AICPA Statements: Standards For Tax Services
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CPA Tax Compliance & Planning (TCP) › AICPA Statements: Standards For Tax Services
Under SSTS No. 1, a CPA may not take a tax return position that lacks a reasonable basis. Which of the following most accurately describes a position that meets the 'reasonable basis' standard?
A position supported by substantial authority.
A position that is not frivolous and has at least a reasonable chance of being sustained on its merits, though it need not be more likely than not to succeed.
A position that is more likely than not to be sustained on its merits.
A position that has been previously sustained in Tax Court.
Explanation
The reasonable basis standard under SSTS No. 1 requires that a position have at least some arguable merit - it must not be frivolous - but it does not need to be the most likely outcome or more likely than not to succeed. Answer A is correct. Answer B (prior Tax Court sustenance) is not the definition of the standard. Answer C (more likely than not) is a higher standard than reasonable basis. Answer D (substantial authority) is also a higher standard, roughly 40% probability, above the reasonable basis floor.
Under SSTS No. 4, what standard governs a CPA's advice to a client in a tax planning engagement?
The CPA must advise the client only of positions that are more likely than not to be sustained.
The CPA must disclose to the IRS any aggressive tax positions taken based on the advice.
The CPA should use judgment to ensure that advice is based on reasonable assumptions, addresses the tax consequences, and considers the client's specific situation.
The CPA's advice must be in writing to be enforceable.
Explanation
SSTS No. 4 on tax advice requires the CPA to exercise professional judgment, base advice on reasonable assumptions, and address the tax consequences for the client's situation. Answer C is correct. Written form is not required (A). The more likely than not standard (B) applies to return positions, not all advice. Disclosure to IRS is not required for advice (D).
A CPA is preparing a business tax return and realizes the client did not provide documentation for a claimed deduction that appears large relative to the business income. Under SSTS No. 2 (Questions on Returns), the CPA should:
Accept the client's oral representation and include the deduction without documentation.
Refuse to include the deduction and explain that only documented deductions may be taken.
Independently verify all client-provided information through third-party sources.
Make reasonable inquiries if the information furnished appears incorrect, incomplete, or inconsistent with the return.
Explanation
SSTS No. 2 requires the CPA to make reasonable inquiries when client information appears incorrect, incomplete, or inconsistent - but does not require independent verification of all information. Answer B is correct. Accepting without inquiry when there are red flags violates SSTS (A). Refusing without inquiry is too restrictive (C). Independent verification of all information is not required (D).
Treasury Department Circular 230 governs:
Only CPAs and attorneys who practice before the IRS.
The filing requirements for all federal tax returns.
The ethical standards for AICPA members in all professional engagements.
The practice of all practitioners - including CPAs, attorneys, enrolled agents, and others - before the IRS, including standards for tax advice and return preparation.
Explanation
Circular 230 governs all practitioners before the IRS, regardless of professional designation - establishing standards for advice, return preparation, and conduct. Answer D is correct. It applies to all practitioners, not just CPAs and attorneys (A). It governs practice standards, not filing requirements (B). Circular 230 is a Treasury regulation, not an AICPA standard (C).
Under Circular 230 Section 10.37, which of the following is a requirement for written tax advice provided by a practitioner?
Written advice must be based on reasonable factual and legal assumptions, must consider all relevant facts and applicable law, and must not give greater weight to the likelihood of non-detection than to the merits of the position.
Written advice is automatically confidential and protected from IRS disclosure under attorney-client privilege.
Written advice must be filed with the IRS within 30 days of delivery.
Written advice must be reviewed by a second CPA before delivery to the client.
Explanation
Circular 230 Section 10.37 sets the standard for written tax advice. Written advice must be based on reasonable factual and legal assumptions, must consider all relevant facts and applicable law, must not rely on representations the practitioner knows are incorrect or unreasonable, and must not give greater weight to the possibility that a position will not be examined than to the technical merits of the position. Answer A is correct. Filing written advice with the IRS is not required (B). Written advice is not automatically privileged; privilege depends on the nature of the communication and applicable law (C). A second CPA review is not required by Circular 230 (D).
Under IRC Section 6694(a), a tax return preparer is subject to a penalty when:
The preparer charges an unreasonable fee for return preparation services.
The return contains any error, regardless of whether the preparer was at fault.
The preparer fails to sign the tax return.
An undisclosed position on a return does not have a reasonable basis, or a disclosed position is not reasonably supported by law.
Explanation
Section 6694(a) penalizes preparers for taking undisclosed positions without a reasonable basis or disclosed positions not reasonably supported by law. Answer C is correct. Failure to sign (A) is a Section 6695 penalty. Fee issues (B) are not a Section 6694 matter. Fault is required - strict liability does not apply (D).
A client asks their CPA to sign a return that contains a position the CPA believes has no legal merit. The CPA should:
Sign the return but report the questionable position to the IRS on Form 8275.
Sign the return and include a disclosure statement disclaiming responsibility for the position.
Sign the return as long as the client represents in writing that the position is correct.
Decline to sign the return and advise the client that the CPA cannot sign a return with a position lacking reasonable legal basis.
Explanation
Under SSTS No. 1 and Circular 230, a CPA cannot sign a return with a position lacking any legal merit. The CPA must decline and explain why. Answer B is correct. A disclaimer does not protect the CPA from professional obligations (A). Client representation does not excuse the CPA's own judgment (C). Filing Form 8275 is for disclosed positions the CPA believes may be challenged - not for meritless ones (D).
A CPA member violates SSTS No. 1 by taking a position on a client's tax return that lacks a reasonable basis. The most likely consequence under the AICPA's disciplinary framework is:
A mandatory fine of $5,000 per violation.
Automatic referral to the IRS for investigation.
Potential disciplinary action by the AICPA, including suspension or termination of AICPA membership.
Criminal prosecution under the Internal Revenue Code.
Explanation
Violations of SSTS are professional standards enforced by the AICPA - consequences include disciplinary action up to membership termination. Answer A is correct. AICPA violations are not automatically referred to IRS (B). There is no mandatory fine schedule in SSTS (C). Criminal prosecution is an IRC matter, not an AICPA standard violation consequence (D).
Which of the following statements correctly describes the relationship between the AICPA SSTS and Circular 230?
The SSTS apply only to tax return preparation; Circular 230 applies only to tax advice.
Both apply to CPAs in tax practice - Circular 230 as a federal regulation governing IRS practice, and SSTS as AICPA professional standards; CPAs must comply with both.
The SSTS supersede Circular 230 for CPA members, making Circular 230 inapplicable to CPAs.
Circular 230 supersedes the SSTS, so CPAs need only comply with Circular 230.
Explanation
Both sets of standards apply to CPAs in tax practice and must be followed simultaneously - Circular 230 is a federal regulation and SSTS are professional standards. Answer C is correct. Neither supersedes the other for CPAs (A, B). Both apply broadly across tax services (D).
Under SSTS No. 1, the 'substantial authority' standard is most accurately described as:
A standard requiring that the position has been sustained in at least one federal court case.
A standard requiring that the weight of authorities supporting a tax position is substantial relative to authorities taking a contrary position - generally interpreted as approximately a 40% probability of success.
A standard requiring that a position is more likely than not to be sustained on its merits.
The lowest standard for taking a tax return position, requiring only that the position is arguable.
Explanation
Substantial authority requires a substantial weight of authority supporting the position, estimated at approximately 40% probability - higher than reasonable basis but lower than more likely than not. Answer A is correct. More likely than not (B) is a higher standard. Reasonable basis (C) is the lower standard. Court support (D) is not the definition.