Academic journal article Journal of the International Academy for Case Studies

Ethical Issues in Professional Tax Practice

Academic journal article Journal of the International Academy for Case Studies

Ethical Issues in Professional Tax Practice

Article excerpt


CPA tax practitioners operate in a highly competitive environment. When employed in aggressive firms, they face strong incentives to maximize professional revenue. They may confront immense pressure to retain old clients and recruit new ones. At times, these clients may demand that their CPAs utilize aggressive tax positions to minimize tax liabilities. But there are technical and ethical limits on the tax positions a CPA can take. The CPA who oversteps these limits can suffer numerous sanctions including penalties, malpractice claims, expulsion from the AICPA, loss of a CPA license, and even imprisonment.

Recent problems related to aggressive tax shelters illustrate the prevalence of these pressures and sanctions (Kahn, 2003; Halper, 2005.) Large accounting firms have suffered penalties for providing overzealous tax advice. Some tax preparers feel pressured to provide aggressive tax advice because their clients are aware of the low percentage of tax returns subjected to audit. But if tax preparers permit even minor violations of tax law, they can create an atmosphere that is desensitized to unethical conduct.

The market for tax advice is large. Yetmar and Rioux (2004) report estimated expenditures of $11 billion for professional tax advice in 2002 with 62% of returns receiving professional advice. Their research also reports that approximately one-fourth of all preparers will be assessed a preparer penalty during their careers.

The tax profession has recognized the need for sensitivity to ethics issues. A study of senior level members of the AICPA found that 47% considered their most difficult ethical issue to be "client proposals of tax alteration and tax fraud" (Finn, Chonko & Hunt, 1988.) According to a 1997 survey of members of the AICPA Tax Division, personal moral values and standards, followed by the firm culture and management philosophy, were of greater help to the tax professional in ethical dealings than professional guidelines, although to some extent the fear of losing licensure did affect work-related ethics (Yetmar, Cooper & Frank, 1999.)

In response to a need for effective ethical guidelines, the AICPA adopted new tax practice standards in 2000. The Statements on Standards for Tax Services (SSTS) replaced the more advisory Statement on Responsibilities in Tax Practice. Preface #1 of the SSTS states:

"Practice standards are the hallmark of calling one's self a professional. Members should fulfill their responsibilities as professionals by instituting and maintaining standards against which their professional performance can be measured. Compliance with professional standards of tax practice also confirms the public's awareness of the professionalism that is associated with CPAs as well as the AICPA."

Ethics instruction should be an essential component of today's tax curriculum, yet it is often overlooked (Grasso & Kaplan, 1998; Finn et al 1988.) Ethics cases are common in the audit and assurance services area, but there is a strong need for ethics cases in tax (Grasso and Kaplan, 1998; Hite & Hasseldine, 2001.)

In addition to the prevalence of ethical issues in the tax setting, ethics issues are commonplace in the general business setting, leading to a call for better ethics education in business schools. The AACSB has gathered numerous articles on ethics education at its ethics education resource center with many of these articles containing relevance for the taxation classroom. The report of the Ethics Education Task Force of AACSB International (2004) stresses this ideal in their introduction: "This report is based on the premise that the time has come for business schools--supported by AACSB--to renew and revitalize their commitment to the centrality of ethical responsibility at both the individual and corporate levels in preparing business leaders for the twenty-first century. …

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