5.3 Professional Responsibilities in Tax Practice

Tax professionals face complex ethical challenges in their practice. They must balance client advocacy with integrity, adhering to standards set by state boards, the AICPA, and IRS Circular 230. These guidelines cover everything from tax return positions to handling errors.

Ethical obligations extend beyond client service to public responsibility. Tax pros must maintain competence, exercise due diligence, and navigate conflicts of interest. They play a crucial role in upholding the tax system's integrity through their conduct and advice.

Professional Standards for Tax Practitioners

Governing Bodies and Regulations

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• Tax practitioners are subject to various professional standards and codes of conduct set by state boards of accountancy, the AICPA's Statements on Standards for Tax Services (SSTSs), and Circular 230 from the IRS Office of Professional Responsibility
• State boards of accountancy may have additional ethical requirements and standards of conduct for CPAs engaged in tax practice within their jurisdiction (California, New York)

Key Standards and Guidelines

• The AICPA's SSTSs provide guidance on tax return positions, answers to questions on returns, use of estimates, departure from a position previously concluded in an administrative proceeding or court decision, and knowledge of error
• Circular 230 prescribes regulations governing practice before the IRS, including duties and restrictions relating to practitioners, sanctions for violation of the regulations, and rules applicable to disciplinary proceedings (disbarment, suspension)

Ethical Obligations of Tax Professionals

Duties to Clients

• Tax professionals have a duty to act with integrity, objectivity, and professional competence in providing services to clients
• They must maintain client confidentiality, except when required by law or authorized by the client, and avoid conflicts of interest that could impair their objectivity (personal financial interests, family relationships)
• Tax professionals should provide clients with complete and accurate information about their rights and obligations under the tax laws, and not mislead or take advantage of client misunderstandings

Responsibilities to the Public

• Tax professionals have an obligation to the public to promote compliance with tax laws and regulations
• They should avoid any actions that could discredit the profession or undermine public trust in the tax system (fraudulent reporting, abusive tax shelters)
• Tax professionals play a crucial role in ensuring the integrity and fairness of the tax system, which relies on voluntary compliance and public confidence

Professional Competence in Tax Practice

Maintaining Knowledge and Skills

• Tax professionals must maintain a high level of professional knowledge and skill through ongoing education and training to ensure they provide competent services to clients
• They must stay current on changes in tax laws, regulations, and administrative guidance, as well as relevant court decisions and interpretations (annual continuing education requirements, attending tax conferences)

Due Diligence and Accuracy

• Tax professionals should obtain a thorough understanding of the relevant facts and circumstances before providing advice or preparing tax returns
• They must exercise due diligence in gathering and verifying information to ensure accuracy and completeness (reviewing source documents, questioning inconsistencies)
• Failure to maintain professional competence or exercise due diligence can result in errors, omissions, or misrepresentations that may expose tax professionals to disciplinary action, penalties, or legal liability (malpractice claims, IRS preparer penalties)

Ethical Considerations in Tax Representation

Balancing Advocacy and Integrity

• Tax professionals must balance their duty of advocacy for clients with their obligations of truthfulness and candor towards tax authorities
• They should not knowingly misrepresent facts or law, or counsel or assist clients in conduct they know is fraudulent or illegal, in any communications or proceedings with the IRS or other tax authorities (false statements, altered documents)

Advising on Tax Positions

• Tax professionals must exercise caution in advising clients on tax return positions and ensure there is a reasonable basis for any position taken
• They should ensure that any positions lacking substantial authority are adequately disclosed to avoid penalties (Form 8275 Disclosure Statement)
• Tax professionals should consider the potential consequences of any proposed course of action, including the risk of penalties, interest, or criminal charges, and advise clients accordingly

Conflicts of Interest

• Tax professionals must be mindful of any personal or professional relationships that could create a conflict of interest or impair their ability to represent clients effectively before tax authorities
• They should disclose any potential conflicts to clients and obtain informed consent before proceeding with representation (prior employment with the IRS, representing multiple clients with adverse interests)