Ethical considerations of e-business for practitioners

Editor: Roby B. Sawyers, CPA, Ph.D.

Each year more tax practitioners are using the internet to generate business and share ideas with other professionals. This column reviews ethical considerations associated with activities such as advertising on social media, using the cloud to process and store client data, and networking through online business networking platforms.

CPAs' traditional sources of guidelines and rules for ethical behavior, such as Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), the Internal Revenue Code, and the AICPA's Statements on Standards for Tax Services (SSTSs), for the most part do not directly address this paradigm shift from standard brick-and-mortar business practices to the integration of e-business techniques.

Social media has become a popular method for CPAs to advertise their services. However, practitioners need to be wary of potential ethical consequences that could easily be overlooked when posting to social media.

Three recent cases heard by the IRS's Office of Professional Responsibility (OPR) highlight some potential traps in social media advertising. OPR is the governing body responsible for interpreting and applying Circular 230. IRS employees are required to refer tax practitioners to OPR in certain situations, including for any violation of Circular 230 (Circular 230, §10.53(a)). OPR also receives referrals from state licensing authorities, tax professionals, taxpayers, and other sources.

Video content

The first OPR case involved a practitioner who advertised through online video-sharing platforms. The practitioner created video content and posted it online to generate business and help potential clients find the practitioner's firm. OPR deemed some of the content inappropriate because it portrayed IRS agents and officers in a negative light and recommended strategies that would unduly delay IRS proceedings. OPR found that these videos violated Circular 230, Section 10.30(a)(1), which states that a practitioner cannot "in any way use or participate in the use of any form of public communication . . . containing a false, fraudulent, or coercive statement or claim; or a misleading or deceptive statement or claim."

In a settlement with OPR, the practitioner received a reprimand and was required to remove the videos from all video-sharing platforms.

Website metadata

The next case involved the use of metadata. Metadata is information contained inside of a website that is not visible without special effort. These data are often used for search engine optimization, which results in a site's placing higher in a search engine's rankings. An OPR investigation found that several companies were using metadata that did not relate to their companies. For example, a firm included the names of prominent CPAs and attorneys in its metadata even though those persons did not work for it.

In this case, OPR sent a Circular 230, Section 10.20, letter requesting information about the website, including who was responsible for creating the metadata and who supervised the person who created them. This request for information is important because under Circular 230, Section 10.36(a):

Any individual subject to the provisions of this part who has (or individuals who have or share) principal authority and responsibility for overseeing a firm's practice governed by this part, . . . must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with subparts A, B, and C of this part, as applicable.

This establishes a responsibility for people overseeing a tax practice to ensure proper ethical procedures are in place and followed. Further, as noted in Section 10.36(b), any such individual who has (or such individuals who have or share) principal authority as described in Section 10.36(a) will be subject to discipline for failing to comply with the requirements of Section 10.36 if:

The individual through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that firm procedures in effect are properly followed, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with this part, as applicable; or . . . [t]he individual knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, that does not comply with this part, as applicable, and the individual, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance. [Circular 230, §§10.36(b)(2) and (3)]

It is important to note that Section 10.36 does not just refer to people employed by the firm, but also to people associated with the firm. This means that the person responsible for overseeing the tax department is responsible for ensuring compliance with these ethical procedures for employees as well as for contractors and other parties who are associated with the firm.

The typical situation often involves the individual responsible for overseeing the tax practice hiring a web designer to build the firm's webpage. Unbeknownst to the firm, the web designer then adds metadata as part of the design. In this case, the person responsible for overseeing the tax practice would have a clear responsibility to discuss the firm's and the profession's ethical regulations and requirements with the web designer and ensure that he or she complies with those rules. Failure to do so could result in sanctions against the person charged with overseeing the firm's tax department.

Advertising

The final case involved the use of false information in an advertisement. In this situation, the firm advertised in an online banner advertisement that a person employed with the firm had obtained certain educational degrees. However, that person had left the firm; yet the company continued to run the advertisement through several websites. This is a violation of the advertising rules under Circular 230, Section 10.30. To comply with this rule, firms should make sure they run ads that are unlikely to become outdated or to provide inaccurate information. They must promptly remove or discontinue distributing ones that do.

As with the previous example of a webpage designer, if a CPA firm hires a vendor to provide cloud services for processing and storing data, that cloud service company is now associated with the tax practice for the purposes of Circular 230, Section 10.36.

Circular 230, Section 10.51, states that "incompetence and disreputable conduct for which a practitioner may be sanctioned under §10.50 includes, but is not limited to . . . willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Internal Revenue Code" (Section 10.51(a)(15)). If the practitioner in charge of the tax practice hired a cloud provider without properly determining if the company had sufficient capabilities to protect client data, there could be a sanctionable violation of Circular 230.

Business networking sites are a powerful tool for CPA firms. They allow practitioners to share ideas with other practitioners, and they allow clients to find practitioners. However, several ethical considerations should be weighed before posting to these sites.

Inaccurate information

Having inaccurate information on these sites could constitute false or misleading advertising under Circular 230. For example, the use of the CPA designation by someone who is not a CPA is false and misleading, and most state CPA societies have strict rules forbidding such a practice.

Using hyperbole to describe a practitioner's experience is also a concern. The use of language like "master of all things tax" most likely exaggerates a practitioner's experience and ability and could be considered false or misleading.

Misleading endorsements

The use of endorsements on business network sites can also lead to problems. If a person endorses a practitioner who does not have knowledge in an area and the practitioner accepts the endorsement, it could be considered a false advertisement. For example, if a practitioner is endorsed as an expert in international tax but, in fact, has limited experience in that specialty, the endorsement could lead a potential client into thinking the practitioner is competent in that area. This is one reason some firms require employees to turn off social media endorsements or to simply decline them.

Unauthorized disclosure of client information

Practitioners must in addition be aware that the use of business networking sites can potentially lead to the unauthorized disclosure of client information. Writing an article or posting to a business networking site is a great way to highlight "wins" for the practitioner and showcase things the practitioner has done to help his or her clients, but great care is required to make sure a client's confidential information is not disclosed.

This includes not using a client's name without consent. It is also important to avoid using details that could identify the client. This consideration is commonly overlooked. For example, a CPA may note that a client is a local personal trainer who also coaches her daughter's soccer team. Those facts could allow people to figure out who the person is, and the client's information would no longer be confidential. In such a case, besides upsetting the client, the practitioner could be in violation of Sec. 7216 and Circular 230, Section 10.51(a)(15), for causing an unauthorized disclosure of tax return information.

When sharing client stories, it is always best to obtain the client's consent via a Sec. 7216 waiver. If this is not practicable, consider changing key facts to render it unlikely that people could identify the client.

As practitioners use the internet to generate business, store data in the cloud, and network with other professionals, they must be diligent to ensure that professional responsibilities are met and ethical requirements are followed. In the case of outsourced work, such as for web design, practitioners must be wary of Circular 230 requirements that hold them responsible for ensuring that these professional and ethical requirements are followed. This standard applies not only to employees and members of the firm, but also to contractors and other outside parties associated with the firm. While direct ethical guidance may not be available to practitioners in all situations, it is still the practitioner's responsibility to apply the requirements of Circular 230, the Internal Revenue Code, and the SSTSs to these relatively new business practices.