Ethical Responsibilities in Tax Practice

Subject: Finance
Pages: 6
Words: 1661
Reading time:
6 min

Introduction

Best practices guidelines allow tax practitioners to do the right thing for the clients and themselves as a way to avoid the penalties and repercussions of being guilty of unethical practices. Circular 230, Section 6695 and Section 6694 together with the Statements on Standards of Tax Practice (SSTPs) provide sufficient information on the ethical responsibilities of those who practice before the Internal Revenue Service (IRS).

What is a practice, who may practice?

Practice before the IRS refers to the authority to represent the taxpayer before the IRS. The qualified person to represent a taxpayer must have qualification documents. In addition, practice refers to the presentation of all matters before the IRS, which includes the representation of taxpayers as mentioned above and returns preparation. Moreover, the practice covers the provision of written advice regarding any entity, plan, transaction, or arrangement that will cause tax avoidance. The professionals allowed to practices are attorneys, enrolled agents, certified public accountants (CPAs), and in special circumstances, enrolled retirement plan agents or enrolled actuaries might be permitted to practice based on specifications of the Internal Revenue Code as provided in Circular 230. In exceptional circumstances, low-income, taxpayer clinic student interns and un-enrolled return preparers together with appraisers are allowed to practice. All the individuals authorized to practice may lose their privilege due to particular actions. Further, the IRS does not recognize corporations and non-individual entities. It also does not recognize individuals who fail to meet requirements for practice, for example, timely renewal of their application.

Rules on return of client records

It is important for practitioners to return any record provided by a client. The return must happen promptly, and the existence of fee disputes should not hinder the commitment to return. The only exceptions that a practitioner may enjoy are when state laws permit retention of original records and allow the creation of copy for retaining. When complying with the provisions, the practitioner must still return the records if they are required to accompany a tax return. The practitioner also has to give full access to the client to review and copy records when necessary especially when the client needs to company with Federal tax obligations. The records of clients relate to the records that existed before the client engaged the practitioner. The client or others may have prepared them. At the same time, the practitioner can make records then give them to a client for complying with federal tax obligations. Exceptions exist for return, schedules and other records that would be made by the practitioner and are withheld as part of a bargain in a fee dispute.

Violations, which are subject to penalties under Code sections 6694 and 6695

Preparers can be penalized by Internal Revenue Code section 6694 penalties without having seen a tax return. To avoid penalties, preparers must use reasonable cause and act in good faith always. Violations that attract penalties include understatement due to unreasonable positions and understatements caused by willful or reckless conduct. Preparers will face penalties when they knowingly or recklessly disclose or use information that was presented to them as part of filing an income tax return before obtaining the right authority to do so from concerned parties. The protection against the penalties occurs when the preparer makes adequate disclosure, and there is reasonable cause. In addition, there could be protection when there was no reason for the preparer to know.

Section 6695 will penalize a preparer when he or she does not sign a return or a claim, when the preparer fails to furnish the tax authority with his or her taxpayer identification number and when the preparer fails to disclose it whenever necessary. Other penalties occur when preparer does not keep a copy or list of returns or claims prepared. A requirement for preparers is to keep the list of claims for at least three years after the return period is over. Preparers must comply with requirements for maintaining information about all perpetrators that they employ to fill returns or claims and when they fail to do so, they face a penalty. A penalty will also arise when a practitioner negotiates or endorses a federal income tax check that goes to a taxpayer, or when there is a failure to meet due diligence requirements.

Statements on Standards of Tax Practice (SSTPs)

Accounting practice standards for use in tax practice provide a number of behaviors that would be appropriate for use in individual and professional settings. However, the interpretation and use of a particular behavior require sufficient knowledge of the motivation behind the standard. The American Institute of Certified Public Accountants (AICPA) sets the standards for tax practice and periodically lets its Tax Executive Committee update elements of the standards of tax practice. Practitioners then rely on existing standards to understand their expected conduct about federal and state laws. Members of the AICPA rely on SSTPs to do their job in an ethical manner. All ethical requirements that pertain to their job the SSTPs cover them. Meanwhile, the SSTPs get periodic updates to reflect changes in law and state regulations concerning tax practice. The SSTPs do not absolutely fit all situations that a practitioner faces as part of his or her practice. However, the SSTPs provide the most realistic approach for dealing with all situations that may arise.

Statement 1 of SSTP covers tax return positions and offers guidelines for AICPA members when recommending a tax return position. It also works when they are signing tax returns. It calls for members to consider the existing tax standards of an authority they work under when recommending a tax return position so that they are not defeated in an administrative or judicial challenge to their position. Considerations should be made to ensure there is a reasonable basis for a position and appropriate disclosure of a position. On the other hand, the Statement 1 of SSTP prohibits members from recommending a tax position, preparing or signing a tax return to reflect a position as long as the preparer affiliated with AICPA knows that the following conditions are true. The position exploits the audit selection process of a taxing authority, or it will be used as an arguing position to obtain an advantage during negotiations with taxing authority.

Statement 3 of SSTP provides members with procedural aspects that they should follow when preparing returns. Although a member can forward information from taxpayers in good faith, he/she must know that such information has implications because the preparer will eventually declare the information as true. Furthermore, the liability for accurate information falls on the preparer of tax returns to an extent. The ultimate liability falls on the taxpayer. It is the duty of the preparer to assist the taxpayer in providing relevant and accurate information and documentation. In this regard, a member is encouraged to look into prior records of tax returns for clarifications whenever necessary.

Statement 4 of SSTP provides guidelines on how to use estimates in the course of preparing tax returns. It explains that estimates are allowed as long as it is impractical to get exact data, and there is no statute or rule prohibiting estimates. Several cases call for use of statements such as when records are missing when the returns are being filled, the essential thing is to disclose the estimates such that they do not appear falsely accurate and at the same time make disclosures in cases where non-disclosure is likely to mislead taxing authority.

Statement 5 of SSTP guides members in cases where they recommend a position that is different from an earlier position obtained by an administrative proceeding or a court decision. The statement clarifies the scope of administrative proceedings to include an examination by a taxing authority and it allows members to recommend a different tax position for tax returns in another year in the future. The member will have to follow through with the recommendations of recommending a tax position presented in Statement 1 of SSTP, and as long as he/she does that, there will be no violation of the required ethical code of practice. However, limitations will arise when there is a formal closing agreement that requires the member to refrain from departing from an earlier recommended position by an administrative proceeding or a court decision. This statement takes care of the fact that previous position could have been recommended due to lack of documentation and that circumstances might have changed to favor the taxpayer’s current position such that it makes sense to recommend a different position. The important thing to note while following the provisions of Statement 5 of SSTP is to ensure that Statement 1 SSTP provisions are all met.

Statement 6 of SSTP provides the procedures that members will follow whenever they discover errors. The errors can be in the taxpayer’s previous returns, or they can exist in a return that should go into administrative proceedings. Other errors arise due to the taxpayer’s failure to file the required tax return. An error is a position, an omission, or a method used in accounting. It arises when at the time of filing the return, statement 1 of SSTP was violated regarding tax return positions. The only exception is when there is a criminal proceeding. The ethical conduct expected of members is to inform the taxpayer about the error as soon as possible. The member must notify the taxpayer of any consequences that may arise, and while doing so, he/she should offer remedial action recommendations. Members must evaluate the records of a taxpayer regarding the previous year’s returns and then act in a manner to ensure that past failure to prepare returns. When making representations of a taxpayer in an administrative proceeding, statement 6 of SSTP requires the member to inform the tax authority and he/she would do this by requesting the concerned taxpayer to disclose the error. This follows that the member will have informed the taxpayer of the error and advice on the likely consequences of the error.