Standards of Tax Practice for CPA Candidates
As a CPA candidate preparing for the REG section of the exam, understanding the Standards of Tax Practice is crucial. These standards guide tax professionals in their dealings with clients, the IRS, and the public, ensuring ethical conduct and professional competence. They are primarily derived from the AICPA's Statements on Standards for Tax Services (SSTSs).
Core Principles of Tax Practice
The SSTSs are built upon fundamental principles that underpin responsible tax practice. These include honesty, integrity, objectivity, and competence. They address various aspects of the tax practitioner-client relationship, from preparing tax returns to providing advice and representing clients.
Key Statements on Standards for Tax Services (SSTSs)
The SSTSs are organized into several statements, each addressing a specific area of tax practice. Understanding these statements is vital for the REG exam.
| SSTX Statement | Focus Area | Key Obligation |
|---|---|---|
| SSTX-1 | Tax Return Positions | A CPA should not recommend a tax return position or prepare/sign a tax return unless the position has at least a reasonable basis. If the position is not disclosed, it must have a realistic possibility of being sustained on its merits. |
| SSTX-2 | Certain Procedural Aspects of Preparing Returns | A CPA should make a reasonable effort to obtain from the taxpayer sufficient information to provide appropriate answers to all questions on a tax return. A CPA should not ordinarily be expected to examine or verify, by audit or otherwise, records provided by the taxpayer. |
| SSTX-3 | Certain Aspects of Preparing Returns | A CPA may rely on information provided by the taxpayer or by a third party, but should not ignore the implications of information furnished and should make reasonable inquiries if the information appears incorrect, incomplete, or inconsistent. |
| SSTX-4 | Form and Content of Advice to Clients | A CPA should provide advice that considers all relevant facts and circumstances. The CPA should also consider the potential tax consequences of alternative courses of action. |
| SSTX-5 | Form and Content of Advice to Clients | A CPA should exercise due professional care in preparing tax returns and providing tax advice. This includes adequate research, planning, and supervision. |
| SSTX-6 | Knowledge of Error: Administrative or Judicial Proceedings | A CPA should advise a client of an error or omission in a previously filed tax return or other tax documents, and the CPA should recommend the measures to correct the error. This applies when the CPA becomes aware of the error and the error is significant and was made on a return that is subject to administrative or judicial proceedings. |
| SSTX-7 | Knowledge of Error: Administrative or Judicial Proceedings | A CPA should advise a client of an error or omission in a previously filed tax return or other tax documents, and the CPA should recommend the measures to correct the error. This applies when the CPA becomes aware of the error and the error is significant and was made on a return that is subject to administrative or judicial proceedings. |
Reasonable Basis vs. Realistic Possibility
A critical distinction in tax practice is between a 'reasonable basis' and a 'realistic possibility of being sustained on its merits.' Understanding this difference is key to assessing the appropriateness of tax return positions.
The 'reasonable basis' standard is a relatively high standard of tax reporting, that is, significantly more than 'not frivolous' or 'not patently improper.' A tax return position having a reasonable basis is one that is reasonably and in good faith supported by at least one of the sources normally considered authoritative. A tax return position supported by a 'realistic possibility of being sustained on its merits' requires that the taxpayer's position be one that a reasonable and well-informed analysis of the facts and law would conclude has at least a one-in-three, or greater, likelihood of being sustained if challenged. The 'realistic possibility' standard is a higher standard than 'reasonable basis'.
Text-based content
Library pages focus on text content
Ethical Considerations and Due Diligence
Beyond the specific SSTSs, ethical conduct and due diligence are overarching themes. CPAs are expected to maintain objectivity, avoid conflicts of interest, and ensure client confidentiality. Due diligence involves exercising reasonable care and thoroughness in all aspects of tax practice.
Remember: The SSTSs are enforceable ethical standards for CPAs. Failure to adhere to them can result in disciplinary action.
Practice Scenarios and Application
The REG exam will likely test your understanding of these standards through various scenarios. Consider how each SSTX applies to situations involving client-provided information, tax advice, and potential errors.
A realistic possibility of being sustained on its merits.
A reasonable basis.
To advise the client of the error and recommend corrective measures.
Learning Resources
The official source for the Statements on Standards for Tax Services, providing the complete text of these crucial ethical guidelines for CPAs.
A blog post that breaks down the Standards of Tax Practice in a way that's digestible for CPA exam candidates, offering practical insights.
An article from the Journal of Accountancy discussing the ethical landscape of tax practice and the responsibilities CPAs hold.
A comprehensive tutorial explaining the SSTSs with examples relevant to CPA exam preparation, focusing on practical application.
The official regulations governing tax practitioners' conduct when representing clients before the IRS, a key companion to SSTSs.
A video lecture that explains the core concepts of tax ethics and standards relevant to the REG section of the CPA exam.
Investopedia provides a clear explanation of the 'reasonable basis' standard in tax law, helping to differentiate it from other standards.
The overarching AICPA Code of Professional Conduct, which includes principles that inform the SSTSs and other ethical guidance for CPAs.
A blog post that offers practical advice and tips for understanding and applying tax practice standards for success on the CPA exam.
A hypothetical video resource that would explain the Standards of Tax Practice in an engaging and visual manner for CPA exam preparation.