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Abstract:
Should tax professionals owe a duty (or a greater duty) to the tax system during a period of reduced IRS enforcement activities? If there is a special duty owed by tax professionals to the tax system, it will affect how these professionals interact (or should interact) with the IRS. Also, any such special duty should be clear, firmly established, normative, and feasible for tax professionals to comply. This article maintains that this has not been the case and that has led to the current crisis in investor confidence in the stock market and it has undermined the federal income tax system.
The conflict between the ABA and the IRS over whether the filing of a tax return is adversarial has been a contributing factor to the current crisis. Until this conflict is resolved, the article argues there can be no meaningful duty to the tax system. One problem is that the accuracy related penalty provisions allow tax practitioners to resolve ambiguities in a return position in their client's favor without disclosure to the IRS. Thus, the tax system has encouraged the reporting of aggressive return positions.
Another problem has been that the practitioner's reporting standard has been a higher standard than the taxpayer's reporting standard, and this has created conflicts of interest between the practitioner and the client because the practitioner is sometimes ethically obligated to recommend disclosure even though the client is not legally required to disclose, and even though disclosure may not protect the client from penalty.
Yet another problem is the fact that there is some question about whether the accuracy related penalties establish a normative standard to which tax practitioners must adhere. The article reviews the debate over this issue and raises additional arguments why the penalty may not be regarded as normative.
The article explores the potential factors that may have contributed to the spate of corporate accounting scandals and abusive tax avoidance transactions. It also discusses pending legislation that proposes new, increased accuracy-related penalties and greater disclosure. The article points out problems associated with this proposed legislation, but notes that if enacted, this legislation should bring an end to the debate over the tax professional's duty to the system because there will be fewer opportunities for tax practitioner's to use their discretion with respect to aggressive return positions.
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