The scope of Circular 230 is much broader than return preparation alone; disregard of its rules by return preparers can result in suspension or, in extreme cases, their disbarment from IRS practice. Subpart B of Circular 230, "Duties and Restrictions Relating to Practice Before the Internal Revenue Service," contains a number of "ethical" requirements applicable to CPAs, attorneys, and enrolled agents. However, these ethical requirements are broadly drawn and generally do not address specific facts and circumstances. It is here that the AICPA Statements on Responsibilities in Tax Practice have played a significant role. The IRS has considered them an important source of accepted customs and practices of the CPA profession. To the extent that these statements are more specific than the "Duties and Restrictions" themselves (as most of the statements are) the IRS may, in effect, apply them as interpretations of the "duties and restrictions." Therefore, even though the statements are intended to be educational and advisory, and are not enforceable under the AICPA Code of Professional Conduct, they can, in many circumstances, become quasi-enforceable rules by the IRS under Circular 230.

The Due Diligence Issue

The original ten SRTP were issued by the AICPA between 1964 and 1977. To reflect subsequent changes in tax legislation, case law, and regulations pertaining to tax return preparers, the statements were undergoing a major revision which was nearing completion in 1986. Then a complication arose. In August of that year, the IRS issued a highly controversial proposed amendment to the Circular 230 regulations, which would subject tax practitioners to IRS discipline for rendering tax services to a client that resulted in the assessment to the client of the 25% "Substantial Understatement" penalty under Sec. 6661. This proposed amendment affected the statements' revision project, which was temporarily placed on hold.

The IRS proposal, as issued, would have substantially changed the current due diligence rule in Sec. 10.22 of Circular 230 by tying it to a narrower standard. The current rule requires that a CPA, attorney, or enrolled agent rendering tax services, "shall exercise due diligence:

(a) In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to IRS matters;

(b) In determining the correctness of oral or written representations made by him to the Department of the Treasury; and

(c) In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the IRS."

While this current rule is extremely broad in scope, the phrase due diligence is not defined in terms of a specific standard. The IRS proposal noted that the term due diligence is subject to varying interpretations and, as a result, affords elasticity in its application. In fact, at the time the IRS proposal was issued, the due diligence standards of the legal profession and the suggested standards contained in the original AICPA statements were different. Since the IRS has given weight to the customs and practices of a profession when interpreting Circular 230, the differences in the two professions'standards made it difficult to achieve uniform application of the Circular 230 rules. Achieving uniformity was an important goal of the IRS proposal.

Most organizations representing tax practitioners, including the AICPA and the American Bar Association (ABA), strongly opposed the concept as expressed in the proposed amendment and even questioned the legal authority of linking the due diligence of tax practitioners to the assessment of a penalty on taxpayers. However, rather than merely offer opposition, the AICPA and the ABA worked constructively to meet the IRS goal of developing a uniform due diligence standard for all tax practitioners governed by Circular 230.

The result of this joint AICPA-ABA effort was the development of a uniform standard which requires that a tax position have "a realistic possibility of being sustained administratively or judicially on its merits if challenged." In addition, "a return position that does not meet this standard but that is not frivolous may be advised or recommended so long as the position is adequately disclosed on the return," using the disclosure standards of Sec. 6661.

While at the date of this writing the IRS has not finalized its Circular 230 due diligence rule, it is hoped by both the legal and CPA professions that the uniform joint standard proves acceptable.

The Revised Statements on Responsibilities

With the development of the uniform AICPA-ABA due diligence standard, the project to revise the AICPA statements went forward and was completed with their issuance by the AICPA Tax Division in July 1988. Each of the three-part statements, numbered one through eight, contains an introduction, the statement text, and an explanation.

CPAs should remain aware of both the Tax Division's intent that the statements be educational and advisory rather than enforceable, and of the fact that the IRS has relied on the statements as a source of the CPA profession's accepted customs and practices. Until the IRS resolves the due diligence issue, its reliance is likely to be especially strong for Statement No. 1, which contains the joint AICPA-ABA due diligence standard. In addition, the IRS has applied the Circular 230 standards, and by implication the statements, to CPAs' own self-prepared tax returns. These standards are, of course, higher than those applicable to taxpayers generally.

The remainder of this article is a discussion of the eight revised AICPA Statements on Responsibilities in Tax Practice (SRTP).

SRTP (1988 Rev.) No. 1--Tax Return Positions

SRTP (1988 Rev.) No. 1 replaces former Statement No. 10 and, as noted, contains the uniform AICPA-ABA due diligence standard. It provides guidance on "the standards a CPA should follow in recommending tax return positions and in preparing or signing tax returns including claims for refund." The statement defines a "tax return position" as "1) a position reflected on the tax return as to which the client has been specifically advised by the CPA, or 2) a position as to which the CPA has knowledge of all material facts and, on the basis of those facts, has concluded that the position is appropriate." This precautionary language is a clear reminder that a CPA is responsible for either a reporting position which the CPA has specifically advised or for an appropriate reporting position based on material facts which were known to the CPA. Unlike its predecessor, the first statement is not limited to tax return positions that may be contrary to IRS or Treasury Department interpretations of the IRC; SRTP (1988 Rev.) No. 1 applies to all tax return positions.

This statement recommends that a CPA follow a new "realistic possibility" standard when advising or recommending any tax return position. Specifically, a CPA should not recommend to a client that a position be taken with respect to the tax treatment of any item on a return unless the CPA has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged." No CPA should prepare or sign a return that does not comply with this standard unless the position is not frivolous: a position that is knowingly advanced in bad faith and patently improper is considered frivolous. A non-frivolous position that does not meet the realistic possibility standard should either be adequately disclosed on the return itself or part of a claim for refund. Finally, "a CPA should, where relevant, advise the client as to the potential penalty consequences of the recommended tax return position and the opportunity, if any, to avoid such penalties through disclosure."

The statement also addresses certain improper actions pertaining to return positions. For example, a CPA should not recommend a reporting position that would exploit the audit selection process or which would be a "mere 'arguing' position advanced solely to obtain leverage in the bargaining process of settlement negotiation with the IRS."

The explanatory section of this statement recognizes that a tax practitioner has a dual responsibility to both the client and to the tax system. However, it stresses that taxpayers are obviously not required "to pay more taxes than are legally owed..." CPAs are under an affirmative duty to assist clients in minimizing their legal tax liability and may advocate positions that meet both the realistic possibility standard and which also conform to Rule 102 of the AICPA Code of Professional Conduct. This rule provides that in the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others." A CPA who adheres to these standards may act as an advocate for his or her clients.

Sources that do not meet the substantial authority criteria contained in the Sec. 6661 regulations (e.g., well reasoned treatises and articles, private letter rulings, and the general explanations of various revenue acts prepared by the staff of the Joint Committee on Taxation) can be used as support for a position that complies with the realistic possibility standard in SRTP (1988 Rev.) No. 1. Nonfrivolous positions based on such sources would be acceptable even though they were ultimately "abandoned because of practical or procedural aspects of an IRS administrative hearing or in the litigation process."

The revised statement permits CPA practitioners to discuss with their clients the possibility that a particular reporting position will lead to an audit, so long as any position discussed meets the realistic possibility standard.

Finally, a CPA may also recommend disclosure of a position that meets the realistic possibility standard if doing so would enable the client to "mitigate the likelihood of claims of taxpayer penalties under the Internal Revenue Code or would avoid the possible application of the six-year statutory period for assessment under Sec. 6501(e)."

Although a CPA should provide advice to clients regarding disclosure on a tax return, the responsibility of whether to disclose and how to disclose still rests with the taxpayer.

Comment

The realistic possibility standard, which has now been jointly adopted by the American Bar Association in Formal Opinion 85-352 and by the AICPA in SRTP (1988 Rev.) No. 1, establishes a uniform standard for both groups of tax professionals. This standard provides a good alternative to the proposal to amend Circular 230 by tying the substantial understatement provisions of Sec. 6661 to the practitioner's exercise of due diligence. A taxpayer would only be able to avoid the penalty if the position were either based on "Substantial Authority" or fully disclosed in the return itself. In contrast to the ill-defined concept of substantial authority, the realistic possibility standard would forbid a practitioner from recommending a position that realistically could not be sustained either administratively or judicially. Additionally, SRTP (1988 Rev.) No. 1 would not permit a CPA to recommend a frivolous position or one mainly designed to enable either the practitioner or clients to avoid fraud or other penalties in the event the clients' returns were audited.

SRTP (1988 Rev.) No. 1 also recognizes the taxpayer's role in making the final decisions regarding tax return positions or disclosure of particular items. Although a CPA may provide advice based on the realistic possibility standard a tax return is primarily a taxpayer's representation of facts, and the taxpayer has the final responsibility for positions taken on the return." The client's responsibility thus extends to decisions about disclosure, all reporting positions, or any claims for refund.

Finally, practitioners should pay special attention to those situations which may require them to inform taxpayers about possible penalties or where it may be appropriate to recommend disclosure. Practitioners should be aware that clients may try to bring liability claims against them if the client has not been fully advised about possible penalties (e.g., Sec. 6661) and how to avoid these penalties.

SRTP (1988 Rev.) No. 2--Answers to Questions on Returns

The second statement discusses whether a CPA may sign a return if all questions on a return are not answered. The introduction to SRTP (1988 Rev.) No. 2 defines "questions" broadly to include any request "for information on the return, in the instructions, or in the regulations," even if not stated in question form. According to this statement, a CPA should make a reasonable effort to obtain from the client, and provide, appropriate answers to all questions on a tax return before signing as preparer." Omitting an answer on a return is not justified by the fact that the answer may not be advantageous to the taxpayer.

The explanation to SRTP (1988 Rev.) No. 2 recognizes that not all questions on a tax return are equally important but notes that any failure to obtain answers to certain questions could affect the calculation of taxable income or loss or the taxpayer's actual liability and thus "detract from the quality of the return." In addition, the preparer's jurat requires that "the return is true, correct, and complete." Failure to answer one or more questions could be considered a violation of the preparer's declaration.

Although a CPA must make a reasonable effort to obtain answers to questions, SRTP (1988 Rev.) No. 2 does discuss circumstances which would permit a CPA to sign a return even if the answers to one or more questions were not provided. First, answers to questions might not directly affect the calculation of taxable income or loss, or tax liability. Second, answers to questions on a return may be important but genuine uncertainty exists regarding the meaning of the question in relation to the particular return." Finally, the information required to answer a question may be too voluminous to be attached to the return; if so, the return should be submitted with the "assurance" that the information will be available to the IRS upon examination.

CPAs are permitted to sign a return if reasonable grounds exist for omitting an answer to a question. Although the statement does not require CPAs to furnish an explanation for such an omission, it does advise them to "consider whether the omission of an answer to a question may cause the return to be deemed incomplete."

Comment

Circumstances exist that permit a tax practitioner to sign a return even though the answers to some questions have not been provided. One obvious example would be the question on Form 1040 that asks whether a taxpayer wants to contribute to the Presidential Election Campaign Fund. Failure to answer this question should not prohibit a CPA from signing the return and having the taxpayer sign and file it. In contrast, failure to supply the answer to the question on Schedule C regarding the type of accounting method a taxpayer utilizes would affect the calculation of income or loss as well as tax liability, and therefore would preclude the CPA from signing the return as preparer. CPA practitioners should therefore look to the reasoning contained in the statement as well as use their professional judgment before signing a return which omits answers to particular questions.

SRTP (1988 Rev.) No. 3 Certain Procedural Aspects of Preparing Returns

This statement provides that in preparing or signing a return, the CPA may in good faith rely without verification upon information furnished by the client or by third parties. However, the CPA should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the CPA." CPAs are encouraged to utilize returns from prior years in order to avoid errors or omissions and should satisfy themselves through sufficient inquiries that underlying records or other data exist. Finally, a CPA should consider the implications of information "actually known to that CPA from the tax return of another client when preparing a tax return..." The statement does stress, however, that the information from the other client's tax return must be relevant to the actual preparation of the tax return of that particular CPA's client and the utilization of such information must not violate any rules or laws regarding confidentiality.

Even though a tax return is ultimately the client's responsibility, the CPA should encourage the taxpayer to provide documentation where appropriate which could help "reduce the possibility of misunderstanding, inadvertent errors, and administrative problems in the examination of returns ..." In the case of pass-through entities such as limited partnerships the CPA may, where appropriate, suggest that a client contact management of the entity with questions regarding the imposition of any penalties, interest, or deficiencies especially if the taxpayer does not participate in the management of the entity. However, a CPA is not required to have the client contact the entity and may prepare the return based on the information furnished "unless there is reason to believe it is incorrect, incomplete, or inconsistent, either on its face or on the basis of other facts known to the CPA."

Comment

The third statement provides needed caution about the gathering of information utilized in the preparation of tax returns. It is consistent with language in Reg. Sec. 1.6694-1(b) (2) (ii) which states generally, in preparing a return, the preparer may in good faith rely without verification upon information furnished by the taxpayer. ... However, the preparer may not ignore the implications of information furnished. The preparer shall make reasonable inquiries if the information as furnished appears to be incorrect or incomplete." Further discussion of the issues raised in Sec. 6694 is contained in Rev. Proc. 80-40, 1980-2 CB 774 which outlines the factors used in assessing penalties under Sec. 6694 and reiterates the criteria for reliance upon client representations.

Additional guidance regarding reliance on taxpayer provided information can be gained by reviewing the situations discussed in Rev. Rul. 80-266, 1980-2 CB 378, which involves a preparer's reliance upon a taxpayer's assurances that adequate documentation existed to support the deductibility of the taxpayer's entertainment expenses under Sec. 274(d). These situations reinforce SRTP (1988 Rev.) No. 3 by permitting a CPA to rely upon unverified tax information provided by the client "unless it appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the CPA."

Finally, SRTP (1988 Rev.) No. 3 should be read in light of Brockhouse v. United States, 749 F.2d 1248 (7th Cir. 1984), the leading case on tax preparer penalties assessed against a CPA under Sec. 6694(a). Mr. Brockhouse had prepared the return of both the closely held corporation and the sole shareholder; the corporations's trial balance showed loans to the corporation from the sole shareholder and from a bank. There was no indication that the owner had received any payments from the corporation and Mr. Brockhouse relied upon information for the personal return that "was supplied by the corporation's business manager or bookkeeper." However, the Circuit Court ruled that the CPA was negligent since he did not try to determine whether any of the interest payments were made to the sole shareholder: "A prudent preparer would have inquired about interest payments on the loans rather than ignoring the implications of the information furnished."

A concise warning regarding conditions imposed upon deductibility or particular treatment of tax return items is also found in this statement. A CPA should take appropriate steps to insure that any conditions which are imposed by the Code or regulations "such as taxpayer maintenance of books and records or substantiating documentation to support the reported deduction or tax treatment ... have been met." By carefully following any specific requirements mandated in the Code or regulations, a CPA will insure that he or she has exercised due diligence in tax return preparation.

The issue of protection of client confidentiality in the use of third or related party information known to a particular CPA is crucial under SRTP (1988 Rev.) No. 3. Specifically, a practitioner must look to Sec. 7216 and related regulations for information on disclosure or use of federal tax return information. Reg. Sec. 1.7216-2(b) (1) permits the use of related party information under carefully delineated circumstances. A practitioner should carefully review this section of the Codes as well as other relevant materials before disclosing or utilizing such information.

SRTP (1988 Rev.) No. 3 should thus be considered carefully by any CPA practitioner because it provides guidance concerning the responsibilities of a preparer in relying upon and inquiring about facts related to a client's tax return.

SRTP (1988 Rev.) No. 4--Use of Estimates

SRTP (1988 Rev.) No. 4 sets forth a CPA's responsibility when using a taxpayer's estimates in preparing the taxpayer's return. The statement does not preclude a CPA from using estimates if it is impractical to obtain the data and if the estimated amounts are reasonable.

Generally, a CPA is not required to disclose the use of estimates on a client's tax return. However, the statement cites several "unusual circumstances" in which disclosure of the use of estimates is necessary, including: death or illness of the taxpayer, nonreceipt of a K-1 for a flow-through entity, pending litigation (e.g., bankruptcy), or destruction of records due to fire or computer failure.

The explanation notes that accounting requires the exercise of judgment and, in many instances, the use of approximations based on judgments." Furthermore, the implementation of such judgment is acceptable if there is no conflict with methods mandated by the Code. Accounting judgments, moreover, are not considered estimates covered by this statement. An example of the acceptable exercise of accounting judgment is contained in the explanation:"...if all other conditions for accrual are met, the exact amount of income or expense need not be known or ascertained at year end if the amount can be determined with reasonable accuracy."

Comment

The use of estimates is an acceptable practice so long as it does not become a substitute for good record keeping practices and falls within the guidelines covered by SRTP (1988 Rev.) No. 4. However, estimated amounts should not be presented in a manner that will imply greater accuracy than actually exists. For example, if an individual taxpayer gave $10 weekly to the church, an estimate of $520 might be used on Schedule A under contributions. A representation of $520.15, however, might give the appearance that the taxpayer has adequate receipts and documentation. SRTP (1988 Rev.) No. 5--Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision

This statement contemplates that a taxpayer, after consenting to the treatment of a particular item during an audit or appeal, might choose to treat a similar item differently on a subsequent return. It raises the issue whether a CPA may recommend a tax return position or prepare a return containing a departure from the previous treatment of the item. So long as the CPA believes, in good faith, that the later treatment of the item has a realistic possibility of being sustained on its merits (the new standard enunciated in SRTP (1988 Rev.) No. 1, the CPA may sign and prepare the return.

SRTP (1988 Rev.) No. 5 recognizes that the facts and law existing at the time a tax return is prepared should determine how an item is treated on the return. Thus, for example, unless the taxpayer has executed a formal closing agreement pursuant to Sec. 7121, consenting to be bound by an IRS determination regarding the subsequent treatment of that item, the taxpayer can depart from that treatment on later returns. Although a taxpayer will usually treat similar items on a later return consistently with the treatment on a prior return, neither an administrative decision nor a court decision ruling against the taxpayer's prior treatment of an item necessarily requires the taxpayer to do so.

There are, however, factors that should be considered by a CPA in determining whether the new tax return position satisfies the "realistic possibility" standard of SRTP (1988 Rev.) No. 1. First, a taxpayer may have consented to the IRS determination due to inadequate documentation in support of his position. If sufficient data is available to support that position on a subsequent return, the taxpayer may treat the item differently on the later return. Second, although the previous position may have satisfied the realistic possibility of success standard mandated by SRTP (1988 Rev.) No. 1, the taxpayer may nonetheless have assented to the IRS view in the administrative proceeding for settlement purposes or decided not to appeal an adverse court ruling. If the taxpayer subsequently decides to disregard the assented-to treatment and to assert the original position, he may do so if he can still meet the evidentiary requirements of the first statement. Finally, the explanation envisions that the legal climate may change. New revenue rulings or more favorable court decisions, for example, may make the taxpayer's position more likely to prevail on a subsequent return; if so, a CPA may advise the client to assert that position.

Comment

Although it has been more than 20 years since this statement was originally issued, SRTP (1988 Rev.) No. 5 makes few substantive changes to its predecessor. The former statement explicitly rejected any requirement that the taxpayer disclose the different treatment of the item on a later return. However, while the revised statement does not require disclosure, it may be advisable to do so to avoid a substantial understatement penalty.

SRTP (1988 Rev.) No. 6--Knowledge of Error: Return Preparation

When a CPA learns that a client did not file a required tax return, or that a previously filed return contains an error or an omission, SRTP (1988 Rev.) No. 6 requires the CPA to "inform the client promptly" of the error. The CPA should also recommend the proper measures to be taken." In appropriate cases, particularly where it appears that the IRS might assert the charge of fraud or other criminal misconduct, the client should be advised to consult legal counsel before taking any action regarding the error. However, the CPA has no obligation to inform the IRS of the error and, in fact, may do so only with the client's permission "except where required by law."

The decision whether to correct the error in a prior return rests solely with the client. Where a client refuses to correct an error in a prior return that has more than an insignificant impact "on the client's tax liability," the CPA must decide whether to maintain a relationship with the client, including the preparation of the current year's return for the client. If the CPA concludes it is possible to continue the relationship and prepare the return for the current year, SRTP (1988 Rev.) No. 6 requires that the CPA should "take reasonable steps to ensure that the error is not repeated."

Comment

SRTP (1988 Rev.) No. 6 is concerned with errors on prior returns regardless of whether the CPA prepared the return containing the error. To comply with this statement, the CPA must first advise the client promptly of the error, either orally or in written form. Written notification, which provides documentation that the client was advised of the error, is clearly, in this authors' view, the better practice.

The statement also urges the CPA to recommend appropriate measures to correct the error. Again, this advice can be oral or written, but written advice is preferred. SRTP (1988 Rev.) No. 6 does not include any discussion of specific remedial measures that should be taken, but does stress that if the error is discovered in a nontax return engagement, the CPA must not only advise the client about the error's existence but also "recommend that the error be discussed with the client's tax return preparer."

The requirement in SRTP (1988 Rev.) No. 6 that the CPA advise the client of the error in the prior return is also mandated by Sec. 10.21 of Circular 230. Sec. 10.21 provides that a tax return preparer who knows that a client has made an error or an omission on a prior tax return or other tax document, must "advise the client promptly of the fact of such noncompliance, error, or omission." However, SRTP (1988 Rev.) No. 6 goes beyond the mandate from the Treasury. Not only must the CPA advise the client of the error, he or she should also recommend appropriate measures to correct the error. Furthermore, the statement requires the practitioner to take reasonable steps to assure that the error is not repeated in preparing the current year's return. Failure to do so may expose the CPA to a Sec. 6694 penalty as the preparer of a return that understates the taxpayer's liability or a Sec. 6701 penalty for aiding and abetting an understatement of tax liability. In addition, Rule 102 of the AICPA Code of Professional Conduct provides that a CPA "shall not knowingly misrepresent facts or subordinate his or her judgment to others." A CPA who knowingly prepares a return that repeats an error from a prior return would probably be in violation of the rule.

Critical to SRTP (1988 Rev.) No. 6 is whether the error will have more than an insignificant impact on the client's tax liability. Although a CPA must make a determination about the impact of the error on the taxpayer's liability and advise the client as to appropriate corrective action, ultimately it is the client who decides whether to correct the error. If the taxpayer refuses to correct such an error, the explanation to SRTP (1988 Rev.) No. 6 urges the CPA to "consider whether to withdraw from preparing the return and whether to continue a professional relationship with the client." Note No. 2 to the statement emphasizes that the CPA should consider consulting an attorney before giving any recommendation to the client or deciding whether to continue any professional relationship with the particular client. Practitioners are especially cautioned about possible violations of Rule 301 of the Code of Professional Conduct adopted by the AICPA in January 1988 (which deals with client confidentiality and privileged communication provisions of state law and any other factors which may create "a conflict between the CPA's interests and those of the client," which would make the advice of an attorney necessary.

SRTP (1988 Rev.) No. 7--Knowledge of Error: Administrative Proceeding

SRTP (1988 Rev.) No. 7 covers situations where a CPA learns of an error (or omission) on a return during an administrative proceeding. The term administrative proceeding includes "an examination by the IRS or an appeals conference relating to a return or a claim for refund." This statement is applicable regardless of whether the particular CPA prepared the return but "does not apply where a CPA has been engaged by legal counsel to provide assistance in a matter relating to the counsel's client."

When a CPA learns of an error in the course of an administrative proceeding, the CPA should inform the client of the error and make a recommendation as to how to correct it. According to SRTP (1988 Rev.) No. 7 the CPA should request the client's agreement to disclose the error to the IRS. Lacking such agreement, the CPA should consider whether to withdraw from representing the client in the administrative proceeding and whether to continue a professional relationship with the client." Factors that would influence this decision involve the existence of Rule 301 on client confidentiality, state laws on privileged communication, and possible conflicts between the practitioner's interests and those of the client. The CPA may wish to seek the advice of legal counsel before taking any action in this regard. A CPA who is confronted with this situation should also recommend, in appropriate cases, that the taxpayer consult with a lawyer "particularly where it appears that the IRS might assert the charge of fraud or other criminal misconduct." However, the CPA should not tell the Service about the error or omission without the client's express permission unless "required by law."

The explanation to SRTP (1988 Rev.) No. 7 elaborate upon the CPA's responsibilities once an error or omission is discovered. First, the definition of "error" is similar to that contained in SRTP (1988 Rev.) No. 6. Second, whether an error will have an insignificant tax effect is left to the professional judgment of the CPA. Third, the issue of disclosure of the error to the Service can present certain strategic problems. For example, if the client gives permission for the disclosure "it should not be delayed to such a degree that the client or the CPA might be considered to have failed to act in good faith or to have, in effect, provided misleading information." Disclosure, at a minimum, should be completed prior to the termination of the administrative proceeding itself.

Comment

The comment section following SRTP (1988 Rev.) No. 6 discusses several issues equally applicable to this statement: the possible imposition of penalties, notification requirements pursuant to Sec. 10.21 of Circular 230, and the unauthorized disclosure rules articulated in Sec. 7216. Similarly, the related issues of confidentiality and withdrawal are critical in the administrative proceeding context if the CPA's withdrawal would signal the Service that a conflict existed between the practitioner and client over a particular matter. Thus, the likelihood of preparer penalties coupled with sanctions for a violation of Sec. 10.21 of Circular 230 would have to be carefully weighed against the CPA's duty to protect client confidentiality if withdrawal from the particular engagement or from furnishing any additional professional services to the client were deemed necessary. For these reasons, practitioners are advised to consider consulting legal counsel in a situation which might require unauthorized disclosure of information to the IRS.

SRTP (1988 Rev.) No. 8--Form and Content of Advise of Clients

SRTP (1988 Rev.) No. 8 recognizes that rigid guidelines cannot be established for advising clients because of the varying complexity of the advice and the need to tailor such advice to the client's particular needs. However, because most advice is pertinent to the preparation of the client's tax return, a CPA is required to follow SRTP (1988 Rev.) No. 1 relative to tax positions taken by clients on returns.

In recognizing that the form and content of tax advice may vary, this statement stresses seven factors to be considered when determining the formality and content of the communication. These factors range from the technical complexity and importance of the matter about which the client has inquired to the general level of tax knowledge which either the client or the client's staff possesses. CPAs must also consider the necessity of seeking legal advice and the types of authority available as well as time constraints within which advice has to be rendered.

To avoid any misinterpretation, the statement recommends that advice be communicated in writing. Should the advice be rendered orally, however, CPAs are encouraged to follow with a written communication.

SRTP (1988 Rev.) No. 8 also recognizes that changes in the law resulting from judicial decisions and legislative or administrative changes may render advice obsolete or even incorrect. If the CPA is not participating in the implementation of the professional advice or has not made a contractual obligation to report the effects of future changes, the CPA is under no obligation to communicate changes that affect the previously proffered advice. The update should be treated as a separate contractual obligation. The explanation suggests that to avoid misunderstandings, CPAs can make a precautionary statement in their original advice that the authorities upon which their advice is premised are subject to change and that future developments could affect advice previously given.

Comment

Tax advice is, as SRTP (1988 Rev.) No. 8 recognizes, a valuable service which a practitioner may render to a client. CPAs are cautioned to give advice in writing and to be aware of penalties which may be assessed against them or their clients in rendering such advice. Care must also be taken to meet the due diligence requirements of Circular 230 and to avoid client lawsuits. In addition, while they are not as common in tax practice as they are in financial statement engagements, the use of engagement letters in tax practice can help prevent misunderstandings and, therefore, lawsuits between CPAs and their clients.

Conclusion

The Statements on Responsibilities in Tax Practice currently perform a valuable educational and advisory function for CPAs. However, it is likely that they will become even more valuable as continued calls come from both the IRS and Congress for increased due diligence on the part of tax practitioners. CPAs have long demonstrated that effective self- regulation best meets the needs of both government and the public. The "Statements on Responsibilities" program is an important part of the professions's self-regulatory efforts to develop guidance for CPAs that properly balances the rights and needs of taxpayers, the government, and tax practitioners alike.