The answers to these frequently asked questions (FAQs) are based on guidance developed by the Statements on Standards for Tax Services (SSTSs) Guidance Task Force in response to questions that were presented during the SSTS public exposure period and since that time in administering the SSTSs. These FAQs are not rules, regulations or official statements of the Tax Executive Committee issued pursuant to its rule-making authority and, therefore, are not authoritative guidance.
The SSTSs should be used in conjunction with these FAQs. The answers to these FAQs may not necessarily address the requirements of other regulatory bodies, including State Boards of Accountancy, the Internal Revenue Service and other tax regulatory bodies whose rules may differ from those of the AICPA. A member should always consult these other sources to ensure compliance with all appropriate regulatory requirements.
A member has concluded there is a reasonable basis for a tax return position and recommends the position to a taxpayer. What are the basic considerations in recommending disclosure that will constitute adequate disclosure?
Paragraph 14 of Statement No. 1 provides that a member’s determination of whether information is “appropriately disclosed” by the taxpayer “should be based on the facts and circumstances of the particular case and the disclosure requirements of the applicable taxing authority.” Disclosure should generally include a description of the position that is being taken, the amount of tax at issue and the basis for the position. It is also important to consider whether the relevant taxing authority has specific disclosure requirements.
What constitutes appropriate disclosure for purposes of Paragraph 5(b) of Statement No. 1?
Where the tax authority has a specific form for disclosure
Where the taxing jurisdiction has administrative or guidance with required contents for disclosure
Where there is neither form nor guidance
Where the tax authority has a specific form for disclosure – The member should use the specific form of the tax authority for purposes of disclosure.
Where the taxing jurisdiction has administrative or guidance with required contents for disclosure – The member should follow the procedures set forth in the administrative or judicial guidance.
Where there is neither form nor guidance – The member should disclose the position being taken, the amount of tax in issue and the basis for the position.
How does a member satisfy the disclosure requirements of Statement No. 1 when the member merely recommends a tax position, but is not engaged to prepare or sign the related tax return?
A member who recommends a position but is not engaged to prepare or sign the related tax return, will be deemed to meet the disclosure requirement, if the member advises the client concerning the appropriate disclosure of the position.
Should a member prepare and sign a tax return on the basis of the taxpayer's appraisal report (in the following situation)?
A member is preparing an income tax return for a taxpayer who has made a substantial charitable contribution of artwork. While the member believes there is a reasonable basis for the appraisal report provided by the taxpayer, he does not believe it meets the tax authority's higher standard for undisclosed tax positions. Should the member prepare and sign the tax return on the basis of the taxpayer's appraisal report?
A member may still prepare or sign the return if the member concludes there is a reasonable basis for the position and the member advises the taxpayer to appropriately disclose the position.
If the particular facts and circumstances lead a member to believe a taxpayer penalty might be asserted, the member should also advise the taxpayer and should discuss with the taxpayer the opportunity, if any, to avoid such penalty by disclosing the position on the tax return. Although a member should advise the taxpayer with respect to disclosure, it is the taxpayer's responsibility to decide whether and how to disclose.
If a member concludes there is reasonable basis for a position that income is not subject to taxation in a particular state, what disclosure is required under Paragraph 5(b) of Statement 1 (in the following situation)?
A member has been engaged by a taxpayer to prepare an income tax return which will be filed in State T. State T has written reporting and disclosure standards with respect to recommending tax return positions and preparing and signing tax returns. State T's standards are lower than the realistic possibility of success (RPOS) standard. The taxpayer wants to take a position that a significant amount of income is not taxable in State T because the income is not properly sourced to State T under existing statutes, regulations and case law. The member concludes the position does not satisfy the RPOS standard. However, the member believes that State T's statutes and regulations are not entirely clear, and the taxpayer has a reasonable basis for taking the position. If the member concludes there is reasonable basis for the position that the income is not subject to taxation in State T, what disclosure is required under Paragraph 5(b) of Statement 1?
If the position of the taxpayer does not satisfy the RPOS standard, the member should use professional judgment to determine whether the taxpayer has a reasonable basis for the position that the income is not subject to taxation in State T.
May a member prepare and sign a return with 100% business use of an automobile on the Schedule C if the taxpayer doesn't have adequate substantiation (in the following situation)?
A member is engaged by a taxpayer to prepare her federal individual income tax returns, which includes a Schedule C. The member has been furnished with a copy of the taxpayer's general ledger which includes expenditures for automobile expenses. The member also furnishes the taxpayer with the substantiation requirements for automobile expenses. The taxpayer has indicated she believes her auto use is 100% business. The member has informed the taxpayer she does not have adequate substantiation to deduct 100% of the automobile expenses. May the member prepare and sign the return with 100% business use of the automobile on the Schedule C?
No. If the member determines that, in his or her professional judgment, the taxpayer does not have reasonable basis for her position of deducting 100% of the automobile expenses recorded in the general ledger, then the member should not prepare or sign the income tax return reflecting such a position. No disclosure can make this an appropriate position to take on the tax return.
Has a member complied with the standards for appropriate disclosure set forth in Paragraph 5(b) of Statement No.1 if, subsequent to sending the taxpayer a signed original copy of the completed tax return along with the appropriate disclosure attached to the taxpayer for signature and filing by the taxpayer, the taxpayer removes the disclosure(s) and files the return (in the following situation)?
A member has completed and sent to the taxpayer a signed original copy of taxpayer’s state tax return for the taxpayer’s signature and mailing. The state does not have written standards with respect to preparing tax returns. Included in the return is an appropriate disclosure, as required under Paragraph 5(b) of Statement No. 1, of a tax return position for which the member has concluded there is reasonable basis. Has a member complied with the standards for appropriate disclosure set forth in Paragraph 5(b) of Statement No.1 if, subsequent to sending the taxpayer a signed original copy of the completed tax return along with the appropriate disclosure attached to the taxpayer for signature and filing by the taxpayer, the taxpayer removes the disclosure(s) and files the return with the applicable taxing authority?
Yes. The member’s responsibility for advising a taxpayer that a tax return position should be “appropriately disclosed” by the taxpayer is deemed to have been met if, after preparation of the tax return is complete, a copy of the original return along with the appropriate disclosure or disclosures attached is signed by the member and sent by the member to the taxpayer for signature and filing by the taxpayer.
The member should also assess whether to continue a professional or employment relationship with the taxpayer.
If Form 8275, Disclosure Statement, is required, may a member electronically file a return without it (in the following situation)?
A member is engaged to prepare the income tax returns for a corporation. The Internal Revenue Service requires the federal return to be filed electronically. The member has received and reviewed the taxpayer’s tax accrual workpapers and has concluded there is not “substantial authority” for a position the taxpayer wants to take, but there is a “reasonable basis” for a position that the taxpayer wants to take. The member timely communicates to the taxpayer there is a reasonable basis for taking the position but that it has to be appropriately disclosed by attaching a properly completed Form 8275 to the return. The member prepares a memorandum for her files documenting this communication with the taxpayer. The return with Form 8275 is sent to the taxpayer with an authorization form to electronically file the return with sufficient time for review and completion of the electronic filing authorization. A few days before the filing deadline, the taxpayer returns the signed e-filing authorization but instructs the member to remove Form 8275 before filing. May the member electronically file the return without Form 8275?
No. The member may not electronically file the return without Form 8275, the specified disclosure form.
The AICPA’s Statements on Standards for Tax Services (SSTSs) are enforceable tax practice standards for members of the AICPA. Additional guidance is also found in the corresponding interpretations and frequently asked questions (FAQs). Access to the complete set of SSTSs and guidance are available in the AICPA’s Statements on Standards for Tax Services Library.