As you likely already know, the tax preparation profession is not heavily regulated and has very little barrier to entry. This makes it an excellent career choice for those who are committed to learning tax laws and best practices of the industry, allowing them to start their tax preparation business without years of college coursework. However, this lack of regulation and universal guidelines can leave the industry open to unethical practices and create confusion for tax preparers who want to prioritize practicing ethically and legally.
While there may not be a single written code of ethics all tax preparers are required to follow, there are some regulations put forth by the IRS and guidelines created by industry credited organizations. In this post, we’ll break down the fundamentals of tax preparer ethics (both written and implied), the professional responsibilities of tax preparers, and the consequences of unethical practices.
What is the code of ethics for tax professionals?
The truth is, there is no single “Code of Ethics for Tax Professionals.” However, certain types of tax professionals, such as Certified Public Accountants (CPAs) and Enrolled Agents (EAs), do have specific, detailed codes of ethics.
Additionally, organizations such as the National Association of Tax Professionals (NATP) have outlined a code of ethics and Standards of Professional Conduct. The IRS also issues Ethical Guidelines for Tax Preparers under Circular 230, a written body of regulations. Even if you aren’t a CPA, EA, or member of the NATP, it’s still wise to familiarize yourself with the codes of ethics they outline.
Note: Many regulations for CPAs’ may not apply to tax professionals since CPAs have a much larger scope of practice. Reviewing the Code of Ethics for EAs should be sufficient for most tax professionals.
Remember, ignorance of these codes is not a justifiable reason for noncompliance; being well-versed in them is an integral part of your responsibility as a tax preparer. Below, we outline some of the key takeaways from these ethical codes and guidelines.
Professional responsibilities of a tax preparer
Accuracy and precision – First and foremost, it’s the duty of tax professionals to prepare returns accurately, ensuring all tax calculations and returns are accurate to the best of your knowledge. Mistakes can lead to financial consequences for your clients and legal repercussions for yourself.
Sufficient knowledge of tax law – To prepare returns accurately, you need sufficient knowledge of the tax codes relevant to your clients. This is best obtained by meeting the educational requirements to become a CPA or EA or by participating in the IRS’s Annual Filing Season Program. Knowledge should then be maintained through continuing education.
Continual education – Responsible, ethical tax preparers stay abreast of changes in tax laws and regulations, ideally through courses provided by an IRS-approved continuing education provider. See our Tax Prepaer’s Guide to Continuing Education Credits for more information.
Due diligence – In addition to understanding the tax code, you’ll also need to perform tax preparer due diligence as outlined in Form 8867 to ensure accurate returns. This includes making sure, to the best of your ability, that your clients truly qualify for certain tax credits such as the Earned Income Tax Credit, Child Tax Credit, and others.
Confidentiality & data protection – You are responsible for safeguarding the sensitive financial information of your clients. Of course, intentional misuse of client data would be a direct violation of this requirement. But you could even be held responsible for accidental data breaches. Every tax professional is legally required by the IRS to have a written information security plan (WISP).
Record keeping – Tax preparers are required by the IRS to keep records of their clients’ returns, documents, and communication. You are also required to furnish copies of certain documents, such as the finalized return, to both the IRS and the client.
Client communication – You should maintain clear and transparent communication with clients. This includes advertising honestly, explaining the tax preparation process, being transparent about your fees as well as fees associated with any ancillary products – like bank products and identity theft protection.
Avoiding conflicts of interest – Identifying and managing any potential conflicts of interest that may compromise your ability to provide unbiased and objective advice. For example, the NATP’s Standards of Practice specify that “A member should avoid the appearance of an unduly close business relationship with representatives of the Internal Revenue Service.”
What does it mean for a tax professional to be unethical?
Violation of tax preparer ethics can take various forms, such as:
Fraudulent activities – This includes deliberately falsifying information on tax returns to benefit clients or yourself. One common example is promising larger returns to attract clients and then falsifying information to ensure said “larger return.” This can also include misleading clients about your fees and trying to conceal exorbitant charges.
Conflicts of interest – Conflicts of interest can include placing personal interests above the welfare of clients or engaging in activities that compromise your impartiality.
Negligence – Negligence can include careless errors or failing to exercise due diligence in preparing accurate and compliant tax returns.
Breach of confidentiality – Sharing or mishandling client information violates the trust placed in you as a tax professional. Accidental breaches due to a tax preparer’s lack of data security are also included in this category.
Inadequate communication & record keeping – This occurs when tax preparers provide unclear, untrue, or incomplete information to clients regarding their tax situation or when tax preparers fail to keep sufficient, organized records.
What can happen if a tax preparer gets caught?
The consequences of unethical behavior in tax preparation can be severe, affecting both your professional standing and personal life. Some potential repercussions include:
Legal action – Unethical conduct can lead to legal consequences, including fines and, in extreme cases, imprisonment.
Loss of professional reputation – Your reputation as a tax professional is built on trust. Unethical behavior can irreparably damage this trust, resulting in the loss of clients and business opportunities.
Revocation of license or certification – CPAs, EAs, and attorneys can have their licenses or certifications revoked or suspended for engaging in unethical practices, and the IRS can revoke PTINs.
Financial repercussions – Legal fees, fines, and restitution payments can impose a significant financial burden on tax professionals found guilty of unethical conduct.
In conclusion
Though there may not be a single, all-encompassing tax preparer code of ethics that legally applies to every tax preparer, there are plenty of laws and guidelines put forth by the IRS and organizations like the NATP or the National Association of Enrolled Agents. Even if you do not hold the EA credential or a NATP membership, you can and should use these guidelines to inform your practice. And you should always be well-versed in the legal requirements set by the IRS. By prioritizing tax preparer ethics, you not only protect yourself from legal and business troubles but also contribute to the overall integrity of the tax profession.
For more information on specific violations that could impact your business, see our guide, Not Losing Your License as a Tax Preparer.
