Tax practice responsibilities: due diligence update.

• Author: Purcell, Thomas J., III

THE AICPA TAX PRACTICE RESPONSIBILITIES Committee is charged with providing guidance to CPAs in matters of high-quality professional performance. One area of focus for the committee is a CPA's duty to exercise due diligence in tax return preparation. The AICPA standard is contained in Statement on Standards for Tax Services (SSTS) No. 3, Certain Procedural Aspects of Preparing Returns. In addition, CPAs must follow Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), in respect to practice before the IRS, including income tax preparation.

Lately, the IRS has focused on due diligence as it applies specifically to preparation of returns claiming the earned income tax credit (EITC). This column discusses the tax professional's due-diligence obligations under SSTS No. 3 and Circular 230. This column also focuses on due diligence in tax return compliance. While the same concepts apply to tax advice and research, a full discussion of due diligence in those areas is beyond the scope of this column.

SSTS No. 3 states, in part, that a CPA practitioner "may in good faith rely, without verification, on information furnished by the taxpayer ... However, a member should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent" [emphasis added].

Example 1: The taxpayer provides an amount of taxes paid during the year that is much lower than amounts reported on prior returns prepared by the CPA. The CPA should inquire whether amounts are missing, or perhaps property subject to tax was sold or otherwise disposed of. SSTS No. 3 continues, "[A] member should make appropriate inquiries to determine to the member's satisfaction" whether adequate records are maintained when required to substantiate a deduction [emphasis added].

Example 2: The taxpayer uses his only vehicle for business and personal use. The CPA preparer sees the taxpayer in the vehicle regularly during the year, including at schools and shopping malls. The CPA should request satisfactory assurance that the taxpayer keeps detailed records of the business-use percentage of the vehicle. The CPA should not ignore his or her casual observations of the taxpayer in the community during the year when obtaining the information from the taxpayer. Over the past 18 months, there have been significant developments in due diligence in tax...