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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