The answers to these frequently asked questions (FAQs) are based on guidance developed by the Statements on Standards for Tax Services (SSTSs) Guidance Task Force in response to questions that were presented during the SSTS public exposure period and since that time in administering the SSTSs. These FAQs are not rules, regulations or official statements of the Tax Executive Committee issued pursuant to its rule-making authority and, therefore, are not authoritative guidance.
The SSTSs should be used in conjunction with these FAQs. The answers to these FAQs may not necessarily address the requirements of the Internal Revenue Service, other tax regulatory bodies and State Boards of Accountancy. These bodies may have rules which differ from those of the AICPA. A member should consult these other sources to confirm compliance with all appropriate regulatory requirements.
SSTS No. 7, Form and Content of Advice to Taxpayers, offers guidance to members for communicating tax advice to taxpayers on federal, state, local and international tax matters. Tax advice is a broad topic and includes the application of tax law (statutes, regulations, case law and other issued guidance of a specific jurisdiction) to the specific facts and circumstances of a transaction, ongoing operations and activities, or planning situations of a taxpayer. Both compliance and planning engagements are included.
When providing advice on federal tax matters, members should also look to Circular 230, §10.37 Requirements for written advice. This section provides members with a detailed explanation of the applicable rules and considerations for written advice in federal tax matters and the process a member should use in providing both written and oral advice. In addition, members should look to Paragraph 7 of SSTS No. 7 when deciding on the form of written advice to taxpayers.
What form and content should a member use to communicate the tax consequences of a property sale when written advice is requested by a taxpayer versus when it is not requested by a taxpayer (in the following situation)?
A member had a tax planning meeting with a taxpayer. The taxpayer indicated that he recently sold depreciable real property and would like the member to review the transaction and provide written advice on the potential tax consequences. The taxpayer does not believe he should have a tax issue since the sales price is very close to the acquisition cost.
The member knows the property has been depreciated yearly, the client has a low basis in the property sold due to depreciation claimed on previous income tax returns, and there are other considerations including the taxpayer’s other income, alternative minimum tax, and state and local tax that could impact the amount of tax due by the taxpayer. What form and content should the member use to communicate the potential tax consequences of the property sale when written advice is requested by the taxpayer versus when it is not requested by the taxpayer?
What form and content should the member use to communicate the potential tax consequences of the property sale when written advice is requested by the taxpayer?
The taxpayer appears not to understand the relationship between depreciation expense claimed on previous years’ tax returns and the gain computation at the time of the sale. The member may consider providing the taxpayer with an oral explanation during their conversation so that the taxpayer is not surprised by the results or overlooks it when the written advice is provided.
There is no required format for tax advice under SSTS No. 7 or Circular 230. Paragraph 7 of SSTS No. 7 provides factors to be considered when deciding on the format. One such factor is “the tax sophistication of the taxpayer.” Because it seems that the taxpayer does not understand the tax issues associated with the transaction, the written advice should provide a sufficient explanation so that someone without tax sophistication can understand how the tax law applies to him or her.
With respect to content, the member should exercise professional judgment and consider the following issues associated with the sale:
Taxpayer’s other income
Explanation of depreciation rules and adjusted basis of the property sold
State and local tax issues
Possible alternative minimum and net investment income taxes, passive losses and carryovers, and other carryover items
Possible alternatives, if any (e.g., a tax-free exchange)
Possible federal, state and local penalty provisions
Other relevant issues depending on the taxpayer’s tax situation and financial sophistication
Other considerations for issues addressed in SSTSs No. 1-6.
Paragraph 3 of SSTS No. 7 provides that, when providing tax advice, a member should assume that the tax advice will affect the manner in which the matter is reported or disclosed on the taxpayer’s return, and the member should therefore consider the potential penalty consequences of the issues on which the advice is provided. Accordingly, the member should consider including information on potential penalties that could be associated with the transaction.
Additional information that should be considered include:
The advice reflects professional judgment based on the member’s understanding of the facts and the law existing as of the date the advice is rendered.
Subsequent developments could affect previously rendered professional advice.
The member has no obligation to communicate subsequent developments that could affect previously rendered professional advice unless by specific agreement.
What form and content should the member use to communicate the potential tax consequences of the property sale when written advice is not requested by the taxpayer?
The member should explain the gain to be reported for tax purposes and other tax implications of the sale which the taxpayer may not have anticipated. The member may counsel the taxpayer that the taxpayer would benefit from written tax advice (which would further clarify the tax implications of the sale).
Where the taxpayer only requests oral advice, it is recommended that the member contemporaneously document the advice in written form in the taxpayer’s file.
When the need for outside consultation is required, what steps should a member take to communicate the need for outside expertise to a taxpayer, and how should a member evaluate and document the outside professional advice received (in the following situation)?
A taxpayer has invested a substantial amount of money in the rehabilitation of a building with the intention of qualifying for rehabilitation and other available tax credits. The taxpayer is also interested in maximizing depreciation deductions. The taxpayer has engaged a member to prepare the applicable returns reflecting these items. The member has determined that outside professional advice will be needed to determine depreciation lives of the building components and the tax benefits of the expenditures. What steps should the member take to communicate the need for outside expertise and how should the member evaluate and document the outside professional advice received?
What steps should the member take to communicate the need for outside expertise?
The member should communicate to the taxpayer that the member does not have the experience and expertise to determine the information necessary to prepare the returns, and the member recommends additional professional advice will be needed.
How should the member evaluate and document the outside professional advice received?
The member should evaluate the advice from the outside professional advisor using professional judgment. Regs. Sec. 1.6694-2(e)(5) provides factors to consider when relying on the advice of others, including whether the advice was reasonable on its face value and the qualifications of the outside advisor. The member should also review Circular 230, §10.22(b) and applicable reporting and disclosure standards in the Internal Revenue Code and regulations and the jurisdictions where the returns will be filed.
The AICPA’s Statements on Standards for Tax Services (SSTSs) are enforceable tax practice standards for members of the AICPA. Additional guidance is also found in the corresponding interpretations and frequently asked questions (FAQs). Access to the complete set of SSTSs and guidance are available in the AICPA’s Statements on Standards for Tax Services Library.