Welcome to Ethics & Professional Responsibilities!

Hello future CPAs! Before we dive into the "numbers" side of tax, we have to talk about the "behavior" side. Think of this chapter as the Rules of the Road for tax practitioners. If you don't follow these rules, you could lose your license or face massive fines. Don't worry if this seems a bit "legalistic" at first—we’re going to break it down into simple, common-sense concepts that you’ll encounter every day in practice.

1. Treasury Department Circular 230

Circular 230 is a publication from the IRS that dictates how we must behave when practicing before the Internal Revenue Service. It applies to CPAs, attorneys, enrolled agents, and others. If you are representing a client in front of the IRS, these are your mandatory rules.

Key Duties and Restrictions

  • Information to be Furnished: If the IRS requests info, you must give it to them unless you believe in good faith that the info is privileged (like attorney-client privilege).
  • Knowledge of Client’s Omission: If you find out your client made a mistake or left something off a previous return, you must tell the client. You also have to tell them the consequences of that mistake.
    Common Mistake: Students often think you have to tell the IRS. Wrong! You tell the client; you do not "tattle" to the IRS.
  • Due Diligence: You must exercise due diligence in preparing returns and determining the correctness of representations made to the Treasury Department. Basically, don't just take a client's wild guesses as truth without checking.
  • Prompt Disposition of Pending Matters: Don’t stall! You shouldn't unreasonably delay any matter before the IRS.
  • Circular 230 prohibits unconscionable fees and generally restricts contingent fees for matters before the IRS. Section 10.27 lists exceptions for specified IRS examinations/challenges, certain interest or penalty claims, and judicial proceedings. In Ridgely v. Lew, the court held that the IRS lacked statutory authority to regulate contingent fees for ordinary refund claims prepared before an examination or challenge. Other applicable AICPA and state rules must also be checked; neither a blanket ban nor unrestricted permission is correct.

Best Practices for Tax Advisors

Circular 230 suggests "best practices" to ensure your firm runs smoothly. These include:
1. Communicating clearly with the client regarding the terms of engagement.
2. Establishing the facts and arriving at a conclusion supported by law.
3. Advising the client about the importance of the conclusions reached (e.g., whether they might get penalized).

Quick Review: Under Circular 230, if you find an error on a past return, you tell the client, not the IRS. If the client refuses to fix it, you might have to consider withdrawing from the engagement.

Key Takeaway: Circular 230 is the "minimum standard" required by the IRS. It's designed to protect the integrity of the tax system.

2. AICPA Statements on Standards for Tax Services (SSTS)

The four revised SSTS took effect January 1, 2024 and superseded the former seven standards. SSTS No. 1 covers general standards for members providing tax services, including competence, due care, data protection and use of tools. The former numbering for return positions, estimates and prior determinations must not be taught as current.

SSTS No. 1: General Standards

The four revised SSTS took effect January 1, 2024 and superseded the former seven standards. SSTS No. 1 covers general standards for members providing tax services, including competence, due care, data protection and use of tools. The former numbering for return positions, estimates and prior determinations must not be taught as current.

SSTS No. 2: Tax Compliance

SSTS No. 2 governs tax compliance services. Return positions must meet the applicable taxing authority’s standard; where none applies, the SSTS realistic-possibility standard generally applies, with a reasonable-basis route and appropriate disclosure where permitted. Make reasonable efforts to answer relevant return questions, inquire into incorrect, inconsistent or incomplete client information, and use reasonable estimates without false precision only where permitted. A prior administrative or court determination does not automatically govern a different year, but the current position must still meet applicable standards.

SSTS No. 3: Tax Consulting

SSTS No. 3 governs tax consulting services. Establish the relevant facts, identify applicable law and assumptions, exercise professional judgment, and communicate the advice, scope and limitations appropriately. Return preparation procedures belong to SSTS No. 2, not the former SSTS No. 3.

SSTS No. 4: Tax Representation

SSTS No. 4 governs tax representation services, including professional conduct when representing a taxpayer before a taxing authority. Rules for estimates in a return are within the current tax-compliance standard, SSTS No. 2; an estimate cannot replace documentation specifically required by law.

SSTS No. 2 governs tax compliance services. Return positions must meet the applicable taxing authority’s standard; where none applies, the SSTS realistic-possibility standard generally applies, with a reasonable-basis route and appropriate disclosure where permitted. Make reasonable efforts to answer relevant return questions, inquire into incorrect, inconsistent or incomplete client information, and use reasonable estimates without false precision only where permitted. A prior administrative or court determination does not automatically govern a different year, but the current position must still meet applicable standards.

Key Takeaway: SSTS provides the "Code of Honor" for CPAs. It emphasizes honesty, thoroughness, and professional judgment.

3. Tax Preparer Penalties

The IRS can punish "Tax Return Preparers" (TRP) who don't follow the rules. A TRP is anyone who is paid to prepare (or employ others to prepare) a substantial portion of a tax return.

Unreasonable Positions vs. Willful Conduct

  • Under section 6694(a), an undisclosed ordinary return position generally needs substantial authority; an adequately disclosed position generally needs a reasonable basis. Tax shelters and specified reportable transactions require a reasonable belief that the position is more likely than not correct. Subject to statutory conditions and the reasonable-cause/good-faith exception, the penalty is the greater of $1,000 or 50% of preparer income derived or to be derived from the return or claim. Willful or reckless understatement under section 6694(b) carries the greater of $5,000 or 75%.

Other "Common Sense" Penalties

The IRS also fines preparers for smaller administrative failures. Think of these like "parking tickets" for tax pros:
- Failure to provide a copy of the return to the taxpayer.
- Failure to sign the return.
- Failure to keep a copy of the return or a list of clients.
- Negotiating a refund check: Never, ever endorse or deposit a client's IRS refund check into your own account! This is a major no-no.

Memory Aid: Remember "S.S.K." for the paperwork requirements: Sign the return, give a Signed copy to the client, and Keep your records for 3 years.

Key Takeaway: Penalties get much harsher as you move from "oops, I didn't have enough authority" to "I am intentionally cheating the system."

4. Role of State Boards of Accountancy

This is a very important distinction for the CPA exam: The IRS and AICPA cannot take away your CPA license. Only your State Board of Accountancy can grant or revoke your license.

State Board Power

  • The State Board is the sole authority that can license you.
  • They can suspend or revoke your license for "Professional Misconduct" (like fraud, gross negligence, or even failing to file your own tax return!).
  • After a formal hearing, they can also impose fines or require additional CPE (Continuing Professional Education).

Quick Review:
- IRS: Can stop you from practicing before the IRS (Circular 230).
- AICPA: Can kick you out of the AICPA (membership only).
- State Board: Can take away your "CPA" title and license.

Key Takeaway: Your license is a privilege granted by the State, and they are the ultimate "judge" of your professional standing.

Summary: Putting it All Together

To succeed in this section of the REG exam, remember:
1. Circular 230 = IRS rules for representation.
2. SSTS = AICPA's ethical standards for CPAs.
3. Errors = Tell the client, not the IRS.
4. Due Diligence = Don't be blind to red flags.
5. State Board = The only ones who can take your license.

Keep going! You've got this! Ethics might feel like a lot of rules, but it's really just about being the professional the public expects you to be.