how your tax ethics knowledge stacks up? Take the tax ethics IQ test below and see if your level of proficiency is enough to obtain the rank of master.
- The AICPA’s Statements on Standards for Tax Services (SSTSs) are enforceable tax practice standards for CPAs who perform tax services. True or false?
- CPAs may recommend a tax position that has a realistic possibility of success of being sustained but only with adequate disclosure of the position. True or false?
- You suspect your client has engaged in a potentially fraudulent activity which impacts the tax return you are preparing. Your client refuses to take appropriate action and provide corrected amounts to be included in the return. You should:
- Disclose the suspected fraudulent activity to relevant third parties.
- Disclose the suspected fraudulent activity to the IRS and other tax authorities.
- Do nothing and prepare the return. You are required to maintain the confidentiality of your client’s information.
- Consider withdrawing from the engagement.
- You just had a tax planning meeting with your client. He sold his vacation home this year and would like to know the tax consequences of this property sale. Are you required to communicate this advice in writing? Yes or no?
- Your client, ABC Corporation, wishes to engage you in doing due diligence work related to possible acquisitions of companies with similar lines of business, including XYZ Corporation among others. XYZ Corporation is also a client of your firm. Before accepting the engagement, you must:
- Disclose to both parties the nature of the existing relationships and obtain their consent before continuing.
- Disclose to ABC Corporation the nature of your relationship with XYZ Corporation and obtain ABC’s consent before continuing.
- Disclose to XYZ Corporation the nature of your relationship with ABC Corporation and obtain XYZ’s consent before continuing.
- Do nothing, as disclosing the nature of your relationship with either party would be a breach of client confidentiality.
- Your client, French Connection, LLC, has global business operations, including a presence in Quebec. The LLC has three partners, Mr. Perreault, Mr. Martin and Mr. Robert. The client engages an accounting firm in Canada to prepare the company’s required income tax filings for Canadian federal and provincial taxes. The Canadian firm has requested financial and tax data from you to prepare these returns. Can you provide it to them?
- No, any transfer of data to a third party would be a breach of confidentiality.
- Yes, because your firm is aware that the client engaged the Canadian accountants to prepare these returns.
- Yes, because the company’s CEO, Mr. Perreault, called you to say it was okay to release the information.
- Yes, but only after obtaining a signed written authorization from the CEO, one of the two other partners or another member of management allowed to provide this consent.
- Circular 230 allows the IRS Office of Professional Responsibility (OPR) to issue an expedited suspension when:
- A practitioner fails to file four of their last five individual income tax returns.
- A practitioner files a client’s tax return knowing the information is not correct.
- A practitioner charges a fee that is more than 10 times the industry standard for the work being performed.
- A practitioner obtains a restraining order against a Revenue Officer.
- A CPA has discussed the acquisition of an existing accounting practice from another CPA who operates as a sole practitioner. As part of the prospective buyer’s due diligence process, the buyer wishes to review various client files of the existing firm. Before allowing these files to be reviewed, the prospective seller must obtain consent from any client whose files are being reviewed. True or false?
- A long-time valued client disputes a fee and decides to move to another CPA firm. He requests that you transfer all information in your possession to the successor accountant and provides you written authorization to do so but refuses to pay your firm the balance due on his account. Can you withhold these records until the outstanding amount is paid? Yes or no?
- Which of the following is a common source of referrals for OPR:
- Angry clients
- IRS revenue agents and officers
- Treasury Inspector General of Tax Administration (TIGTA)
- All of the above
1. False. SSTSs are enforceable for AICPA members who perform tax services. These enforceable SSTSs apply to all tax services and are designed to 1) identify and develop appropriate standards in providing tax services and promote their uniform application by CPAs, 2) increase the understanding of CPA responsibilities by Treasury and IRS officials and encourage the development of similar standards for their personnel, 3) foster increased public compliance with and confidence in our tax system through awareness of good standards of tax practice and 4) enhance the CPA professional designation. See the AICPA’s SSTSs for more information.
2. False. Under SSTS No. 1, realistic possibility of success is the floor for an undisclosed position. This means as long as you think the outcome has a realistic possibility of success (a one-in-three chance of success if challenged by the IRS), then the position does not need to be disclosed. The AICPA has a level of confidence for tax return positions chart to help practitioners determine when tax return disclosures are necessary.
3. d. If your client has a material omission in their tax returns or engages in potentially fraudulent activity, it is the duty of the CPA to disclose the material omission or fraudulent activity to the client. The CPA should inform the client of potential penalties or other consequences if they do not correct the issue. If the client refuses, then the CPA should consider withdrawing from the engagement. With these types of situations, it is always best to discuss them with your malpractice carrier or legal counsel before continuing with the engagement.
4. No. There is no requirement that tax advice be written. Under Circular 230, practitioners have the same due diligence requirements whether an answer to a client is oral or written. Further, providing a written opinion of a tax transaction carries a higher burden and additional ethical considerations. SSTS No. 7 also provides information on the form and content of advice to taxpayers.
5. a. When a conflict of interest arises, both sides must be informed of the conflict and sign a written waiver declaring they have been informed of the conflict and agree to let you continue to represent them even though there is a conflict of interest. Under Circular 230, Sec. 10.29, these waivers should be kept for 36 months. The guidelines for conflicts of interest in the performance of federal tax services provide a good reference of what to do when a conflict of interest arise. In addition, the Journal of Accountancy published Managing Conflicts of Interest by Deborah Rood, CPA, a risk control consulting director at CNA Insurance, for additional guidance on this matter.
6. d. In order to provide tax return information to a third party, practitioners should have the client sign a Sec. 7216 waiver allowing them to provide the tax return information to the third party. Violating Sec. 7216 can result in criminal liability for practitioners. Sample consent letter templates along with other Sec. 7216 guidance and resources are available from the AICPA.
7. a. Failure to file four of your previous five individual income tax returns will lead to an expedited suspension from practice before the IRS. This allows OPR to automatically suspend a practitioner where the practitioner does not have a chance to offer a settlement with OPR or go before an Administrative Law Judge absent filing a demand for proceeding on the expedited suspension. See Circular 230, Sec. 10.82.
8. False. Due diligence when purchasing a practice is an acceptable form of client disclosure. See the AICPA Code of Professional Conduct, ET sec. 1.700.001, Confidential Client Information Rule, and related Interpretation, 1.700.050, Disclosing Client Information in Connection With a Review of the Member's Practice. Some other disclosures that do not meet this standard include leaving documents with client information on your desk overnight or throwing out client information without shredding it.
9. Both yes and no, depending on the situation. A dispute over fees generally does not relieve the practitioner of his or her responsibility to return client records. Providing the member’s work product, work papers or member-prepared records is a different matter. Client records do not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner's firm pending the client's fulfillment of his or her contractual obligation to pay fees with respect to the document. However, if Form 8879, IRS efile Signature Authorization, is provided to a client for signature, it must be accompanied by a copy of the applicable tax return. If a client requests their documents back prior to a practitioner receiving payment for the work done, then the answer may vary depending on the state. The safest way to typically proceed would be to make copies of any documents the client needs to file their returns. This allows the client to still timely file their returns. Since work is being done for the client at their request, then a reasonable fee for making the copies or electronic copies of the documents is appropriate. See Circular 230, Sec. 10.28 and Practitioners' Responsibilities in Complying With Records Requests from The Tax Adviser.
10. d. Anyone can make a referral to OPR. While a lot of referrals to OPR come from dissatisfied clients, many referrals come from interactions between the practitioner and the IRS. These referrals vary from being unprofessional with an operator on the Practitioner Priority Service support line to a revenue agent discovering a practitioner deducts personal vacations on Form 1040 Schedule A.
How did you do?
Give yourself 5 points for every correct answer and find out your tax ethics mastery level.
0 – 10 points = Novice. It’s time to take it back to the basics. Study the Statements on Standards for Tax Services to get the essentials.
10 – 30 points = Experienced. Keep it up. You’re on the right track. Explore the Tax Section’s Tax Ethics & Professional Standards page to reach your full potential.
30 – 45 points = Expert. You’re almost there. Review the Tax Practice Quality Control Guide to get to the next level.
50 points = Master. You have a solid knowledge of your ethical responsibility, and you keep doing you.
The bottom line
Ethical dilemmas occur in practice all the time. Not every situation is black and white. The AICPA’s extensive ethics resources are tools that every practitioner can use in successfully navigating these often confusing situations. Members of the AICPA’s Tax Section are provided four complimentary webcasts each year including an annual tax ethics update.