Preview and analysis of proposed statements on standards for tax services.

• Author: Gardner, John C.

EXECUTIVE SUMMARY

* The AICPA's Tax Executive Committee released an exposure draft of proposed Statements on Standards for Tax Services (SSTS Nos. 1-7) on November 26, 2008. The IRS, state boards of accountancy, and other professional organizations rely upon the SSTS as the appropriate articulation of professional conduct by CPAs engaged in tax practice.

* The revision of the existing SSTS, which were issued in 2000, reflects requests by AICPA members for clarification of various matters and changes in the tax return preparer standards in the Code and in the Circular 230 regulations governing individuals practicing before the IRS.

* While some of the individual standards in the proposed SSTS have undergone significant changes, some remain largely the same as the existing standard they replace. Current SSTS 6 and SSTS 7 are combined into a single standard in the proposed SSTS.

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The AICPA's Tax Executive Committee (TEC), the standard-setting body authorized to promulgate standards of tax practice for AICPA members, released an exposure draft of proposed Statements on Standards for Tax Services (SSTS Nos. 1-7) on November 26, 2008. Comments on the exposure draft may be submitted until May 15, 2009. (1) The TEC anticipates that revised SSTS, based on the exposure draft with possible modifications for comments received, will become effective no earlier than January 1, 2010.

The preface to the proposed SSTS states that standards are the foundation of any profession. AICPA members are aided in fulfilling their ethical responsibilities through the existence of these enforceable tax practice standards against which a member's professional performance is measured. These standards apply to all members providing tax services regardless of the jurisdiction in which they practice. A member's compliance with the standards also reaffirms the public's awareness of the professionalism that is associated with CPAs and the AICPA.

The proposed SSTS have their historical origins in the AICPA's Statements on Responsibilities in Tax Practice (SRTPs), originally issued between 1964 and 1977. By the 1990s, the SRTPs, originally considered advisory in nature, had become recognized and relied upon by the IRS, state boards of accountancy, and other professional organizations as the appropriate articulation of professional conduct by CPAs engaged in tax practice. In August 2000, the TEC issued the current SSTS, largely mirroring the content and language of the SRTPs, but changing them from best practices to enforceable standards.

Since the TEC issued the SSTS, members have asked for clarification on various matters contained therein. In addition, with changes in federal and state laws on tax practice matters, a need arose to revise the statements. Thus, a task force, appointed in 2003, began the revision process for the SSTS, culminating in the TEC's exposure of the proposed SSTS in November 2008.

Changing Standards

The exposure of the proposed SSTS is important due to dramatic changes in tax return preparer standards in the Internal Revenue Code and Circular 230 (2) over the past few years. Circular 230 was revised to include proposed conforming language to keep it consistent with tax return preparation standards found in Sec. 6694 and related regulations. In addition, Congress has revised the Sec. 6694 tax return preparer reporting standards dramatically over the past two years. It is likely that in 2009, new language will be proposed for Circular 230, [section] 10.34, to make it consistent with that of the revised Sec. 6694.

Prior to 2007, the Sec. 6694 preparer standard for an undisclosed tax return position was similar to the realistic possibility of success standard contained in the current and proposed SSTS. The standard essentially meant that the tax return position had to have a 33% or greater chance of being sustained if challenged on the merits. The Small Business and Work Opportunity Tax Act of 2007 (3) increased this standard to a reasonable belief that more likely than not (i.e., greater than a 50% chance of success) the position would be sustained on its merits if challenged.

This statutory change to Sec. 6694 set up a potential conflict of interest between the taxpayer and the preparer because the Sec. 6662 taxpayer standard for undisclosed tax return positions is the substantial authority standard, which is lower than the more likely than not (MLTN) standard applicable to the preparer. As defined under Sec. 6662 and explained in Regs. Sec. 1.6662-4, the substantial authority standard is generally considered to require approximately a 40% or greater chance of success. Notices 2007-54, 2008-11, and 2008-13 provided transitional relief from this potential conflict in standards. (4)

The potential conflict of interest was finally resolved with the passage of the Emergency Economic Stabilization Act (5) in October 2008. In this act, Congress lowered the preparer standard under Sec. 6694 for undisclosed, nontax-sheher positions from MLTN to substantial authority, equalizing the preparer and taxpayer standards for such positions. The Sec. 6694 preparer standards for tax shelters (as defined under Sec. 6662(d)(2) (C)(ii)) and reportable transactions (Sec. 6662A) were kept at the MLTN level. (6)

Notice 2009-5 (7) (issued on December 15, 2008) provides interim guidance on transitional rules related to the revisions to Sec. 6694, the definition of substantial authority for purposes of Sec. 6694, and interim compliance rules for tax shelter transactions.

It should be noted that the Sec. 6694 preparer standard for a disclosed tax return position is the reasonable basis standard, which is less rigorous than the substantial authority and the realistic possibility of success standards but more rigorous than the not frivolous standard that had been in effect prior to the May 2007 revisions to Sec. 6694. The current SSTS No. 1 standard for such positions is the not frivolous standard; that standard is raised to a reasonable basis in proposed SSTS No. 1.

Practitioners are encouraged to review all the documents mentioned above to ensure that they understand what the applicable standards are. Practitioners should also review case law under Sec. 6662 dealing with the relationships between legal authority and factual matters.

The recent changes to the standards for tax return positions make it important to have the professional guidance provided in proposed SSTS No. 1. The federal standards are now stricter than the default realistic possibility of success standard found in proposed SSTS No. 1. In addition, various state and local jurisdictions may have standards for nontax-sheher state tax return positions that involve the MLTN standard and are thus higher than both the federal and AICPA default positions for nondisclosed (nonabusive) tax return positions. This article presents a summary of the proposed statements using the language found in the exposure draft. (8) The discussion highlights changes to the current statements, provides commentary on significant areas, and makes suggestions to the practitioner community.

Proposed SSTS No. 1: Tax Return Positions

Proposed SSTS No. 1 "sets forth the applicable standards for members when recommending tax return positions and preparing or signing tax returns (including amended returns, claims for refunds, and information returns) filed with any taxing authority." For purposes of proposed SSTS No. 1, a tax return position includes "(1) a position reflected on a tax return on which a member has specifically advised a taxpayer or (2)...