Truth, Justice, and Taxation: Towards an Ethical Framework for Tax Practitioners

Abstract

Uniquely, tax practitioners have dual ethical duties, both to the taxpayer-client and to the tax system. They protect the integrity of our voluntary tax system by ensuring that clients comply with the law, but they must also help clients minimize their legal tax liability. When tax law is ambiguous, as it often is, practitioners must decide how far they may go to interpret it in the client's favor. The professional responsibility standards provide little practical help in navigating this ethical dilemma. Instead, penalty provisions in the Internal Revenue Code set the parameters for taking uncertain positions, but these rules lack principles to guide their implementation and do not address other ethical dilemmas. This article seeks to fill this void and articulate for the first time an ethical framework for tax practitioners. Building on the work of Michael Pakaluk and Mark Cheffers, I develop a framework based on the two societal goods that tax practitioners are intended to produce: justice and trust. Justice means that taxpayers should pay the tax liability that their transactions merit under the law, neither more nor less. Private tax practitioners focus on ensuring that taxpayers do not unjustly overpay, while the tax authority focuses on ensuring that taxpayers do not unjustly underpay. Congress, aided by courts, balances the competing functions of the tax authority and private tax practitioners. The other societal good produced by tax practitioners, trust, requires the perception that most citizens are paying their legal share, increasing taxpayers' willingness to honestly report their own liabilities under our voluntary system. Tax practitioners produce trust by ensuring that clients make all required disclosures in a truthful manner. In tax, placing substance over form is critically important for truthful disclosure. The article concludes by applying the framework to two example scenarios where practitioners face conflicts between their dual duties.

Keywords: Taxation, Ethics, Tax Ethics, Uncertain Tax Positions