An Overview of AICPA and IRS Rules of Practice

By Gerard H. Schreiber Jr., CPA

Editor: Thomas J. Purcell III, CPA, J.D., Ph.D.

The ethical standards to be followed by CPAs in tax practice require them to know about applicable rules of the AICPA and the IRS and other statutory and regulatory rules of tax practice. This column refreshes practitioners on the AICPA and IRS rules of practice, provides a list of resources for questions and answers, and details the relationship and similarities between the AICPA and IRS ethics standards related to tax practice.

Comparisons are made among the AICPA Code of Professional Conduct (the AICPA Code), AICPA Statements on Standards for Tax Services (the Standards), Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and the Internal Revenue Code (IRC) and other Treasury regulations. In addition to these, tax practitioners should be aware of state board rules and state statutes governing practice in the practitioner’s jurisdiction and any tax compliance filings in the jurisdiction where the client’s tax return is filed.

The AICPA Code and the Standards are enforceable rules for all AICPA members in public practice and industry. Circular 230 applies to all CPAs in federal tax practice, and the IRC and Treasury regulations are enforceable on both practitioners and the public. Many of these rules are available on the AICPA Tax Section’s Standards and Ethics webpage.

The number and increases in the amount of penalties in the IRC in recent years make following the tax practice standards all the more important.

Integrity and Objectivity

AICPA Code Rule 102, Integrity and Objectivity, states, “In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”

Included under this section is Interpretation 102-2, “Conflicts of Interest,” which states:

A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product, or service that could, in the member’s professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member’s objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, the rule shall not operate to prohibit the performance of the professional service. When making the disclosure, the member should consider Rule 301, Confidential Client Information [ET Section 301.01].

Circular 230, Section 10.29, Conflicting Interests, is a more rigid rule than the one in the AICPA Code. It defines a conflict as

  1. The representation of one client will be directly adverse to another client; or
  2. There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner.

Circular 230 also indicates the practitioner may represent the client if

  1. The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client;
  2. The representation is not prohibited by law; and
  3. Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner. The confirmation may be made within a reasonable period of time after the informed consent, but in no event later than 30 days. [Circular 230, §10.29(b)]

Circular 230 also requires that the written waiver obtained from the client be retained by the practitioner for 36 months and that it be made available to the IRS upon request.

The many entity choices available to taxpayers create situations that necessitate vigilance over possible conflicts. Practitioners commonly perform tax services for different generations and members of families; partnerships and their individual partners; corporations and their individual shareholders; and fiduciaries and their beneficiaries. These situations increase the need to evaluate whether there is a conflict, and if so, disclosing it and obtaining a waiver from the client.

Conflicts of interest have received increased attention and focus in recent years in The Tax Adviser (see Horwitz, “Conflicts of Interest: IRS Rules Differ From AICPA Professional Standards,” 42 The Tax Adviser 776 (November 2011)) and comments from Karen Hawkins, the director of the IRS Office of Professional Responsibility. The AICPA Tax Practice Responsibilities Committee is updating a guide on conflicts for members.

General Standards

AICPA Code Rule 201, General Standards, includes four standards for professional practice for all AICPA members: professional competence, due professional care, planning and supervision, and sufficient relevant data.

Circular 230, Section 10.22, Diligence as to Accuracy, is the corresponding IRS rule. This rule encompasses all documents submitted to the IRS including “tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters.” Also included under this section are “oral or written representations made by the practitioner to the Department of the Treasury.”

All practitioners must exercise due diligence in everyday tax practice. The broad language of Circular 230 extends past the preparation of income tax returns and tax planning and includes much of the work performed by practitioners on federal tax matters.

The current penalty regime and increased documentation requirement for tax return items place more importance on the due-diligence steps taken in the preparation of income tax returns and other filings and submissions to the IRS. The IRS has also indicated the Return Preparers Program (Internal Revenue Manual §4.1.10) applies to all examinations, and examiners must evaluate whether a referral should be made.

Practitioners are now faced with more due-diligence requirements on taxpayer-provided information, including items such as extensions, contributions, business auto mileage, elections, and answers to questions on returns. Accepting from a taxpayer the answer “same as last year” might not satisfy the due-diligence obligation under Circular 230 (see Schneid, “Due Diligence Update,” 43 The Tax Adviser 340 (May 2012)).

Tax Return Positions

AICPA Statement on Standards for Tax Services (SSTS) No. 1, Tax Return Positions, paragraph 1, defines a tax return position as “(i) a position reflected on a tax return on which a member has specifically advised a taxpayer or (ii) a position about which a member has knowledge of all material facts and, on the basis of those facts, has concluded whether the position is appropriate.”

Relevant portions of Circular 230 include Sections 10.34 (standards for advising with respect to tax return positions and for preparing and signing returns), 10.35 (requirements for covered opinions), and 10.37 (requirements for other written advice). Statutory rules are contained in IRC Secs. 6662 (accuracy-related penalties) and 6694 (understatement of taxpayer’s liability by tax return preparer).

Most practitioners do not realize the correlation between SSTS No. 1 and the Circular 230 and IRC sections on tax return positions. There is no definition on the IRS website of a “tax return position.”

Practitioners should consider the definition in SSTS No. 1 when advising taxpayers on transactions and amounts that may be reported on their tax return. Practitioners may be surprised to find that many routine matters and items in return preparation and tax planning are tax return positions under the SSTS No. 1 definition. Examples include:

  • Elections filed with returns, including the choice of a depreciation method;
  • Net operating loss carryover or carry-
  • Choice of an accounting method;
  • Sec. 179 depreciation;
  • Bonus depreciation;
  • Installment reporting of gains;
  • Use of safe-harbor methods; and
  • Reporting business-use mileage on Form 4562, Depreciation and Amortization (Including Information on Listed Property) .

Some authors have suggested payroll tax return preparation items and amounts are included as tax return positions.

The complexities of tax services require the practitioner to be vigilant in return preparation and tax planning due to the broad definition of, and increased penalties associated with, tax return positions.

Answers to Questions on Returns

SSTS No. 2, Answers to Questions on Returns, provides guidance to AICPA members on answering questions on tax returns.

SSTS No. 2, paragraph 1, indicates “[t]he term questions includes requests for information on the return, in the instructions, or in the regulations, whether or not stated in the form of a question.”

SSTS No. 2 discusses situations in which it is important to make a reasonable effort to obtain the information to provide appropriate answers to questions on returns. In addition, the standard provides guidance on when there are reasonable grounds for omitting an answer to a question on a return.

The increasing number of questions on tax returns and reporting requirements in recent years complicates return preparation and processing. Some tax return questions have no relation to the computation of tax and correctness of information of the return being filed. In addition, many questions on returns, including those concerning entity ownership, have a relation to penalties that may be assessed against the taxpayer. Following the principles of SSTS No. 2, the preparer must use professional judgment to determine whether these questions must be answered or may be omitted.

Certain Procedural Aspects of Preparing Returns

SSTS No. 3, Certain Procedural Aspects of Preparing Returns, sets standards for members in examining or verifying supporting data when preparing a return. Circular 230, Sections 10.22 and 10.34, and IRC Sec. 6694 correspond with SSTS No. 3. Practitioners are presented with information from taxpayers and third parties when preparing returns. Questions arise as to how much due diligence and verification should be applied to such information.

For example, practitioners regularly receive information from various sources, including Forms 1099 and Schedules K-1. Questions arise as to how much additional verification (if any) of the reliability of such information is needed to satisfy the necessary due-diligence standard before entering the information on a return. SSTS No. 3 provides members with the necessary steps to do this analysis.

The complexities associated with transactions entered into by taxpayers and financial products bought and sold by taxpayers may require practitioners in certain instances to seek additional verification of the amounts reported on Forms 1099 (see Schneid, “Due Diligence Update,” 43 The Tax Adviser 340 (May 2012)).

Use of Estimates

SSTS No. 4, Use of Estimates, provides standards for the use of estimates by members in the preparation of a tax return. IRS guidance is lacking on this subject, and this standard provides guidance to AICPA members. SSTS No. 4 indicates a member may use the taxpayer’s estimate in the preparation of a tax return when not prohibited by statute if it is not practical to obtain exact data and the member determines that the estimates are reasonable, based on the facts and circumstances known to the member.

Departure From a Previously Concluded Position

SSTS No. 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision, provides standards for members in recommending a tax return position that departs from the position determined in an administrative proceeding or in a court decision with respect to the taxpayer’s prior return.

A member may recommend a tax return position or prepare or sign a return that departs from the treatment of an item as concluded in an administrative proceeding or court decision with respect to a prior return of the taxpayer, provided the requirements of SSTS No. 1 for tax return positions are satisfied.

Knowledge of Error

SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, provides standards for when a member becomes aware of an error in a taxpayer’s previously filed return; an error during an administrative proceeding, such as an IRS examination; or a taxpayer’s failure to file a return. Circular 230, Section 10.21, Knowledge of Client’s Omission, corresponds with SSTS No. 6. While Circular 230 covers a broader range of documents than SSTS No. 6, including “any return, document, affidavit, or other paper which the client submitted,” SSTS No. 6 provides more definitions of terms, examples, guidance, and special considerations.

The practitioner must advise the client promptly of the error or omission and advise on the consequences to the client of neglecting to correct the error or omission (see Sonnier, “Circular 230, Section 10.21, and SSTS No. 6: Standards Relating to Taxpayer Errors and Omissions,” 43 The Tax Adviser 544 (August 2012)). 

Form and Content of Advice to Taxpayers

SSTS No. 7, Form and Content of Advice to Taxpayers, provides standards for members in providing advice to taxpayers and considers circumstances in which a member has a responsibility to communicate with a taxpayer when subsequent events affect advice previously provided. Circular 230, Section 10.33, Best Practices for Tax Advisors, also contains recommendations concerning certain aspects of practice. SSTS No. 7 provides more clarity in communicating tax advice with clients and contains additional matters to consider when rendering advice (see Schreiber, “Circular 230 Best Practices,” and Sonnier, “Circular 230: Its Day-to-Day Impact on Tax Practices,” 43 The Tax Adviser 130 (February 2012)).

Confidential Client Information

AICPA Code Rule 301, Confidential Client Information, governs AICPA members and client information. IRC Sec. 7216 and Section 10.20 of Circular 230 provide law and IRS regulations concerning the confidentiality of client information. It should be noted that criminal penalties are associated with IRC Sec. 7216, and this section expands the definition of a preparer beyond IRC Sec. 7701(a)(36) and Regs. Sec. 301.7701-15 (see Bond, et al., “Current Tax Return Disclosure Issues Involving Sec. 7216,” 44 The Tax Adviser 546 (August 2013)).


The different rules of the AICPA, the IRS, state statutes, and state boards necessitate that members be familiar with them in their everyday practice. The AICPA Standards provide guidance to members and go a step further in explaining sound principles for members to follow in these circumstances. IRS rules dictate the IRS position on what practitioners must do in applicable circumstances.

The AICPA Tax Practice Responsibilities Committee is issuing answers to frequently asked questions (FAQs) on the Standards to assist members in answering questions that arise in practice. These new FAQs, along with other, currently available FAQs, will be available on the AICPA Tax Section’s Standards and Ethics webpage.

See the table for a summary of the AICPA and corresponding IRS rules of practice.



Thomas Purcell is a professor of accounting at Creighton University in Omaha, Neb. Gerard Schreiber is a partner with Schreiber & Schreiber CPAs in Metairie, La. Prof. Purcell and Mr. Schreiber are members of the AICPA Tax Practice Responsibilities Committee. For more information about this article, contact Mr. Schreiber at

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