Chapter 1Introduction to Tax Practice and Ethics

William A. RaabeGerald E. WhittenburgDebra L. SandersRoby B. Sawyers

Elements of Taxation

Elements of Tax Practice

Elements of Tax Practice Tax compliance

• Gathering of pertinent information, evaluation• Evaluating and classifying the information• Filing of necessary tax returns• Representing clients before the IRS during tax return audits

Tax planning • Arranging transactions to optimize (usually minimize) tax

liability• tax avoidance – legitimate• tax evasion – illegal

• Planning undertaken for • open transactions – plan for pending future transactions• closed transactions – plan for how to best present past

transactions

Elements of Tax Practice

Tax litigation• Settling disputes with the IRS in court• Attorneys usually handle litigation beyond initial

appeal of an IRS audit

Tax research• Analyze and determine answers to tax problems• Steps:

• Identify issues• Determine proper authorities• Evaluate appropriateness of authorities• Apply authority to specific fact situation

Sources of Rules and Ethics for Tax Practitioners

Who May Practice

“Practice” before IRS• Represent clients during audits

Who may practice• Attorneys• CPAs• Enrolled agents

• Enrolled = passed IRS exam or formerly employed by IRS for 5 years

• Enrolled actuaries• Limited practice without enrollment

Proposed Requirements for Tax Return Preparers

Tax Return Preparers Must register with IRS, pay a fee, and obtain a

preparer tax identification number (PTIN)

Pass competency tests

Continue education 15 hours per year

Subject to tax compliance checks

Must follow Circular 230 ethics standards

Practice Before the IRS (Circ. 230)

Circular 230 subpart B provides a set of rules of conduct, which includes:• Must furnish information to the IRS on request• If have knowledge of client’s omission, must

advise client of both error and remedy• Exercise due diligence• Must not unreasonably delay matters before the

IRS• May not act as a notary public for clients• May not charge contingent or unconscionable fees• Must promptly return all client records upon

request (but may keep copies of client records)

Solicitation and Advertising (Circ. 230)

Most media permissible

Cannot contain false, fraudulent, coercive, or unfair statements

Must comply with ethical standards of other authorities (e.g., ABA, AICPA, State CPA societies, state regulatory agencies, National Association of Enrolled Agents, etc.)

Best Practices (Circ. 230)

Aspirational standards to help tax advisors provide clients with the highest quality representation concerning Federal tax issues. Standards address:• Communications with clients• Establishing relevant facts• Evaluating reasonableness of assumptions• Relating the law to the facts• Arriving at supported conclusions• Advising clients of the conclusions• Acting fairly and with integrity before the IRS

Positions and Covered Opinions (Circ.230)

A practitioner should not recommend a position unless the position has a more-likely-than-not possibility of being sustained on its merits

Strict standards for written communication encompassing a covered opinion• A “covered opinion” is written advice that

concerns• A tax avoidance transaction• A transaction where the principal purpose is tax

avoidance or tax evasion• Reliance or marketed opinion• A transaction subject to confidentiality provisions• A transaction subject to contractual protection

Other Written Advice (Circ. 230)

A practitioner should not give written advice that:• is based on unreasonable factual or legal

assumptions (including assumptions as to future events

• unreasonably relies upon representations, statements, findings or agreements of the taxpayer or any other person

• does not consider all relevant facts that the practitioner knows or should know

• takes into account the possibility that the return will not be audited, that the issue will not be raised in an audit, or that an issue will be resolved through settlement if raised

AICPA Code of Professional Conduct

Governs AICPA members• All services provided by CPAs

Purpose is to provide:• Enforceable comprehensive code of ethical and

professional conduct• Guide for members in answering complex questions• Assurance to the public

Other guidance comes in the form of:• Interpretation of the rules• Ethics rulings• Ethics features

Departures from this Code must be justified

Independence (Rule 101)• A CPA in public practice must be independent of

enterprise for which services are being provided• Independence is impaired if certain financial

relationships exist with a client, e.g.:• Direct or material financial interest in client’s

business• Jointly held material investments• Loans to or from the client• Officer, director, employee or underwriter of the

client

Integrity and objectivity (Rule 102)• Services must be provided with objectivity and

integrity and avoid conflicts of interest

AICPA Code of Professional Conduct

General standards (Rule 201)• Competence• Due professional care• Adequate planning and supervision• Obtain sufficient relevant data for conclusions or

recommendations

Compliance with standards (Rule 202) and accounting principles (Rule 203)• No departures unless departure is described, its effect is

described, and justification for departure is disclosed

Confidential client information (Rule 301)• No disclosure without client consent • Exceptions:

• Conflict with rules 202 and 203 • CPA served with subpoena or summons

AICPA Code of Professional Conduct

AICPA - Code of Conduct

Contingent fees (Rule 302)• Fees must not be contingent on findings of

services (e.g., type of audit opinion)

Acts discreditable (Rule 501)• Committing a felony• Failing to return client records after a client

request • Signing a false concern• Issuing a misleading audit opinion

Advertising and solicitation (Rule 502)• Cannot use false, misleading, or deceptive

advertising/solicitation

AICPA - Code of Conduct

Commissions and referral fees (Rule 503)• Cannot receive a payment for referral of a

product or service of a third party to a client• Accepting payment would create conflict of interest• Exception: A CPA performing only tax work or other

nonaudit work may accept a commission

Form of organization and name (Rule 505)• Form

• Only those forms allowed by state law or regulation, usually a proprietorship, partnership,or professional corporation

• Name• Cannot use misleading name• Acceptable to use past owners’ names

Statements on Standards for Tax Services

Statements on Standards for Tax Services (SSTS) issued by AICPA intended to:

• Address problems inherent in the tax practitioner’s dual role in serving the client and the public

• Supplement AICPA Code of Professional Conduct and Circular 230

Statements on Standards for Tax Services Tax return positions (SSTS 1)

• Should have good-faith belief that position has a realistic possibility of being sustained

Answers to questions on returns (SSTS 2)• Reasonable effort to obtain information to answer all questions• Exceptions:

• Data not readily available and not significant to the outcome of return

• Meaning of question uncertain• Answer too voluminous

• Not acceptable on Form 1120

Certain procedural aspects of preparing returns (SSTS 3)• May rely on client information without verification unless

information appears to be incorrect, incomplete, inconsistent• Not required to examine supporting documents

Statements on Standards for Tax Services Use of estimates (SSTS 4)

• Use estimates if impractical to obtain exact data and if estimates appear reasonable

• Disclosure of estimates may be necessary:• Records destroyed by disaster• K-1’s not received

Departure from a position previously concluded in an administrative proceeding or court decision (SSTS 5)• Prior year disposition may not prevent

recommending a different treatment of a similar item in a later year

• CPA and IRS not bound to act consistently with previous position, IRS usually is consistent, however

Statements on Standards for Tax Services

Knowledge of error (SSTS 6)• Must inform client upon discovery of an error in a

previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return

• Must recommend appropriate action• Not the CPA’s duty to inform tax authority

Form and content of advice to clients (SSTS 8)• Judgment reflects professional competence• Use written communication for complex matters• Oral communication okay for simple matters

Sarbanes-Oxley and Taxation

Auditors may not provide certain nonaudit services to audit clients• Sarbanes-Oxley Act of 2002 lists nine such

prohibited services

• List does not include tax services

Services not listed may be provided • But only if approved in advance by the audit

committee

Nonregulatory Ethical Behavior Models

Nonregulatory ethics involve making choices that are not always clearly spelled out (resolving ethical dilemmas)• Ethical reasoning

• End-based – An action is right if it produces at least as much net good as any alternative action could have produced

• Rule-based – Rules are made to apply to everyone with no exceptions

• “Zero Tolerance”

• Care-based – Decisions based on the treatment you yourself would like to receive (Golden Rule)

Sources of Ethical Behavior and Impacts

Legal Research by CPAs

When does undertaking tax research become the unauthorized practice of law?

Different tests/standards across time• Shouldn’t be wholly within the field of law

• Should be incidental to accounting practice

General rule: CPAs should avoid providing general legal services