Statement on Standards for Tax Services No. 2
Standards for Members Providing Tax Compliance Services, Including Tax Return Positions
2.1. Tax Return Positions
Introduction
2.1.1. This section sets forth the applicable standards for members preparing or signing tax returns (including amended returns, claims for refund, and information returns) filed with any taxing authority.
2.1.2. Additional standards apply to tax positions that a member advises on. Refer to section 1.1, “Advising on Tax Positions,” of Statement on Standards for Tax Services (SSTS) No. 1, General Standards for Members Providing Tax Services. When signing or preparing a tax return that includes a tax position advised on by a third party, the member should also refer to section 2.3, “Reliance on Information From Others.”
2.1.3. For purposes of this section, preparation of a tax return includes giving advice on events that have occurred at the time the advice is given if the advice is directly relevant to determining the existence, character, or amount of a schedule, entry, or other portion of a tax return.
2.1.4. This section also addresses a member’s obligation to advise a taxpayer of relevant tax return disclosure responsibilities and potential penalties.
Standard
2.1.5. A tax return position is a tax position (as defined in paragraph 1.1.4 of SSTS No. 1) that is reflected on a tax return prepared by a member or for which a member signs as preparer.
2.1.6. A member should determine and comply with the standards, if any, that are imposed by the applicable taxing authority with respect to preparing or signing a tax return.
a. If the applicable taxing authority has no written standards with respect to preparing or signing a tax return, a member should not prepare or sign the tax return unless the member has a good-faith belief that the tax return 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 2.1.6a, the member should comply with those taxing authority standards.
c. Notwithstanding paragraph 2.1.6a and b, a member may, as permitted by a taxing authority, prepare or sign a tax return, which includes a tax return position in which
(i). the member concludes there is a reasonable basis for the tax return position, and
(ii). the position is appropriately disclosed to the taxing authorities.
2.1.7. When preparing or signing a tax return on which a tax return position is taken, a member should, when relevant, advise the taxpayer regarding potential penalty consequences of such tax return position and the opportunity, if any, to avoid such penalties through disclosure.
2.1.8. A member should not advise a taxpayer to take a tax return position or prepare or sign a tax return reflecting a tax return position that the member knows
a. exploits the audit selection process of a taxing authority, or
b. serves only as an arguing position advanced solely to obtain leverage in a negotiation with a taxing authority.
2.1.9. A member may rely, in good faith, on others’ proposed tax positions regarding the issues being considered, provided the member is satisfied that the standards in section 2.3 are satisfied.
Explanations
2.1.10. The AICPA and various taxing authorities impose specific reporting and disclosure standards regarding tax return positions and preparing or signing tax returns. 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 2.1.6. 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 2.1.6, the standards set forth in paragraph 2.1.6 will apply.
2.1.11. Our self-assessment tax system can function effectively only if taxpayers file tax returns that are true, correct, and complete. A tax return is prepared based on a taxpayer’s representation of facts, and the taxpayer has the final responsibility for positions taken on the return.
2.1.12. When attempting to reach a conclusion about whether a given standard in paragraph 2.1.6 has been satisfied, a member may consider a well-reasoned construction of the applicable statute and related regulations, if any. In addition, well-reasoned articles, treatises, or pronouncements 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 it is later abandoned for practical or procedural considerations during an administrative hearing or in the litigation process.
2.1.13. If a member has a good-faith belief that more than one tax return position meets the standards set forth in paragraph 2.1.6, a member’s advice concerning alternative acceptable positions may include a discussion of the likelihood that each such position might or might not cause the taxpayer’s tax return to be examined and whether the position would be challenged in an examination. In these circumstances, such advice is not a violation of paragraph 2.1.6.
2.1.14. A member’s advising on whether information is appropriately disclosed by the taxpayer should be based on the facts and circumstances of the particular case and the disclosure requirements of the applicable taxing authority. If a member advising on a tax position, but not engaged to prepare or sign the related tax return, advises the taxpayer concerning appropriate disclosure of the position, then the member shall be deemed to meet the disclosure requirements of these standards.
2.1.15. If particular facts and circumstances lead a member to believe that a taxpayer penalty might be asserted, the member should advise the taxpayer and discuss with the taxpayer the opportunity, if any, to avoid such penalty by disclosing the position on the tax return. A member should also advise the taxpayer that it is the taxpayer’s responsibility to decide whether and how to disclose. If the member believes disclosure of a position is required and the taxpayer chooses not to disclose the position, the member should consider whether to continue a professional or employment relationship with the taxpayer.
2.2. Tax Return Questions
2.2.1. This section sets forth the applicable standards for members when signing the preparer’s declaration on a tax return if one or more questions on the return have not been answered. The term questions includes requests for information on the return, in the instructions, or in the regulations, regardless of whether it is stated in the form of a question.
2.2.2. Before signing as preparer, a member should take reasonable steps to obtain from the taxpayer the information necessary to provide appropriate answers to all required questions on a tax return.
2.2.3. Taxing authorities ask a variety of questions on tax returns to elicit information from taxpayers that will be filing a specific form. As a result, questions on tax returns are not of uniform importance and may not be applicable to a particular taxpayer. Members should consult with taxpayers to determine if tax return questions do apply and what appropriate answers should be included when filing the return.
2.2.4. In determining whether a tax return question is applicable to specific taxpayers, a member should consider whether
a. omitting an answer to a question may affect the completeness of a return in determining taxable income or loss, or the tax liability shown on the return.
b. a request for information may require a disclosure necessary for a complete return or to avoid penalties.
c. not answering the question could prevent the member from being able to sign the commonly required preparer declaration stating that the return, to the best of the member’s knowledge and belief, is true, correct, and complete.
2.2.5. Reasonable grounds may exist for omitting an answer to a question applicable to a taxpayer. For example, reasonable grounds may include the following:
a. The information is not readily available and the answer is not significant in terms of its impact on taxable income or loss, or the tax liability shown on the return.
b. Genuine uncertainty exists regarding the meaning of a question in relation to the particular return or whether the question applies to the taxpayer.
c. The information requested is voluminous; in such cases, a statement should be made on the return that the information will be supplied upon request.
2.2.6. A member should not omit an answer merely because it might prove disadvantageous to a taxpayer.
2.2.7. A member should consider whether the omission of an answer to a question may cause the return to be deemed incomplete or result in penalties, and advise the taxpayer accordingly.
2.2.8. If reasonable grounds exist for omission of an answer to an applicable question, a member is not required to advise the taxpayer to include an explanation of the reason for omission on the return.
2.3. Reliance on Information From Others
2.3.1. This section sets forth the applicable standards for members concerning the obligation to examine or verify certain supporting data or to consider information related to another taxpayer when preparing a taxpayer’s tax return.
2.3.2. When preparing or signing a return, or a portion of a return, a member may, in good faith, rely on information furnished, without verification, by the taxpayer or by third parties. However, a member 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 member. A member should consider one or more of the taxpayer’s prior-year tax returns, or a portion of a return, whenever feasible.
2.3.3. If the tax law or regulations impose a condition regarding deductibility or other tax treatment of an item, a member should make reasonable inquiries to determine, to the member’s satisfaction, whether such condition has been met.
2.3.4. When preparing a tax return, a member should consider relevant information actually known by that member from other sources, including the tax return of another taxpayer. When using such information, a member should consider any limitations imposed by any law or rule relating to confidentiality.
2.3.5. The preparer’s declaration on a tax return often states that the information contained therein is true, correct, and complete to the best of the preparer’s knowledge and belief based on all information known by the preparer. This type of reference should be understood to include information furnished by the taxpayer or by third parties to a member in connection with the preparation of the return.
2.3.6. The preparer’s declaration does not require a member to examine or verify supporting data; a member may rely on information furnished by the taxpayer unless it appears to be incorrect, incomplete, or inconsistent. However, there is a need to determine by inquiry that a specifically required condition, such as maintaining books and records or substantiating documentation, has been satisfied and to obtain information when the material furnished appears to be incorrect, incomplete, or inconsistent. Although a member has certain responsibilities in exercising due diligence in preparing a return, the taxpayer has the ultimate responsibility for the contents of the return. Thus, if the taxpayer presents unsupported data in the form of lists of tax information, such as dividends and interest received, charitable contributions, and medical expenses, such information may be used in the preparation of a tax return without verification unless it appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to a member.
2.3.7. Even though there is no requirement to examine underlying documentation, a member should encourage the taxpayer to provide supporting data where appropriate. For example, a member should encourage the taxpayer to submit underlying documents for use in tax return preparation to permit full consideration of income and deductions arising from security transactions and from pass-through entities, such as estates, trusts, partnerships, and S corporations.
2.3.8. The source of information provided to a member by a taxpayer for use in preparing the return is often a pass-through entity, such as a limited partnership, in which the taxpayer has an interest but is not involved in management. A member may accept the information provided by the pass-through entity without further inquiry, 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 member. In some instances, it may be appropriate for a member to advise the taxpayer to ascertain the nature and amount of possible exposure to tax deficiencies, interest, and penalties by taxpayer contact with management of the pass-through entity.
2.3.9. A member should make use of a taxpayer’s returns for one or more prior years in preparing the current return whenever feasible. Reference to prior returns and discussion of prior-year tax determinations with the taxpayer often provides information to determine the taxpayer’s general tax status, avoid the omission or duplication of items, and afford a basis for the treatment of similar or related transactions. As with the examination of information supplied for the current-year’s return, the extent of comparison of the details of income and deduction between years depends on the particular circumstances.
2.4. Use of Estimates
2.4.1. This section sets forth the applicable standards for members when using the taxpayer’s estimates in the preparation of a tax return. Appraisals or valuations are not considered estimates for purposes of this section. The accuracy of the estimate is the responsibility of the taxpayer.
2.4.2. Unless prohibited by statute, administrative rule, or judicial holdings, a member may use estimates, whether from the taxpayer or other sources authorized by the taxpayer as permitted in section 2.3, in the preparation of a tax return if it is not practical to obtain exact data and if the member determines that the estimates are reasonable based on the facts and circumstances known to the member. Estimates should be presented in a manner that does not imply greater accuracy than exists.
2.4.3. Accounting requires the exercise of professional judgment and, in many instances, the use of approximations based on judgment. The application of such accounting judgments, as long as they are not in conflict with rules set forth by a taxing authority, is acceptable. These judgments are not estimates within the purview of this section. For example, a federal income tax regulation provides that 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.
2.4.4. When the taxpayer’s records do not accurately reflect information related to small expenditures, accuracy in recording some data may be difficult to achieve. Therefore, the use of estimates by a taxpayer in determining the amount to be deducted for such items may be appropriate.
2.4.5. When records are missing or precise information about a transaction is not available at the time the return must be filed, a member may prepare a tax return using a taxpayer’s estimates of the missing data. The member should inform the taxpayer of the taxpayer’s duty to maintain records that support the return.
2.4.6. Estimated amounts should not be presented in a manner that provides a misleading impression about the degree of factual accuracy.
2.4.7. Specific disclosure that an estimate is being used for an item in the return is not generally required; however, such disclosure should be made in unusual circumstances in which nondisclosure might mislead the taxing authority about the degree of accuracy of the return as a whole. Examples of unusual circumstances include the following:
a. A taxpayer has died or is ill at the time the return must be filed.
b. A taxpayer has not received a Schedule K-1 for a pass-through entity at the time the tax return is to be filed.
c. Litigation is pending (for example, a bankruptcy proceeding) that bears on the return.
d. Fire, technology issues, or a natural disaster has destroyed the relevant records.
2.5. Departure From Previous Positions
2.5.1. This section sets forth the applicable standards for members when advising on a tax return position that departs from the position determined in an administrative proceeding or in a court decision with respect to the taxpayer’s prior return.
2.5.2. For purposes of this section, an administrative proceeding includes an examination by a taxing authority or an appeals conference relating to a return or claim for refund.
2.5.3. For purposes of this section, court decision means a decision by any court having jurisdiction over tax matters.
2.5.4. Unless the taxpayer is bound to a specified treatment of a tax return position in a later tax year, the member may advise on a tax return position or prepare or sign a tax return that departs from the treatment of an item as concluded in an administrative proceeding or court decision with respect to a prior return of the taxpayer, provided the requirements of section 2.1, “Tax Return Positions,” are satisfied.
2.5.5. If an administrative proceeding or court decision has resulted in a determination concerning a specific tax treatment of an item in a prior-year’s return, a member will usually advise this same tax treatment in subsequent years. However, unless the taxpayer is contractually bound to a particular tax treatment, departures from consistent treatment may be justified under such circumstances as the following:
a. Taxing authorities tend to act consistently in the disposition of an item that was the subject of a prior administrative proceeding but generally are not bound to do so. Similarly, a taxpayer is not bound to follow the tax treatment of an item as consented to in an earlier administrative proceeding.
b. The determination in the administrative proceeding or the court’s decision may have been caused by a lack of documentation. Supporting data for the later year may be appropriate.
c. A taxpayer may have yielded in the administrative proceeding for settlement purposes or may not have appealed the court decision, even though the position met the standards in section 2.1.
d. Court decisions, rulings, or other authorities that are more favorable to a taxpayer’s current position may have developed since the prior administrative proceeding was concluded or the prior court decision was rendered.
2.5.6. The consent in an earlier administrative proceeding and the existence of an unfavorable court decision are factors that the member should consider in evaluating whether the standards in section 2.1 are met.