The New Standards for Tax Services

Art Auerbach, CPA, CGMA

AICPA members and other tax preparers should know that the AICPA has adopted revised Statements on Standards for Tax Services (SSTSs). The new standards were effective January 1, 2024. The AICPA SSTSs serve as the ethical framework for tax professionals and are enforceable tax standards for AICPA members. Many states also adopt the AICPA Standards to cover licensees who prepare tax returns or render tax services.

The revised SSTSs introduce a new structure to organize the standards by type of work performed. They also include three new standards on data protection (Section 1.3 of SSTS No. 1), reliance on tools (Section 1.4 of SSTS No. 1), and representation of clients before tax authorities (SSTS No. 4).

The existing interpretations and FAQs have also been updated to reflect the reorganization of the revised tax standards with updated citations.

Other than some housekeeping for existing standards, there are three new standards: data protection, use of tools and representation services.

Data Protection Standard
This new standard explains a preparer's responsibility to protect taxpayer data. The standard is primarily common sense and recommends what most good practitioners are already doing to safeguard client records. Remember you answered yes to the question about having a WISP (Written Information Security Pan) when you renewed your PTIN. The standard requires preparers to make "reasonable efforts to safeguard taxpayer data, including data transmitted or stored electronically" and consider "applicable privacy laws when collecting and storing data." This continues our professional responsibilities of client confidentiality and external requirements in the Code, Treasury regulations and court decisions to protect taxpayer information. Protecting taxpayer data is clearly an essential consideration in a flash-drive, online world where data can be copied and easily hacked or scammed.

Further amplification of the standard recommends using security software, encryption for saved and transmitted data, secure networks, use of passwords, firewalls, and secure data sharing and collaboration platforms. The explanation of the standard allows preparers to continue using external tax return preparation, with proper notification to the client regarding outsourcing and other software, but says that preparers should make reasonable efforts to be sure that information is appropriately protected. Preparers are to take the following appropriate steps:

•    Limit client confidential information maintained in their files, and documenting retention policies are recommended.
•    Consider a contingency plan in case of a data breach.
•    Consider various privacy laws and should have a general knowledge of the security expectations of the IRS, FinCEN and other regulatory agencies. 
•    Make reasonable efforts to ensure that all personnel are trained and informed about privacy protection, particularly as the result of those working remotely.

Most preparers have already considered these items and taken reasonable steps to protect data, but reading the standard may trigger some new ideas.

The standard is flexible, with "reasonable" appearing numerous times in the explanations section. Reasonable is a relative term described in the standard's explanation: "Actions or behaviors considered reasonable may differ over time, among preparers and from firm to firm based on size and resources."

Reliance on Technology Tools
This new standard guides preparers in relying on tools to provide tax services, including return preparation, consulting services and taxpayer representation. Tools are broadly defined to include, but not be limited to, "tax preparation software, tax research publications (paper and electronic), tax-related calculation aides, tax planning software, state and local tax aids, online data search engines, data analytics, statistical models, artificial intelligence and relevant professional publications and resources."

The standard requires preparers to exercise professional care when using a tool, something that is already covered in the AICPA Code of Professional Conduct and in court decisions requiring CPAs to exercise "due professional care." Preparers must also exercise "appropriate" professional judgment when using a tool. Practitioners can reasonably rely on tools used to provide tax services. Still, that reliance does not prevent practitioners from fulfilling their professional obligations under the AICPA "or other applicable ethical standards."

The most significant use of this standard will be in using artificial intelligence (AI) for tax research and writing. AI queries various databases known or unknown to the practitioner; sometimes, results need to be more accurate. Occasionally, AI makes things up, depending on the query and the databases consulted, extrapolating from other information it analyzes. In a case this past summer, two New York attorneys blamed ChatGPT when they were sanctioned by a U.S. judge for submitting a legal brief with six fictitious case citations. The SSTS encourages the use of tools to improve efficiency and client service but says that a practitioner "should take reasonable steps to determine that the tools are appropriate for the intended purpose." However, it does not state how this should be done, leaving it to the practitioner's professional judgment in using professional care. This vagueness may be intended to set a standard in flexible terms that might provide cover for CPAs who could say that they met the standard of reasonable care and professional judgment.

SSTS 1.4., Reliance on Tools

New Standards
Section 1.4.3. A member should exercise appropriate professional judgment and professional care when relying on a tool.

Section 1.4.4. A member may reasonably rely on tools used to provide tax services to a taxpayer. Use of the tool does not absolve the member of their professional obligations under AICPA or other applicable ethical standards.

CPAs rely on technology to provide services more today than ever in history. That trend will likely continue with the introduction of artificial intelligence, data science, quantum computers, and other developing technologies. However, tax professionals do not have written standards allowing them to place a degree of reliance on these tools when providing services. The task force identified the need for a standard that protects members by defining when they may reasonably rely on tools used to perform tax services.

SSTS Section 1.4. applies to a broad range of tools, including but not limited to tax preparation software, tax calculation tools, and tax research tools. Members can reasonably rely on tools if they use appropriate professional judgment and professional care in selecting and using that tool. For example, it would generally not be reasonable for a member to assume a tax return prepared using a standard tax compliance software package was complete without reviewing the prepared tax return. The member should also employ a standard tax return review process, such as confirming that taxable income computed by the tax return software matches the expected taxable income from the taxpayer's trial balance.

In the case of tools used for tax research, the practitioner may not be able to confirm the accuracy of a specific source directly. Instead, the practitioner should consider the source of the research. For example, documentation obtained from a prominent subscription-based tax research software vendor may have more weight than opinion articles from independent internet sources. The standard does not, however, prevent a practitioner from using an opinion article in developing a position; a practitioner should use professional judgment to apply sound tax principles in applying the opinion put forward in that article.

The task force believes most practitioners already follow the proposed standard, exercising diligence in selecting tax tools and their use. This standard will assist those practitioners when working through an issue arising from software errors. Although reliance on software alone will not constitute an adequate defense, the task force believes this standard establishing principles for the reliance on tools will be overwhelmingly beneficial to practitioners (see, e.g., "Reliance on Tax Software Does Not Let Taxpayer Off the Hook," Tax Insider, August 3, 2017, discussing a Tax Court case where the taxpayer was denied relief when asserting reliance on personal tax preparation software).

To implement this standard, firms should review their current tool selection process to ensure it meets the essence of the standard. For many widely available and relied-upon tax software packages, practitioners may find that a fundamental review of a new software vendor's offerings is sufficient to demonstrate that reliance on the tool is appropriate.

However, practitioners should also remember that using a tool does not absolve the practitioner of professional obligations under AICPA or other applicable ethical standards. Therefore, practitioners should consider implementing a general technical review process to ensure the work product is accurate.

Providing Tax Representation Services
New SSTS No. 4 is largely a collection and update of prior standards of compliance services, recognizing that practitioners have expanded tax representation services. It requires practitioners to become competent in the tax practice and procedures of the taxing authority and technical competence in controversy. The practitioner must "take appropriate steps to comply with applicable professional and regulatory obligations in connection with representing the taxpayer." Practitioners are to "act with integrity and professionalism in dealings with the tax authority," including timeliness of responses. The practitioner must consult the AICPA Code of Professional Conduct regarding the treatment of confidential client information in responding to any request from a taxing authority. When an examination is completed, the practitioner should discuss the results with the taxpayer and the consequences of agreeing to the exam conclusions, consistent with any terms of the engagement.

If a practitioner becomes aware of fraudulent or criminal conduct, the practitioner should consider continuing the professional or employment relationship and may also recommend legal consultation.

In the explanations of this standard, preparers are to consider:
•    Whether the representation might constitute the unauthorized practice of law, and for this, CPA practitioners who are not attorneys might consult an attorney,
•    Whether the representative is licensed in the relevant jurisdiction representation,
•    Whether a power of attorney or other taxpayer authorization is required for the
representation,
•    Whether the practitioner has any conflict of interest in the matter and
•    Whether there is an adequate engagement letter detailing the engagement's objectives, the services to be performed, the taxpayer's acceptance of its responsibilities, the practitioner's responsibilities and any limitations on the engagement.

Additional guidance in the form of interpretations and FAQs is being updated to reflect the reorganization of the revised standards. This updated guidance will be published soon.

SSTS 4, Standards for Members Providing Tax Representation Services

New Standards
Section 4.1.3. The member and any individuals working with or for the member should have or take steps to obtain technical competence in the subject matter. This includes competence in the technical tax area involved as well as the tax practice and procedures of the taxing authority. For this purpose, competence follows the definition established in Section 10.35 of [Treasury] Circular 230 [Regulations Governing Practice Before the Internal Revenue Service (31 CFR Part 10)].

Section 4.1.4. When representing a taxpayer, the member should take appropriate steps to ensure compliance with all relevant professional and regulatory obligations.

Section 4.1.5. The member should act with integrity and professionalism in all dealings with the taxing authority. This includes not unduly delaying or impeding the taxing authority.

Section 4.1.6. With taxpayer approval, information requested by the taxing authority should be provided by the member on a timely basis unless there is a good-faith belief that the information is privileged.

Section 4.1.7. The member should consider if the taxpayer's conduct may be fraudulent or criminal in nature. If so, the member should advise the taxpayer to retain legal counsel and refrain from further representation.

Section 4.1.8. Upon completion of the examination by the taxing authority, the member should review any documents or computations detailing the examination results for correctness and discuss with the taxpayer the consequences of agreeing to these conclusions.

The SRTPs, predecessors to the SSTSs, were drafted at a time when tax practices primarily only prepared tax returns. Since then, tax practices have expanded to provide various services, including tax representation. The task force believed the continuing growth in the number of CPA firms providing tax representation services obligated the development of a standard.

While developing the standard, both the task force and others raised the question of whether a separate standard was necessary, given the breadth of guidance provided by Circular 230. Upon discussion of the issue, the task force agreed that Circular 230 does provide significant guidance to anyone involved in the representation of a taxpayer before a taxing authority. However, that guidance applies only to the representation of federal tax clients. Therefore, task force members felt it important to develop one set of standards that would apply to all members providing tax services, regardless of tax jurisdiction. SSTS 4 is not intended to override other regulatory standards but rather to supplement existing standards and serve as basic standards where a lower or no standard otherwise exists.

SSTS 4 generally follows familiar concepts for experienced tax practitioners. First, members can represent taxpayers with an issue they do not have direct experience with. Still, they are expected to take steps to obtain technical competence as part of that representation engagement. Second, members must comply with all other relevant professional and regulatory obligations in providing representation services, such as Circular 230 and the AICPA Code of Professional Conduct (the AICPA Code). Third, members must maintain integrity and professionalism when dealing with tax authority representatives. Fourth, members are expected to, with taxpayer approval, respond in a timely manner to tax authority requests for information. Fifth, members are advised to refer any situations where there may be fraudulent or criminal taxpayer activity to legal counsel and withdraw from further representation. Sixth, members are expected to review documents or computations from an examination for correctness, discussing the results with the taxpayer.

The application of this standard will generally require little action from most preparers who already know and abide by Circular 230 and the AICPA Code. It is recommended that preparers read through and familiarize themselves with the new standard, identify any parts of their practice to which the standard is relevant, and ensure that current practice is in line with the new standard.

Reprinted with permission of The Georgia Society of CPAs.

Art Auerbach, CPA, CGMA, is a special consultant to Asbury Law Firm, Tax Counsel, specializing in tax consulting for individuals, practitioners and closely held businesses.