Standards of practice and the tax preparer penalty regime treat tax return positions and tax preparation differently. For example, a client emails her CPA to ask about substantiation requirements for donating a car to charity. Would providing the answer to that question be considered a tax return position since the CPA might be advising on a position to take on a tax return? Or would it constitute preparing a tax return since the CPA might be instructing the client to fill out Form 8283, Noncash Charitable Contributions? The issue is important because as a tax practitioner, simply preparing a return may invoke different ethical and legal standards than if the CPA is providing tax advice.
Tax return position
When confronting this issue, it is important to understand how a tax return position is defined. When looking at the definition, two questions arise:
What is tax advice?
Has the tax practitioner made a conclusion on a matter where he or she has all the material facts?
Subtle differences exist between preparing a tax return and taking a tax return position. Statement on Standards for Tax Services (SSTS) No. 1, Tax Return Positions, provides the standards for tax return positions. Under SSTS No. 1, a tax return position is:
(i) a position reflected on a tax return on which a member has specifically advised a taxpayer or (ii) a position about which a member has knowledge of all material facts and, on the basis of those facts, has concluded whether the position is appropriate. [SSTS No. 1, [paragraph]1(a)] Thus, for a position to be considered a tax return position, a tax practitioner must either advise the client on the position or the tax practitioner must have knowledge of all material facts and conclude the position is appropriate to report on the tax return.
While SSTS No. 1 provides the definition of a tax return position, it does not go into detail on what is considered tax advice. One place to look for guidance on this is the Internal Revenue Code. Sec. 7525 defines tax advice as "advice given by an individual with respect to a matter which is within the scope of the individual's authority to practice" under 31 U.S.C. Section 330, generally meaning CPAs, attorneys, and enrolled agents (Sec. 7525(a)(3)(B)).
"Within the scope of an individual's authority to practice" is a rather broad statement. For CPAs, anything within the scope of their ability to practice, i.e., being CPAs, would relate to any tax advice they provide. Therefore, when considering the first prong of a tax return position as defined by SSTS No. 1, tax advice will be anything that is even remotely related to tax that falls under a CPA's authorization to practice before the IRS, as set forth in 5 U.S.C. Section 500(c).
For tax advice to be a tax return position, it must be reflected somewhere on a tax return (SSTS No. 1, [paragraph]1(a)). Reflecting advice on the return can be both explicit and implicit. For example, if a CPA tax practitioner tells a client that she should report $2,000 of original issue discount (OID) interest on her tax return and she reports the $2,000 on the tax return, then it is explicitly disclosed on the tax return. If the tax practitioner tells the client not to report the $2,000 on the tax return, then the tax return position regarding the OID interest is reflected on the return precisely because it is omitted from the return. The advice then is implicitly disclosed on the tax return.
The other important...