In Brief
CPAs are distinguished by being subject to high professional standards. But what happens when professional standards overlap, or even conflict with, federal and state laws and regulations? Under many common circumstances, CPA tax practitioners may be hard pressed to determine the correct course of action to stay in compliance. This article is the first of a two-part series providing tax professionals with advice on how to deal with these issues, especially in New York.
Many licensed tax practitioners in the state of New York must adhere to a myriad of professional standards. There is often confusion about which of the standards to follow, especially when there are conflicts between various standards.
This article is the first of a two-part series which will address the knowledge gap in this area by presenting information that highlights the similarities and dissimilarities among standards, as well as the appropriate position to take when conflicts occur among standards. It will address, at length, the most common issues in professional responsibilities in tax practice for confidentiality, independence, and conflicts of interest. Part 1 presents an analysis of these issues as they relate to the various standards including the AICPA Code of Professional Conduct, the AICPA Statement on Standards of Tax Practice, the Internal Revenue Service’s Circular 230, relevant sections of the Internal Revenue Code and the New York State Board of Regents, which governs the licensure of the New York CPA. Part 2 will discuss other special circumstances practitioners may encounter, identify implications for noncompliance with the standards, and present best practices for practitioners to ensure compliance.
General Overview
New York State licensed tax practitioners are required to comply with any and all pronouncements—whereas nonlicensed tax practitioners, including enrolled agents, are only responsible for compliance with IRS pronouncements, particularly Circular 230, as well as relevant sections of the IRC. For CPAs in New York State, the burden of compliance can sometimes be more complicated not only because there are more pronouncements, but also because there sometimes are conflicts with the crossover among the standards. The relevant standards for New York CPA practitioners are as follows:
AICPA statements on standards for tax services.
The AICPA has promulgated standards for CPAs to follow in the practice of tax preparation. There was a need for guidance for CPAs in their unique relationships with their clients and the integration with the other services they require, such as financial statement services. The Statements on Standards for Tax Services (SSTS), published by the AICPA, replaced the original Statements on Responsibility in Tax Practice effective October 31, 2000. Originally established as SSTS 1-8, the Statements were completely updated in 2008 to the current SSTS 1-7 with the effective date of January 1, 2010, and updated April 30, 2018, to include revised citations of the AICPA Code of Professional Conduct. The preamble to the SSTS states that the standards, as well as their interpretations, are intended to complement the Treasury Department’s Circular 230. The SSTSs establish the enforceable tax practice standards for which all CPAs who provide tax services must comply with, regardless of their jurisdiction (Preface, SSTS 1–7). It is important to note that the SSTSs are enforceable in accordance with the AICPA Code of Professional Conduct, General Standards Rule, ET sections 1.300.001 and 2.300.001, and Compliance with Standards Rule, ET sections 1.310.001 and 2.310.001. Such enforcement is determined on a case-by-case basis by the AICPA Tax Executive Committee. As noted above, the SSTSs were last updated on April 30, 2018, to include the most up-to-date citations of the AICPA Code of Professional Conduct. The AICPA website has indicated that the AICPA SSTS Revision Task Force is in the process of reviewing and revising the current SSTS discussed in this article and are currently soliciting feedback from practitioners. The task force hopes to update the standards so that they are more indicative of the new ways tax practitioners work. It is the authors’ hope that this article series will assist them in that endeavor.
AICPA Code of Professional Conduct.
The Code of Professional Conduct was adopted by the AICPA “to provide guidance and rules to all members in the performance of their professional responsibilities.” (ET section 0.100.010.01) The Code has long provided guidance for CPAs on practice issues and how they must conduct themselves in professional practice. Originally drafted as the Code of Professional Ethics, it was later renamed the Code of Professional Conduct given that ethics cannot be codified. The Code of Professional Conduct consists of three sections as they apply to members in public practice, members in business, and all other members (i.e., those who are retired or unemployed); these sections include principles, rules, and interpretations. The principles provide the framework for the Code of Professional Conduct. The rules govern the performance of professional services by the members of the AICPA. CPAs refer to the Code of Professional Conduct when questions arise as to what professional responsibilities apply in certain situations. Furthermore, the Code provides general guidance when there are no other standards in place to provide guidance on specific issues. The citations of the Code of Conduct within this article are from the most recent version of the Code, which was last updated for all official releases through September 1, 2018.
Circular 230.
The Treasury Department has adopted rules governing the recognition and conduct of persons representing taxpayers before the IRS. The rules, published as Regulations, are reprinted in Treasury Department Circular 230. The rules of Circular 230 govern the practice of attorneys, CPAs, enrolled agents, enrolled retirement plan agents, registered tax return preparers, and other persons representing taxpayers before the Internal Revenue Service. Both licensed and nonlicensed tax practitioners, including enrolled agents, should comply with the standards set forth in this publication.
Circular 230 is divided into five parts:
- Rules relating to authority to practice before the IRS
- Duties and restrictions relating to such practice
- Sanctions for violation of the regulations
- Rules relating to disciplinary proceedings, and
- General rules (e.g., provisions relating to the availability of records).
Circular 230 is modified periodically with the last revision dating from June 2014 (see Regulations Governing Practice before the Internal Revenue Service,http://www.irs.gov/pub/irs-pdf/pcir230.pdf).
New York State Law.
Licensure in New York State is issued and monitored by the New York State Board of Regents. Under their direction, the State Education Department regulates the profession through the Office of the Professions, which is assisted by the state boards for the professions. Similar to the Code of Professional Conduct, practitioners who are licensed, certified, or registered pursuant to Title VIII of the New York State Education Law, should refer to the following state laws in order to determine their professional responsibility in multiple aspects of the profession:
- Title VIII and Article 149, “Public Accountancy,” of the NYS Education Law
- Part 29, “Unprofessional Conduct,” of the Rules of the Board of Regents
- Part 52-13, “Registration of Curricula, Accountancy,” and Part 70, “Public Accounting,” of the Commissioner’s Regulations.
For the purposes and scope of this article, discussion will focus on the applicable laws set forth in Part 29, “Unprofessional Conduct,” of the Rules of the Board of Regents.
It is imperative for New York State licensed practitioners to comply with such responsibilities, as failing to do so may result in the suspension or revocation of licensure within the state.
Standards Related to Confidentiality, Independence, and Conflicts of Interest
The areas of confidentiality, independence, and conflicts of interest have long been issues that tax practitioners find the necessity for interpretation when faced with complicated client issues. Because of the unique nature of the work of CPAs, sometimes terminology such as “independence” is used, whereas in other areas of tax preparation a “conflict of interest” is used. The article will address each and try to clarify the overlap.
Confidentiality.
Confidentiality is addressed in both the AICPA Code of Professional Conduct and the AICPA Tax Standards. SSTS 7, Form and Content of Advice to Taxpayers, warns that in providing tax advice, an accountant should be cognizant of applicable confidentiality privileges. The AICPA Code of Professional Conduct addresses confidentiality only as it applies to members in public practice (“CPAs” or “licensed tax practitioners”) in ET section 1.700.001, Confidential Client Information Rule. Pursuant to this rule, a CPA in public practice may not disclose any confidential client information without the specific consent of the client. This rule, however, is not to be construed to relieve a professional from the following obligations:
- To adhere to the Compliance with Standards Rule (ET section 1.310.001) or the Accounting Principles Rule (ET section 1.320.001) [ET section 1.700.001.02]
- To comply with a “validly issued and enforceable subpoena or summons, or to prohibit a member’s compliance with applicable laws and government regulations” [ET section 1.700.001.02]
- To disallow the review of a member’s professional practice under AICPA or state CPA society or board of accountancy authorization [ET section 1.700.001.02] or
- To prohibit a member to “initiate a complaint with, or respond to any inquiry made by, the professional ethics division or trial board of the Institute or a duly constituted investigative or disciplinary body of a state CPA society or Board of Accountancy.” [ET section 1.700.001.02]
Furthermore, ET section 1.700.001.01 states that members of the professional ethics division or trial board of the AICPA, state CPA society or board of accountancy members tasked with the execution of professional practice reviews, shall not use to their own advantage, or disclose, any member’s confidential client information that comes to their attention in performing such activities. This restriction, however, does not impede upon the members’ exchange of information as it relates to the investigations and disciplinary proceedings or professional practice reviews. Failure to comply with the standards set forth in SSTS 7, as well as those set forth in the AICPA Code of Professional Conduct, will result in remedial action on a case-by-case basis by the AICPA Tax Executive Committee.
Circular 230 addresses confidentiality in section 10.20(a), “Information to be furnished to the Internal Revenue Service,” which states that once a proper and lawful request is made by an authorized IRS employee or officer, the practitioner must promptly submit any records to the IRS, unless he or she believes in good faith and on reasonable grounds that the requested records are privileged. If such requested records or information are not in the possession of the practitioner, however, they must promptly notify the requesting IRS employee or officer and provide any information that he or she has regarding the identity of any party whom they believe may have access to such information. Although practitioners are required to speak to their clients regarding the identity of the potential parties who may have access to the requested information, they are not required to contact or question the other party nor verify any information provided by their client regarding the identity of such party. If licensed or nonlicensed tax practitioners (e.g., enrolled agents, attorneys) fail to comply with section 10.20(a), then in accordance with section 10.52 (a)-(a)(1), “Violations Subject to Sanction,” of Circular 230, they will be sanctioned in accordance with section 10.51, “Incompetence and Disreputable Conduct,” for willfully violating any of the regulations set forth in Circular 230. In addition, failure to comply with section 10.20(a) will result in the practitioner willfully disclosing or otherwise utilizing a tax return or the tax return information that is not authorized by the IRC, in accordance with section 10.51(15) of Circular 230. Section 10.20(a) of Circular 230 requires a tax practitioner to turn over records they have privilege to, which of course only applies to attorneys and CPAs. Only in exceptionally limited cases is it an issue of confidentiality, not privilege, under IRC section 7525, discussed below. Therefore, the practitioner is subject to the sanctions set forth in section 10.50 of Circular 230, which allows the Secretary of the Treasury to censure, suspend, or disbar the practitioner from practice before the IRS. Herein lies a conflict whereby the professional standards issued by the AICPA as well as the NYS Board of Regents require confidentiality, but the IRS under Circular 230 can mandate the turning over records over the objections of the client. If CPAs comply, they run the risk of AICPA membership expulsion and of licensing defense.
In addition to the standards set forth in the AICPA Code of Professional Conduct, the SSTS, and Circular 230, licensed tax practitioners must comply with IRC sections 7216 and 7525.
IRC section 7216 prohibits a tax practitioner from disclosing a client’s tax return information without written consent unless it is disclosed in accordance with a court order. This also appears to contradict Circular 230. James J. Rigos cautions that when obtaining written consent from a client, the tax practitioner must pay specific attention to the language of the consent as the statute implies that consent must be obtained for each and every disclosure of the information (“Applying the AICPA’s Professional Standards to Tax Practice Best Practices for Minimizing Risks and Penalties,” The CPA Journal, March 2017, pp. 34–41). It is important to note that this only applies to information provided to the tax practitioner for the preparation of tax returns. Therefore, the statute would not apply to financial statements or any other non–tax-related information and may be subpoenaed as deemed relevant to any pending litigation. In an effort to narrow the scope of discovery, files for tax work should be maintained separately. Many accounting firms take special care to segregate the tax files to limit discovery in litigation, but also to protect information that may have limited privilege, as outlined below.
The IRS Restructuring and Reform Act of 1998 led to the creation of IRC section 7525, which establishes yet another confidentiality statute that CPA tax practitioners, as well as any other “federally authorized tax practitioners” are expected to consider when providing tax advice. In accordance with this section, as it relates to tax advice, “the same common law protections of confidentiality which apply to communications between a taxpayer and attorney shall also apply to communications between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney” [IRC section 7525(a)(1)]. This section is only applicable to any noncriminal matters before the IRS or federal court and does not apply to communications regarding tax shelters [IRC section 7525 (a)(2)(A) and (a)(2)(B)]. In addition, the individual soliciting the tax advice must either be a client of the practitioner or be in the process of becoming a client of the practitioner in order for the privilege to apply (Nicholas Nebolsine, “The Sec. 7525 Privilege Relating to Taxpayer Communications,” Tax Adviser, August 2018, pp. 91–94).
In addition to the AICPA standards and the IRS regulations and rules, CPA practitioners must be aware of any additional rules imposed upon them by the state in which they are licensed to practice. In most cases, the violation of rules established by state legislatures can result in the loss or suspension of one’s CPA license. For example, failure to comply with standards can not only result in enforceable actions by both the AICPA Tax Executive Committee and the Secretary of the Treasury; a New York State licensed CPA may face additional reprimands pursuant to Part 29, “Unprofessional Conduct,” of the New York State Rules of the Board of Regents. If a New York State CPA does not adhere to confidentiality standards, they will be considered in violation of sections 29.1(b) (8) and 29.10(c) of the NYS Rules of the Board of Regents. This section states that divulging personally identifiable information, facts, and data, that was obtained through the performance of professional services provided, without obtaining the consent of the client, constitutes professional misconduct.
Many accounting firms take special care to segregate the tax files to limit discovery in litigation, but also to protect information that may have limited privilege.
In addition, a CPA practitioner is considered to have willfully or grossly neglected to comply with federal, state, or local laws, rules, and practice governing the accounting profession as stated in section 29.1(b)(1) of the NYS Rules of the Board of Regents. Such misconduct must be reported, in writing, to the New York State Education Department (NYSED) within 45 days of the occurrence of the misconduct [section 29.10(e) (2)]. Failure to timely notify NYSED of any professional misconduct may result in the suspension or revocation of license to practice in New York.
It is important to note that where there is a conflict between the standards as it relates to confidentiality, or any other standards for that matter, licensed and nonlicensed tax professionals should consult with their malpractice carrier as well as an attorney well-versed in these specific issues. Although the malpractice carrier is mostly focused on financial liability rather than protecting a practitioner’s license, an attorney will focus on both.
The standards both licensed and non-licensed tax practitioners must adhere to with regard to confidentiality are vast; it can be difficult for practitioners to navigate through such a minefield. A summary of best practices to ensure successful compliance with such standards will be included in the second article in this series.
Conflicts of interest and independence.
The AICPA addresses conflicts of interest in the Code of Professional Conduct at ET section 1.110.010. A conflict of interest is a circumstance that creates an “adverse interest and self-interest threat” to a licensed practitioner’s ability to comply with the Integrity and Objectivity Rule (ET section 1.100.001), which clearly states that the practitioner must be free of conflicts of interest (ET section 1.100.001.01, ET section 1.110.010.02). Circumstances that may create such threats include providing a professional service related to a matter involving two or more clients whose interests are in conflict (e.g., in a divorce) or in which the practitioner and the client’s interests are in conflict (e.g., a disagreement regarding a tax position). Furthermore, ET sections 1.110.010.05 to .07 state that the practitioner is responsible for identifying potential conflicts prior to accepting a new client or engagement. Under these sections, a practitioner should employ reasonable methods, or “safeguards,” to identify potential conflicts, including identifying “the nature of the relevant interests and relationships between the parties involved and the nature of the service and its implication for relevant parties.” The practitioner is also encouraged to have an “effective conflict identification process” in place to identify interests and relationships that may lead to conflict threatening their compliance with the Integrity and Objectivity Rule, prior to considering whether to accept the new client or engagement. Best practices on implementing such safeguards are discussed in Part Two of this series.
If a conflict is identified, a licensed practitioner should evaluate the “significance of the threat” to determine if it is at an “acceptable level” or potentially interferes with compliance to the Integrity and Objectivity Rule (see ET sections 1.110.010.07 and 1.110.010.09). ET section 1.110.010.11 states that the practitioner should either “decline to perform or discontinue the professional services that would result in the conflict of interest” or “terminate the relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.” (emphasis added)
Regardless of whether a practitioner determines the threat to be at an acceptable level, they should disclose the conflict of interest to the relevant affected parties and obtain their consent to perform the solicited professional services (ET section 1.110.010.12).
ET section 2.110.010 addresses conflicts of interest as they pertain to members in business. Similar to ET section 1.110.010, this section defines a conflict of interest as a situation that creates an “adverse interest and self-interest threat” (ET section 2.110.010.02) to a practitioner’s ability to adhere to the Integrity and Objectivity Rule. The suggested procedures (identification, evaluation, and disclosure of a conflict of interest, as well as confidentiality) discussed in ET section 2.110.010 are similar to those discussed in ET section 1.110.010, with the exception of the types of disclosure. ET sections 2.110.010.11 through .14 do not provide any suggestions as to the type of disclosure a member in business should employ when a conflict of interest is encountered. Again, it is suggested that the practitioner consult with both their malpractice carrier and their own attorney for guidance in this area.
The standards both licensed and nonlicensed tax practitioners must adhere to with regard to confidentiality are vast; it can be difficult for practitioners to navigate through such a minefield.
When dealing with conflicts of interest, ET section 1.110.010.17 and 2.110.010.13 encourage practitioners to remain aware of the requirements of the Confidential Client Information Rule (ET section 1.700.001) and the Confidential Information Obtained from Employment or Volunteer Activities interpretation (ET section 1.400.070 & 2.400.070) of the Acts Discreditable Rule (ET section 1.400.001 2.400.001). Furthermore, ET sections 1.110.010.16 – 18 and 2.110.010.13 suggest being aware of federal, state and local statutes or regulations, such as IRC section 7216 and Circular 230, which may be more restrictive than the Code of Professional Conduct.
If practitioners believe that they can perform the professional service with objectivity; the relationship is properly disclosed; and consent is obtained from the client, employer, or other appropriate parties, the above rules will not prohibit performing the professional service.
Conversely, certain professional engagements, such as audits, reviews, and all other attestation services, require independence, as mandated by the Independence Rule of the AICPA Code of Professional Conduct (ET section 1.200.001.01). Independence impairments cannot be eliminated through disclosure and consent. The Code of Professional Conduct provides examples of situations that should cause a practitioner, as a member in practice and member in business, to consider whether the client, employer, or other appropriate party could view the relationship as impairing the accountant’s objectivity (ET section 1.110.010.02). These examples include, but are not limited to, the following:
- Simultaneously representing two clients regarding the same matter who are currently in a legal dispute, such as a divorce or a dissolution of a business partnership [1.110.010.04(e)].
- Providing tax or personal financial planning (PFP) services for a married couple who are undergoing a divorce.
- In connection with a PFP engagement, suggesting that the client invest in a business in which the practitioner’s “immediate family member” has a financial interest [1.110.010.04(g)].
- Providing tax or PFP services for several members of a family with opposing interests that the practitioner is aware of [1.110.010.04(l)].
- In connection with a PFP engagement, referring a potential PFP or tax client to a service provider for which the practitioner maintains an exclusive referral agreement [1.110.010.04(m)].
- A PFP or tax engagement wherein the client requests that the accountant provide such services but the performance of such services results in the practitioner recommending a course of action that may be adverse to the company [1.110.010.04(n)].
- When members in business are assigned the task of selecting a vendor for their employer where the member or a member of their immediate family can financially benefit [2.110.010.04(d)].
- When members in business are granted the capacity to approve or have influence over their employer’s investment decisions, resulting in a financial benefit to the members’ personal financial investment portfolio [2.110.010.04(e)].
If licensed tax practitioners fail to comply with the standards set forth in the AICPA Code of Professional Conduct, they will face enforceable action that is determined by the AICPA’s Tax Executive Committee on a case-by-case basis.
Although Circular 230 does not provide guidance with regard to independence, it does address conflicts of interest at section 10.29, which states that generally, licensed and nonlicensed tax practitioners (e.g., enrolled agents) cannot represent a client before the IRS if the representation would be a conflict of interest.
A conflict of interest exists when: 1) the representation of the client would have a direct adverse effect on another client; and 2) when, because of the practitioner’s responsibilities to another client, a former client, a third person, or his/her own personal interest, there is a significant risk that the representation of a client would be “materially limited” [Circular 230 sections 10.29(a)(1), (2)].
Practitioners may still represent a client when a conflict of interest exists under the following conditions:
- The practitioners “reasonably believe” that they will be able to “provide competent and diligent representation to each affected client;”
- The practitioner’s representation of each affected client is not prohibited by law; and
- Each of the affected clients provides written informed consent, confirmed in writing, waiving the conflict of interest within a reasonable time period after being notified of the conflict, but not more than 30 days after notification [Circular 230 sections 10.29(b)(1)–(3)].
Practitioners must retain copies of the consents for a period of at least 36 months from the conclusion of the representation of the affected clients. Additionally, the written consents must be provided to any officer or employee of the IRS upon request [Circular 230 section 10.29(c)].
If licensed or nonlicensed tax practitioners (e.g., enrolled agents) fail to comply with section 10.29, then in accordance with section 10.52 (a)-(a) (1), “Violations Subject to Sanction,” of Circular 230, they will be sanctioned pursuant to section 10.51, “Incompetence and Disreputable Conduct,” for willfully violating any of the regulations set forth in Circular 230. Violators are subject to the sanctions set forth in section 10.50 of Circular 230, which allows the Secretary of the Treasury to censure, suspend, or disbar the practitioner from practice before the IRS.
Although New York state law does not specifically address conflicts of interest, there is an all-encompassing statute in Part 29 of the Rules of the Board of Regents. If tax practitioners are licensed in New York state under Title VIII of the NYS Education Law and has failed to comply with any of the aforementioned standards, they could face sanctions—including suspension, or revocation of their license—for willingly or negligently failing to comply with provisions of federal, state or local laws or regulations governing the practice of public accounting. Such ramifications are in accordance with sections 29.1(B) (1), 29.10(a)(12), 29.10(d), 29.10(e) and 29.10(h) of Part 29 of the Rules of the Board of Regents.
The Intersection of Conflicts
It is important for a licensed tax practitioner to note the overlap between the AICPA standards as well as those established in Circular 230 when it comes to conflicts of interest. Professionals are expected to adhere to the most onerous of standards. In this case, pursuant to Circular 230, practitioners may still represent a client if a conflict of interests exists if they reasonably believe they will still be able to provide competent representation to both affected parties. However, a CPA practitioner is precluded from providing any tax services to a client when a conflict of interest exists, in accordance with the Independence Rule. If CPAs find themselves in a situation where a conflict of interest exists and they continue to provide services to both parties simultaneously, they will unknowingly be exposing themselves to sanctions by the AICPA, the Secretary of the Treasury, and the New York State Board of Regents.
Based on the review of the three most common scenarios licensed and non-licensed practitioners face during tax preparation engagements, as well as the multitude of associated standards, it is easy to understand why confusion exists as to which standard is the most onerous. In an effort to assist tax practitioners in navigating this minefield of compliance, the authors developed the Exhibit, which highlights the similarities and dissimilarities among the standards and indicates the most onerous of the standards for compliance.
Exhibit
Compliance Similarities Among Applicable Standards
