Tax Practice Responsibilities

By Thomas J. Purcell III

Editor:Thomas J. Purcell III

Are CPAs preparing tax returns subject to preparer penalties under the Internal Revenue Code when they prepare a Form 990 for a nonprofit organization? If a preparer gives gratuitous advice to a neighbor about the proper form to use to report a transaction on a tax return, could the IRS penalize him or her if that advice is erroneous? When could preparers be subject to AICPA ethical actions if they do not ask clients for additional clarifying information in completing tax returns? How can CPAs reconcile their tax practice responsibilities under the Code, the regulations, and professional ethics requirements?

These and other questions are considered by the AICPA Tax Division’s Tax Practice Responsibilities Committee (TPRC). There are 15 tax committees and technical resource panels in the Tax Division and numerous task forces. Members of these groups are appointed for one-year terms following an application and selection process. (For information about service, visit the AICPA's volunteer site.)

This quarterly column provides an overview of the three areas of jurisdiction that address the tax practice responsibilities part of CPA tax professionals’ practice. The objective of this and future columns is to provide information that will enable practitioners to become better informed about and meet their legal, regulatory, and ethical responsibilities as professionals.

Roles and Responsibilities of the TPRC

The two primary functions of the TPRC are to:

  • Monitor and make recommendations on internal (AICPA Statements on Standards for Tax Services) and external (Circular 230; statutory preparer and practitioner penalties) rules regulating the conduct of tax practice; and
  • Maintain relations with the IRS director, Office of Professional Responsibility, who has authority to discipline practitioners in their practice before the IRS.

The TPRC is composed of volunteer members representing a wide set of constituencies within the AICPA. Members come from Big Four firms, large national firms, local and regional firms, industry, and education. Many of the members coordinate or participate in overseeing tax practice matters within their firms.

Recent Changes in the Tax Practice Environment

Tax practice oversight efforts by Congress, the IRS, and the AICPA are not stagnant. In the past several years there have been major statutory changes governing tax preparers, with related regulatory activity. In response to the perceived need for greater oversight of the tax preparation part of tax practice, in 2010 the IRS expanded its scope of and processes for regulating tax return preparers. As the environment has evolved, the AICPA has responded by revising its ethical standards to address the increasingly complex professional practice of taxation.

The most important point to note is these changes affect any covered practitioner who engages in tax practice, not just those individuals who might specialize in or devote a significant portion of their professional practice to tax services. Since the scope of the changes is broad, it is important for all practitioners who might engage in any tax services to determine the level of their professional responsibility for the tax services they are offering or intend to offer to clients.

Recent Statutory and Regulatory Changes

In 2007, Congress revised the preparer penalty that addressed negligent or intentional activity giving rise to an understatement of tax on an income tax return. The revisions to Sec. 6694 expanded its scope from being limited to only income tax returns to (potentially) covering all tax returns. In addition, the changes elevated the required level of authority needed to avoid the preparer penalty and increased the penalties for failure to comply. Conforming changes were made to Sec. 6695 (which imposes penalties on return preparers, e.g., for failing to provide a client with a copy of the return) by expanding its scope from income tax to all tax returns.

Prior to revision, the level of authority required to avoid preparer penalties was the realistic possibility of success (RPOS) upon challenge (a one-in-three likelihood). The initial revised authority level would have enabled a preparer to avoid an understatement only if the position causing the understatement had a more-likely-than-not (MLTN, or more than 50%) expectation of success upon examination. This MLTN standard was greater than the authority level under the accuracy penalties of Sec. 6662 applicable to taxpayers (substantial authority, or approximately 40% likelihood of success).

The AICPA and others in the tax practice community were concerned about this disparity and requested that the MLTN level of authority be confined to tax shelters or willful and reckless conduct. In 2008, Congress revised the 2007 changes to the Sec. 6694 penalty standard to match that imposed on taxpayers at the substantial authority level (more than the RPOS of one in three but less than the 50% MLTN, or approximately a 40% likelihood of success). As with prior provisions, even if the level of authority could not be satisfied, preparers could avoid the penalty if the position was reasonable (approximately a 20% likelihood of success) and was properly disclosed (either on the return or to the taxpayer).

In addition to changing the Sec. 6694 penalty avoidance standards, the 2007 revisions also increased the amount of penalties that could be imposed. Monetary fines were increased from $250 to $1,000 for covered understatements, and an additional measure of damages was added, so the penalty now is the greater of $1,000 or 50% of the income generated from the engagement in which the tax return understatement occurred (Sec. 6694(a)(1)). The dollar amount penalty is increased to $5,000 for willful or reckless conduct. Note that the threshold for the penalty is an understatement of tax on a covered tax return (Sec. 6694(b)).

The IRS quickly released guidance and regulations to implement these changes, with final regulations effective for returns filed and advice provided after December 31, 2008 (T.D. 9436). Returns covered by Secs. 6694 and 6695 include, among others, Forms 706, 709, 940, 941, 990PF, 990T, 1040, 1065, 1120, 1120S, and 5500, with the higher willful or reckless behavior rules applying to the preparation of, for example, Forms SS-8 and 990 and forms in the 1099 series (Rev. Proc. 2009-11).

The regulations are extensive, and full discussion is beyond the scope of this column. A few key points, however, include:

  • “Preparer” is defined as the signing preparer and anyone else who either prepares a substantial portion of the return or provides advice on return entries; it specifically excludes clerical workers and employees who prepare their employer’s return;
  • There is only one preparer per position who may be liable for penalties, rather than one preparer per return (thus, there can be multiple preparers on the same return); and
  • Employers of tax return preparers may be liable if management knew of or participated in the activity or if it either failed to implement review procedures or had such procedures but was deficient in monitoring them.
Recent Changes in IRS Oversight of Tax Practice

Circular 230 governs practice before the IRS. Traditionally, CPAs, attorneys, and enrolled agents (and several other specialized groups) were subject to oversight by the IRS in their client representational activities. Practice before the IRS is defined as “all matters connected with a presentation to the [IRS] . . . relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the [IRS]” (Circular 230, §10.2(a)(4)). This includes preparing and filing documents, communications, and representing a client before the IRS. It also includes “rendering written advice with respect to any entity, transaction, plan or arrangement . . . having a potential for tax avoidance or evasion.”

Although tax return preparation is a covered activity for practitioners subject to Circular 230 jurisdiction, in the past tax return preparation by noncovered practitioners (i.e., those preparers who were not CPAs, attorneys, or enrolled agents) was not regulated by Circular 230. In 2010, to address significant perceived problems among this large group of noncovered paid preparers, the IRS expanded this jurisdiction to cover tax return preparation by registered tax return preparers (RTRPs), a newly designated group of paid preparers.

RTRPs will be required to complete a competency-level examination prior to being allowed to practice and to maintain skills through mandatory annual continuing education. In addition, an RTRP’s right to practice is limited to preparation of tax returns and representation of clients at the agent level for examinations of tax returns that they prepared. They are subject to the same sanction regime that applies to other covered professionals.

As part of expanding its tax preparer oversight authority, the IRS required that all tax return preparers, not just RTRPs, obtain a personal tax identification number (PTIN) that must be affixed to the prepared return. CPAs are exempt from the competency-level examination and mandatory CPE requirements, but not from the requirement to obtain a PTIN. For a fuller discussion of the PTIN requirements, see Hodes et al., “Regulation of Tax Return Preparers.”

Circular 230 is administered by the IRS Office of Professional Responsibility (OPR). The OPR has the authority to impose a variety of sanctions on covered practitioners whose conduct is found to be actionable. These sanctions can vary from simple warnings to public censure, monetary fines, and suspension from practice before the IRS for a stipulated length of time. In addition, the names and geographic practice jurisdictions of practitioners who have been adjudged deficient are published on the IRS website. CPAs who are sanctioned by the OPR are also subject to the automatic opening of an ethics investigation by the AICPA Professional Ethics Executive Committee.

One of the significant types of practitioner conduct that can result in sanctions is disreputable behavior. This includes criminal conviction, disbarment, knowingly or recklessly rendering false opinions, willfully evading tax, and failing to file personal income tax returns. An analysis of published OPR enforcement actions for 2009 indicates that almost 25% were related to failure by practitioners to file their personal returns, while during the first half of 2010 this number shrank to slightly less than 7%.

Recent Changes in AICPA Ethical Rules Governing Tax Practice

The Tax Executive Committee (TEC) of the Tax Division was authorized by the AICPA Council in October 1999 to promulgate binding tax ethical standards, known as Statements on Standards for Tax Services (SSTS). After proposed SSTS have been exposed, comments considered, modifications (if any) made, any re-exposure conducted, and final wording approved by the TEC, these standards are enforceable as part of the AICPA’s Code of Professional Conduct and are binding on any CPA who is subject to the code. The initial SSTS were effective on October 31, 2000. In 2009 these standards were revised and exposed for comment. Following those comments, further revisions were made, and the final revisions became effective on January 1, 2010. The current text of the SSTS can be downloaded from the AICPA website.

The SSTS are not limited to federal income tax engagements but extend to any tax engagement conducted by a CPA. They cover tax return positions (SSTS No. 1), answers to questions on returns (No. 2), procedural aspects of preparing returns (No. 3), use of estimates in preparing returns (No. 4), departure from previously concluded positions (No. 5), knowledge of error (No. 6), and form and content of advice to clients (No. 7). Two interpretations of original SSTS No. 1 were issued, and these are in the process of being revised as of this writing. A future column will discuss the proposed form of these interpretations.

In addition to clarifying amendments and some consolidation from the 2000 version of the SSTS, the most significant 2010 revision is in SSTS No. 1 and deals with the minimum level of support that must be present before a member can recommend a tax position. Recognizing that the federal tax environment in this area has changed, the new standard indicates that members must comply with standards imposed by applicable taxing authorities. However, if the taxing authorities have no standards or have standards lower than the AICPA standard, the member must adhere to the AICPA standard. SSTS No. 1 indicates that the level of support for a tax position in these circumstances is the RPOS standard—i.e., the member should not recommend a position or sign a tax return that takes a position unless the member is satisfied that there is a RPOS that the position will be upheld upon review by taxing authorities or judicial bodies. This standard is the same one that existed in the prior SSTS and generally has a one-in-three likelihood of success.

If there is not a RPOS, a member may still recommend a position or sign a return, provided there is a reasonable basis (approximately 20% likelihood of success) for the position. Therefore, since the current federal standard of Sec. 6694 is the substantial authority standard and exceeds the realistic possibility standard, members should adhere to the substantial authority standard in federal tax matters covered by Sec. 6694. However, for state, local, or international tax matters where there is no standard or it is less than the realistic possibility standard, members will be held to the SSTS No. 1 standard of RPOS.


Future columns will discuss in more detail aspects of these three parts of oversight of tax practice, as well as expanding areas of concern for taxpayers, such as compliance with the new codified economic substance doctrine. The TPRC is in the process of studying the need for tax practice aids that would help practitioners manage tax engagements so they can be confident they have met their ethical responsibilities.


Thomas Purcell III is a professor of accounting and professor of law at Creighton University in Omaha, NE. He is a member of the AICPA’s Tax Practice Responsibilities Committee. For more information about this column, contact Prof. Purcell at

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