Can a system of quality management in tax benefit everyone?

Editor: James W. Sansone, CPA

The AICPA’s Revised Statements on Standards for Tax Services: An Exposure Draft and Invitation to Comment, released in August 2022, addressed potential approaches to effectively introduce quality management.  The invitation to comment (ITC), included in Part 2 of the exposure draft of the proposed revised Statements on Standards for Tax Services (SSTSs), asked the following questions:

1. How do you define quality management in tax?

2. What role do you think the AICPA should undertake regarding quality management in tax?

3. To preserve the ability to selfregulate, do you believe the AICPA should consider quality management in tax for potential inclusion in future SSTSs?  If “no,” how should quality management in tax be addressed?

4. How do you currently approach and ensure adherence to quality management within your tax function?

A. What challenges do you experience?

B. What type of application material would be helpful from the AICPA?

This column focuses on questions 1 and 4a, the definition of quality management in tax and the challenges practitioners experience.

During the public comment period, which ended Dec. 31, 2022, comments came from members and nonmembers of the AICPA; public accounting firms; and other outside stakeholders, including state CPA societies.  Although the ITC did not result in any immediate changes, the comments reflected the tax practitioner community’s views and illustrated the central challenges to any future system of quality management — notably, can it benefit everyone?

Overview

The SSTSs were initially established through a series of “best practices” and formally adopted by the AICPA Tax Executive Committee (TEC) in August2000. The SSTSs are not limited to the provision of federal income tax services, as many state boards of accountancy incorporate the SSTSs or the AICPA Code of Professional Conduct (the AICPA Code) into their own professional rules of conduct for CPAs. As of 2022, the AICPA Code had been fully or partially adopted by 29 states and three U.S. territories.  Also, the National Association of State Boards of Accountancy reported approximately 672,000 CPAs with active licenses in the United States as of May 2024. Therefore, the SSTSs and any potential standard on quality management in tax have a potentially broad reach.

The revised SSTSs, which became effective on Jan. 1, 2024, included three new standards: Section 1.3, Data Protection; Section 1.4, Reliance on Tools; and SSTS No.  4, Standards for Members Providing Tax Representation Services. The new standards were added to reflect the current landscape practitioners operate in; as practitioner responsibilities have changed, revisions to professional standards became necessary to keep up with the evolving environment. Unlike the implemented new standards, a system of quality management is often subjective.  Exploring at a high level some of the questions asked by the ITC, this column aims to clarify complexities in this area.

How do you define quality management in tax?

The first question in the ITC asked, “How do you define quality management in tax?” There is no definition of “quality” within the AICPA Code; however, the Oxford English Dictionary states that quality is “the standard of something as measured against other things of a similar kind; the degree of excellence of something.” One of the central purposes of the AICPA Code is to protect the public interest, and it uses the term “integrity” as an element of character and “the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions” (ET §300.040.02). From these definitions, the close relationship between “integrity” and “quality” becomes visible, with “integrity” marking the foundation upon which quality is based.  However, the lack of a clear definition of quality in the AICPA Code is reflected in the responses to the ITC.

Some respondents to the ITC stated that defining a system of quality management should be left to the existing standards, namely, Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10).  For practitioners representing a taxpayer before the IRS, Circular 230 sets forth certain requirements that are closely related to quality management.  The requirements include Section 10.36, Procedures to Ensure Compliance, requiring firm management to take reasonable steps to make certain that adequate procedures are in place to comply with ethical and quality requirements within Circular230. Additionally, Section 10.33, Best Practices for Tax Advisors, states, “Tax advisors should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the Internal Revenue Service.” But not all practitioners practice before the IRS, so reliance on Circular 230 as a standard of quality management in tax may have uneven application.

Other commenters noted the current iteration of the AICPA’s Tax Practice Quality Control Guide (TPQC system), which was reissued in February 2020, as an example of a system of quality management.  The TPQC system continues to be a recommendation to practitioners and sets forth six elements.  The first element, Leadership Responsibilities for Quality Within the Firm, emphasizes “setting the tone at the top” and is in line with the AICPA Code’s definition of integrity as well as Circular 230’s requirement for leadership to assume responsibility for overseeing a firm’s practice and quality.

The second element, Relevant Ethical Requirements, seeks to provide reasonable assurance that a firm and its personnel perform all responsibilities in compliance with applicable professional, statutory, and regulatory requirements. The third element, Acceptance and Continuance of Client Relationships and Specific Engagements, acts to minimize the likelihood of reputational and other risks.

The fourth element, Human Resources, encompasses hiring and personnel activities.  The fifth element, Engagement Performance, centers on how services are performed and provided to clients.  Finally, the sixth element, Monitoring, oversees the TPQC system.

The TPQC system is supplemented by a sample Tax Practice Control document that assists practitioners in tailoring a process that suits their firm’s unique needs.  While the TPQC system allows more flexibility for practitioners, others may view it as a time-consuming and cumbersome process to implement.

What challenges do you experience?

Question 4(a) of the ITC asks, “What challenges do you experience?” Although ITC questions centered on a system of quality management in tax, responses to this question focused on a variety of challenges practitioners face.  This may demonstrate the complexity of implementing a system of quality management in a field undergoing transformation.

Challenges for the accounting profession are real.  Recent headlines in professional journals illustrate that firms of all sizes feel the impact of talent shortages and emerging technology, both of which are key assets to firms and important components in a system of quality management (see, e.g., Hood, “The Worst of Times: Issues in Accounting in 2024,” Accounting Today (March 20, 2024)).  High-performing workers are in demand.  Attracting and retaining talent as employment opportunities in high-paying fields diversify is a challenge for everyone.  Technology is an appealing initial option to fill the talent gap.  However, artificial intelligence (AI) and other emerging technologies, once thought to be a potential threat to the accounting industry, may actually help it grow.

The challenges noted by ITC commenters were personal and often focused on specific practice concerns such as limits on time and frustrating inefficiencies.  The personal perspective of each practitioner is both central to the success of a quality system in tax and its biggest obstacle.

The potential burdens of a system of quality management

Firms’ quality needs are often subjective and may lack uniformity.  This may make enforcement of a quality standard difficult or potentially ineffective both internally and externally.  Some ITC commenters pointed out the difficulty of implementing a system that would be effective in practice.  Also, quality is not static and will continue to evolve as practitioners and the provision of tax services change.  An effective system needs periodic review to avoid duplication with other internal procedures and to remain up to date with current professional, statutory, and regulatory requirements.

A system of quality management should also be customized to the needs of the firm.  However, the resources necessary may be unavailable.  For example, in a 2021 speech to the Accountants Club of America, Barry Melancon, CPA, CGMA, the CEO of the AICPA & CIMA, estimated that the vast majority of the approximately 46,000 accounting firms are small, with fewer than 20 employees.  These employees and firms may feel the time and resource constraints of the industry most acutely and potentially see the least cost benefit in implementing a system of quality management.  Therefore, it is important to emphasize both the potential benefits in a system of quality management and that there is a potential benefit for everyone.

The potential benefits of a system of quality management

The SSTS Revision Task Force indicated in the ITC that “quality” was a key market differentiator in practice and noted that quality work products are a defining feature of CPAs.  A successful system of quality management may be a system of organizational efficiency rather than a layer of firm administration. A system of organizational efficiency may be a benefit to small firms.  A previous Tax Practice Responsibilities column (Love, “Taking Back Control With Quality Management,” 52 The Tax Adviser 714 (November 2021) ) provides illustrative quality management examples for sole practitioners and small firms that can bring about real organizational efficiency in an actionable way.

Although some may disagree, a system that requires evaluation of internal procedures can be a benefit to stay ahead of new and emerging areas.

While some firms may have robust quality management systems, all firms should reevaluate internal procedures to implement safeguards related to the new standards incorporated into the SSTSs as well as potential challenges posed by new ethical considerations in AI and advancing technologies, as highlighted in a recent Tax Practice Responsibilities column (Jenkins, “Tax Ethics and Use of Generative AI Systems,” 55-2 The Tax Adviser 42 (February 2024) ).

The goal is to develop a system that helps practitioners operate better. Gathering information and data points necessary to effectively design a quality management system, including strengths and weaknesses of a firm’s operational approach, may be a guide for future training, education, and internal policy development.  This internal due diligence may ultimately lead to opportunities for future growth and greater connection in client relationships.

Can a system of quality management in tax benefit everyone?

A system of quality management can benefit everyone if it is skillfully and thoughtfully designed and implemented. Being a tax practitioner is no longer just about assisting clients with tax positions.  The idea of quality management in tax highlights the many hats tax practitioners wear to make quality an integral part of their practice.  Ultimately, any system of quality management is only as effective as those practitioners who use and update it consistently and regularly monitor compliance.

The adoption of a system of quality management standard for tax was not included in the revised SSTSs, and it is unclear if a new standard will be proposed in the future.  However, it is clear, as stated in the ITC, that there is no “one size fits all” solution.  Often, the implementation of a system of quality management brings with it the fear of peer review.  Self-regulation has been a hallmark of a CPA’s practice, and the TEC and the AICPA consider the concept of quality management and peer review to be “independent and distinct from one another” (Revised Statements on Standards for Tax Services: An Exposure Draft and Invitation to Comment, p. 43).

It may be hard to structure a standard that can both protect and not burden such a diverse landscape of practitioners. There is precedence for drafting standards without a bright-line rule.  For example, SSTS Section 1.3, Data Protection, requires members to use “reasonable efforts,” and Section 1.4, Reliance on Tools, requires members to exercise “professional judgment and professional care.” A future system of quality management may employ such standards as a baseline for practitioners, allowing for variability.

An ongoing discussion

The elements of a system of quality management will always be relevant. Guidance on leadership, education, analysis, and monitoring provides benefits to practitioners and the public they serve.  While the ITC is an important first step in the discussion of a system of quality management, and the responses received include valuable feedback in this regard, it will be important to keep the discussion moving forward. The future will only bring further complexities to this already complicated area of practice.  In the meantime, practitioner firms of all sizes should be proactive. Incorporating a system of quality management when and where possible may help reduce the risk of disruption and may help generate opportunities for future growth.

Contributor

Kathryn Clymer-Knapp, J.D., LL.M., is a managing director at Ernst & Young LLP in Boston and chair of the AICPA Tax Practice Responsibilities Committee. The views expressed in this column are solely those of the author and do not necessarily represent the views of Ernst & Young LLP.  Moreover, they should be read in the context of the time they were expressed. For more information on this column, contact thetaxadviser@aicpa.org.