In preparing tax returns, keep in mind that you must satisfy all applicable standards - professional standards as well as those of the relevant taxing authority - regarding the levels of authority required to support entries on tax returns.

AICPA Standards – SSTS No. 1

AICPA Statement on Standards for Tax Services (SSTS) No. 1, generally requires that a position taken on a tax return have a “realistic possibility” of being sustained on the merits if challenged. If a position does not satisfy that requirement, it may nevertheless satisfy the AICPA standards if it is “not frivolous” and the position is adequately disclosed on the return.

Federal Standard

The federal standard in IRC section 6694 was revised in May 2007 to require that there be a reasonable belief that a position taken on a return would “more likely than not” be sustained on its merits, or that there be a “reasonable basis” for the position and the position be adequately disclosed. Notice 2008-13 provides interim guidance on how a tax return preparer may be deemed to satisfy the section 6694 requirements. Click here for further discussion of Notice 2008-13.

In general, during the interim guidance period, a preparer will be deemed to satisfy the section 6694 requirements with respect to a position if there is a “reasonable basis” for a position, but the preparer does not have a reasonable belief that the position would more likely than not be sustained on its merits, provided:

1.      The position is disclosed;

2.      The return provided to the taxpayer by the preparer contains adequate disclosure of the position;

3.      There is substantial authority for the position and the preparer (i) advises the taxpayer of the difference between the penalty standards applicable to the taxpayer under section 6662 and the penalty standards applicable to the tax return preparer under section 6694, and (ii) contemporaneously documents in the preparer’s files that this advice regarding differing standards was given to the taxpayer; or

4.      In the case of a position that may be described as a “tax shelter,” as defined in section 6662(d)(2)(C), the preparer (i) advises the taxpayer of the penalty standards applicable to the taxpayer under section 6662(d)(2)(C) and the difference, if any, between these standards and the standards under section 6694, and (ii) contemporaneously documents in the preparer’s files that this advice was given to the taxpayer.

Helpful Guidance

• What is your obligation to examine or verify supporting data?
• What if you cannot answer every question on a return?
• When may a taxpayer’s estimates be used on a return?

You will find useful guidance with respect to the AICPA’s standards on these and other issues in the AICPA’s SSTSs. With respect to federal returns, in addition, to federal guidance previously available, see also Notice 2008-13 for new guidance on issues such as reliance on information furnished by the taxpayer or a third party.

Toolkit Available Regarding AICPA Valuation Standard

When does the AICPA standard on valuation services apply to a tax practitioner?

You will find the answer to that question, and helpful guidance on how to comply with the standard if it applies to you, in an implementation toolkit available free-of-charge on the AICPA Web site. The toolkit for the AICPA Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business Ownership Interest, Security, or Intangible Asset, was prepared by members of the Business Valuation Section with the assistance of members of the Tax Section.

For an overview of SSVS No. 1, see Professional Guidance in Business Valuation: Applying SSVS1, in the September 2007 Journal of Accountancy.

Click here for illustrations regarding the application of the standard to specific types of tax engagements.