Tax Prep Rules; Liability Caps; More

The U.S. Treasury Department and the Internal Revenue Service have issued guidance on implementing a May 2007 law that holds tax preparers to a higher standard of certainty for the tax positions they assert in tax filings.

The guidance also asks preparers to offer input on how the IRS and Treasury Department can overhaul the regime of penalties for preparers, an undertaking the two agencies expect to complete by the end of the year.

The law modified Section 6694 of the tax code to say that preparers would face penalties if they assert positions on a tax return that they did not believe would “more likely than not” be sustained if challenged by tax authorities. (Financial statement preparers are now held to the same standard for asserting positions in their financial statements.) Previously, preparers could assert a tax position if they saw a “realistic possibility” that the position could be sustained under challenge.

The American Institute of Certified Public Accountants says the guidance will be helpful in implementing the new standard, but the group is also working to have the law overturned. The AICPA objects to the preparer standard because it differs from the standard for taxpayers themselves, who may still assert a position if they see it as reasonably possible. The AICPA says having different thresholds for preparers and taxpayers creates a conflict of interest for preparers.

IRS and Treasury officials say the interim guidance provides interpretation on the new heightened standard, which will be in place until new preparer penalty regulations are overhauled. The interim rules emphasize that preparers must understand the legal basis for positions they take on tax returns, as well as the requirements for taxpayers to disclose certain positions and the need for preparers to advise their clients of penalties that may apply when unsupportable positions are taken.

The IRS notice says preparers generally can continue to rely on taxpayer or third-party representations unless the preparer has good reason to mistrust them. The guidance also includes examples illustrating how the new standards will be applied.

Ochsenschlager

Tom Ochsenschlager, the AICPA’s vice president for taxation, says the AICPA is pleased the IRS and Treasury found a reasonable and practical way to enforce the new law, but the group also continues to support legislation introduced in the House of Representatives that would overturn the May 2007 change to the tax code. The AICPA says the bill would restore the CPA role as an advocate for the taxpayer by setting the same standard for preparers as for their taxpayer clients.

“At this point, we’re very pleased with the new guidance,” he says. “It’s the best result under the circumstances. Our next step is to get this legislation through Congress.” Ochsenschlager says the legislation is quickly gaining traction both with Democrats and Republicans, and the AICPA is “cautiously optimistic” a companion bill will soon be introduced in the Senate.

AICPA Abandons New Rule on Liability

A professional ethics group is reminding accountants to see what regulators have to say about indemnification provisions or limits on legal liability before seeking such protections from clients.

The Professional Ethics Division of the AICPA has published a draft proposal that would not establish new rules about indemnification or liability limitations, but instead would remind auditors to know what the regulators in a given sector require. Lisa Snyder, director of the professional ethics division, says the guidance reminds accountants that seeking protections from liability in violation of regulatory rules is regarded as an act discreditable to the profession.

Snyder says the Securities and Exchange Commission and a host of banking and insurance regulatory groups have specific rules prohibiting accountants from seeking certain protections from liability as a condition of a client engagement. “There was some concern that some of our members may not be aware that there are other regulators out there who prohibit the use of these provisions,” she says. “So we thought it would be prudent to get the word out there.”

Snyder says the guidance also makes it easier for the group to enforce its professional standards, ensuring that all in the profession are aware of prohibitions where they exist.

The Professional Ethics Division twice proposed new ethics interpretations that would address the effect of certain indemnification and liability limitation provisions, but the feedback was so diverse and the regulatory landscape so tenuous that the division withdrew the proposals. The current proposed guidance says the division concluded that liability reform initiatives are developing both in the United States and Europe, so the timing for new rules from the AICPA is not right.

Instead, the division chose to issue the current proposal simply reminding auditors to check on regulatory prohibitions before inserting clauses into engagement letters. “Once the legislative efforts concerning auditor liability reform are concluded, the committee will continue to monitor events on this subject both nationally and internationally and consider what, if any, additional guidance may be appropriate,” the proposed new guidance says.

FEI Research Produces Financial Reporting Resources

The research arm of Financial Executives International has published two resources aimed at helping public companies evaluate their assessment of financial reporting and internal controls.

In “What’s New in Financial Reporting: Financial Statement Notes from Annual Reports,” the FEI examines disclosures from 2006 annual reports for the 100 largest publicly traded companies and highlights those with particularly clear discussion of difficult accounting issues. The study identifies and analyzes recent reporting trends and common practices in financial statements.

Graziano

“The objective was to identify, by looking at 13 key areas, disclosures that seemed to rise above the pack,” says Cheryl Graziano, director of the FEI’s research foundation. “The report highlights what the authors thought were the more noteworthy footnote disclosures.”

In the second resource, “Fraud Risk Checklist,” the FEI compiles the latest market research and resources on how to identify where an entity may have the greatest risk for fraud. The checklist provides a series of questions on fraud, providing a single framework from which to evaluate reporting. It also provides a sample structure for management to use in documenting its thought process and conclusions.