Establishing quality control in a tax practice.

Author:Scutellaro, Joseph F.
Position::From The Tax Adviser

When managing a tax practice in a CPA firm, one of the primary goals is to establish and comply with best practices by operating with due professional care. Tax practices come in all shapes and sizes, where best practices may be interpreted and implemented differently. However, whether a solo practitioner or a multipractitioner firm, all CPA tax practices are obligated to adhere to established quality-control and professional standards. Many firms accomplish this goal by implementing policies and procedures in a quality-control (QC) system that helps communicate the firm's best practices to partners and staff.

Treasury highlighted the need to establish and maintain a formalized system of quality control for tax services by first adding aspirational Section 10.33, Best Practices for Tax Advisors, in June 2005, to Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and then later adopting Section 10.36, Procedures to Ensure Compliance, in August 2011. The latter of the two relatively recent additions to Circular 230 places responsibility on the individual who has principal authority for overseeing a firm's tax practice (for Circular 230 purposes) to take reasonable steps to ensure that the firm has adequate procedures in place for all personnel to provide their tax services with the requisite measure of due care. Because Section 10.36 is an enforceable provision of Circular 230, a responsible individual may be subject to sanctions by the IRS Office of Professional Responsibility for any violations. These sanctions can include censure, suspension, a financial penalty, and even termination of rights to practice before the IRS (Circular 230, [section]10.50).

If the AICPA Code of Professional Conduct's "Due Care" rule ([section]0.300.060) and the provisions of Circular 230 are not enough to prompt a firm to implement a QC system, then professional liability risk may provide an additional incentive: Every year, 65% to 75% of CPA professional liability claims are related to tax services, and more than half of those tax-related claims relate to improper tax treatment or advice, according to statistics released by CNA Financial Corp. from 2012 to 2016. Unlike the relatively high thresholds applicable to Circular 230 sanctions (willful, egregious, etc.), the threshold for malpractice is the relatively low standard of negligence. Negligence is defined as the absence of due care (i.e., the lack of...

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