Question

The other day a CPA friend of mine received a subpoena from the Alabama Revenue Department. The criminal investigation subpoena asked the CPA to produce his entire tax return files for a particular individual filer for the last three years. The CPA knew that this individual had taken some deductions and tax positions that were more likely than not to be disallowed but he though that they had say a 25% chance of being upheld. The CPA remembered that he did not get paid for doing this person's taxes last year but he has a history of being slow to pay.  Just never this slow before. Some of the things in the CPAs file might be embarrassing to the individual because the CPA advised the individual of the riskiness of some of his tax positions. Also, the CPA had up charged this individual a higher fee because of his slow payment history and because the CPA also had some risk on the tax positions taken. The subpoena says that if the CPA produced the requester a copy of the records by a certain date, (now 2 weeks away) then the CPA did not have to show up and testify. What are the CPAs ethical responsibilities and what actions should he/she take?

Answer 1

CPA's Ethical Responsibilities roles around

Responsibilities, Public Interest, Integrity, Obejectivity & Independence,Due Care

1. CPA should follow "realistic possibility" standard when advising or recommending any tax return position. Specifically, a CPA should not recommend to a client that a position be taken with respect to the tax treatment of any item on a return unless the CPA has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged."

2.No CPA should prepare or sign a return that does not comply with this standard unless the position is not frivolous: a position that is knowingly advanced in bad faith and patently improper is considered frivolous

3. CPA should, where relevant, advise the client as to the potential penalty consequences of the recommended tax return position and the opportunity, if any, to avoid such penalties through disclosure.

4. CPA should not recommend a reporting position that would exploit the audit selection process or which would be a "mere 'arguing' position advanced solely to obtain leverage in the bargaining process of settlement negotiation with the IRS.

5. CPAs are under an affirmative duty to assist clients in minimizing their legal tax liability and may advocate positions that meet both the realistic possibility standard and which also conform to Rule 102 of the AICPA Code of Professional Conduct.

6. In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

7.When a CPA learns that a client did not file a required tax return, or that a previously filed return contains an error or an omission, SRTP (1988 Rev.) No. 6 requires the CPA to "inform the client promptly" of the error.

Actions to be taken by CPA

CPA should guide his client to disclose the records appropriately and accept its fault and pay the penalty. In respect of which file the Revised Tax return with correct figures