Voluntary tax practice reviews.

AuthorPurcell, Thomas J., III

In recent years the complexity of tax practice has increased significantly for a variety of reasons, including exponential expansion of the technical content of tax laws; significant new and revised regulations; far-reaching judicial decisions; the imposition of new and revised statutory penalty provisions for tax return preparers and tax advisers; expanded calls for oversight from legislatures, regulators, and public interest groups; and expansion of civil liability for professional malpractice in tax-related engagements. As a result of this complexity, it has become even more challenging to manage a tax practice. One tool that can assist both the person responsible for managing the tax practice and the professional firm generally is a regular review of the tax practice.

Currently, there is no statutory, regulatory, or professional regimen requiring a regular tax practice review. This column explores the primary reasons for implementing a tax practice review and the development of the AICPA voluntary approach to tax practice management.

Why Do Tax Practices Need a Tax Practice Review?

Treasury Department Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), contains the rules governing tax practice before the IRS. The two provisions of Circular 230 that are most relevant to the subject of this column are discussed below.

The June 2005 revisions to Circular 230 added Section 10.33, Best Practices for Tax Advisors. This section provides that practitioners "should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices in providing advice and in preparing ... a submission to [the IRS],"The section met with some controversy when it was proposed and finalized, since it does not by its terms impose a penalty for failure to follow best practices, nor does it preclude a penalty. The IRS indicated at the time that the section was intended to be aspirational. Besides stating some generally accepted indicia of best practices, Section 10.33(b) also imposes a duty on the person responsible for tax practice oversight to take steps to ensure that all members of the firm, not only those with Circular 230 credentials, take actions consistent with best practices.

In the June 2014 revisions to Circular 230, Section 10.36, Procedures to Ensure Compliance, was revised to impose IRS disciplinary authority over the person with the "principal authority" for "overseeing a firm's practice governed by [Circular 230]."Practice governed by Circular 230 includes advice about federal tax matters and tax compliance, claims for refund, or documents to be submitted to the IRS. The scope of the responsibility of this person is to ensure the firm has adequate procedures for compliance at both the individual practitioner and firm level with any parts of the tax practice that are subject to the provisions of Circular 230. The potential for penalties exists if the person, through willfulness, recklessness, or gross incompetence, does not take steps to ensure that the firm has adequate procedures to comply with Circular 230, and to ensure that the adequate procedures are in fact being followed by firm members. (For an expanded discussion of the changes made in Section 10.36, see Blatch, et al., "New Rules on Written Tax Advice and Other Revisions to Circular 230 and Their Effect on CPAs," 45 The Tax Adviser 890 (December 2014).)

The sanctions provisions of Circular 230 are contained in Sections 10.50-10.53. Section 10.52, Violations Subject to Sanction, indicates that a practitioner may be sanctioned for willful violations of any of the Circular 230 provisions (other than the Section 10.33 best practices provisions) and also for reckless or grossly incompetent behavior that violates, among others, Section 10.36. Thus, the tax practice oversight professional could be personally sanctioned for not only his or her own actions, but also for egregious behavior by others within the firm that the oversight professional willfully or recklessly disregarded or, through gross incompetence, failed to properly oversee. Clearly, a system of tax practice oversight that is regularly monitored would substantially reduce, if not totally eliminate, the risk of sanctions...

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