Statement on Standards for Tax Services No. 1
General Standards for Members
Providing Tax Services
1.1. Advising on Tax Positions
Introduction
1.1.1. This section defines tax positions and sets forth the general standards for members advising on tax positions. Standards related to tax return positions are contained in section 2.1, “Tax Return Positions,” of Statement on Standards for Tax Services (SSTS) No. 2, Standards for Members Providing Tax Compliance Services, Including Tax Return Positions.
1.1.2. This section also addresses a member’s obligation to advise a taxpayer of relevant tax disclosure responsibilities and potential penalties.
1.1.3. In addition to the AICPA, applicable taxing authorities may impose specific reporting and disclosure standards with regard to advising on tax positions. These standards can vary between taxing authorities and by type of tax.
Standard
1.1.4. A tax position is a conclusion reached when applicable tax law, regulations, case law, or other regulatory or recognized guidance is applied to a particular transaction, a specific set of facts and circumstances, or a controversy.
1.1.5. A member should determine and comply with the standards, if any, that are imposed by the applicable taxing authority with respect to advising on tax positions.
a. If the applicable taxing authority has no promulgated standards regarding advising on tax positions, a member should not advise a taxpayer to take a tax position unless the member has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits, if challenged.
b. If the applicable taxing authority has written standards that exceed the realistic possibility standard described in paragraph 1.1.5a, the member should comply with those taxing authority standards.
c. Notwithstanding paragraph 1.1.5a and b, a member may, as permitted by a taxing authority, advise a taxpayer to take a tax position in which the member
(i). concludes that there is a reasonable basis for the position and
(ii). advises the taxpayer to appropriately disclose that position to the taxing authorities.
1.1.6. A member should exercise due diligence and professional judgment when advising on tax positions for a particular situation.
1.1.7. When advising on a tax position, a member has the right to be an advocate for the taxpayer regarding a position satisfying the aforementioned standards.
Explanations
1.1.8. The AICPA and various taxing authorities impose specific standards regarding tax positions. In a given situation, the standards, if any, imposed by the applicable taxing authority may be higher or lower than the standards set forth in paragraph 1.1.5. A member should comply with the standards, if any, of the applicable taxing authority; if the applicable taxing authority has no standards or if its standards are lower than the standards set forth in paragraph 1.1.5, the standards set forth in paragraph 1.1.5 will apply.
1.1.9. In addition to a duty to the taxpayer, a member has a duty to the tax system. However, it is well-established that the taxpayer has no obligation to pay more taxes than are legally owed, and a member has a duty to the taxpayer to assist in achieving that result or any other legally valid tax outcome the taxpayer desires. The standards contained in paragraph 1.1.5 recognize a member’s responsibilities to both the taxpayer and the tax system.
1.1.10. When attempting to reach a conclusion about whether a given standard in paragraph 1.1.5 has been satisfied regarding a particular jurisdiction, a member may consider a well-reasoned construction of the applicable statute and related regulations of that jurisdiction, if any. In addition, well-reasoned articles, treatises, or guidance issued by the applicable taxing authority (regardless of whether such sources would be treated as authority under IRC Section 6662, Imposition of accuracy-related penalty on underpayments) and the regulations thereunder may also be considered. A position would not fail to meet these standards merely because the position is later abandoned for practical or procedural considerations during an administrative hearing or in the litigation process.
1.1.11. If a member has a good-faith belief that more than one tax position meets the standards set forth in paragraph 1.1.5, a member’s advice concerning alternative acceptable positions may include a discussion of the likelihood that each such position might or might not be challenged by the taxing authority.
1.1.12. If particular facts and circumstances lead a member to believe that a taxpayer penalty might be asserted, the member should advise the taxpayer and should discuss with the taxpayer the opportunity, if any, to avoid such penalty by appropriate disclosure to the taxing authority. A member should also advise the taxpayer that it is the taxpayer’s responsibility to decide whether and how to disclose.
1.2. Knowledge of Errors
1.2.1. This section sets forth the applicable standards for a member who becomes aware of
a. an error in a taxpayer’s previously filed tax return;
b. an error in a return that is the subject of an administrative proceeding, such as an examination by a taxing authority or an appeals conference;
c. a taxpayer’s failure to file a required tax return; or
d. an error in a tax representation engagement.
1.2.2. As used herein, the term error includes any position, omission, or method of accounting that, at the time a position is recommended or a return is filed, fails to meet the standards set out in sections 1.1, “Advising on Tax Positions,” or 2.1 “Tax Return Positions.” The term error also includes a position taken on a prior-year’s return that no longer meets these standards due to legislation, judicial decisions, or administrative pronouncements having retroactive effect. However, an error does not include an item that has an insignificant effect on the taxpayer’s tax liability (see paragraph 1.2.16). The term administrative proceeding does not include a criminal proceeding.
1.2.3. This section applies regardless of whether the member prepared or signed a return that contains the error.
1.2.4. In addition to the AICPA, applicable taxing authorities may impose specific standards regarding errors discovered during the provision of tax services by a member. These standards can vary between taxing authorities and by type of tax.
1.2.5. Special considerations may apply when legal counsel engages a member to provide assistance in a matter relating to a taxpayer.
1.2.6. A member should promptly inform a taxpayer upon becoming aware of the taxpayer’s failure to file a required return, an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, an error in an administrative filing (such as a ruling request, accounting method change, and so on), an error in a tax representation engagement, or an error in advice provided if discovered by the member while providing services for the taxpayer. A member also should advise the taxpayer of the potential consequences of the error and advise on corrective measures to be taken. Such advice may be given orally. See also paragraph 3.1.3 regarding the documentation of advice.
1.2.7. If a member prepares a tax return for the current year or a prior tax year, and the taxpayer has not taken appropriate action to correct an error related to a tax return position in a tax return for a prior year, the member should consider whether to withdraw from preparing the current return and whether to continue a professional or employment relationship with the taxpayer. If the member does prepare the current-year return, the member should take reasonable steps to ensure that the error is not repeated.
1.2.8. A member is not allowed to inform a taxing authority of an error without the taxpayer’s permission, except when required by law. Members also should consider whether they can continue a professional relationship with a taxpayer who refuses to properly mitigate a discovered error.
1.2.9. If a member believes that a taxpayer may face possible exposure to allegations of fraud or other criminal misconduct, the member should promptly advise the taxpayer to consult with an attorney before the taxpayer takes any action. The member should also consider consulting with the member’s legal counsel before deciding whether to provide advice to the taxpayer and whether to continue a professional or employment relationship with the taxpayer.
1.2.10. If a member becomes aware of an error while performing tax services, the member’s responsibility is to advise the taxpayer of the existence of the error. The member should advise the taxpayer of the error and the potential consequences and advise on corrective measures to be taken, if any. If the member does not prepare the taxpayer’s tax return or was not the provider of the advice, the member may instead advise that the error be discussed with the taxpayer’s tax return preparer or adviser. Similarly, when representing the taxpayer before a taxing authority in an administrative proceeding about a return containing an error of which the member is aware, the member should advise the taxpayer to disclose the error to the taxing authority and of the potential consequences of not disclosing the error. Refer to paragraph 3.1.3 for considerations regarding the decision to provide such advice in oral or written form.
1.2.11. It is the taxpayer’s responsibility to decide whether to correct an error. If the taxpayer does not correct an error, a member should consider whether to withdraw from the engagement and whether to continue a professional or employment relationship with the taxpayer.
1.2.12. Once the member has obtained the taxpayer’s consent to disclose an error in an administrative proceeding, the disclosure should not be delayed to such a degree that the taxpayer or member might be considered to have failed to act in good faith or to have, in effect, provided misleading information. In any event, disclosure should be made before the conclusion of the administrative proceeding.
1.2.13. Members have a responsibility to both the taxpayer and the tax system. Discovery of an error in an administrative proceeding or filing, such as a ruling request, might negate the effect of the ruling if not disclosed to the authority. Failure to comply with statutory or regulatory compliance requirements affects not only the taxpayer but also the tax system.
1.2.14. A conflict between the member’s interests and those of the taxpayer may be created by, for example, the potential for violating the “Confidential Client Information Rule” (ET sec. 1.700.001) of the AICPA Code of Professional Conduct (relating to the member’s confidential client relationship); the tax law and regulations; or laws on privileged communications, as well as by the potential adverse impact on a taxpayer of a member’s withdrawal. Therefore, a member should consider consulting with the member’s legal counsel before deciding whether to provide advice to the taxpayer and whether to continue a professional or employment relationship with the taxpayer.
1.2.15. If a member decides to continue a professional or employment relationship with the taxpayer and is requested to prepare a tax return for a year subsequent to that in which an error occurred, the member should take reasonable steps to ensure that the error is not repeated. If the subsequent year’s tax return cannot be prepared without perpetuating the error, the member should consider withdrawal from the return preparation. If a member learns that the taxpayer is using an erroneous method of accounting and it is past the due date to request permission to change to a method meeting the standards of paragraph 2.1.1, the member may sign a tax return for the current year, provided that the tax return includes appropriate disclosure of the use of the erroneous method.
1.2.16. Whether an error has no more than an insignificant effect on the taxpayer’s tax liability is left to the member’s professional judgment, based on all the facts and circumstances known to the member. In judging whether an erroneous method of accounting has more than an insignificant effect, a member should consider the method’s cumulative effect, as well as its effect on the tax advice provided, current-year’s tax return, or the tax return that is the subject of the administrative proceeding.
1.3. Data Protection
1.3.1. This section sets forth the applicable standards for a member’s responsibilities related to the protection of taxpayer data obtained in the course of rendering services for a taxpayer. Because technology, laws, guidance, and practice concerning data protection are constantly changing, this section purposefully does not include bright-line rules.
1.3.2. A member’s responsibility to protect taxpayer information is a well-established professional responsibility. The increasing use of technology by individuals and businesses, together with a growing awareness of data breaches and identity theft, has resulted in a growing sensitivity toward and need to focus on the protection of taxpayer data, including electronic data.
1.3.3. This section complements, and does not alter or replace, the confidentiality standards established in the “Confidential Client Information Rule” (ET sec. 1.700.001) and the interpretations thereunder.
1.3.4. A member should make reasonable efforts to safeguard taxpayer data, including data transmitted or stored electronically.
1.3.5. A member should consider applicable privacy laws when collecting and storing taxpayer data.
1.3.6. This section uses the term reasonable, knowing that actions or behaviors considered “reasonable” may differ over time, among members, and from firm to firm based on size and resources.
1.3.7. Appropriate safeguards should be implemented to protect both member and taxpayer data stored within the member’s information systems platform. Appropriate safeguards should be based on current recommended practices and may, for example, include the installation and use of commercial security software to prevent unwanted or unauthorized access to information, encryption of data that is sent between multiple parties over the internet, the use of secure networks, strong password policies, use of firewalls, and use of secure data sharing and collaboration platforms. Also, a member should consider other industry standards, such as the AICPA’s Privacy Management Framework and 2017 Trust Services Criteria for Security, Availability, Processing, Integrity, Confidentiality, and Privacy (with Revised Points of Focus – 2022) when developing a privacy program.
1.3.8. Members may use electronic tools owned and hosted by others, such as tax return preparation software, or may outsource certain tasks, such as converting paper documents to electronic information. Members should make reasonable efforts to confirm that taxpayer information properly shared with others in the course of providing a service is appropriately protected.
1.3.9. A member should take reasonable steps to limit the amount of confidential taxpayer information in the member’s files. For example, the member may request only the information necessary to perform the services for which the member is being engaged or otherwise approved to perform by the taxpayer. The member, subject to any applicable retention requirements, may also decide to delete, return, or redact any confidential taxpayer information that is unnecessary to complete the services. This may also include, when appropriate, asking the client to mask any personally identifiable information (PII) or personal health information (PHI) prior to transmission to the member if such information is not required for the services being performed. Additionally, adherence to appropriate document retention and destruction policies can help to ensure that taxpayer data is properly removed from a member’s information systems once it is no longer needed under the respective statute of limitations or the member’s document retention policies.
1.3.10. In developing safeguards, members should also consider steps to be taken in the event of a data breach, including compliance with notification obligations. For example, the Federal Trade Commission (FTC) provides recommendations that include securing systems and fixing issues that are attributed to the breach. Members should consider forming a plan to quickly respond to those affected by the breach and notify appropriate authorities of the breach as required by law.
1.3.11. Members should consider applicable privacy laws. For example, the Financial Services Modernization Act of 1999 (also referred to as the Gramm-Leach-Bliley Act [GLBA]), requires professional tax return preparers to ensure the security and confidentiality of customer (that is, taxpayer) financial information. As part of the implementation of the GLBA, the FTC issued the Safeguards Rule, which requires tax return preparers to develop and implement a written information security plan to protect client data. Failure to do so may result in an FTC investigation. When developing this plan, the member may consider the relative firm size and complexity of services provided. Additionally, under this rule, tax return preparers are responsible for taking steps to ensure that their affiliates and service providers safeguard taxpayer information in their care. As with many privacy laws, the FTC has subsequently updated the rule to keep pace with technology, and members should periodically review applicable privacy laws to keep abreast of applicable rules.
1.3.12. A member should have general knowledge of the current security expectations of taxing authorities and other applicable regulatory authorities. Data security is a topic addressed in various tax resources, in tax research databases and related publications, and by taxing authorities. For example, at the time of this writing, the IRS has a website with links to various publications and other information related to data protection. Members are not expected to become experts in this area, but it is reasonable to expect that members would familiarize themselves with the information made generally available to tax professionals on the subject, including those referenced in paragraph 1.3.7.
1.3.13. Training is a vital component of any data protection plan. A member should make reasonable efforts to ensure that all nonmember personnel that the member supervises are trained and informed about data protection. For example, staff should be informed about how to recognize phishing emails and the dangers of opening or downloading attachments from unknown senders.
1.4. Reliance on Tools
1.4.1. This section sets forth the applicable standards for members when relying on tools in the provision of tax services, including, but not limited to, the preparation of a tax return, tax consulting services, and tax representation services.
1.4.2. For purposes of this section, a tool is a resource used in the provision of tax services. Tools include, but are not limited to, tax preparation software, tax research publications (paper or electronic), tax-related calculation aids, tax planning software, state and local tax aids, online data search engines, data analytics, statistical models, artificial intelligence, and relevant professional publications and resources.
1.4.3. A member should exercise appropriate professional judgment and professional care when relying on a tool.
1.4.4. A member may reasonably rely on tools used in providing tax services to a taxpayer. Use of a tool does not absolve the member of professional obligations under AICPA or other applicable ethical standards.
1.4.5. Tools developed for use in the provision of tax services provide significant benefits to members. It is generally a best practice of a member to rely on such tools to a certain extent to improve efficiency and client service.
1.4.6. The source of the tools must be considered when determining the appropriate level of reliance on that tool. For example, subscription- based tax research tools and resources may have more weight than articles from independent internet sources.
1.4.7. A member who employs tools in providing tax services remains responsible for the completed work product in accordance with the various other standards contained in the SSTSs. Accordingly, members should take reasonable steps to determine that the tools used are appropriate for the intended purpose.
1.4.8. Tools should be used to enhance or improve the member’s understanding of a tax issue, not to supplant the member’s professional judgment. For example, when preparing Form 1040, U.S. Individual Income Tax Return, a member must still attest under penalties of perjury that, to the best of the preparer’s knowledge and belief, the return and accompanying schedules are true, correct, and complete. That responsibility cannot be transferred entirely to reliance on a tool.