Real World Business Ethics for Tax Practitioners How Will You React ?

• Chapter 1 - Case 1 - Scrap Metal Aggregators, Inc. - You Are the Tax Return Preparer
  • Learning Objectives
  • Introduction
  • Focus Points: Statements on Standards for Tax Services
  • Recent Independence Developments
  • Ethical Guides
  • Case Study Facts
  • Case Study Questions
  • Suggested Readings
• Chapter 2 - Case 2 - Radar One, LLP - You Are the Amended Return Preparer
  • Learning Objectives
  • Introduction
  • Focus Points: Treasury Circular 230
    • Subpart A - Rules Governing Authority to Practice
    • Subpart B - Rules Governing Authority to Practice
    • Subpart C - Sanctions for Violations of the Regulations
  • Strengthening Circular 230: Tax Shelter Best Practices
    • Best Practices
    • Compliance Procedures and Discipline of Oversight Personnel
    • Covered Tax Shelter Opinions - New Requirements
  • Recent Tax Shelter Fraud Cases Featuring Preparers
  • Ethical Guides
  • Case Study Facts
  • Case Study Questions
  • Suggested Readings
• Chapter 3 - Case 3 - Military Communications Corp. - You Are the Outside Tax Advisor
  • Learning Objectives
  • Introduction
  • Focus Points: Section 409A - What It Is, Why It Is Important, When It Applies and to Whom It Applies
    • What Is Section 409A and Why Is It Important?
    • Application of Section 409A
    • Documentary Compliance versus Operational Compliance
    • What to Do in 2008
    • What About Private Companies – How Do You Know If an Option or SAR Was Granted at Less
      Than Fair Market Value?
  • Other Corporate and Individual Tax Implications Related to Backdated Options
  • Potential Solutions Now Being Used to Address Backdated Options and Discounted Stock Rights
  • Recent &A Regulatory Advisories on Options
  • A
  • Ethical Guides
  • Case Study Facts
  • Case Study Questions
  • Suggested Readings
• Chapter 4 - Ethics Focus: Accounting and Auditing
  • Ethics Overview
  • Recent Developments
  • Spotlight on Independence
  • Key Ethical Dilemmas
  • Addressing Ethical Dilemmas
  • Available Resources
• Chapter 5 - Latest Developments
• Appendix A - Ethics Interpretation and Conceptual Framework
• Appendix B - Designing an Ethics Training Program
  • What Is an Ethics Training Program?
  • What Are the Objectives of an Ethics Training Program?
  • What Makes Up an Ethics Training Program?
  • How Does the Organization Implement an Ethics Training Program?
  • Who Provides Ethics Training?
  • Who Is the Ethics Training Program Directed To?
  • What Issues Are Commonly Encountered in Designing Ethics Training Programs?
  • How Does an Organization Evaluate the Effectiveness of Its Ethics Training Program?
  • What Follow Up Should Take Place after the Ethics Training Program Is Initiated?

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Chapter 1 - Case 1 - Scrap Metal Aggregators, Inc. - You Are the Tax Return Preparer

Learning Objectives

• Review Statements on Standards for Tax Services and their application.
• Understand the ethical obligations of CPA tax professionals under the SSTSs.

Introduction

Today's tax practitioners must be familiar with three significant resources that contain ethical standards and related information bearing on their practices:

• The AICPA Statements on Standards for Tax Services, or SSTSs, as enforceable under the Code of Professional Conduct;
• Treasury Circular 230; and
• Consequences for ethical violations as provided in the Code.

This chapter and the case study focus on the SSTS regime. The following chapter and case study will cover Treasury Circular 230 and associated Code provisions. As you review the SSTS provisions, keep in mind that there is some overlap with Treasury Circular 230, particularly with respect to taking positions, preparing and signing returns. The overlap, however, does not mean that the SSTS regime and Circular 230 are identical in their application - you may encounter situations that require you to apply both before advising a client about a position and preparing or signing a return.

There is one other important distinction between the SSTS regime, on the one hand, and the ethical standards of Circular 230 and consequences imposed under the Code, on the other. Circular 230 and the Code apply only to federal tax practice, and the Code applies only to income tax return preparation. In contrast to this, SSTSs apply to all types of tax practices. Tax practitioners should keep the broad application of SSTSs in mind when considering their professional responsibilities.

Focus Points: Statements on Standards for Tax Services

Effective October 31, 2000, the Tax Executive Committee of the AICPA adopted eight Statements on Standards for Tax Services (SSTS) as enforceable tax practice standards for AICPA members. The SSTS regime was designed to harmonize federal and state tax practice standards by giving recognition to the fact that many states and courts, as well as the Service, had come to explicitly or implicitly use the preexisting Statements of Responsibilities as substitute standards for tax practice where none existed. Compliance with the eight standards is mandated by Rules 201 and 202 of the Code of Professional Conduct.

The rationale for adopting the eight Statements was well described both in the preface to the Statements and the letter of April 18, 2000 to AICPA members from the Chair of the Tax Executive Committee:

...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.

The letter from the Chair went on to state that, "The promulgation of practice standards also reinforces one of the core values of the AICPA Vision - that CPAs conduct themselves with honesty and integrity."

Here is a brief summary of the eight standards:

• SSTS No. 1 - Tax Return Positions (Including Interpretation Nos. 1-1 and 1-2)
  • A CPA should not recommend a position be taken on a return unless he/she has a good faith belief that, if challenged, the position has a reasonable possibility of being sustained; this is called the realistic possibility standard.
    Avoid this Pitfall. Note that §10.34 of Circular 230 also contains the realistic possibility standard, but uses language that varies from that in SSTS No.1; in general, §10.34 uses more objective language and measurements than those in SSTS No. 1. As these provisions co-exist, CPAs must consider the language of §10.34 and SSTS No. 1 when recommending tax return positions and preparing or signing returns.
  • Meeting the realistic possibility standard of SSTS No. 1 means the CPA should have a good faith belief that the position is warranted by existing law or can be supported by a good faith argument for extension, modification, or reversal of existing law via administrative or judicial action.
    Avoid this Pitfall. The likelihood of audit or detection should not be taken into account when considering if the standard is met.
  • A CPA should not prepare or sign a return as preparer if the CPA knows the return takes a position that may not be recommended as meeting the realistic possibility standard.
  • The CPA preparing or signing a return should advise the taxpayer, when relevant, concerning the potential penalty consequences of a tax return position and the opportunity, if any, to avoid the penalty through disclosure.
  • Interpretation No. 1-1 discusses the application of the realistic possibility standard in specific fact scenarios, including instances where the standard is not met but disclosure of the position is provided and the position is not frivolous.
  • Interpretation No. 1-2, issued in October 2003, expands on tax planning services, specifically the obligations to establish relevant background facts, consideration of the reasonableness of assumptions and representations, application of pertinent authorities, consideration of the business purpose and economic substance of the transaction, and a conclusion supported by the authorities. Again, specific fact illustrations are provided with the relevant conclusions.
• SSTS No. 2 - Answers to Questions on Returns
  • This Statement governs the standards for a CPA when signing as a preparer if one or more questions on the return are not answered.
  • A reasonable effort must be made to obtain information from the taxpayer that is necessary to provide appropriate answers to all "questions," on a tax return. The term "questions" must be broadly interpreted to include information requested on the return, in the instructions, or in the regulations.
  • Reasonable grounds to omit information from a return may include that the information is not readily available and is not significant in terms of taxable income or loss or the tax liability shown on the return.
• SSTS No. 3 - Procedural Aspects of Preparing Returns
  • When preparing or signing a return, a CPA may rely, without verification, on information furnished by the taxpayer or a third party.
  • If information appears incorrect, incomplete, or inconsistent, a CPA should make reasonable inquiries, including examining or verifying supporting data, including referring to prior years' returns or even information related to another taxpayer or its return.
• SSTS No. 4 - Use of Estimates
  • Unless prohibited by law, this Statement permits the use of taxpayer estimates if it is not practical to obtain exact information and the CPA determines that the estimates are reasonable based on the known facts and circumstances.
    Avoid this Pitfall. Taxpayer estimates should be presented so as not to imply greater accuracy than exists.
• SSTS No. 5 - Departure from a Previous Position in Administrative or Court Action
  • A CPA may recommend a different tax position in a later year's return than that determined in a prior administrative or court proceeding unless the taxpayer is bound to a specified treatment by a formal closing or other agreement.
  • A CPA may prepare or sign a return that departs from the treatment applied in a prior administrative or court proceeding to a prior year's return, but must consider factors such as the existence of a consent or court decision in evaluating whether the standards in SSTS No. 1 have been met.
• SSTS No. 6 - Knowledge of Error in Return Preparation
  • A CPA who becomes aware of an error in a previously filed return, including a position, omission, or method of accounting that does not meet the standards in SSTS No. 1, should inform the taxpayer promptly and recommend corrective action.
  • This Standard applies whether or not the CPA prepared or filed the return containing the error, and applies to positions that do not meet the standards due to legislation, court decisions, or administrative proceedings with retroactive effect.
  • The only exception: errors that have an insignificant effect on tax liability.
    Avoid this Pitfall. A CPA cannot inform the taxing authority of the error without the taxpayer's permission, except when required by law.
  • If a CPA is asked to prepare the current year's return and the taxpayer has not corrected a prior year's error, the CPA should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer. If the CPA does continue the relationship, he/she is obligated to take reasonable steps to ensure the error is not repeated.
• SSTS No. 7 - Knowledge of Error in Administrative Proceeding
  • In an administrative proceeding, a CPA who becomes aware of an error (as defined in SSTS No. 6) should inform the taxpayer, recommend corrective measures, and ask the taxpayer to agree to disclose the error to the tax authority.

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