State tax tribunals: is taxpayer representation by CPAs a potential independence problem?

• Author: Kirkell, Brian J.
• Position: Certified public accountants

In an expanding trend, many states have begun to establish tax tribunals that allow taxpayers to appeal final decisions of the state's tax authority in a forum independent of that authority's control and without having to incur the costs of formal litigation. These tribunals often allow taxpayers to be represented by CPAs. This representation can be a significant advantage for taxpayers because their CPAs, as tax preparers, are typically familiar with the issues in question and may have handled the matter at the administrative level. In addition, CPAs stand to benefit from being able to offer their clients additional services. However, benefits rarely come without burdens, and, in this instance, the burden is significant, as the question arises whether a CPA representing a client in one of these tribunals has impaired his or her independence under the AICPA Code of Professional Conduct (the AICPA Code).

The Potential Independence Problem

CPAs performing attest services are required to be independent under AICPA Code Rule 101, which states "[a] member in public practice shall be independent in the performance of professional services." In its interpretations under Rule 101, the AICPA provides guidance regarding which nonattest activities will and will not impair independence. In relation to taxpayer representation, Interpretation 101-3 provides:

Authorized representation of a client in administrative proceedings before a taxing authority would not impair a member's independence provided the member obtains client agreement prior to committing the client to a specific resolution with the taxing authority. However, representing a client in a court [n. 23] to resolve a tax dispute would impair a member's independence. Footnote 23 to Interpretation 101-3 defines the term "court" to encompass "a tax, district, or federal court of claims, and the equivalent state, local, or foreign forums." However, the interpretations do not discuss the factors to be used to determine whether a particular body is the equivalent of "a tax, district, or federal court of claims." This leaves open the possibility for significant unknown independence risk because CPAs can interpret this provision differently based solely on the text of the footnote.

Background and Basis Document

The source document referenced by the footnote in Interpretation 101-3 is a publication from the AICPA Professional Ethics Executive Committee (PEEC) titled Background and Basis for Conclusions: Revisions to Interpretations and Rulings Under Rule 101--Independence (the Background and Basis Document). The Background and Basis Document is nonbinding authority that summarizes the considerations PEEC made in making changes, including the addition of the footnote discussed above, to the Interpretations. PEEC stated that the following criteria should be used to determine what other forums are equivalent to a court:

1. The forum is presided over...