The importance of ethics in taxation
Any discussion of ethics at its core involves understanding right and wrong. This may seem simple on the surface, but as anyone who has studied philosophy will readily admit, there is much more complexity to this practice. In professions like tax preparation, accountancy, and other similar professions, ethical questions are likely to arise on a regular basis. Naturally, federal and local laws govern a great deal of these decisions, as well as ethical codes laid out by professional organizations. At the end of the day, making that crucial distinction between right and wrong in a given scenario requires tax professionals to use their training to make an informed judgment.
Laws governing tax practice
Any tax professional with the appropriate education, training, and experience is certainly familiar with the U.S. tax code, along with a litany of state and local laws and regulations governing tax practice. Whether they are working with clients to prepare individual tax returns, working as an accountant for a company, or providing any kind of professional tax advice, anyone interfacing directly or indirectly with the IRS is beholden to a code of conduct known as Circular 230 [i].
As an official publication of the governing body of the IRS, the Department of the Treasury, Circular 230 is the defining standard of conduct for any Certified Public Accountant, Enrolled Agent, tax attorney, and anyone else working as a taxation professional [ii]. The document, available on the IRS website, is very dense, but tax professionals don’t need to read it line by line before they can understand its main tenets and use it in their practice.
To advance the goals outlined in Circular 230, the IRS’ Office of Professional Responsibility (OPR) acts as an official representative and advocate for ethical standards in tax practice [iii]. As stated on its website, “OPR’s vision, mission, strategic goals, and objectives support effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law” [iii].
To accomplish this mission, OPR listed three primary objectives [iii]:
- ● “Increase awareness and understanding of Circular 230 and OPR through outreach activities [iii].
- ● Apply the principles of due process to the investigation, analysis, enforcement, and litigation of Circular 230 cases [iii].
- ● Build, train, and motivate a cohesive OPR team [iii].
Basics of Circular 230
As the IRS explained in its guide to frequently asked questions concerning Circular 230, the document outlines not only ethical standards that every U.S. tax professional must follow, but also the details of what constitutes a violation of those ethical codes and what sanctions may be applied as a result [i].
According to The Tax Advisor, a tax professional beholden to the codes of conduct outlined in Circular 230 has three basic obligations [iv]:
- ● Take reasonable steps to ensure that the person or company he or she represents has procedures in place to meet all requirements of U.S. tax law [iv].
- ● Take reasonable steps to ensure those procedures are followed [iv].
- ● If any procedures are not adhered to, take prompt remedial action to inform the necessary people and take corrective measures [iv].
Much of Circular 230 dictates who is not allowed to legally practice as a tax advisor or preparer in the eyes of the law, as well as disciplinary procedures the IRS and OPR will follow [iv]. Some of the most notable and flagrant violations outlined in these sections of Circular 230, according to The Tax Advisor, include [iv]:
- ● Having been previously convicted of any federal tax crime, any criminal offense involving “dishonesty or breach of trust,” or any state or federal felony. If any of these are applicable, the tax professional is considered unfit to practice before the IRS [iv].
- ● “Contemptuous conduct in practice before the IRS,” which might include using abusive language or publishing libelous material [iv].
- ● Disclosing any information about an individual’s tax return or otherwise violating any client’s confidentiality regarding taxation or other financial matters [iv].
Rules regarding tax advice
When it comes to providing clients or organizations advice regarding taxation matters, the laws become a bit less clear. According to the American Institute of CPAs, the organization “sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments” [vii] The AICPA explained how tax professionals must remain independent, referring to the practice as a “long-standing professional requirement” [ix]. For example, auditors are required, by both AICPA and SEC guidelines, to not serve in a management role for the person or organization under audit, audit his or her own work, advocate on behalf of the client, or have any conflict of interest with the person or entity under audit [ix].
Overall, ethical rules governing tax advice pertain to written advice, oral advice, and “covered opinion” [v]. As Circular 230 and other pieces of tax law continue to be revised, the precise definitions and impacts surrounding these concepts have changed over the years. According to The Tax Advisor, the IRS made significant changes to the advice section of Circular 230 as recently as June 2014, and explained that two changes stand out in particular: [v]
- ● Changes to rules governing written advice to make it less ambiguous what actually constitutes written advice [v].
- ● Wholesale elimination of rules on covered opinions [v].
Regarding changes to rules concerning written advice, The Tax Advisor speculates that the IRS sought to make these regulations stricter and limit the amount of advice that could be given [v]. This would hopefully work to curb the problem of tax evasion, which the agency estimated costs the federal government upward of $458 billion per year [v][vi].
It is in this vein that the IRS also eliminated covered opinion rules that were included in previous versions of Circular 230 [v]. A covered opinion refers to advice given either in writing or verbally that may be used in a general, informative, or educational way by its audience, but is explicitly not to be taken as a personal directive, as detailed by the Journal of Accountancy [x]. Covered advice and the opt-out rule, for example, were the reason why any email or online article from a tax professional that could potentially contain personal advice had to include a lengthy disclaimer at the bottom [v].
According to IRS, as cited by The Tax Advisor, the net effect of the covered opinion rule prior to the 2014 revisions was one that “increased the burden on practitioners and client, without necessarily increasing the quality of the tax advice that the client received” [v].
Therefore, per the 2014 revisions, tax advisors distributing written advice no longer need to include the opt-out clause at the end of the document itself [v]. Instead, the IRS outlined a set of specific guidelines that any piece of written advice must follow, the gist of which serves as a good ethical code of conduct for any tax professional to follow: [v]
- ● The written advice must be based on “reasonable factual and legal assumptions, including assumptions as to future events,” and reference these facts appropriately [v].
- ● The advice cannot rely on outside assumptions that cannot be proven as fact, like financial forecasts or appraisals [v].
- ● Never assume or state the possibility that a tax return will not be audited, or that a specific issue will not come up in the process of an audit [v].
Practical application of tax ethics
It may not be possible for every tax professional to memorize Circular 230 word for word—but fortunately, that’s not necessary. What is essential is that every tax professional finds the appropriate balance between serving clients and upholding the law [v].
As Canadian tax organization CPA Canada explained, this can be broken down in a few very general ideas, in the form of questions a tax professional needs to ask themselves regularly [viii]:
- ● Is my client providing me (and the government) with complete, accurate information? [viii]
- ● Would a broad interpretation of a tax law justify potential penalties incurred upon me and my client, even if a broad interpretation would benefit me or my client? [viii]
- ● Is it ethical to create a complicated tax plan for my client if they probably do not fully understand its implications? [viii]
Just like any other study of ethics, there is seemingly no end to the different ways to interpret arguments between right and wrong. Even the law and rules put forth by government agencies contain some room for ambiguity.
It can all seem very confusing, but a well-trained and experienced tax professional can take these challenges in stride. By using all the resources at their disposal, as well as a good degree of honest communication between clients and other stakeholders, it is possible to uphold these complex ethical values in any situation.
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