Ethics in Tax Practice
For an individual professional to be termed as ethical, he has to conform to professional standards of a certain group, or profession. Therefore, tax practitioners need to comply with the tax legal requirements, as well as, American Institute of Certified Public Accountants (AICPA) rules, for them to be termed as ethical. The legal requirements, together with non-compliance penalties are found in Circular 230 in the Treasury department. They are also found in the Internal Revenue Code (1986). This paper discusses the legal tax requirements for the tax practitioners. The law is believed to be complex as many people find it hard to interpret it rightly. Therefore, the guide to ethical behavior in this case will be the Internal Revenue Service (IRS) and the judicial system. Conforming to ethical standards will usually lead to good public image, less confrontations with the Internal Revenue Service, and less litigation (Hoffman, 2012).
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Professional ethics get reflected in standards of conduct, which are practiced in a given profession. Members of the profession usually determine what to call ethical and what to call unethical. Being unethical can affect many people in the society and, therefore, ethical behavior ought to be encouraged in all the professions. Tax practitioners are governed, ethically, by IRC and Treasury Circular 230. In addition to the two governing bodies, AICPA sets the standards for its members. IRS, for instance, explains negligent of a tax preparer [Sec 6694(a)]. Lawyers together with CPAs also have standards suggesting what is ethical so as to maintain a status that is active in the professional organization. (Hume, 1999)
Rules and regulations to be practiced in IRS, by CPAs, as well as other qualified persons in representing clients are found in Treasury Department’s publication, Circular 230. The basic requirements in this circular include providing information to IRS when authorized and notifying a client of an error/omission promptly. It is also a requirement to exercise due diligence while determining accuracy of presentations. Requirement four states that reasonable prompt disposition should be there concerning matters that are before IRS. The fifth requirement is that unconscionable fee must not be charged during client representation. Circular 230 also contain other matters to do with tax shelter, as well as advertising, among others (Hume, 1999).
Tax preparers receive penalties, for example, for underestimating liability of a tax payer, not furnishing a return’s copy to tax payers, failing to maintain copies of completed returns, and not signing returns or giving Identity Numbers. An example of a case where penalty was imposed is found in the case of Weidmann V. U. S (1989). In this case, the tax practitioner had underestimated, due to negligence, the tax payer’s liability. Weidmann dealt with a client who had a home office and suggested to him to indicate in the form that the wife was his employee in the home office. The form required the husband and the spouse to live and have their meals at the client’s home. The client was allowed by this procedure to deduct housing expenses from his business income. The expenses were, however, not included as spouse’s income as required by IRS, Sec. 119. When the client was questioned, he indicated that there was no change in his living conditions after following Weidmann’s advice.
Tax practitioners follow the same ethical rules of IRS, just as CPA. Therefore, the penalties imposed are the same. The case of Judisch v. U. S (1985), explains this issue very well. Here, Judisch limited her work to tax preparation, though she was a lawyer. She would send questionnaires to clients, prepare returns following completion of the questionnaires, and finally send the returns back to the clients for signing and mailing. She would rarely communicate with her clients unless in case clarification was needed (Hume, 1999).
At one time, she failed to ask in the questionnaire whether the client had a home office deduction, but she asked about the home portion used to produce income. The client was also asked to state other expenses related to home office. Judisch, without enough knowledge regarding her client’s deductions, claimed a deduction to do with the client’s home office. She also included personal expenses, which did not qualify to be regarded as business expenses. She admitted having knowledge of the requirements to claim a home office as a deduction under IRC Sec. 280A(c) (5). Therefore, she was assessed a penalty for intentionally disregarding Sec 6694(a) to give a single return to a tax payer who had no home office.
Application of IRC and Professional Standards’ Requirements
Several CPA firms have established procedures of accepting new clients. A firm’s clients should be ethical to reduce embarrassing ethical situations. Many of the clients already exist, but still new clients need to be admitted for tax return preparation. It is advisable that a firm
receives enough and sufficient information regarding the client before he completes Federal Tax Return (Hoffman, 2012).
The following guidelines can help firms in deciding whether to accept a new client. First, the client should be consulted about his business, and any other areas that may cause problems. Prior accountants should be spoken to determine possible problems. Mutual acquaintances should also be talked to in order to understand the client better. it is also advisable to obtain credit report of the client. Finally, a tax practitioner should not accept any client unless the firm has accepted (Hoffman, 2012).
Accepting new information
AICPA sec 132 states that a preparer should not, necessarily, examine documents in order to verify any kind of supporting data. However, it is his duty to inquire whether the supporting data satisfactorily, gives correct information. In short, he should exercise due diligence, which is also a requirement in Circular 130. A CPA may, however wish to verify the information only to get satisfied. He needs to encourage his clients to keep supporting documents properly regarding returns.
A firm can also meet clients who get information from other CPA firms such as partnerships. Good decisions should be made regarding such information. In fact, before acting that information, a form is required to consider tax basis of the client. It should be ensured that tax shelters get reported in the correct manner. The firm should make sure that the client knows responsibility for any missing data in the Federal Tax Form. This information is not exhaustive and each firm should add more steps and grounds for acceptance (Hume, 1999).
Disagreements with clients
A client may wish to take a position in Tax that the firm does not support for various reasons. For example, such a position may not be accepted by the courts, or may be unrealistic to IRS. The CPA should, therefore decide whether to prepare the Tax Return. His judgment should take into consideration the possible penalties, firm’s reputation, among others. Sec. 112 of the AICPA advises a CPA to prepare a return in case the client discloses the position and does not leave it frivolous. By frivolous we mean a situation where the CPA knows that the position is not the right one. In signing any return, it means that the CPA accepts it as correct according to his knowledge from the information (Hoffman, 2012).
The Professional Standards, Sec 301, states clearly that client’s information should never be disclosed without his consent except under legal requirements. From a tax practitioner’s point of view, Sec 171 of the AICPA professional; standards, requires that the relationship between a CPA and his client remains confidential. Penalties can be imposed if a CPA discloses a client’s information illegally. This is according to Sec 6712 of the Internal Revenue Code. A client’s tax information should also not be used without his consent, or else a penalty would be imposed on the CPA. These penalties range between 250- 10, 000 dollars. In conclusion, a client’s information must always remain confidential unless the CPA receives subpoena or a related legal document (Hoffman, 2012).
Internal Revenue Code contains provisions that regulate Tax Preparers’ conduct. IRS is given the power to impose penalties and even institute criminal prosecutions. These sections that give power to IRS include Sec 6694, which talks about liability as a result of negligence or disregard, which is intentional, of rules and regulations governing tax preparers. The other sections include Sec 6695, 6696, and 6701. Behavior of the return prepares is also regulated by IRS. Consequences for not following the ethics code should be understood by the firm’s employees.
Communicating with the client
This is one of the components when it comes to tax practice. Oral communication is especially important to let the client know that he is not yet accepted until the completion of the investigations. A CPA should have both good written and oral communication because he is required to communicate with his clients, and to write several documents including reports (Hume, 1999).
In conclusion, the fundamental source of ethics in tax profession comes from the way a CPA judges things based on the available information, as well as circumstances surrounding the situation. Tax practitioners are guided and governed by Circular 230, AICPA standards, Internal Revenue Code, and ABA professional standards. The most important guidelines include investigation of clients, confidentiality, maintaining proper tax positions, being client’s advocate, documenting all information, keeping copies of returns, and effective communication skills. Important to note is that courts should be used as incentives to encourage ethical behavior. Finally, ethical standards give a good reputation of the firm, ensures proper documentation, and it avoids confrontations, which may arise between the firm and IRS.
Hoffman, Raabe, Smith, & Maloney (2012). Corporations, Partnerships, Estates & Trusts. Southwestern. ISBN: 13: 978-1-111-22172-0 or ISBN: 10: 1-1111-22172-3
Hume, E. C., Larkins, E. R., & Iyer, G. (1999). On compliance with ethical standards in tax preparation. Journal of Business Ethics, 18(2), 229-238.