Tax return processes: the intersection of due diligence and quality control.

• Author: Schreiber, Gerard H., Jr.

The standards for due diligence and quality control contain significant overlapping responsibilities that CPAs must be aware of before, during, and after tax return filing season.

CPAs are in the midst of another filing season: sending out tax organizers and engagement letters, receiving (they hope!) an influx of client information, implementing recent tax law changes, using tax research services, keeping computer systems operational and current, checking data security, and overseeing staff and personnel as they follow office procedures and processing practices for client data and tax returns.

These processes seem normal since many CPAs have been doing the same things year after year, and they are routine to everyone involved in the process. Many times, CPAs associate the concept of due diligence with matters that arise during actual return preparation, and they think of quality-control issues as arising before and after return preparation. However, these two practice concerns actually overlap from before returns are prepared through delivery of returns to clients and beyond. Many practice matters become ethical matters during an engagement.

This column explores the interrelationship of ethical and practical considerations that start before client data come into the office and continue after the return is e-filed or a hard copy is delivered to the client for filing. Ideally, these practice management and ethical responsibilities are best addressed before the start of filing season, but even in preparing and fifing returns, CPAs must be aware of these considerations and the need to adhere to ethical standards.

CPAs have to consider the relevant standards and pronouncements issued by both the IRS and the AICPA. Some are mandatory; others are not mandatory but would be considered best practices, and liability insurers suggest that firms comply with them. These standards include:

* Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10) (available at irs.gov/pub/irs-pdf/ pcir230.pdf).

* AICPA. Code of Professional Conduct (the AICPA Code) and its answers to frequently asked questions (FAQs) (the searchable AICPA Code is available at pub.aicpa.org/ codeofconduct).

* AICPA Statements on Standards for Tax Services (SSTSs), Interpretations 1-1 and 1-2, and the FAQs (available at tinyurl.com/nzx2anp); and

* Statement on Quality Control Standards (SQCS) No. 8,A Firm's System of Quality Control (available at tinyurl.com/7u3ffd3).

Circular 230

Many sections of Circular 230 concern the processes involved in the planning and preparation of tax returns. These include:

* Section 10.22, Diligence as to Accuracy,

* Section 10.33, Best Practices for Tax Advisors;

* Section 10.34, Standards With Respect to Tax Returns and Documents, Affidavits, and Other Papers;

* Section 10.35, Competence, and

* Section 10.36, Procedures to Ensure Compliance.

Recent judicial decisions have questioned IRS authority to regulate return preparers. Questions have arisen on whether these decisions extend to CPAs only engaged in tax return preparation services in comparison to CPAs who also represent clients in IRS examinations. CPAs will have to monitor their individual practice, court decisions, and IRS announcements concerning these topics.

CPAs should already be familiar with Section 10.22:

(a) In general. A practitioner must exercise due diligence--

(1) In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;

(2) In determining the correctness of oral or written representations...