How to Comply with the New SSTSs

William Stromsem, CPA, J.D., George Washington University School of Business


AICPA promulgated three new Statements on Standards for Tax Services (SSTS) covering data protection, reliance on tools and tax representation that became effective on January 1, 2024. Prior SSTSs were carried over and reorganized but contain no new requirements and will not be dealt with in this article, assuming that you already have policies in place to work with them. 


The new SSTSs do not have bright-line standards and mostly use flexible terms like reasonable efforts, due professional care, due diligence and professional judgment. (See prior article on SSTSs.) The SSTSs tend to use “should” instead of the more mandatory “must,” so the compliance is somewhat flexible and hedged. This should give comfort to CPAs in tax practice, and the SSTSs might be thought of as providing a defensible standard against regulatory sanctions and liability claims.


The new SSTS on data protection requires members to make “reasonable efforts to safeguard taxpayer data, including data transmitted or stored electronically” and consider “applicable privacy laws when collecting and storing data.” It does not require encryption or ask us to do any more than most practitioners are currently doing to protect taxpayer privacy. The new SSTS on reliance on tools requires only that members exercise professional care when using a tool, that members exercise “appropriate” professional judgment when using a tool, and that they “take reasonable steps to determine that the tools are appropriate for the intended purpose.” The new SSTS on representation requires that a practitioner determine that technical competence exists, follow applicable agency or court rules, act with integrity and professionalism, comply with applicable rules on timeliness of responses, consider confidentiality responsibilities for the taxpayer, suspend or withdraw from engagement if the case appears to be going into criminal issues, and review with the client the consequences of a proposed agreement with a tax authority.


Note that the AICPA standards reflect current external legislative, regulatory and judicial standards. AICPA would not want to set more lenient standards, misleading practitioners to believe that they were in compliance with external standards, and having the standards look weak to outside regulators and the public. AICPA would also not want to set more rigorous standards, placing a self-regulatory burden on members and placing them at a competitive disadvantage to non-CPA practitioners. So, in general, compliance with the SSTSs may help avoid sanctions by other regulators.   


The SSTSs are binding under the AICPA Code of Professional Conduct. You may be tempted to think that there are likely to be few disciplinary actions by AICPA with the new flexible standards and that in the rare instance of a successful action against a CPA, AICPA’s most extreme sanction is to expel you from the organization, with a major consequence being the loss of AICPA group-term life insurance. However, this ignores the fact that the IRS and state professional licensing authorities all review AICPA sanctions – if you are sanctioned by AICPA, you may also see an action brought by other regulators. AICPA disciplinary actions are published on its website, and IRS sanctions are published in the IRS Bulletin, with each regulatory body reviewing the work of the other, and with state licensing authorities often having the same standards also reviewing AICPA and IRS sanctions. If your IRS practice rights are terminated, your firm must choose between giving up IRS practice or terminating you because the IRS does not want a sanctioned CPA to be able to work indirectly through others in the firm. Violations can result in a loss of your job, your right to practice before the IRS, or your CPA license, as well as your valuable professional reputation. Another major concern with failing to comply with the SSTSs is that these standards are often used in malpractice claims that a CPA was not acting in accordance with professional standards. 


The issue, then, is how do we show compliance with these flexible standards. You do not have to get it right with the benefit of hindsight, but you do have to be prepared to show a reasonable effort to satisfy the requirements. Again, there are no bright lines, but there are several ways to evidence your efforts that may be helpful.


Training on Professional Standards, Including the New SSTSs 


A training session on the SSTSs will help your staff members to be aware of ethical issues and know how to exercise professional judgment and due professional care. The training might include some close calls, bringing a good discussion of current and better practices. This will help your associates and staff recognize when they are in an area where there are issues. Plus, it shows your firm’s effort to act in accordance with the standards. Be sure to keep a record of the training to be able to show your efforts.


Written Policies 


A firm might consider various policies to help support a claim of compliance with the SSTSs, such as:


  • A policy that requires employees to report possible professional standards issues in writing to a more senior professional in the firm, emphasizing to everyone that this is an important part of quality review. Resolution of the issue might provide a defense against penalties or liabilities by showing, for example, why a preparer decided that a position taken met the applicable IRS and SSTS standards (substantial authority for undisclosed positions, reasonable basis for disclosed positions, more-likely-than-not standard for tax shelters and realistic possibility of success for other issues where there is no regulatory standard). These are set in SSTS No. 1, which is the only bright-line standard in the SSTSs. Even these may be subject to different opinions as to the level of certainty for the position.
  • Consider using ethics compliance checklists whenever a sensitive issue arises. This analysis may help avoid problems and can show that the firm exercised professional judgment and due professional care in resolving an issue. This documentation may be helpful in a future claim of an ethics violation or a professional liability claim.
  • Ensure that everyone in the firm is aware of the importance of documentation to comply with the soft requirements of the SSTSs. Substantiation will help you recall your efforts when the issue arises during an IRS audit, a disciplinary action or a liability claim for failing to comply with professional standards. Regulatory sanctions and liability claims may arise years after the event; without records, it may be difficult to recall, let alone defend yourself.
  • Develop policies on the use of generative artificial intelligence tools. You might have a staff member who heavily uses ChatGPT for research, and you don’t even know it. Your firm might require a researcher to disclose the use of an AI tool and the specific tool used when it is a major source of a work product. This might be in an in-house cover memo that transmits the research.


Engagement Letters


Consider the need for engagement letters, particularly in client representation work. Although the SSTSs do not require engagement letters, they may help limit your exposure to unreasonable client expectations. The engagement letter should clearly state what is being done and what is not being done. This will help, for example, if a criminal issue arises in a controversy, and the CPA must withdraw from the engagement. Otherwise, the client may feel entitled to be reimbursed for the extra costs of bringing in a second professional.




The new SSTSs does not place any new specific requirements on CPAs—we are already expected to meet the requirements of the AICPA Code general standards (rule 1.300.001), IRC penalty provisions, IRS regulations, Circular 230, privacy protection law and other standards. However, practitioners should be prepared to show that they have complied with the SSTSs to protect against a penalty or lawsuit based on the practitioner allegedly failing to meet professional standards. It is not just complying with the standards, but it is being prepared to show your reasonable efforts to meet them. This can be done largely by training, firm policies that require documentation and engagement letters. Implementation of these procedures will help make compliance with ethical standards a routine part of your firm’s tax practice. 

D.C. Circuit Court Reverses U.S. Tax Court in Farhy Decision

By John Kelleher, CPA-Dallas


In April 2023, the U.S. Tax Court decided that the IRS did not have the authority to assess penalties under IRC Section 6038(b) because the IRS was not expressly authorized to do so, and such penalties may only be assessed by obtaining a judgement from a federal court. As background, Alon Farhy was assessed $60,000 in penalties in 2018 for failing to include Forms 5471 reporting his ownership in two controlled foreign corporations with his federal tax return for years 2003-2010.


The IRS appealed the case to the U.S. Court of Appeals in D.C. On May 3, 2024, the Court found that indeed the IRS does have the authority to administratively assess penalties despite the lack of specific language. The Tax Court, however, has indicated that it will abide by its decision and therefore is in contradiction of the U.S. Court of Appeals. Taxpayers outside of the D.C. district may wish to continue to challenge the assessment of IRC Section 6038(b) penalties in the U.S. Tax Court unless the U.S. Supreme Court otherwise decides to rule on the issue.


Circuit Reverses Farhy on Close Examination of Statute, Context | Tax Notes

Farhy v. Commissioner

A Review of IRS Notice 2024-35, Certain Required Minimum Distributions for 2024

By Rick Allen, CPA-East Texas


Notice 2024-35 is a detailed analysis and explanation of what the final regulations will say regarding required minimum distributions (RMDs) related to retirement accounts of decedents who died after 2019. The IRS seems to be giving taxpayers one more year of not taking RMDs without assessing an excise tax … that being 2024. So, taxpayers are protected if they did not take post death RMDs for 2021 (the first year they would have been required to take an RMD under the IRS interpretation), 2022, 2023 or 2024. 


It appears as if the relief will stop there. RMDs will be required to be made beginning in 2025. The notice seems to be silent about whether distributions which (in the IRS’ view) should have been made in 2021, 2022, 2023 or 2024 will need to all be made in 2025 or if the taxpayer can just begin taking normal RMDs in 2025.


The analysis is thorough, but I am unsure whether the IRS properly tied the RMD rules to the five-year rule (now changed to the 10-year rule) correctly.


I think TXCPA Federal Tax Policy Committee’s efforts in pushing back against the IRS regarding their late roll-out of the RMD rules bought taxpayers four years of free space not being required to take RMDs on inherited retirement accounts, and correspondingly, helped CPAs in working with these clients.


Taxpayers with illiquid retirement assets and other reasons to delay taking distributions have benefited by the delay and should be prepared to start taking RMDs in 2025. Texas CPAs should work to notify clients impacted by these rules accordingly.


Notice 2024-35: Relief with respect to certain required - KPMG United States

President Biden’s Energy Tax Proposals

William Stromsem, CPA, J.D.

George Washington School of Business


President Biden’s 2025 revenue proposals would eliminate fossil fuel tax preferences because they “distort markets by encouraging more investment in the fossil fuel sector than would occur under a neutral system. This market distortion is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of supporting a clean energy economy, reducing our reliance on oil and reducing greenhouse gas emissions.”


President Biden’s budget provides billions of dollars to support renewable energy development in a continuation of his climate change agenda. The renewable energy proposals were detailed in a FACT Sheet on March 11, 2024.


The Energy Tax Proposals


The Biden proposals would repeal the following oil and gas tax benefits after 2024:

  • the use of percentage depletion with respect to oil and gas wells;
  • the expensing of intangible drilling costs;
  • the expensing of exploration and development costs;
  • two-year amortization of geological and geophysical expenditures by independent producers, instead allowing amortization over the seven-year period used by major integrated oil companies;
  • capital gains treatment for royalties;
  • the deduction for costs paid or incurred for any qualified tertiary injectant used as part of a tertiary recovery method;
  • the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project;
  • the credit for oil and gas produced from marginal wells;
  • the exception to passive loss limitations provided to working interests in oil and natural gas properties;
  • percentage depletion for hard mineral fossil fuels;
  • the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels;
  • the Oil Spill Liability Trust Fund (OSTLF) and Superfund excise tax exemption for crude oil derived from bitumen and kerogenrich rock; and
  • accelerated amortization for air pollution control facilities.


The energy tax benefits repeal proposals are detailed in the Treasury Department's General Explanations of Administration's Fiscal Year 2025 Revenue Proposals, beginning at page 65.




These proposals may sound familiar because they were also floated at the beginning of the Obama administration but were dropped because of the need for energy independence in the face of conflicts in the Middle East. The Middle East is still in turmoil, and the need for energy independence continues. Also, most Americans support the continued use of fossil fuels and believe that we are far from being able to shift to renewable alternatives. Even President Biden, in his 2023 State of the Union Address, said we would still need oil for another decade, with many believing that this short time frame was just aspirational cheerleading by the President. 


The legislation is unlikely to be enacted now any more than during the Obama administration. Even if the Democrats win both the House and Senate in the fall elections, the Senate is likely to still be fairly evenly divided, with all Senators from energy-producing states joining Republicans in opposing the Biden proposals.     


President Biden’s Budget Proposal for Taxable Gain on Gifts and Bequests—Another Reason to Consider Lifetime Gifts Now

William Stromsem, CPA, J.D.

George Washington School of Business


President Biden’s budget proposal would require gain recognition on appreciated assets transferred by gift or bequest and would end the step up in basis on inherited assets and the deferral of gain on gifted appreciated assets. The Biden proposal would make death a realization event and would also expand this to make gifting a realization event for appreciated assets.


The Basics


The proposal would treat death as a realization event, taxing the gain on the difference between the decedent’s basis and the fair market value at the date of death. The tax would be paid in the decedent’s final tax return. Inheritors would receive assets with a basis that is stepped-up to the fair market value at the date of death.


The proposal would also treat gifting as a realization event with tax due when the property is gifted as if it had been sold by the donor rather than current law where the gain is deferred through carryover basis. The gain would be the difference between the fair market value at the date of the gift and the donor’s basis, and again, the recipient would get stepped-up basis.




The proposal is fairly developed with provisions that include:

  • There is a $5-million-per-donor gain exclusion on income taxes on appreciated property transferred by gift or bequest to the extent that the exclusion had not already been used by prior transfers. This is to make the proposal simpler and applicable only to higher-wealth individuals.
  • Gain is not taxed on items received by a surviving spouse with carryover basis that will result in gains when the surviving spouse transfers property during life or at death. This ends the partial step-up in basis at death for jointly held marital property.
  • A family-owned business would not be taxed if the heirs continue running the business. This allows the business to continue and avoids borrowing money or selling off assets to pay the taxes on the gain. Again, basis carries over.
  • The proposal does not contain any additional relief for family farms or businesses.
  • The proposal would allow the payments to be spread over up to 15 years when appreciated illiquid assets are inherited.
  • The proposal would not cover tangible personal property, avoiding some of the complexity of accounting for many assets for which the basis was never recorded.
  • There’s an exemption for appreciated assets contributed to charities.
  • The principal residence gain exclusion ($500,000 married filing jointly or $250,000 other filers) would continue.
  • The proposal does not address capital losses on bequests or gifts of depreciated property.
  • The tax imposed on gains would be deductible on a decedent’s estate tax return.
  • The Treasury Secretary is authorized to develop safe harbor and other rules regarding basis where records are not available.




Nothing will likely happen in this election year with a Republican House, but we may hear a lot about inherited wealth and the need for wealth distribution in campaigns to lay the groundwork for possible legislation next year.  If the Democrats take over or retain control over both houses of Congress and the Presidency, legislation could move next year. The Biden proposal is structured to avoid most taxpayers' concerns by only applying it to the wealthy and providing various relief measures.




Those representing wealthy taxpayers should carefully watch the November elections and consider advising clients to be prepared to make gifts of appreciated property by year-end. If the Democrats sweep, legislation next year could be made retroactive to the first day of the new Congress, and the Biden budget proposals would have it become effective for transfers after Dec. 31, 2124.  Gifts before the effective date of such legislation would allow for continued deferral through carryover basis.


Another reason to consider lifetime gifts for wealthier clients is that the larger unified credit offset that was enacted in the Tax Cuts and Jobs Act of 2017 will sunset at the end of 2025, reducing the offset amount from its current level of $13.61 million per donor to the inflation-adjusted from before the increase of approximately $6.5 million beginning in 2026. Legislation could extend the higher credit amount but will not be passed if the Democrats control either House of Congress or the Presidency.


(See the White House description of its budget proposal with the capital gains provisions beginning on page 79.)


OPR Says to De-CAFinate Your Old Client Authorizations

The IRS Office of Professional Responsibility (OPR) recently reminded Circular 230 practitioners to maintain an up-to-date list of your valid authorizations in the IRS’ Central Authorization File (CAF) Unit and routinely withdraw any client authorizations no longer needed.


Why withdraw old authorizations? Several provisions of Circular 230 implicate a practitioner’s obligation to client authorizations and a responsibility to safeguard taxpayer data. If an authorization is listed as active in the CAF, the possibility exists that a cybercriminal could misuse it to gain access to valuable taxpayer information. You can prevent that unnecessary connection and risk.


There is no fixed form for withdrawing a CAF, but it must be done in writing and include all relative data. OPR says the easiest way is to write “WITHDRAW” across the top of the first page of a copy of the Form 2848, Power of Attorney and Declaration of Representation, with the current signature and date (see instructions).


You can also request a CAF77 report for a printout or electronic copy of current authorizations. See Freedom of Information Act's sample CAF client listing request letter. Edit and return your list per the instructions.


If you link your CAF numbers to your Tax Pro Account, you can manage all active authorizations in a more efficient and secure manner.


De-CAFinating Your Client Authorizations—Practice Good Records Hygiene by Filing a FOIA Request for a CAF77 Report and Withdrawing Unneeded Authorizations (

IRS Commissioner to Answer to Ways & Means on IRS Backdating Forms

By Christi Mondrik, J.D., CPA-Austin


The House Ways and Means Committee Chair Jason Smith, and Oversight Subcommittee Chair David Schweikert issued a letter to IRS Commissioner Daniel Werfel on Feb. 27, 2024, questioning the IRS’ response to the U.S. Tax Court’s decision in LakePoint Land II LLC v. Comm’r, T.C. Memo 2023-111, (Aug. 29, 2023). In its decision, the tax court sanctioned IRS counsel for failing to alert the court it had backdated penalty approval documents asserting penalties – a penalty lead sheet – against a partnership in a conservation easement. The court found it had relied upon a false declaration and a backdated document when it discovered different versions of a lead sheet, one of which was signed in February 2017 but backdated to July 2016. The court found the actions of the revenue agent and respondent’s counsel “to be in bad faith and to have multiplied the proceedings in this case unreasonably and vexatiously.” The court imposed sanctions against the IRS but declined to award costs and fees to the petitioner.


IRS Satisfies Penalty Approval Requirement in Easement Case | Tax Notes

IRS Backdating Case Nears an End: Agency Settlement Explained (

IRS Direct File Program Comes to Texas

William Stromsem, CPA, J.D., George Washington University School of Business


The Inflation Reduction Act of 2022 directed the IRS to explore a direct filing program and for 2023, the IRS started a pilot program for individuals in Texas and 12 other states. The pilot program is limited to certain types of income, deductions and credits, and is aimed at more average taxpayers who are generally not our client base. IRS Direct File will affect return preparation software sellers, but it will not likely affect our practices for the next few years. However, it is worth noting as we look towards the future. 


IRS Direct File is an online program that works like most commercial return preparation software and walks the user step-by-step through the return process, asking questions and inviting input of identifying information, W-2s and certain other information returns. Direct filers have access to IRS employees who provide dedicated Direct-File customer support in both English and Spanish. When the data input is complete, the program shows a summary of the return and resulting taxes; the return is e-filed with receipts for the submission and when the IRS accepts the return. 


The types of income, deductions and credits covered by the program are limited:

  • Income—W-2 wages, SSA-1099 for Social Security, 1099-G for unemployment compensation and 1099-INT for interest income of $1,500 or less (not business income or income from the gig economy);
  • Deductions—standard deduction (not itemized deductions), student loan interest and educator expenses; and
  • Credits—earned income credit, child tax credit, credit for other dependents, but not the child and dependent care, saver’s or premium tax credits.


Most of our clients have tax issues that are not covered by the pilot program and in any case, they likely want professional assistance and will not want to figure out how to use the online program. Some may not entirely trust an IRS return preparation program. 


You may want to provide information on this program to non-clients with simple returns that you do not want to undertake.


You may also want to watch the program. It is likely to be expanded in future years – likely augmented by artificial intelligence – so this program bears watching. 


A Closer Look at the IRS Direct File Pilot | Internal Revenue Service

Hold Your Horses

By Janet C. Hagy, CPA-Austin


It looks like tax season may get delayed (current IRS funding runs out March 7) and even more complicated due to the pending legislation H.R.7024, Tax Relief for American Families and Workers Act of 2024. There are two provisions in the bill that would be potentially retroactive to 2023. On the table are the extension of deductibility of Section 174 domestic research and development (R&D) expenses and the extension of 100% bonus depreciation deduction, through Dec. 31, 2025.


With these potential changes to the 2023 rules, requesting extensions of time to file returns for taxpayers who might benefit from these changes should be considered. Of course, that brings the correct amount of tax to pay by the due date into question. If the legislation fails to pass and taxpayers base their extension estimates on taking these extra deductions, tax could be underpaid with resulting penalties and interest.


R&D expenses are an either/or deduction based on whether we follow current law or bank on the legislation passing.


We do have some ammunition to consider regarding depreciation deductions. Bonus depreciation is not limited by net income. This made it more desirable than taking a Section 179 deduction. But whether the legislation passes or not, combining the two types of accelerated depreciation deductions in a tax year may be advantageous for many clients.


Here is a recap of what depreciation limits we currently have for 2023.


Under Section 168(k), property eligible for bonus depreciation gets a deduction of 80% of cost with the remaining 20% depreciated over the remaining life of the asset. The deduction does not phase out and it is not limited to net income, thereby creating possible net deductible losses.


Section 179 is limited to $1.16 million and phases out between $2.89 and $4.05 million of investment. Section 179 is also limited by net income and cannot create a loss. More asset classes are eligible for Section 179 depreciation, such as HVAC and roofs on commercial business property. Section 179 depreciation carryovers are also 100% deductible in the subsequent year subject to the net income limitation.


Basis limitations and state law differences must also be considered in determining the tax effect of depreciation deductions.


Since 100% bonus depreciation became an option, Section 179 has not been utilized as frequently. But with the 20% haircut of bonus depreciation and the extended period for depreciation of this remainder, electing Section 179 may be a better alternative. Even if the client cannot use all the Section 179 amount, the carryover could potentially be used in full in the subsequent year versus depreciating the 20% haircut over the remaining life.


Claiming bonus depreciation on some assets and Section 179 on others allows us to dial in the deduction that creates the best tax option for the client. Very small businesses may not want to show a big loss they cannot use in the current year or that negates the benefit of certain individual tax credits. For example, the unusual purchase of a large piece of equipment may create a better tax benefit over time by claiming a lesser percentage of the cost with a Section 179 deduction, rather than the fixed 80% bonus depreciation deduction.


Be sure to review the restrictions for electing Section 179. In addition to net income, basis and state limitations, certain entities like estate and trusts cannot make the election. Also, passive investors in a trade or business cannot deduct Section 179 expenses even if it is allocated to them on their Form K-1. 


Hopefully, Congress will finalize the legislation soon. No matter what the outcome, more professional time is going to be spent evaluating depreciation options this tax season.


Tax Expert: Timing of Tax Deal Bill May Impact Taxpayer Decision on When to File (