Ethics in tax resolution: balancing client advocacy and legal compliance

CPAs specializing in tax resolution often walk a fine line between advocating for clients and adhering to legal and ethical guidelines. Given the complexities of IRS regulations and the high-stakes nature of tax resolution, ethical dilemmas are common. These situations emphasize the delicate balance CPAs must strike between zealously representing clients and upholding their moral and legal obligations. The AICPA’s Code of Professional Conduct provides a framework for addressing common ethical dilemmas in tax resolution and maintaining integrity.  

Navigating common ethical dilemmas in tax resolution 

One frequent issue in tax resolution involves unreported income. It’s not uncommon for clients to believe that income not reported on a 1099 form is exempt from taxation. For example, some clients may assume that cash income doesn’t count if the IRS isn’t immediately aware of it. As one CPA likes to say, “I don’t look good in stripes, and neither do my clients.” The AICPA’s integrity principle mandates honesty in these situations. Educating clients about their obligations protects them legally and reinforces the public interest principle, which fosters trust between the profession and the public. 

Conflicts of interest: identifying and resolving them ethically

Conflicts of interest are common in tax resolution, particularly when dealing with married couples or business partners. A typical example involves a couple whose spouse owes a significant amount to the IRS while the other has sufficient withholding to cover their liability. This can create a conflict, especially in divorce situations or where assets are shared. The AICPA emphasizes objectivity and independence in these cases, requiring CPAs to disclose any potential conflicts to all parties. In some cases, stepping away may be necessary to avoid compromising independence. 

Clients also are tempted to suggest moving assets to a spouse’s name to avoid IRS scrutiny. One client, for instance, considered selling property and depositing the proceeds in a spouse’s account to avoid reporting it in an offer in compromise. This is a classic case of fraudulent conveyance, and it is the CPA’s duty to explain the severe penalties involved. Upholding due care means understanding these legal ramifications and guiding clients away from potentially harmful actions. 

Transparency and confidentiality: balancing ethical priorities 

Transparency is critical in tax resolution. Clients must understand their options and the potential outcomes of different strategies. Whether negotiating an OIC or setting up a payment plan, CPAs must ensure clients are presented with a realistic picture of what the IRS will likely accept. At the same time, protecting client confidentiality is essential. CPAs with access to sensitive financial information are ethically bound to maintain confidentiality unless disclosure is required by law. 

In one case, a client revealed they had an unreported gold bar and wished to exclude it from IRS submissions. The CPA refused to assist despite the client’s insistence, knowing that concealing assets violates ethical standards. Assisting clients in submitting inaccurate financial information undermines the profession’s integrity and carries severe legal consequences. 

AICPA guidelines and their practical application 

The AICPA’s Code of Professional Conduct is built on six principles: responsibilities, public interest, integrity, objectivity and independence, due care, and scope and nature of services. While these principles apply broadly across the profession, tax resolution requires nuanced application. 

For example, due care requires CPAs to stay informed about IRS regulations and navigate complex tax laws effectively. When advising clients on whether to file jointly or separately for back taxes, CPAs must weigh the impact on both parties, especially in divorce scenarios or where significant assets are involved. Ensuring objectivity in these cases is crucial for providing unbiased advice. 

The long-term benefits of ethical decision-making

Ethical missteps in tax resolution can have far-reaching consequences. Violations of IRS rules or involvement in fraudulent schemes can result in fines, loss of licensure, or even criminal charges. More importantly, ethical breaches damage the trust that clients, the IRS and the public place in CPAs. 

Adhering to ethical standards fosters trust and builds long-term client relationships. Strong reputations with clients and IRS agents often lead to smoother negotiations and better outcomes. Upholding these standards is essential for sustaining a successful, reputable practice. In tax resolution, where the intersection of ethics and advocacy is particularly challenging, CPAs must remain committed to the AICPA’s Code of Professional Conduct. By balancing transparency, managing conflicts of interest, and maintaining the highest standards of integrity, CPAs can help clients resolve tax issues ethically and effectively, safeguarding their own reputations and public trust in the profession.