Tax Pros’ Duty of Competence With the New Tax Lawby
One of the first thoughts that likely occurred to any tax professional upon first hearing about the Tax Cuts and Jobs Act — passed late in 2017 and the most substantial change to the Internal Revenue Code in 31 years — was, “Oh, goodie, now I get to become familiar with 700 pages of new and revised tax statutes!”
For some, the second thought was, “Do I really need to learn all of this? What would happen if I didn’t?”
If you are a tax professional who prepares federal returns, chances are you are bound by a set of rules of professional conduct governing everything from your relationships with clients to what you can say in TV ads and email signatures.
For the four most common types of tax professionals — CPAs, attorneys, enrolled agents and Annual Filing Season Program participants — there is a single, generally uniform concept that answers the question, “Do I really have to learn all of this stuff?” That concept is the duty of competence, and for the most part, it’s a fairly simple standard to meet.
Who Defines Competence?
Competence is defined and explained differently by the different authorities that oversee tax professionals, but the various rules generally agree.
CPAs and attorneys are governed at the state level by boards of accountancy and state bar associations, respectively, and may subject themselves to additional oversight by professional associations, including state CPA societies and voluntary bar associations.
Enrolled Agents and voluntary participants in the IRS Annual Filing Season Program are governed at the federal level by IRC Section 330 and the accompanying regulations put forth in Circular 230 (Title 31 Code of Federal Regulations, Subtitle A, Part 10.)
Here’s how the rules affect each of the four types of tax professionals:
Lawyers. So what exactly is the duty of competence? According to the Model Rules of Professional Conduct, periodically published by the American Bar Association and adopted at least in part by the governing bar associations of 50 U.S. states and territories, “Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”
The accompanying explanatory notes go on to say: “[R]elevant factors include … the lawyer's … training and experience …. A lawyer need not necessarily have special training or prior experience to handle legal problems of a type with which the lawyer is unfamiliar …. A lawyer can provide adequate representation in a wholly novel field through necessary study …. To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law … engage in continuing study and education and comply with all continuing legal education requirements ....”
CPAs and Accountants. The Uniform Accountancy Act Model Rules, periodically published jointly by the National Association of State Boards of Accountancy and the AICPA, and adopted in whole or in part by many state boards of accountancy, discuss at length the types and quantity of continuing professional education required to ensure professional competence and competent representation of client matters.
The non-binding but highly influential AICPA Code of Professional Conduct (and similar rules adopted by state societies of CPAs) states: “A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council: Professional Competence — Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence. Competence, in this context, means that the member or member’s staff possess the appropriate technical qualifications to perform professional services and that the member, as required, supervises and evaluates the quality of work performed. Competence encompasses knowledge of the profession’s standards, the techniques and technical subject matter involved, and the ability to exercise sound judgment in applying such knowledge in the performance of professional services.”
Enrolled Agents and Annual Filing Season Program Participants. Professionals practicing under the direct authority of the IRS also have a well-defined standard to meet. Section 10.35(a) of Circular 230 states: “A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting with experts in the relevant area or studying the relevant law.”
(Editor’s Note: Since 2014 when Loving v. Commissioner determined that the IRS is not legally able to enforce licensing requirements on tax preparers, the IRS has operated the Annual Filing Season Program. Participants in the program, by agreeing to be bound by Circular 230, are granted limited representation rights before the IRS. Unlicensed preparers who do not participate in the program are not bound by Circular 230.)
What Does it All Mean?
We can see in the above definitions and discussions that meeting the duty of competence isn’t that hard. Rather than requiring that every licensed tax preparer become a tax reform expert before meeting with their first client of the season, the rules require only that they find a way to bring themselves up to speed before giving advice or rendering a service. This familiarity can come in the form of study, previous experience, consultation with colleagues, or anything that will provide the knowledge necessary to provide effective advice and accurate work product.
There’s not much to worry about for tax professionals with enough experience to know what they don’t know and who aren’t afraid to dig into the code or ask a colleague for guidance. A tax pro who takes the time to get familiarized with the new provisions relevant to their area of practice and keep up with relevant continuing education will have no reason not to expect a successful tax season.
Chris Bushong is a tax attorney and economist working in the Intuit Strategic Partners Group. Prior to joining Intuit in June 2017, Chris worked in a number of tax roles in-house and in private practice in the U.S. and Canada. His primary areas of expertise are business tax planning and cross-border transactions.