AICPA Statements on Standards for Tax Services (SSTS)

3.4 AICPA Statements on Standards for Tax Services (SSTS)

The AICPA Statements on Standards for Tax Services (SSTS) provide foundational guidelines for CPAs as they offer tax services, helping them maintain ethical conduct, professional competency, and compliance with governing laws. These standards promote consistent, high-quality tax practices by setting out clear expectations around accuracy, integrity, due diligence, and professional judgment. SSTS are intended to complement other regulatory frameworks, such as Treasury Department Circular 230 (discussed in Section 3.1), and the AICPA Code of Professional Conduct. This section explores the key provisions of the SSTS, their scope and application, and how they guide practitioners in fulfilling their obligations to clients, regulatory agencies, and the public.

Purpose and Background of the SSTS

Federal, state, and local laws—along with professional ethics—inform CPAs’ tax practice responsibilities. Recognizing the intricacies and constant evolution of tax law, the American Institute of Certified Public Accountants (AICPA) developed these standards to unify essential expectations across a range of tax-related areas, such as:

• Preparing and filing tax returns
• Identifying and substantiating tax positions
• Advising clients about tax strategies and transactions
• Communicating and documenting professional judgments

The SSTS serve to ensure that CPAs maintain accuracy, uphold ethical conduct, and protect the public interest when evaluating and applying tax laws. While they are not the only source of professional obligations, they function as crucial guidance for day-to-day practice.

Overview of the SSTS Structure

The SSTS currently consist of seven main statements, each addressing a distinct area of concern in the provision of tax services:

1. SSTS No. 1: Tax Return Positions
2. SSTS No. 2: Answers to Questions on Returns
3. SSTS No. 3: Certain Procedural Aspects of Preparing Returns
4. SSTS No. 4: Use of Estimates
5. SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision
6. SSTS No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
7. SSTS No. 7: Form and Content of Advice to Taxpayers

Although these statements primarily focus on federal tax responsibilities, they are equally relevant to state and local tax matters. They encourage professional consistency by laying out coherent principles that CPAs can rely upon to justify and defend their positions when confronted with ethical or legal dilemmas in tax practice.

Key Provisions of Each SSTS

Below is a breakdown of the seven SSTS, focusing on their scope, purpose, and the responsibilities they impose on tax practitioners.

SSTS No. 1: Tax Return Positions

SSTS No. 1 sets the stage by establishing requirements for presenting tax return positions:

• Realistic Possibility of Success: A CPA should not recommend a tax return position unless it has at least a realistic possibility of success—often interpreted as a 33⅓% likelihood—if challenged by tax authorities.
• Reasonable Basis: If the position does not meet the realistic possibility standard, the CPA must demonstrate that the position has a reasonable basis (at least about 20% likelihood) and that it is properly disclosed to the relevant taxing authorities, as applicable.
• Good Faith and Transparency: Even when stricter standards of substantial authority or more-likely-than-not apply to certain tax positions (e.g., tax shelters or items with higher potential for tax evasion), the CPA must act in good faith and fully comply with mandatory disclosure requirements.

SSTS No. 2: Answers to Questions on Returns

Honesty, completeness, and transparency underlie SSTS No. 2:

• Duty to Answer Questions: CPAs are typically required to make a reasonable effort to obtain essential information and to answer all questions on the tax return in a complete and accurate manner.
• Material Omissions: Firms should avoid omitting questions that could mislead the tax authorities or significantly affect the tax liability.
• Exceptions: In limited circumstances, if certain data cannot be obtained after a reasonable effort, the CPA may leave a question unanswered while explaining or disclosing the rationale.

SSTS No. 3: Certain Procedural Aspects of Preparing Returns

This standard outlines the procedural due diligence that CPAs must observe in return preparation:

• Reliance on Client Data: Tax practitioners can rely on client representations without extensive independent verification, provided they are reasonable and consistent with prior knowledge—unless contradictory information triggers further investigation.
• Inconsistent or Missing Information: If data seems inconsistent with other known information, the CPA must probe further through additional inquiry.
• Documentation: CPAs should maintain robust documentation on how they conducted due diligence to meet professional standards and possible examination by regulatory bodies.

SSTS No. 4: Use of Estimates

Estimates are frequently necessary in tax return preparation. SSTS No. 4 addresses:

• Acceptable Uses: CPAs may use estimates from clients if they appear reasonable and consistent with known facts.
• Materiality Considerations: If the estimated amounts are significant or unusual, further inquiries or consultation may be required.
• Disclosure: When estimates are pervasive and could influence the tax result substantially, CPAs should consider disclosing these estimates to avoid any misunderstanding.

SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision

SSTS No. 5 speaks to consistency when a tax position encountered in a prior administrative or judicial proceeding arises again:

• Prior Determination: Typically, a decision by a court or an administrative agency (like the IRS appeals office) is binding for the specific matter, but the CPA may be able to adopt a new position if circumstances have changed or new authority supports a different interpretation.
• Changes in Law or Facts: If the legal landscape or relevant facts have shifted, the CPA is permitted—indeed, obligated—to adapt the previously concluded position as needed.
• Documentation: Emphasizing the need for careful analysis and documentation, this standard helps CPAs justify their stance in repeated or follow-on engagements.

SSTS No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings

Because errors can be discovered at any time, SSTS No. 6 sets forth:

• Identification of Errors: If the CPA discerns an error or omission in a previously filed tax return, they must inform the client promptly, explain the potential consequences, and recommend corrective measures (such as filing an amended return).
• Client’s Decision: The ultimate decision to correct the error (via amendment or other means) rests with the client, but the CPA cannot be complicit if the client refuses to correct a material error.
• Withdrawal: In extreme situations where a client refuses to correct an error that significantly violates the law, the CPA may consider withdrawing from the engagement to maintain professional standards.

SSTS No. 7: Form and Content of Advice to Taxpayers

The final standard focuses on communicating tax advice effectively:

• Clear and Accurate Advice: CPAs must provide written or oral advice that is correct, internally consistent, and based upon credible authorities.
• Scope of Advice: The complexity of the transaction and the potential for misinterpretation dictate the depth and rigor of the documentation. Simple scenarios might only require a brief memo or note to file, whereas a complex business reorganization may call for an extensive legal analysis.
• Caveats and Qualifications: Where legal or factual uncertainties exist, the CPA should disclose assumptions and highlight the associated risks.

Application of the SSTS in Day-to-Day Practice

Ensuring Accuracy and Compliance

A central purpose of the SSTS is promoting the accuracy of tax work. Following SSTS guidelines helps CPAs:

• Avoid Regulatory Penalties: By meeting or exceeding minimum standards for realistic possibility and reasonable basis, tax practitioners reduce the likelihood of preparer penalties and taxpayer disputes.
• Minimize Ethical Risks: Clear guidance on answering return questions and investigating discrepancies protects CPAs from allegations of willful blindness or misrepresentation.
• Stay Current: CPAs need to remain informed about new legislation, regulations, and court rulings to adequately apply professional judgment in light of evolving authorities.

Coordination with Other Standards

CPAs commonly operate within multiple oversight regimes (including Treasury Department Circular 230 and Section 3.1 of this chapter). The SSTS coordinates with these frameworks by offering a more detailed blueprint for ethical handling of tax positions and return responsibilities. When a conflict arises between SSTS and other binding regulations, the stricter requirement typically takes precedence.

Practical Example: Applying SSTS in a Corporate Return

Consider a CPA firm preparing a corporate tax return for a manufacturing client. The company’s recent research and development (R&D) activities may qualify for a tax credit. While the client provides estimated figures for R&D costs, the CPA notices an inconsistency between the total R&D expenses and the company’s payroll-based R&D staff costs.

• Gathering Data: According to SSTS No. 3, the CPA requests detailed cost breakdowns. Further discussions reveal that the client inadvertently included some non-R&D overhead in the claimed R&D costs.
• Rectifying Estimates: Under SSTS No. 4, the CPA adjusts the flawed estimate, ensuring that overhead not directly tied to experimentation is excluded from the calculation.
• Substantiation: The returns must reflect the correct R&D cost figure that can be substantiated by payroll records and vendor invoices. Complying with SSTS No. 7, the CPA provides the client with thorough written advice outlining the changes, reasons, potential audit exposure, and recommended record-keeping practices for future years.

By following SSTS guidelines, the CPA has acted ethically, documented efforts, and mitigated the risk of an underreporting penalty or future reputational harm.

Real-World Case Studies and Insights

Below are two concise case studies illustrating how SSTS can influence tax practice:

1. Case Study #1: Individual Tax Return
   • Scenario: A CPA preparing an individual client’s tax return encounters unclear stock basis information for assets sold during the year.
   • SSTS Guidance: Under SSTS No. 3, consistently reliant on client-supplied data, the CPA must inquire further if details appear incomplete or contradictory. Because accurate basis data significantly affects capital gains or losses, the CPA cannot simply accept the ambiguous figures.
   • Outcome: After consulting with the client and examining brokerage statements, the CPA revises the basis figures. As required by SSTS No. 1, the CPA ensures that capital gains are calculated with a reasonable basis for supporting documentation.

2. Case Study #2: Knowledge of Error in a Prior Partnership Tax Return
   • Scenario: A CPA notices that a prior-year partnership tax return erroneously omitted substantial guaranteed payments to partners, thereby underreporting partnership income.
   • SSTS Guidance: SSTS No. 6 compels the CPA to inform the client of the error and advise filing an amended return.
   • Outcome: The client decides to promptly correct the filing. Conforming with SSTS, the CPA documents communications with the client and ensures disclosure on the amended return, thus reducing potential penalties and interest.

Best Practices for Implementing SSTS

• Maintain a Written Policy Manual: Clearly outlining firm policies that mirror SSTS helps train staff and reduce errors.
• Conduct Regular Training: Frequent updates ensure every staff member understands new legislation or administrative rulings that might affect tax positions.
• Use Checklists and Workflow Tools: Standardized checklists can help confirm whether each SSTS requirement (e.g., verifying estimates, investigating inconsistent details) has been satisfied.
• Document Thoroughly: In the event of an IRS audit or inquiry by the state board of accountancy, documentation can prove that the CPA adhered to professional guidelines.
• Engage in Peer Review: Monitoring internal compliance with SSTS fosters a culture of consistent, high-quality practice.

Common Pitfalls and Challenges

• Overreliance on Client Representations: While SSTS No. 3 permits reliance on client data, ignoring obvious red flags or failing to address glaring inconsistencies can lead to ethical violations and liability exposure.
• Weak Documentation: A CPA who does not keep adequate records of significant judgments or negotiations with clients may struggle to demonstrate compliance with SSTS under scrutiny.
• Neglecting Disclosure Requirements: Some positions require specialized forms or schedules. Forgetting to disclose a potentially aggressive position that falls below the realistic-possibility threshold can trigger preparer penalties.
• Failure to Update Prior Positions: Changes in legal interpretations or facts can alter a previously correct position. Failing to adapt or re-evaluate tax strategies as outlined in SSTS No. 5 can undermine accuracy and compliance.

Interplay with Circular 230 and the AICPA Code of Professional Conduct

As highlighted in Section 3.1, the IRS’s Circular 230 outlines rules for “practitioners” (tax preparers, attorneys, enrolled agents, etc.) practicing before the IRS. While SSTS provides a more detailed reference specifically targeting CPAs, both sets of standards promote accurate tax reporting and ethical behavior. Additionally, the AICPA Code of Professional Conduct affirms these ideals by holding CPAs to overarching principles such as independence, integrity, objectivity, and due care. When SSTS, Circular 230, and the Code of Professional Conduct are combined, tax professionals gain comprehensive guidance for a wide spectrum of scenarios and complexities.

Visualizing the SSTS Compliance Workflow

Below is a Mermaid diagram illustrating a simplified approach to applying SSTS in tax practice:

    flowchart LR
	    A["Gather Client Information"] --> B["Evaluate Consistency <br/> & Credibility (SSTS No. 3)"]
	    B --> C["Assess Tax Position <br/> Probability (SSTS No. 1)"]
	    C --> D["Disclose if <br/> Required (SSTS No. 1)"]
	    D --> E["Address Estimates <br/> (SSTS No. 4)"]
	    E --> F["Verify Prior <br/> Positions (SSTS No. 5)"]
	    F --> G["Check for <br/> Errors (SSTS No. 6)"]
	    G --> H["Provide Advice <br/> (SSTS No. 7)"]
	    H --> I["Finalize & Submit <br/> Return"]

• Gather Client Information (Node A): Obtain all relevant data before starting the return (e.g., forms, receipts, prior statements).
• Evaluate Consistency & Credibility (Node B): Investigate conflicts or discrepancies that emerge.
• Assess Tax Position Probability (Node C): Determine whether the position has a realistic possibility or meets other required thresholds.
• Disclose if Required (Node D): Fulfill mandatory disclosures for cautious or potentially aggressive positions.
• Address Estimates (Node E): Ensure that the client’s estimates are reasonable and properly documented.
• Verify Prior Positions (Node F): Check any previously taken positions; adapt if new facts or rulings apply.
• Check for Errors (Node G): Identify and recommend corrections for discovered errors, consistent with SSTS No. 6.
• Provide Advice (Node H): Communicate findings, assumptions, and potential risks to the client.
• Finalize & Submit Return (Node I): Confirm that all SSTS requirements are met before filing.

Future Trends and Considerations

Tax legislation is continuously evolving, and so too are the professional standards that govern CPAs. Artificial intelligence tools, data analytics, and digital record-keeping will likely play a larger role in verifying estimates and identifying inconsistencies. CPAs need to stay vigilant in applying SSTS to these emerging technologies, ensuring that reliance on data-driven tools aligns with professional judgment and ethical obligations.

References and Further Reading

• AICPA Professional Standards – Relevant sections on the SSTS, available from the AICPA website.
• IRS Circular 230 – Key regulations for tax practitioners: https://www.irs.gov/tax-professionals/circular-230.
• AICPA Code of Professional Conduct – Overall ethical principles that align with SSTS.
• Treasury Department Circular 230 – Outlined in detail under Section 3.1 of this guide.
• Tax Court Opinions – Real-world precedents often shape the practical application of SSTS.

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