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Doing the Right Thing…When Tax Ethics Get Murky

Dictionary_definition_ethicsI often get phone calls from members who are troubled by a professional ethics issue. “Ed, I have a conflict with a client; I don’t trust him.” Or, “I just engaged with a new client and I suspect the old accountant of doing something wrong; should I turn her in?”  The scenarios change but in the end, they always ask: “What should I do?”  And I always tell them: “I can’t tell you what to do!”  Really, it comes down to a matter of ethics and who am I to tell someone how to behave?

Over the years, while teaching classes on subjects like the AICPA’s enforceable tax ethics, the Statements on Standards for Tax Services, or the Internal Revenue Services’ Circular 230, I often ask the participants to define ethics.  “Guided by a code of conduct,”  “acting with integrity,” “having a moral code,” “moral principles that govern a person’s behavior,” or “living your life with high values” are examples of what I’ve heard.  The definition that resonates best with me is “doing the right thing.” 

And that’s why I tell people I can’t tell them what to do; within the framework of the actual ethical guidance, “doing the right thing” for me may not be the right thing for someone else.  Now I don’t leave people hanging; I give them information about the rules, for example, the SSTSs and the Code of Conduct, ask them questions, suggest various alternatives, and try to help them formulate an answer that makes sense for them.  It’s still not easy.

What do you do when the ethical rules say one thing but your conscience says another?  Standard No. 6 under the SSTSs prohibits a member from notifying a taxing authority regarding an error made by a client; instead, the member should advise on the proper course of client action.  If the client ignores the advice, the member should consider withdrawing from the situation and discontinuing further work with the client.  But I’ve had a few members tell me their moral construct said something else - that they were so repulsed by what the client had done and the client’s refusal to correct the situation - that they were going to turn the client in.

In some cases, there is no guidance and making a decision can be even harder– turning in another CPA, for example.   A few years ago, a CPA was disciplined under the SSTSs for violating the Standard No. 3 due diligence rules. A client had a Form 1099-R (pension plan distribution) that indicated a large taxable distribution but told the CPA that it was not taxable; the CPA left it off the return. Guess who turned him in?  No, it was not the client; it was another CPA.

Here’s what I find intriguing about that story. When I ask CPA audiences whether they would turn in another CPA, the answer is almost universally no.  But when I ask the same question of accounting students, the answer is almost universally yes!  “Well, what if you see another student cheating on a test?” I ask them.  “Oh no, you can’t turn them in!!” 

Does any of this make sense?

The students explained:  The cheating CPA hurts the profession but the cheating student only hurts him or herself.  Of course, there’s a lot more to this but in the end, you are the only person who understands what “doing the right thing” means for you.   

My suggestion: First make sure you know what the guidance says.  If you’re not sure what to do or why the rules say what they do, give me a call and we can talk about it.    

Edward S. Karl, CPA, Vice President of Taxation, American Institute of CPAs.

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