Integrating Tax Ethics Into the First Tax Course

Editor: Annette Nellen, J.D., CPA

Tax planning and compliance activities are significant subsets of the overall responsibilities of tax accounting professionals. Students who study taxation encounter technical tax concepts and practice issues as they learn how to apply tax rules, minimize tax obligations, and report the results of tax transactions to the IRS. Because students generally are in the early stages of their professional development, they easily can be exposed to professional ethics issues and preferred professional behaviors in common ethical situations as they learn more about tax technical content and the practical implementation of those rules.

Background

Accountants who practice as CPAs in the United States are either directly subject to the AICPA Code of Professional Conduct (the AICPA Code) or indirectly governed by it through an incorporation-by-reference process of their state licensing governing body. State boards of public accountancy require some testing on the topic of ethical responsibilities before granting an applicant CPA status, and they increasingly require regular continuing education in ethics.

The AICPA Code requires members to adhere to certain binding professional standards. In 1999, the AICPA governing Council authorized the AICPA Tax Executive Committee (TEC) to act as the Institute’s professional standard-setting body in tax matters. Acting on that authority, the TEC issued Statements on Standards for Tax Services (SSTSs) and several related Interpretations. The SSTSs and Interpretations are available on the AICPA website.

The SSTSs generally cover:

• Expected standards of support for positions that the CPA includes on tax returns;
• Approach to answering tax return questions;
• Reliance on information provided by clients and others;
• Using estimates on tax returns;
• Taking positions that vary from previously reported positions;
• Responsibilities upon learning of errors on prior returns; and
• Tax advice to clients.

Most tax textbooks contain some reference to tax ethical responsibilities and mention the existence of the SSTSs, but generally this coverage is limited and does not offer any depth in addressing tax ethical issues. Using materials prepared specifically for classroom use, the author has for many years expanded coverage of these topics in the introductory tax course, believing that an ethical foundation is the cornerstone upon which this profession is based, and therefore that accounting students should be exposed at multiple levels to the variety of ethical issues they might face in their careers.

Department Goals and Objectives

After extensive discussions, the Department of Accounting at Creighton University concluded that it was essential for all undergraduate accounting majors to be familiar with professional codes of conduct. In addition, the department thought students needed to study at least one such code and apply its tenets in a developmentally appropriate setting for undergraduate students. To adhere to these objectives, courses in the major should build on the two required ethics courses (one a classical, philosophical study of ethics and the other an applied business ethics course) that all Creighton business college students must complete to graduate. As a result, the department adopted a Professional Values Learning Goal and several supporting learning objectives for the program. To implement these goals and objectives, assessment processes were embedded into various courses. The progress on meeting these assessments is discussed in annual department meetings and modified as necessary. The learning goal and learning objective relevant to this column are:

• Learning Goal 1: Professional Values and Attitudes: Graduates of the Creighton Accounting Program should possess an understanding of the accounting profession and what it stands for, and what it means to become an accounting professional and participate in and contribute to the advancement of the ideals of the accounting profession. Specific objectives are as follows. Students will be able to:

• Learning Objective 3: Demonstrate the ability to resolve ethical conflicts in the context of professional codes of conduct governing accounting practice.

  • Assessment measure: Students will demonstrate their understanding of the use of professional codes of conduct to resolve ethical conflicts.
  • Embedded assessment: The SSTSs will be tested on an exam essay question that contains a hypothetical fact pattern calling for the student to apply the standards in an ethical conflict situation.

The listed embedded assessment is a course requirement for the first tax course, which is usually taken in the second semester of the junior year. Other codes of conduct are addressed in other content-relevant courses, such as auditing and information systems.

Pedagogical Approach

To prepare students to fulfill Learning Objective 3, the author employs several pedagogical techniques:

• Two 75-minute class periods are devoted to covering the material;
• Each student is provided both a hard copy of and a link to the SSTSs and Interpretations;
• Prior to the classes in which the SSTSs are covered, students are expected to complete a reading assignment with hypothetical questions drawn from the SSTSs and Interpretations;
• In the first class period, the instructor provides an overview of the SSTSs and Interpretations using a PowerPoint presentation and engages in discussions about the ethical responsibilities of tax practitioners generally; topics such as Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and Secs. 6694 (return preparer penalty) and 7216 (penalty for unauthorized disclosure of return information) also are covered; and
• In the second class period the hypothetical questions are discussed, and then students are provided with suggested solutions.

In recent years, an increasing number of Creighton finance students have taken the first tax course as part of a financial planning track in the finance major. In the future, the author intends to monitor the development of the AICPA’s Proposed Statement on Standards in Personal Financial Planning Services (PFP Standards) and consider using them as a companion to (or a substitute for) the SSTSs. The exposure draft for the PFP Standards is available here. 

Finance students taking their first tax course are expected to complete the SSTSs project. In programs that have separate tax courses for personal financial planning students and for tax students, the PFP Standards might be used in lieu of the SSTSs. However, the PFP Standards have not yet been adopted. Furthermore, there is a significant body of interpretive literature that supports the tax standards, which will not exist for the PFP Standards for some time after they are finalized.

Assessment of Student Performance

Students are tested on the assigned tax ethics material in two ways:

• Objective questions test overall knowledge of the SSTSs, Circular 230, and Secs. 6694 and 7216; and
• An essay question based on a hypothetical case tests more detailed knowledge of the SSTSs.

The essay question that has been used addresses two broad areas: (1) the level of substantial authority needed to include a position on a tax return and (2) the approach that should be taken when discovering an error on a prior tax return. Students are allowed to use their SSTSs handout and the PowerPoint handout with their notes in answering this question. The most recent case used is shown in Exhibit 1.

In preparation for the exam, students are provided with the general grading rubric that is used in grading the essay question. When grading each question, the instructor uses a table for the grading rubric. The left column lists the four desired or expected achievements that demonstrate mastery of the learning objective. The headings for columns 2–6 correspond to assessment of the student’s performance (as demonstrated by the answer) in meeting the objective. For each cell in the table, the student receives points corresponding to the numeric value in the columns 2–6 labels. For example, if a student demonstrates partial understanding of the first objective, three points are awarded. Twenty total grading points are available, which then are converted into the exam points available for the question. The most recent grading table is shown in Exhibit 2.

Once the exam has been graded, the results of the essay question are discussed in class, and additional discussion is devoted to issues that were unclear to students.

The department monitors students’ performance on this project to ensure that Learning Objective 3 is being met. Targets are set in advance of the assessment process and then are evaluated after obtaining results. For example, the department might set as a target that 80% of the students completing the assessment question will earn a grade of at least 75%. After each grading period, the author collates the data for all sections and compiles the overall percentages. At a department meeting, these results and those of other assessment activities are discussed and decisions are made about future program targets, approaches, and modifications that are needed to the department’s overall assessment activities.

In the author’s experience, students find it easy to move from general business ethics and integrity concerns to tax ethics issues, even in the first tax class. While discussing advanced practice and ethical issues, such as Internal Revenue Code and Circular 230 rules regarding tax shelters, listed transactions, and economic substance, cannot be easily addressed in the first tax course, topics such as protecting the privacy of client information (Sec. 7216), adhering to a set of principles before taking a position on a tax return (SSTS No. 1, Tax Return Positions, and Sec. 6694), and having to correct mistakes on prior returns (SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings) are relatively straightforward issues that even a student new to tax practice can understand.

It also is possible to reinforce these previously covered ethics rules as the course progresses. For example, when discussing tax research and tax planning, it is natural to refer to prior coverage of SSTS No. 1, Circular 230, and Sec. 6694 regarding the tax professional’s responsibility for ensuring there is substantial authority for recommended tax positions.

Relevance to Practitioners

Practitioners are expected to know the applicable professional ethics standards and to follow them when they serve their clients. To reinforce this expectation to adhere to an external professional code of conduct, most state boards of public accountancy require CPAs to earn a minimum number of hours of credit in professional ethics to maintain professional licensure.

The transition from an academic environment to the rigors of professional practice can be daunting for even the brightest students. Practitioners generally provide training for newly hired young professionals, but many times this training focuses on technical rules and procedures. Practitioners should consider expanding entry-level training to include commonly encountered ethical situations, such as those illustrated above. For example, senior members of the firm could develop a few ethical scenarios, based on their experience, to use for ethics training. As part of the preparation for tax busy season, reviewing the SSTSs and Circular 230 (in addition to the latest changes in technical rules) can provide significant benefits. Setting a tone of high ethical expectations, and providing the tools to meet those expectations, for young tax professionals from the outset of their careers, will benefit the firm, individuals, and, ultimately, the profession and society.

Conclusion

Ethical conduct is the foundation of the accounting profession. A specific subset of ethical guidance addresses common problems encountered in practicing tax. While the full complexities of tax practice are beyond the grasp of students in their first tax course, the rudiments of acceptable behavior are clearly accessible. Academics should consider expanding the coverage of tax ethics topics in their courses, and practitioners should consider providing more ethics training for entry-level professionals.