The Search for Enforceable Tax Practice Standards
Gardner, John C., Woehlke, James A., Journal of Accountancy
Where should CPAs look to find tax practice standards? The search begins with the Internal Revenue Code. It continues with circular 230 and other Treasury and IRS pronouncements, case law, the AICPA Code Professional Conduct, applicable state ethical rules and regulations and "voluntary" standards such as the AICPA tax division's statements on responsibilities in tax practice (SRTPs). This article discusses each of these as it applies to the search for enforceable tax practice standards.
IRC TECHNICAL STANDARDS
The tax code imposes technical standards via its civil and criminal penalty provisions. Several of these provisions apply to tax return preparers as defined in IRC section 7701(a)(36). In general, anyone who prepares an initial tax return or a later amended return or claim for refund may be classified as a return preparer. Regulations explaining this tax code definition also stress that an individual can be a preparer "without regard to educational qualifications and professional status requirements."
Several of the tax code's penalty provisions apply directly to tax return preparers. IRC section 6694(a) imposes a $250 fine on a return preparer if any part of an understatement on a return he or she prepared results from a position "for which there was not a realistic possibility of being sustained on its merits."
An exception to this rule exists if the position is not frivolous and is disclosed on the return.
Under IRC section 6694(b), a $1,000 penalty may be imposed on a tax return preparer (1) if there is a "willful attempt" to understate tax liability or (2) for any reckless or intentional disregard of rules or regulations. Proposed regulations under section 6694(b) provide a tax return position contrary to rules and regulations will not be penalized if it is not frivolous, as long as the position is disclosed.
Other practices standards found in the penalty provisions of the tax code include
* Knowingly aiding or abetting in preparation of any document for any tax matter leading to an understatement of tax liability (IRC section 6701).
* Promoting abusive tax shelters (IRC section 6700).
* Disclosing taxpayer information (IRC sections 6713 and 7216).
* Aiding or assisting in preparation of a false return (IRC section 7206).
CPAs, attorneys and enrolled agents, who ar epermitted to practice before the IRS, are governed by circular 230, which is included in Treasury Department regulations sections 10.01-.98. According to section 10.2(a), "'Practice before the [IRS]' comprehends all matters connected with presentations to the [IRS] ... relating to a client's rights, privileges or liabilities under [Internal Revenue] laws or regulations...." This includes representation of clients at IRS conferences and preparing and filing documents with the service.
Circular 230 establishes four broad standards all tax practitioners must follow.
* A tax practitioner is required to "submit records or information in any matter before the IRS, upon proper and lawful request...." (section 10.20).
* If a CPA is aware of any client omission, noncompliance or error in any document that has been filed with the IRS, the accountant "shall advise the client promptly of the fact of such noncompliance, error or omission" (section 10.21).
* Practitioners are required to exercise due diligence (which itself is not defined) in assisting or preparing a tax return, in determining whether verbal and written communications to the IRS are correct and in determining whether written or oral advice given to a client is correct regarding "any matter administered by the IRS" (section 10.20).
* Practitioners are expected to avoid "disreputable conduct," which includes such activities as giving false or misleading information to the IRS, using false or misleading information to attract clients and using abusive language with IRS agents (section 10. …