Ethical Issues for the Tax Practitioner

Article excerpt

In today's dynamic and competitive environment, tax practitioners are faced with increasing risk of lawsuits from clients, penalties from the Internal Revenue Service (IRS) and sanctions from professional bodies. In order to survive professionally, the tax professional would be well advised to consult a variety of sources to maintain the highest possible standards.

The ethical issues relating to potential conflicts arising from the various aspects of the tax practitioner's role are examined below.

The Practitioner as Advisor

The practitioner's role as advisor is one of helping the taxpayer to create transactions and develop facts, rather than being limited to the presentation and legal characterization of historical facts. This places the practitioner in a position where it is necessary to satisfy the client's desires to minimize the tax burden while at the same time considering the rights of third parties, the public and particularly the tax system when devising a strategy for the client.

Ethical Prohibitions Concerning Recommendations

The nature of prohibited transactions is such that extreme cases (those clearly fraudulent or clearly supportable) are much easier to recognize than transactions falling somewhere in between. Statutory provisions, which impose civil and criminal penalties for activities such as assisting in the preparation of false documents, regulate actions easily identifiable as noncompliant.

Most transactions falling into the planning area are not fraudulent, yet there is some doubt as to whether the matters will withstand factual and legal analysis. Professional ethical standards are helpful to the practitioner in determining the "realistic possibility" of the factual scales tipping toward the client's position.

The "realistic possibility" standard is addressed by the professional standards of accountants and lawyers, as well as by the IRS. These authorities are in basic agreement about the necessity for positions to meet the standard of realistic possibility of success.

Ethical Standards in the Tax Planning Context

In the tax planning context, the tax practitioner ought to observe an even higher level of ethics than is required by various bodies. For example, communicating with the client regarding subsequent developments that may affect advice previously given is certainly an important step.

Advice based on an existing situation should be tempered with precautionary language to the effect that advice may later change if there are changes in the underlying facts and/or relevant authorities.

Practitioners' Obligation with Respect to Factual and Legal Bases for Advice

The practitioner's obligation regarding the factual and legal bases for advice given to clients is to provide the client with a competent representation of the law relating to the facts of the case, while exercising due diligence with respect to communications with the client on issues under the auspices of the IRS. The Treasury Department (Treasury) has proposed amendments to Circular 230 that would preclude a practitioner from recommending a course of action that puts the client in a position of substantial understatement. The proposed regulations would require the practitioner's exercise of "due diligence" in determining the client's potential liability for the substantial understatement penalty.

Extent of Research Required to Render Advice

The answer to the question of how much research must be performed before advising the client falls general competence in the area in question and due diligence. A practitioner needs enough technical knowledge and skill to reasonably expect to complete services rendered with professional competence. …