Complaints against tax preparers are common, and approximately 66% of malpractice claims against accountants are related to tax services. This is not astonishing when we consider two factors: first, the pace and extent of tax law changes over the past few years leads to errors, and second, industry saturation has led to greater competition for clients, which may cause tax preparers to bend the rules to reduce their tax payments or increase refunds. Accordingly, we hope the following article will help remind tax preparers of some of the most common tax ethics rules in Circular 230 and, for CPAs, the AICPA's Statements on Standards for Tax Services.
Sources of rules and guidance related to tax ethics
The primary sources of tax ethics rules and guidelines are:
- Internal Revenue Code (IRC)
- Circular 230 (IRS’ rules)
- American Institute of Certified Public Accountants’ (AICPA) Statements on Standards for Tax Services (SSTS), which are generally applicable to certain CPAs.
Circular 230
Circular 230 contains the statute and regulations governing practitioners’ duties and obligations while practicing before the IRS. It defines and describes:
- Who may practice before the IRS, including attorneys, CPAs, Enrolled Agents, enrolled actuaries, enrolled retirement plan agents, and unenrolled preparers (with limited representation rights)
- Practitioners’ duties and obligations while practicing before the IRS, including corresponding and communicating with the IRS, rendering written advice to clients, and representing clients at conferences, hearings, and meetings
- Procedures that apply to administrative proceedings for discipline
- Specific sanctions for violations of practitioners’ duties and obligations.
Office of Professional Responsibility (OPR)
The IRS’ Office of Professional Responsibility (OPR) administers the laws and regulations governing the practice of tax preparers before the IRS. It interprets and applies the standards of practice in Circular 230, investigates allegations of tax preparer misconduct, and imposes disciplinary sanctions on tax preparers (if warranted). It may propose the censure, suspension, or disbarment of any practitioner to practice before the IRS if the person is shown to be incompetent or disreputable, fails to comply with Circular 230, or with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client.
OPR may also propose monetary penalties for a person and/or employer of a person if (a) the violations occurred in connection with the person’s activities on behalf of the employer, and (b) the employer knew or reasonably should have known of the person’s conduct.
Key areas of tax ethics rules: Circular 230
Please note that the IRS issued proposed regulations to update Circular 230 in December 2024. This article does not include any of the proposed changes.
Circular 230: Section 10.22
Section 10.22 of Circular 230 requires due diligence in preparing (or assisting in preparing) and filing of tax returns, documents, affidavits, and any other papers related to IRS matters. It requires due diligence in determining the correctness of oral or written representations made by practitioners to the Department of Treasury and clients with reference to any matter administered by the IRS.
Under Section 10.22, practitioners can rely on the work product of another person if they use reasonable care in engaging, supervising, training, and evaluating such person, while considering the nature of the relationship between the practitioner and the person. Practitioners may rely in good faith on and without verification of information furnished by clients. However, they must make reasonable inquiries if any information appears to be incorrect, incomplete, or inconsistent with other facts or assumptions.
Section 10.22 requires practitioners to do their best to make sure they provide correct information to the IRS and clients.
Circular 230: Section 10.35
Section 10.35 of Circular 230 requires competence. Practitioners must have the necessary knowledge, skill, thoroughness, and preparation for the matter for which they have been engaged. Competent representation may be provided through research and education on the issue or by consulting with another tax professional who has established competence related to the matter. For CPAs covered by the AICPA Code of Professional Conduct, there are similar provisions for due care and competence under Section 0.300.060.
Circular 230: Section 10.29
Section 10.29 of Circular 230 addresses conflicts of interest. A conflict of interest exists in the following scenarios:
- If representing one client will be directly adverse to another client, or
- If there is a significant risk that representing a client will be materially limited by responsibilities to another client, a former client, a third person, or by the practitioner’s personal interests.
When a conflict of interest arises, the practitioner may not represent a client in an IRS matter unless all three criteria are met:
- The practitioner reasonably believes that they can provide competent and diligent representation to all affected clients
- The representation is not prohibited by law
- All affected clients give informed, written consent to the representation, which must be retained for 36 months following the termination of the engagement
For CPAs covered by the AICPA Code of Professional Conduct, there are conflicts-of-interest rules under Section 1.110.
Circular 230: Section 10.34
Section 10.34 of Circular 230 addresses tax return positions. A tax position is a conclusion reached when applicable tax law, regulations, case law, or other regulatory or recognized guidance is applied to a particular transaction, a specific set of facts and circumstances, or a controversy. Under Section 10.34, practitioners cannot sign a tax return or refund claim or advise a client to take a position on a tax return or refund claim, if they know or should know that the position should be one of the following:
- Lacks a reasonable basis
- Is unreasonable as defined in IRC Section 6694(a)(2)
- Is a willful attempt to understate tax liability
- Is a reckless or intentional disregard of rules or regulations
An unreasonable position lacks substantial authority as outlined in regulation 26 CFR Sec. 1.6662-4, unless it has a reasonable basis and is disclosed. Substantial authority generally means a 40% likelihood of the position being sustained if challenged on its merits. Reasonable basis is generally interpreted as requiring there to be approximately a 20% likelihood that the position will be sustained if challenged on its merits.
For purposes of Circular 230 disclosure, if a practitioner advises a client regarding a position, or prepared or signed the return, they must inform the client of any penalties that are reasonably likely to apply and how to avoid such penalties through disclosure.
Section 10.34 of Circular 230 prohibits practitioners from advising or signing tax returns or refund claims that lack a reasonable basis, are unreasonable, or show reckless disregard of rules, and requires them to inform clients of potential penalties and how to avoid them through disclosure.
Circular 230: Section 10.37
Section 10.37 of Circular 230 addresses written tax advice, stating that when providing written tax advice, the practitioner must:
- Base their advice on reasonable assumptions
- Reasonably consider all relevant facts or facts that should be known
- Use reasonable efforts to identify and ascertain the relevant facts
Practitioners cannot rely upon representations, statements, findings, or agreements that are unreasonable or known to be incorrect, inconsistent, or incomplete. Moreover, practitioners cannot consider the possibility that a tax return will not be audited or that a matter will not be raised on audit (i.e., the audit lottery).
In providing written advice, the practitioner may rely in good faith on the advice of another practitioner only if that advice is reasonable considering all the facts and circumstances. Practitioners cannot rely on the advice of a person who is known or should have been known to be not competent to provide the advice or who has an unresolved conflict of interest defined in Section 10.29 of Circular 230.
Circular 230: Section 10.21
Section 10.21 of Circular 230 addresses errors and omissions. If the practitioner knows that a client has not complied with revenue laws or has made an error in, or omission from, any return, affidavit, or other tax-related document, they must promptly inform the client of the noncompliance, error, or omission and advise the client about the consequences under the IRC and regulations. Depending on the facts and circumstances, the consequences of an error or omission could include (among other things) additional tax liability, civil penalties, interest, criminal penalties, and an extension of the statute of limitations.
Section 10.20 of Circular 230 addresses furnishing information to the IRS. If the practitioner receives a proper and lawful request for records or information from the IRS, they must promptly submit the requested information unless they believe in good faith it is privileged. If the information is not in the practitioner’s or client’s possession, the practitioner must promptly inform the IRS of such fact. Practitioners must also provide any information they have regarding who is in possession of the requested information, but they are not required to do either of the following:
- Make inquiries of anyone other than their client
- Verify information provided by their client regarding the person in possession of the requested information.
Practitioners cannot interfere with any lawful attempt by the IRS to obtain information unless they reasonably believe in good faith it is privileged. Moreover, practitioners cannot advise a client to submit any document to the IRS that is frivolous or that contains or omits information in a manner demonstrating an intentional disregard of a rule or regulation, unless they also advise the client to submit a document that evidences a good faith challenge to the rule or regulation.
Under various sections of Circular 230, practitioners cannot unreasonably delay the prompt disposition of any matter before the IRS. This applies with respect to responding to clients as well as the IRS. Also, practitioners cannot advise a client to submit any document to the IRS for purposes of delaying or impeding administration of Federal tax laws.
Section 10.21 of Circular 230 requires tax practitioners to promptly inform clients of any noncompliance, errors, or omissions in tax-related documents and advise them of the potential consequences under the IRC and regulations.
Circular 230: Section 10.28
Section 10.28 of Circular 230 addresses responsibilities related to client records, which includes all written or electronic materials provided to the practitioner by the client or a third party. Client records also include any tax return or other document that the practitioner prepared or previously delivered to the client, if that return or document is necessary for the client to comply with their current tax obligations.
Upon request of a client, practitioners must promptly return any client records necessary for the client to comply with their tax obligations—even if there is a dispute over fees. However, practitioners may keep copies of such records. If state law permits retaining the records in case of a fee dispute, practitioners need only return the records that must be attached to the client’s return, but they must provide the client with reasonable access to review and copy any additional client records retained that are necessary for the client to comply with their tax obligations.
Practitioners are not required to provide a client with their work product (i.e., any return, refund claim, or other document that they prepared but have not delivered to the client) if they are withholding the document pending the client’s payment of fees related to the document, and the contract with the client requires payment of those fees prior to delivery.
For CPAs covered by the AICPA Code of Professional Conduct, there are records requests rules under Section 1.400.200.
Section 10.28 of Circular 230 requires practitioners to promptly return any client records needed for tax compliance upon request, even if there is a fee dispute, while allowing them to keep copies and retain work products if fees are unpaid.
Circular 230: Section 10.30
Section 10.30 of Circular 230 addresses solicitation. Practitioners may not use any form of public communication or private solicitation containing a false, misleading, fraudulent, deceptive, or coercive statement or claim. Moreover, practitioners may not assist, or accept assistance from, any person or entity who obtains clients or otherwise practices in violations of the solicitation provisions.
For CPAs covered by the AICPA Code of Professional Conduct, there are advertising and solicitation rules under Section 1.600.
Circular 230: Section 10.31
Section 10.31 of Circular 230 indicates practitioners may not endorse, negotiate, electronically transfer, or direct the deposit of any government checks related to Federal tax liability issued to a client. This prohibits practitioners from directing or accepting payment from the government to the taxpayer into an account owned or controlled by the practitioner but does not apply to whistleblower payments.
Circular 230: Section 10.33
Section 10.33 of Circular 230 includes the following aspirational best practices for practitioners to follow:
- Communicate clearly with clients regarding engagement terms
- Establish facts,
- Determine which facts are relevant
- Evaluate the reasonableness of any assumptions or representations,
- Relate applicable law to relevant facts
- Arrive at conclusions supported by law and facts.
- Advise clients regarding the meaning of any conclusions reached by the practitioner
- Advise clients whether they may avoid accuracy-related penalties if the client acts in reliance on the practitioner’s advice
- Act fairly and with integrity in practice before the IRS.
Source of tax ethics rules: The AICPA's SSTS
CPAs subject to the AICPA Code of Professional Conduct are also generally required to adhere to the AICPA’s Statements on Standards for Tax Services (SSTS) when performing tax services. The new SSTSs became effective on January 1, 2024.
SSTS No. 1.1
SSTS No. 1.1 places limits on tax positions CPAs can advise clients to take. When a taxing authority has no promulgated standards, a CPA should not advise a client to take a tax position unless there is at least a realistic possibility (33% likelihood) of it being sustained on its merits if challenged.
If the taxing authority has written standards that exceed the realistic possibility standard, the CPA must comply with those standards. However, if the taxing authority permits, the CPA may advise their client to take a tax position in which they conclude there is a reasonable basis (20% likelihood) of it being sustained on its merits if challenged and advises the client to disclose the position to the taxing authority.
SSTS No. 1.2
Under SSTS No. 1.2, when a CPA discovers tax return errors on previously filed returns or failures to file returns, they are required to promptly notify the client of the problems, including any potential consequences of the error and corrective actions. However, the CPA cannot inform the taxing authority without the client’s permission. If the client has not corrected the errors, the CPA should consider withdrawing from preparing the current year’s return, but this is not always required. In the event an error in a prior year’s return affects the current year return, and the client refuses to correct the previous error, the practitioner will generally have no choice but to withdraw.
These rules are similar to the rules in Section 10.21 of Circular 230.
SSTS No. 1.3
SSTS No. 1.3 requires CPAs to take reasonable steps to safeguard clients’ data based on current recommended practices. Moreover, CPAs should take reasonable steps to limit the amount of confidential information kept in their clients’ files.
SSTS No. 2.1
SSTS. No. 2.1 applies the same rules as SSTS No. 1.1 to tax positions taken on returns prepared or signed by CPAs. It also advises CPAs not to advise a client to take a position or prepare or sign a tax return reflecting a tax position that the CPA knows it either exploits the audit selection process or serves only as an arguing position advanced solely to obtain leverage in negotiation with a taxing authority. These rules are very similar to the rules in Sections 10.32 and 10.34 of Circular 230.
SSTS No. 2.2
SSTS No. 2.2 requires CPAs to take reasonable steps to obtain the information from clients necessary to provide appropriate answers to all questions on a tax return. Reasonable grounds may exist for omitting an answer to a question applicable to the client, such as the information is not readily available, and the answer is not significant in terms of its impact on taxable income or loss, or the tax liability shown on the return.
Genuine uncertainty exists regarding the meaning of a question in relation to the particular return or whether the question applies to the client. The information is voluminous. In such cases, a statement should be made on the return that the information will be supplied upon request.
SSTS No. 2.3
Like Section 10.22 of Circular 230, SSTS No. 2.3 sets forth standards concerning information supplied by the client or third parties in conjunction with tax return preparation. CPAs may, in good faith, rely on such information without verification. However, a CPA should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or based on other facts known to the CPA, including prior year returns.
SSTS No. 2.4
SSTS No. 2.4 sets forth standards concerning the use of estimates when preparing tax returns. Unless prohibited by statute, administrative rule, or judicial holdings, a CPA may use estimates, whether from the client or other sources authorized by the client, if it is not practical to obtain exact data, and if the CPA determines the estimates are reasonable based on the facts and circumstances. However, estimated amounts should not be presented in a manner that provides a misleading impression about the degree of factual accuracy.
SSTS No. 2.5
SSTS No. 2.5 discusses the instances in which CPAs may advise clients to depart from previous positions determined in an administrative proceeding or court decision with respect to the client’s prior tax return.
Finally, SSTS No. 3 sets out the standards to be followed when CPAs are providing tax consulting services, and SSTS No. 4 covers standards related to tax representation services. Both types of services are beyond the scope of this article.
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