Recognizing SRTP violations in return preparation.

• Author: Yetmar, Scott A.
• Position: AICPA Statements on Responsibilities in Tax Practice

The sweeping legislative changes of the past 11 years (e.g., the Tax Reform Act of 1986, Revenue Reconciliation Acts of 1990 and 1993, Small Business Job Protection Act of 1996 and Taxpayer Relief Act of 1997) have greatly increased the complexity of tax practice and the uncertainty faced by tax practitioners. Considering the many constituencies tax practitioners must serve (e.g., clients, the firm, the IRS, peers and the accounting profession), it is quite likely that a given CPA tax practitioner will face professional ethical conflicts (i.e., disagreement between mutually exclusive alternatives) in the course of a career. The most common response of AICPA members to the question, "What are the major ethical problems confronting AICPA members?" was "a client's proposal of tax alteration and/or tax fraud."(1) Tax-related malpractice suits are the number one cause of legal action against CPAs(2); this may have been caused by increased competition in the tax service arena, client pressure to minimize tax liability and/or ignorance or discounting of professional standards.(3) These factors may be the reason the Code's fines for practitioner violations have increased dramatically in number and size since 1985.(4) According to the AICPA, ethical behavior is a significant determinant of the quality of client and public service.(5)

Tax practitioners who are AICPA members may not recognize when behavior has violated the AICPA's Statements on Responsibilities in Tax Practice (SRTPs)(6); such practitioners may be unaware of the SRTPs (see Table 1 on page 655), may be aware of the SRTPs but not remember their content, or may discount the SRTPs in the decision-making process. Tax practitioners may need more education as to the SRTPs' content and scope to operate more ethically in this increasingly uncertain environment.

Table 1: The SRTPs SRTP No. 1: Tax Return Positions INTRP. No. 1-1: Realistic Possibility Standard SRTP No. 2: Answers to Questions on Returns SRTP No. 3: Certain Procedural Aspects of Preparing Returns SRTP No. 4: Use of Estimates SRTP No. 5: Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision SRTP No. 6: Knowledge of Error: Return Preparation SRTP No. 7: Knowledge of Error: Administrative Proceedings SRTP No. 8: Form and Content of Advice to Clients

The SRTP's objectives are to:

* Recommend appropriate standards of responsibilities in tax practice and to promote their uniform application by CPAs.

* Encourage the development of increased understanding of the responsibilities of CPAs by the Treasury and IRS and to urge their officials to promote the application of commensurate standards of responsibilities by their personnel.

* Foster increased public understanding of, compliance with and confidence in our tax system through awareness of the recommended standards of responsibilities of CPAs in tax practice.

Currently, the SRTPs are unenforceable standards; compliance by CPA tax practitioners is voluntary. However, many states (e.g., Arizona, Colorado, Florida, Idaho, Kentucky, North Carolina and Washington) treat them as enforceable via state statute or regulation.(7) The SRTPs undergo a continual process of review and revision that recognizes the dynamic nature of the tax practitioners' environment and the significance of tax practice to CPAs.

For the SRTPs to be useful, a CPA tax practitioner first must recognize when a situation contains professional ethical issues. The failure to behave ethically is most often due to the inability to identify such issues.(8) Without ethical recognition, the first phase of the ethical decision-making process does not occur, and a CPA tax practitioner's options will be drastically reduced.

Ethical Recognition Examples

The following examples test the ability to recognize conduct contrary to the SRTPs. A discussion of the applicable SRTPs follows each example. The SRTPs do not attempt to address every situation and do not always offer absolute guidance. Table 2 on page 656 offers other SRTP guidance not addressed in the examples.

Table 2: Other Ethical Considerations

SRTP 2.04: "Reasonable grounds may exist for omitting an answer [to a question on a return.] For example, reasonable grounds may include the following: (a) the information is not readily available and the answer is not significant in terms of taxable income or loss, or the tax liability shown on the return... (b) genuine uncertainty regarding the meaning of the question...(c) the answer to the question is voluminous and assurance should be given on the return that the data will be supplied upon...