ACCT 612 Week 1 Essay 1 Example

Advocate and Gatekeeper: What Circular 230 and the AICPA Tax Standards Require of a Tax Researcher

Introduction

A client asks a tax adviser whether a five-day trip to a resort, with two hours of meetings, can be deducted as a business retreat. The client wants a yes. The adviser has to decide what the law supports, how strongly, and what can be put on a return or in a letter. Sawyers and Gill (2018) present tax research as a disciplined process of identifying issues, locating authority and reaching a supportable conclusion, and the professional standards add a second dimension: they define how far a practitioner may advocate before advocacy becomes a violation. This essay argues that a tax researcher owes loyalty to the client and also to the fairness of the system that collects tax, and that the standards mark precisely where the first duty yields to the second. It first summarizes the federal regulations that govern practice before the IRS, then the profession's own standards, then applies both to the client's request, and closes with research on why the line is so often tested.

Circular 230

Treasury Department Circular No. 230 governs practice before the IRS by attorneys, CPAs, enrolled agents and others (Circular 230, 2014). Its due diligence rule obliges a practitioner to take care that returns, and statements made to the IRS or to clients, are correct. Its rule on written advice requires that the advice rest on assumptions about facts and law that are reasonable, that it account for every relevant fact the practitioner knows or should know, and that it not lean on client representations a reasonable practitioner would doubt. A practitioner may also not take into account the possibility that a return will not be audited, or that an issue will not be raised, in evaluating a federal tax matter. The audit lottery is not a fact the adviser may weigh. Circular 230 also addresses conflicts of interest, fees and the return of client records, and it gives the IRS Office of Professional Responsibility authority to censure, suspend or disbar practitioners who violate it. Those sanctions make the regulations more than aspirational: a practitioner who knowingly helps a client take an unsupported position risks the right to practice.

The AICPA Tax Standards

For CPAs, the profession's own tax services standards add enforceable obligations of their own (AICPA, 2023). On tax return positions, they require a member to comply with the standards imposed by the applicable taxing authority, which ties the professional standard to the penalty thresholds in the Internal Revenue Code. Under those thresholds, a preparer generally needs substantial authority for an undisclosed position, a reasonable basis for a disclosed one and, for a tax shelter, a reasonable belief that the position will probably prevail. The standards also require that a member advise the client of potential penalty consequences and of opportunities to avoid them through disclosure. They address other parts of practice as well, including the use of estimates, the treatment of errors discovered in a prior return and the form and content of advice, so that a CPA's professional obligations reach beyond the return itself.

Applying the Standards

For the resort trip, the researcher would look to the deduction for ordinary and necessary business expenses and the stricter rules for travel and entertainment, and to cases that ask whether a trip's primary purpose was business. Two hours of meetings in five days would not establish a primarily business purpose, so the researcher could not find substantial authority for deducting the whole trip. The adviser's duty is to tell the client so, explain which costs, such as the meeting room, might be deductible, and decline to sign a return that takes the full deduction without support. Marshall et al. (2023), in a teaching case built on a CPA's real client requests, show how the pressure not to lose a client can stretch advocacy beyond what the AICPA Code permits, and their case is a reminder that the pressure is ordinary, not exceptional. A good response to the client is also good service: an explanation, in writing, of what the law allows, what it does not and what records would support the deductible portion of the trip.

Conclusion

The pressure is also costly. It is costly to clients, who bear penalties and interest when positions fail, and to the profession, whose credibility depends on returns that can be trusted. Frank et al. (2009) found a strong positive relation between aggressive tax reporting and aggressive financial reporting, suggesting that the same firms push both boundaries. A tax researcher who holds to the standards protects the client from penalties and the system from erosion. Advocacy within the authority is the profession's service; advocacy beyond it is the problem the standards exist to prevent.

References

American Institute of Certified Public Accountants. (2023). Statements on standards for tax services. AICPA.

Circular 230, 31 C.F.R. pt. 10 (2014).

Frank, M. M., Lynch, L. J., & Rego, S. O. (2009). Tax reporting aggressiveness and its relation to aggressive financial reporting. The Accounting Review, 84(2), 467-496. https://doi.org/10.2308/accr.2009.84.2.467

Marshall, L. L., Winstead, J. L., Cao, Z., & Varnon, A. W. (2023). Afraid to lose the client: Client advocacy juxtaposed with the AICPA Code of Professional Conduct. Journal of Forensic Accounting Research, 8(1), 106-127. https://doi.org/10.2308/jfar-2023-022

Sawyers, R. B., & Gill, S. L. (2018). Federal tax research (11th ed.). Cengage Learning.