Why and how to conduct a tax practice inspection.

• Author: Sellner, Mark A.

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AS AN ACCOUNTING FIRM EXPANDS ITS practice, personnel, and geographic locations, it becomes more challenging to ensure that an effective system of tax quality control is in place to identify and assess high-risk engagements. These engagements can cause trouble for both the client and the tax adviser. For example, the author's firm had a client who had been presented a plan by a management company for moving to the U.S. Virgin Islands and claiming a 90% exemption from income tax on his U.S.-based business income. The firm terminated its long-standing individual income tax engagement after the client declined to engage the firm to research and assess the proposal. Even though the firm terminated the engagement, the author was subsequently subpoenaed as a trial witness for the IRS, which reportedly has surveillance tapes and wiretaps of the client to support its case of criminal tax evasion against him and the management company. Fortunately, a tax quality control system was operating that precluded a continued engagement with this client.

Tax quality control is a firmwide issue, not just a tax department concern. At the grand jury deposition, the assistant U.S. attorney asked whether the chairman of the firm had been involved in the discussions of the U.S. Virgin Islands tax proposal. He had not, but he would have been had the matter not been resolved to the satisfaction of the managing partner of tax.

The tone at the top--senior management's commitment to an ethical culture of advocacy, integrity, and objectivity in the firm's tax practice--and senior management's willingness to lead by example in holding all professionals across the firm to the same ethical rules may be the most critical elements in ensuring that all professionals providing tax services are doing the right thing. To that end, a tax practice inspection can assess the degree of compliance with a firm's tax quality control program.

Circular 230 encourages tax practitioners to aspire to follow best practices in providing tax services. A firm can use a tax practice inspection as a tool to test the quality of tax services provided to clients, to develop specific recommendations for improvement, and to prepare or update a tax services policies and procedures manual.

How to Conduct a Tax Practice Inspection

Using the AICPA's voluntary tax practice review guidelines, a tax practice inspection can be planned and conducted as a peer review-type assessment of a single office or a multi-location tax practice for compliance with accounting firm, IRS, state, and professional ethics and practice rules. The reviewer can use checklists and interview forms to implement the approach. (The AICPA Tax Quality Control Task Force is in the process of updating its Tax Practice Quality Control Guide and Guidelines for Voluntary Tax Practice Review.)

Tax Practice Rules

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