Ethical Considerations in Tax Matters: What You Need to Know for 2020

Ethics need to remain top-of-mind for tax pros in 2020—after all, it’s what keeps you legal and on customers’ good sides. But while tax pros can say “ethics” underlie their business operations, being ethical is not as simple as that. From a practical standpoint, there are scores of regulations to contend with, and everyone needs to keep in mind that tax specialists are not perfect no matter how good their intentions may be.

Two prominent standards impact ethics for tax professionals:

There are also relevant penalty provisions in the Internal Revenue Code.

Statements on Standards for Tax Services

This document includes seven sections:

  • Tax return positions
  • Answers to questions on returns
  • Procedural aspects of preparing returns
  • Use of estimates
  • Departure from a position previously concluded in an admin proceeding or court decision
  • Return prep and admin proceedings
  • Advice to taxpayers

Statement No. 7, advice to taxpayers, is typical of the common-sense guidelines present in the AICPA standards. Pronouncements include:

  • “A member should use professional judgment to ensure that tax advice provided to a taxpayer reflects competence and appropriately serves the taxpayer’s needs.”
  • “A member should assume that tax advice provided to a taxpayer will affect the manner in which the matters or transactions considered would be reported or disclosed on the taxpayer’s tax returns. Therefore, for tax advice given to a taxpayer, a member should consider, when relevant (a) return reporting and disclosure standards applicable to the related tax return position and (b) the potential penalty consequences of the return position.”
  • “A member has no obligation to communicate with a taxpayer when subsequent developments affect advice previously provided with respect to significant matters, except while assisting a taxpayer in implementing procedures or plans associated with the advice provided or when a member undertakes this obligation by specific agreement.”

IRS Circular 230

The federal standard is, predictably, not as easy to read as the AICPA’s and is much more detailed and specific. It covers details such as eligibility, application, renewal status, self-representation, practice of law, solicitation, conflicting interests, and best practices.

Best practices include:

  • Clear communication with the client
  • The need to establish facts, determine which are relevant, relate them to applicable law, and arrive at a fact-supported conclusion
  • Supplying client advice based on sound conclusions
  • Acting with fairness and integrity

There are also clear standards for conflicting interests, which may occur if:

  • The representation of one client may be directly adverse to another
  • Representation of one or more clients will be limited by responsibilities to another client, a former client, a third person, or by personal interest

“The AICPA’s Statements on Standards for Tax Services (SSTS) are now an authoritative part of the Code of Professional Conduct,” notes CPA Journal. “As such, they are now applicable to all of a CPA’s tax planning and tax return preparation practice and should be regarded as “best practices standards” for tax preparers.”

Tax pros in search of additional inspiration when it comes to ethical matters don’t have to look far. A 1997 white paper from the William & Mary Law School, “Ethical Problems in Tax Practice,” offers more guidelines for ethical activity, covering:

  • The impact of client fraud on confidentiality
  • Obligations regarding return accuracy
  • A range of hypothetical situations, including obligations to the client regarding discovery, obligations to disclose omission to an auditor, and intentional vs. unintentional omissions

It is important to note, explains an ethics brief from Freeman Law, that ambiguity abounds, and those ambiguities can leave tax pros facing a bevy of questions.

“The nature of tax practice presents a number of unique ethical issues,” the firm notes. “Tax practice requires compliance with multiple ethical frameworks. This creates ambiguities and raises complex questions. Courts have even questioned whether certain regulatory frameworks, such as Circular 230, are applicable to certain conduct of attorneys in practice before the IRS.”

At its core, though, facing these ambiguities requires an understanding of right and wrong, explains a blog from the Northeastern University School of Business. While you may not be able to memorize Circular 230, you can likely find an appropriate balance between serving clients and upholding the law by asking:

  • Is the client providing complete and accurate information?
  • Would a broad reading of the law justify penalties placed on you and the client?
  • Is it ethical to create for your client a complicated tax plan if the client does not fully understand its implications?

“It can all seem very confusing, but a well-trained and experienced tax professional can take these challenges in stride,” asserts the blog from Northeastern University. “By using all the resources at their disposal, as well as a good degree of honest communication between clients and other stakeholders, it is possible to uphold these complex ethical values in any situation.”

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