Ethics and the tax preparer

By Donna Sauter, CPA

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

Members of the AICPA Tax Section enjoy the benefit of a complimentary annual webcast on Tax Ethics, presented by volunteers of the AICPA Tax Practice Responsibilities Committee. Participants receive two hours of continuing education in the Ethics category and can download the PowerPoint presentation for future reference. Members who watch the webcast live are also able to submit questions for real-time response during the webcast. This column briefly summarizes some of the questions that arose during a recent webcast.

Conflicts of interest

Tax preparers have a duty to remain objective and, to a degree, independent from their clients. A situation in which clients have competing interests that could make it difficult for tax preparers to perform services fairly and objectively could be a conflict of interest. It is a best practice to avoid potential conflicts by having procedures in place before accepting new engagements or new clients to determine if the interests of the potential new client conflict with an existing client. Additionally, because there could be a conflict of interest with the tax preparation firm or member of the firm, potential new clients should be vetted with firm members.

Often, a conflict cannot be predicted or avoided — for instance, when individual tax clients file for divorce. A divorce does not require a tax preparer to drop one or both of the divorcing taxpayers; however, the new situation should cause the preparer to tread lightly, be extra vigilant, and make both parties aware of the intention of the preparer to continue to provide services to both parties.

Another common situation occurs when the tax professional provides services to a closely held business and the business owners. When a dispute arises and business partners desire to split up the business, it would be a challenge to fairly represent either owner regarding splitting up the business. The practitioner should consider the option of continued representation of the business only and recommend the individuals seek new and separate representation.

The AICPA Code of Professional Conduct and Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), both address conflicts of interest including the identification of potential conflicts, types of conflicts, and potential resolutions of conflicts. Both guidelines address obtaining a waiver of conflicts by affected parties, but only Circular 230 requires a waiver to be in writing. Section 10.29(b) of Circular 230 allows a practitioner to continue to represent a client with the existence of a conflict if the practitioner believes that he or she will be able to provide competent and diligent representation to each affected client. Therefore, if a tax preparer even remotely considers that a conflict may arise with an existing client, but the practitioner believes he or she can fairly represent all parties, a best practice would be to discuss the concerns and have all affected parties review and sign a conflict waiver document. This document must be kept in the client's permanent file for at least 36 months from the date representation of the client has concluded.

For members of the AICPA Tax Section, Guidelines for Conflicts of Interest in the Performance of Federal Tax Services is a helpful resource. It is a practice guide to educate members and to help members identify and address conflicts of interest. Sample conflict waiver documents are included in the appendix of this resource, available at www.aicpa.org (AICPA member login required). This guideline has been updated as of March 2020 and is expected to be issued soon. For more information on conflicts of interest, see Seto and Tapajna, "Tax Practice Responsibilities: AICPA Committee Updates Its Conflict-of-Interest Advice," 51 The Tax Adviser 338 (May 2020).

Lastly, the practitioner should contact his or her liability insurance carrier at the first sign of a potential conflict. The carrier will be able to offer guidance and resources for the situation. Being proactive will allow the practitioner the ability to better navigate these murky waters.

Third-party verification letters, comfort letters, and Sec. 7216

Another common question asked during the webinar was how a member should properly obtain consent to release tax returns and other documents to third parties, such as lenders and bookkeepers.

Sec. 7216 and Regs. Sec. 301.7216-3 make it a crime for a tax preparer to disclose client tax return information to a third party without signed written consent in a format specified by the IRS in Rev. Proc. 2013-14. A preparer convicted of knowingly or recklessly disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Code can be fined not more than $1,000 or imprisoned for not more than one year, or both, for each violation. Therefore, copies of the taxpayers' tax returns, specific forms, and other requested documentation can be shared with third parties but only after obtaining written authorization from the taxpayer.

The written authorization should address the specific form(s) and year(s) of tax return information to be disclosed and must be signed by the taxpayer. The form should also state the purpose for sharing the information, to whom the information is to be disclosed, and the duration of the consent. If no period is specified, the regulations state that the consent is effective for a period of one year from the date the taxpayer signs the consent (see Regs. Sec. 301.7216-3(b)(5)). No provision allows an email, telephone call, or text as authorization. There is also no authority allowing electronic signatures; therefore, preparers should have a hand-signed consent form on file before releasing taxpayer data. The AICPA offers its members several examples of consent forms on its website under "Section 7216 Guidance and Resources," available at www.aicpa.org.

Additional information and details regarding the specific wording and format for consents can be found in the IRS's Section 7216 Information Center, available at www.irs.gov. The IRS's Section 7216 Frequently Asked Questions, available at www.irs.gov, are a great source of information, answering questions such as, "Who is a tax return preparer for purposes of IRC §7216?," "What is 'tax return information'?," and "What are the special rules for disclosing tax return information outside the United States?"

Confidentiality

A question was raised regarding a situation where the preparer becomes aware of missing information on a client's return as a result of information another client provided. For example, Taxpayer A provides portions of the year-end brokerage statement. Taxpayer B provides the complete brokerage statement, including original and amended statements and all disclosures the broker provided. It is not a breach of confidentiality for the preparer to ask Taxpayer A for additional information and to inquire if the client received an amended statement.

In fact, paragraph 2 of Statement on Standards for Tax Services (SSTS) No. 3,Certain Procedural Aspects of Preparing Returns, states that a member "should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the member." In paragraph 4, this specific situation is addressed, with the SSTS stating that "a member should consider information actually known to that member from the tax return of another taxpayer if the information is relevant to that tax return and its consideration is necessary to properly prepare that tax return." However, in using the information gleaned from Taxpayer B, the member should consider limitations imposed by laws and rules related to confidentiality.

Tax Practice Quality Control Guide

Some participants were surprised to learn there are currently no enforceable quality control standards for a tax practice. While firms that have both tax and attest practices may apply the requirements for the accounting and attest services to the firm's tax practice, for a firm with only a tax practice, the AICPA created the Tax Practice Quality Control (TPQC) Guide. This guide takes the six elements from the AICPA's Statement on Quality Control Standards and applies the concepts to a tax practice. The guide defines quality control as a process to provide a firm with reasonable assurance that the firm and its personnel comply with applicable professional standards. The appendix provides customizable sample tax practice quality control documents for firms. The TPQC Guide is updated regularly and is available to AICPA Tax Section members at www.aicpa.org. It is also included as part of the Tax Section's Annual Tax Compliance Kit.

A participant asked if the TPQC Guide was the same as the checklists the AICPA provided. The checklists cover a specific return and aid the member in preparing and reviewing the return for completeness as well as to identify planning opportunities and potential audit risks on a return. On the other hand, the TPQC Guide provides overall quality control standards including leadership responsibility for quality, evaluation of new and continuing client relationships, engagement performance, and monitoring quality control in a tax practice.

An obstacle for the solo practitioner or small firm is the inability to objectively self-review. Suggestions offered during the webcast included: making sure the practice's quality control procedures are reviewed annually; using a checklist to determine if the procedures are being followed; performing a technical review of randomly selected returns throughout the year; documenting and adopting new procedures as necessary to improve the system; and discussing procedures regularly with staff and CPAs from other firms. For instance, attending a year-end tax update seminar is a valuable opportunity for the practitioner to consider clients who may be affected by a new law or interpretation of an issue. Keeping a list of technical issues and the impacted clients is only the first step, however. The practitioner must follow through and address each item noted. It may even prove to be helpful to document that a technical issue was addressed when it is determined the issue does not apply to the client.

Record retention and client record return requirements

The most frequently asked question during the webcast concerned responsibilities for the retention of documents. Members of the AICPA have access to the Tax Practice Management Resource Center, available at www.aicpa.org. In the Resource Center, the AICPA recommends each accounting firm adopt a record retention policy to address the specific type of work performed, legal requirements, statute of limitation, and state board requirements. Provided in the Resource Center is a list of the types of documents that should be addressed in a policy and guidelines for electronic records and a firm's administrative records. A sample "Retention and Destruction Policy" document is also available. However, creating and adopting a retention policy is only the first step. Once adopted, it is imperative to have the retention policy adhered to and a destruction policy executed on a consistent and ongoing basis.

Tax practitioners can look to Section 10.28 of Circular 230 for guidance on the return of client records. Practitioners "must, at the request of a client, promptly return any and all records of the client that are necessary to comply with Federal tax obligations." This includes all original documents. A dispute over fees does not relieve the practitioner of this responsibility. An exception to the requirement to return documents in the case of a fee dispute is allowed if applicable state laws permit the retention. However, the practitioner must provide the client with those records that must be attached to the taxpayer's return. In addition, the tax practitioner "must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations." The term "records" covers returns, schedules, appraisals, or any other document the practitioner prepared that was presented to the client with respect to a prior representation, if that document is necessary for the taxpayer to comply with a current federal tax obligation.

The AICPA Code of Professional Conduct's "Records Requests" interpretation (ET §1.400.200) provides members guidance on how to respond to a client's request for records. The interpretation states:

  • Once the member has complied with outlined requirements, the member is generally not obligated to respond to a client's repeated requests for the records (¶.08).
  • The member may charge the client a reasonable fee for retrieving and reproducing the records and may require the fee to be paid before releasing the records (¶.11(a)).
  • Although the member is not required to convert records to an electronic format or convert from one electronic format to another electronic format, the member is encouraged to comply with the client's request for a specific format if the format is available (¶.11(b)).
  • The member should comply with the client's request in an expedient manner but generally within 45 days after the request is made (¶.12).

The "Records Requests" interpretation further advises that a member's working papers are the member's property and need not be provided to the client under provisions of this interpretation; however, those requirements may be imposed by state and federal statutes and regulations, and contractual agreements (ET §1.400.200, ¶.10). The Code of Professional Conduct's "Acts Discreditable Rule" (ET §1.400.001), the rule for which the "Records Requests" interpretation exists, was created primarily from an attest services perspective. This may make applying the expectations to tax services a challenge, but they are good guidelines to consider when creating and adopting a policy. Additionally, seeking the advice of the firm's liability insurance carrier regarding the firm's records retention policies and procedures is recommended.

Knowledge of error

Another common question concerned whether materiality thresholds apply when considering correcting an error discovered after the taxpayer's return is filed. SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, addresses standards for members who become aware of an error, including errors found in a taxpayer's previously filed return or in a return subject to an examination or appeal, or of a taxpayer's failure to file a required tax return. This standard applies whether the member prepared the return that contains the error or becomes aware of an error in a return prepared by another tax preparer.

SSTS No. 6 defines an error as a reporting on a return that fails to meet the requirements of SSTS No. 1, Tax Return Positions. SSTS No. 6 gives members some leeway by providing that an error does not include an item that has an insignificant effect on the taxpayer's tax liability. However, the determination of a significant error is left to the member's judgment based on all known facts and circumstances, with consideration given to the cumulative effect of the error.

It is important to note, however, that Circular 230 does not contain a provision for materiality for an error or omission. Section 10.21 states, "A practitioner who . . . knows that the client . . . has made an error in or omission from any return, document, affidavit, or other paper . . . must advise the client promptly" and further instructs that the practitioner must advise the client of the consequences of such noncompliance, error, or omission.

SSTS No. 6 instructs members to promptly inform the taxpayer of the error and advise of the potential consequences of the error as well as recommend proper corrective action. This advice and recommendation can be given orally or in writing. It further advises if the error is discovered during an audit or appeal and the taxpayer refuses to allow the tax preparer to disclose the error to the taxing authority, the member should consider whether to withdraw from representing the taxpayer in the proceedings, as well as any professional relationship with the taxpayer.

A question was raised if the preparer should prepare the following year's return "as if" the error was corrected in the prior year. The member should not let the error be perpetuated in subsequent returns. If the error was not insignificant and the member determined it was appropriate to continue the relationship with the client, the tax preparer should prepare the subsequent year's return as if the correction to the prior year was made so as to not perpetuate the error. The member should consider the client's integrity and honesty when determining whether to continue in the professional relationship, as this decision to not correct the error could be indicative of future behavior.

It is recommended the member document the error discovered, along with providing an estimate of the tax, penalty, and interest consequences due to the error and, most importantly, how the client was advised of the error. A brief letter sent to the client of the discovered error and its consequences, notations of follow-up discussions with the client, and documentation as to how the practitioner determined it was appropriate to continue the relationship should be kept in the client files.

 

Contributors

Donna Sauter, CPA, CFE, is the owner of Sauter Consulting in California's Central Valley. Roby B. Sawyers, CPA, Ph.D., is a professor of taxation and accounting in the Department of Accounting, Poole College of Management, at N.C. State University. Ms. Sauter and Prof. Sawyers are members of the AICPA Tax Practice Responsibilities Committee. For more information on this article, contact thetaxadviser@aicpa.org.

 

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