Why the AICPA SSTSs and IRS Circular 230 Should Be Added to CPAs’ Lists of Favorite Resources

By Donna Sauter, CPA, Sacramento, Calif.

Editor: Valrie Chambers, Ph.D., CPA

Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service, and the AICPA Statements on Standards for Tax Services (SSTSs) are crucial guidelines for tax professionals. They set standards for daily tax position decisions, workpaper documentation, document scrutiny, client communication, and practicing before the IRS. These documents are as useful as a master tax guide or tax handbook, and practitioners should refer to them as frequently as technical guides when confirming a tax position or treatment of a deduction. Becoming intimately familiar with a CPA's professional responsibilities may ultimately save the CPA from time-consuming and costly litigation or disciplinary proceedings.

Many times, busy careers and never-ending deadlines tempt tax practitioners to take shortcuts, discuss technical issues orally without following up with written documentation, or accept less-than-perfect supporting documentation from a client or other professional. Almost daily, practitioners decide which client documents or tax positions pass the proverbial "smell test" and when to pay attention to that gnawing gut feeling that says "dig a little deeper."

Circular 230

Circular 230 (available at www.irs.gov) may be viewed as an uninviting 44-page, dry-read document, but it can be an invaluable tool when making decisions, particularly on tax positions, documentation, and communications with clients.

The IRS most recently updated Circular 230 in June 2014. These guidelines not only inform a tax practitioner on what "must" or "should" be done in professional tax activities but also provide recommendations for how to maintain the highest-quality service that can be offered. Following Circular 230 may help tax professionals avoid tax preparer penalties, losses from litigation, and/or sanctions.

Circular 230 may appear more manageable by first considering each of its five subparts. Subpart A addresses to whom the rules apply; this includes licensed professionals. Hopefully, Subparts C and D will never apply to a given practitioner. Subpart C addresses sanctions for tax preparers who are found by the Office of Professional Responsibility (OPR) to have violated the rules, and Subpart D governs disciplinary proceedings. Subpart E is a very small section containing general provisions and an effective date.

This leaves the busy practitioner with only one section to focus on and become intimately familiar with: Subpart B, ­Duties and Restrictions Relating to Practice Before the Internal Revenue Service. This section provides the rules for engagement and addresses common situations such as what a practitioner must do when a client has omitted information from a tax return.

Having the relevant Circular 230 section on hand to share with the client has proved to be a helpful tool when convincing a potentially noncompliant client to cooperate by providing all relevant tax information. Informing tax clients that professional practitioners are subject to sanctions and must follow certain rules and guidelines takes some pressure off tax professionals; this compels more clients to be forthcoming and cooperative. The guidance helps to separate the taxpayer's responsibilities from the tax professional's. Additionally, it can remind practitioners of their ethical responsibility to provide a high-quality service/product and that severe consequences may be imposed for failure to follow professional guidelines.

Section 10.22, Diligence as to Accuracy, is short but packed with requirements, presumptions, and expectations of a practitioner's actions when preparing tax returns and engaging in other matters involving the IRS. Due diligence is a major theme in this section. For instance, Section 10.22 explains when a practitioner can reasonably rely on others and when the practitioner would be presumed to have exercised due diligence when relying on others. This can help a tax practitioner set his or her bar for how much to scrutinize the advice or opinion of others, including another tax professional.

Another helpful section is Section 10.33, Best Practices for Tax Advisors. This section seems to acknowledge that not every situation comes with a clear-cut or perfect answer. Section 10.33 provides suggestions for how to most effectively provide the highest-quality representation concerning federal tax issues, including communication with clients.

Statements on Standards for Tax Services

The AICPA's Standards contain enforceable tax ethical standards. The current version of the Standards was released in January 2010 and comprises seven statements, including explanations and interpretations. The good news is much of the guidance from the AICPA is aligned with that from the IRS, so practitioners are not following conflicting advice.

The Standards include: SSTS No. 1, Tax Return Positions; SSTS No. 2, Answers to Questions on Returns; SSTS No. 3, Certain Procedural Aspects of Preparing Returns; SSTS No. 4, Use of Estimates; SSTS No. 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision; SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings; and SSTS No. 7, Form and Content of Advice to Taxpayers.

Several of the sections in the Standards apply directly to tax preparation guidance, but the manner in which the subjects are separated into only seven sections aids in determining which section most likely applies to a particular issue or question. SSTS No. 3, for example, contains the AICPA's guidance on reliance on clients and third parties, similar to Section 10.22 of Circular 230. It advises on when to confirm that substantiation documentation exists and when to make reasonable inquiries.

Additionally, preparers will want to carefully note the auxiliary verbs, such as "should," "must," or "might." These indicators are important benchmarks and can make the difference in litigation in determining whether a practitioner followed the Standards. Members are expected to comply with the guidelines, or they may later have to explain the deviation in litigation proceedings. A "must" directive requires a practitioner to follow the guidance, and any deviation from the guidance ought to have a compelling explanation and be properly documented. Even with adequate documentation, the practitioner has a duty to follow the guidance, and any potential litigation positions may be weakened for not implicitly following the rules.

A "should" directive indicates a practitioner is not unconditionally required to follow the guidance and may have a reason for not following the directive, but, again, the practitioner ought to strongly consider the guidance before implementing other methods. During litigation proceedings and disciplinary proceedings, a pattern of not following the guidelines will indicate the practitioner's lack of due care and can cast a negative light on the practitioner's professional performance, even if the departure is not directly related to the alleged damage.


It is important to note that Circular 230 and the AICPA Standards complement each other and often overlap, but practitioners should refer to both documents when making decisions regarding a particular engagement. And when there is a variance in the guidance, the higher level of due diligence should be followed. In some instances only one guide may address a specific topic. Also, it is important to understand that these required guides do not provide tax technical advice; they provide guidance on research, documentation, taking a tax position, conveying information to clients, and representing clients before the IRS. Practitioners unfamiliar with the rules on what to do with their technical knowledge are meeting only part of their client responsibilities.

To make learning these rules easier, the AICPA and the IRS offer free webcasts, documents, articles, publications, and other materials. Adhering to the rules and guidelines may prove to be invaluable to those who receive a letter from the OPR, are assessed preparer penalties by the IRS, or are served with a malpractice lawsuit. "Did the practitioner follow the standards?" is ultimately the question asked in a tax malpractice suit. Knowing and following the rules in Circular 230 and the AICPA Standards adds a level of protection for the tax professional and the firm.



Valrie Chambers is an associate professor of accounting at Stetson University in Deland, Fla. Donna Sauter is the owner of Sauter Consulting in California’s Central Valley and a member of the AICPA Tax Practice & Procedures Committee. For more information about this column, contact thetaxadviser@aicpa.org.


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