Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [CPA] REG: Ethical Guardrails: Mastering SSTS and Tax Preparer Responsibilities
Transcript
- Marcus: Ava, let's start with a scenario I think every tax preparer dreads. A long-time client, great guy, runs a successful construction company. He asks you to deduct fifty thousand dollars in 'consulting fees' paid to his kid, who’s in college and did zero work for the business. Ava: And he’ll often add something like, “My last accountant never had a problem with it.” Marcus: Exactly. He frames it as a small risk, but it feels like a huge one. How do we navigate that? Ava: That moment is a direct test of our professional integrity. Our response isn't just about tax law. It’s governed by the AICPA's ethical framework, specifically the Statements on Standards for Tax Services, or SSTS. Knowing these rules is what protects your license and your reputation. Marcus: Okay, so SSTS. I also hear a lot about Circular 230. Are they the same thing? Ava: That's a critical distinction. Think of it as a two-tiered system. Circular 230 contains the legal rules for practicing before the IRS. It’s the law of the land, enforced by the government. The SSTS are different. They are the enforceable professional standards for AICPA members. Marcus: So, a code of honor, enforced by our own professional organization? Ava: Precisely. You can violate an SSTS and face disciplinary action from the AICPA, even if you haven't broken any tax law or triggered an IRS penalty. They hold us to a high standard of conduct. Marcus: When I see one of these ethics questions on the REG exam, it can feel overwhelming. Is there a systematic way to break it down? Ava: Absolutely. A four-step approach works every time. The first step is to identify the governing standard. Marcus: So, am I being tested on the AICPA's professional code, the SSTS? Or is this about IRS practice rules in Circular 230? Or a potential tax penalty under the Internal Revenue Code? Ava: Exactly. The source of the rule dictates the consequence. Once you’ve identified the standard, step two is to pinpoint the core issue. Marcus: What’s the specific problem here? Is it a shaky tax position? Did I just find a client’s mistake on an old return? Am I using an estimate? Ava: Right. You have to diagnose the problem before you can solve it. Step three is applying the correct rule to that issue. If it’s a questionable tax position, you apply SSTS Number 1. If you discovered an error, you turn to SSTS Number 6. Marcus: And the final step? Ava: Step four is to determine the required action—and just as importantly, what's prohibited. The answer is almost always about communication with the client. An action like calling the IRS on your own is almost always the wrong answer. Marcus: Okay, that’s a helpful framework. You mentioned SSTS Number 1 is a big one. What does it cover? Ava: It covers tax return positions, and it's the most frequently tested standard. It says a CPA must have a good-faith belief that a tax position has a "realistic possibility" of being sustained if the IRS challenges it. Marcus: What does "realistic possibility" actually mean? Is there a number attached to it? Ava: There is. It’s generally interpreted as a one-in-three, or about a 33.3 percent, chance of success. This is the minimum standard for taking a position on a return without special disclosure. Marcus: But what if a position doesn't meet that one-in-three threshold, but it's not totally baseless? Ava: That’s where the next level down comes in: "reasonable basis." This is a lower standard, maybe a greater than 20 percent chance of success. If a position has a reasonable basis but fails the realistic possibility test, you can still recommend it, but with a critical condition: it must be adequately disclosed on the tax return. Marcus: So you're flagging it for the IRS, essentially. And what's below that? Ava: Below that is a "frivolous" position. This is one you know is improper or you’re advancing in bad faith. A CPA must never, ever recommend a frivolous position. Marcus: So the SSTS sets the professional bar. But what about the IRS? Do they have their own penalties for preparers who take aggressive positions? Ava: They do. That’s where the Internal Revenue Code comes in, specifically Section 6694. This imposes a monetary penalty on a tax preparer for an understatement of tax due to an "unreasonable position." Marcus: And how does the IRS define an "unreasonable position"? Ava: It depends on disclosure. For an undisclosed position, the IRS requires "substantial authority" to avoid a penalty. That's a higher bar than the SSTS—around a 40 percent chance of success. Marcus: Wait, so for an undisclosed position, the AICPA's SSTS requires a 33.3 percent chance—realistic possibility—but to avoid an IRS penalty, I need a 40 percent chance, or substantial authority? Ava: You’ve got it. That gap is a key testing point. To keep yourself and your client safe, you need to meet the higher standard. For a disclosed position, the IRS standard aligns with the AICPA's lower tier—you just need a "reasonable basis," that greater-than-20-percent chance. Marcus: What's the penalty if a preparer gets this wrong? Ava: The penalty is the greater of one thousand dollars or 50 percent of the fee you earned for preparing that return. And the penalties are much, much higher for willful or reckless conduct. Marcus: Okay, I'm hearing a lot of different terms and percentages. We have "reasonable basis," "realistic possibility," "substantial authority." Can you walk me through the hierarchy, from lowest to highest? Ava: Of course. At the very bottom, you have "frivolous." Think less than a 5 to 10 percent chance. It's never acceptable. Marcus: Got it. Never frivolous. What's the first legitimate level? Ava: That would be "reasonable basis," which is greater than a 20 percent chance of success. This is the standard that lets you avoid an IRS penalty, but only if the position is disclosed on the return. Marcus: Okay, and the next step up? Ava: That's "realistic possibility," our primary SSTS standard. About a one-in-three, or 33.3 percent, chance. This is the minimum you need for an undisclosed position to meet the AICPA's professional standard. Marcus: Then comes the IRS standard for avoiding a penalty on an undisclosed position. Ava: Correct. That's "substantial authority," around a 40 percent chance of success. Marcus: And is there anything higher than that? Ava: Yes, the highest standard is "more likely than not," which means a greater than 50 percent chance of success. This is required for tax shelters and certain other specific, high-risk transactions. Marcus: That clears it up. So SSTS Number 1 on tax positions is huge. What do the other standards cover? Ava: SSTS Number 2 is simple: you must make a reasonable effort to answer all applicable questions on a return. You can't just leave blanks. Marcus: And Number 3? It’s about procedural aspects. Ava: This one is about client-provided information. The rule says you can rely on what your client gives you in good faith, without having to audit it. But—and this is a big but—you can't ignore information that seems incorrect, incomplete, or just plain weird. Marcus: So if my construction client's revenue doubled but his materials expense stayed flat, I can't just plug in the numbers and file. Ava: Exactly. That’s a red flag. SSTS Number 3 requires you to stop and make reasonable inquiries. You have to use your professional judgment. Marcus: What about using estimates? Is that allowed? Ava: Yes, under SSTS Number 4. You can use client estimates when it's impractical to get exact data, as long as the estimates seem reasonable. Think business mileage or small, unreceipted expenses. But you can't present the estimate in a way that makes it look like a hard number. Marcus: And what if the IRS ruled against a client’s position last year? Am I stuck with that decision forever? Ava: Not necessarily. That's SSTS Number 5. You are not bound by a prior administrative proceeding or court decision. If the facts or law have changed, and a different position now meets the 'realistic possibility' standard, you can recommend it. Marcus: Okay, let's talk about a really tough one: SSTS Number 6, discovering an error. Ava: This is a critical one for the exam. If you find a material error in a client's prior return, or you learn they failed to file a return, you have a very clear, two-step duty. First, you must promptly inform the client of the error and its potential consequences. Marcus: And second? Ava: You must recommend corrective measures, like filing an amended return. Marcus: What can't I do? What’s the prohibited action? Ava: You are not allowed to inform the IRS without your client's permission. Your duty is to your client. If the client refuses to correct a material error, your final step is to consider withdrawing from the engagement. Marcus: And the last one, SSTS Number 7? Ava: That covers advice to taxpayers. It simply says your advice should be clear, and you should consider your client’s level of sophistication. For anything complex or important, put it in writing to avoid misunderstandings. Marcus: This is great. Can we walk through a full example? Let’s use that discovering-an-error scenario from SSTS Number 6. Ava: Let's do it. You're preparing the 2026 return for XYZ Corp. While reviewing last year's depreciation schedule, which was done by another firm, you see they expensed a $200,000 asset under Section 179. You realize that asset wasn't eligible, causing a material understatement of tax in 2025. What do you do? Marcus: Okay, step one is to identify my obligation. I've found a material error in a prior year. Under SSTS Number 6, my duty is to the client, not the IRS. Ava: Perfect. What's step two? Marcus: I have to promptly inform the client—probably the CFO—about the error, the potential penalties, and what I recommend. Ava: And what is that recommendation? Marcus: I have to recommend they file an amended 2025 corporate return to fix the depreciation and pay the back tax. Ava: Now for the hard part. What if the client refuses? They say, "Just fix it on this year's return. No need to go back." Ava: That is the classic tempting-but-wrong answer on the exam. You cannot knowingly perpetuate an error. Each tax year stands on its own. Using an incorrect beginning basis for depreciation on the 2026 return would mean you are now filing a return you know is incorrect. Marcus: So if they refuse to amend the 2025 return, I have no choice. I have to consider withdrawing from the engagement. Ava: That is the only ethical path. You cannot be associated with a return you know to be wrong. Marcus: That's a lot to keep straight. Is there a mnemonic or some other way to remember the seven SSTS standards? Ava: There is. Use the phrase TAPEDKA to remember them in order. Marcus: TAPEDKA. Let me try. T is for Tax Positions… A for Answers to Questions… P for Procedural Aspects… Ava: You’ve got it. Then E for Estimates, D for Departures from prior positions, K for Knowledge of error, and the final A for Advice. Marcus: TAPEDKA. I like it. What’s the most common pitfall for candidates on this topic? Ava: Confusing the enforcement bodies. Remember, a violation of SSTS leads to professional discipline from the AICPA. A violation of Circular 230 can get you disbarred from practicing before the IRS. The exam will test that distinction. Marcus: Any final tip for exam day? Ava: Yes. When a question describes a CPA discovering a client error from a prior year, the answer is almost always a two-step process: inform the client, and recommend correction. Immediately eliminate any answer choice that says the CPA should call the IRS. Confidentiality is paramount. Marcus: This has been incredibly helpful, Ava. You've really clarified the why behind these rules. For our listeners who want this kind of structured approach for all their REG topics, VoraPrep is a full exam-prep app. Ava: That's right. It has lessons, thousands of practice questions, and an AI tutor all in one place. You can get started and try it for free at Vora Prep dot com. Marcus: So, to recap the big ideas: SSTS are the AICPA's enforceable ethical rules, separate from the IRS. For an undisclosed position, you need a 'realistic possibility' to meet the professional standard, but the higher 'substantial authority' to avoid IRS penalties. Ava: And when you find a client error, your duty is to inform the client and recommend they fix it. It is not your job to be an IRS informant. If they won’t fix a material error, you have to consider walking away. Marcus: Excellent. That’s all the time we have for office hours today. Keep up the great work, everyone. Ava: Stay focused, and we’ll talk to you next time.