More tax agents risking sanctions on reasonable care

Practitioners filing in tax returns containing deliberately false claims from clients risk harsh penalties.

The ATO has its sights set on tax agents who contravene the Code of Professional Conduct by failing to take reasonable care in the correct application of taxation laws to their clients’ circumstances. Here’s what you need to consider.

The framework around the obligations of registered tax practitioners to take “reasonable care” when preparing returns for clients is an important element of the Code of Professional Conduct (Code) under the Tax Agent Services Act 2009 (TASA).

However, it is evident many practitioners are not properly following the Code with the exercise of reasonable care. According to the Australian Taxation Office (ATO), instead of declining, the error rate in agent-prepared returns for individual taxpayers is continuing to rise.

This is particularly the case in claims for work-related expenses and tax deductions for property rentals, which remain areas of keen focus for the ATO. 

Practitioners found to have made simple errors in preparing and lodging tax returns can expect a caution, but those filing returns containing deliberately false claims from clients risk harsh penalties.

The issue raises the question of what, exactly, constitutes reasonable care.

There is no set formula, but the standard generally is that of a competent person having the knowledge, skills, qualifications, and experience expected from a registered practitioner.

More specific obligations can be found in Code Items 9 and 10.

Code Item 9 requires registered agents to take reasonable care in ascertaining a client’s state of affairs to the extent that is relevant to a statement they are making or a “thing” (e.g. instituting an appeal against a decision or objection, providing advice about taxation law, or lodging a private ruling request or amendment) they are doing on behalf of the client. 

While it does not require practitioners to audit, examine or review books and records or other source documents to independently verify the accuracy of information supplied by clients, practitioners cannot automatically discharge their responsibility by simply accepting what they’ve been told. 

Exercising professional judgement on reasonable care

“Where a statement provided by a client seems credible, consistent [for existing clients] and you have no reason to doubt it, you can accept it without further checking,” says Tax Practitioners Board (TPB) secretary/chief executive officer Michael O’Neill.

“In these circumstances, you have exercised your professional judgement based on the information previously provided by the client and the nature of the client and made a decision that further checking is not required.

“On the other hand, if the information doesn’t seem credible, appears to be inconsistent with previous claims or statements or other information you know about the client, you would need to make further enquiries.”

O’Neill says in cases where information supplied by a client doesn’t seem to add up, taking reasonable care necessitates further questioning, a close examination of their records, or both.

ATO assistant commissioner intermediaries and lodgement, Colin Walker, adds that the agency expects practitioners to have a high standard of professionalism and exercise appropriate governance in their practice.

“They would have appropriate supervision of staff, know what is being prepared and that when they are talking to clients, they would be expected to ask reasonable and direct questions to understand the client’s tax position,” Walker says.

“We would expect them to be looking for relevant documentation that supports claims and [other statements] their clients make. We don’t expect them to audit, but I certainly think a bit of healthy scepticism is an appropriate way forward.

Related article: Why professional scepticism is a crucial weapon in an auditor’s armoury

“If they feel a client is making a false claim, omitting income, or not being totally open with them, we expect them to highlight basic substantiation rules and how the law works, and to understand the significance of the declaration they as agents make when they complete a return.”

He emphasises the imperatives that practitioners not lodge claims they know through their own legal experience and knowledge to be disallowed, nor facilitate a client in making a false claim.

Applying taxation laws correctly

Code Item 10 states practitioners must take “reasonable care to ensure that taxation laws are applied correctly to the circumstances in relation to which the registered agent is providing advice to a client”.

This may include referring to legislation and related materials, relevant case law, rulings and determinations issued by the ATO, the commissioner’s instructions in documents such as income tax returns, BAS returns, fact sheets and practice statements, and information published or provided by professional associations or other regulators.

Walker says that in his experience the majority of practitioners do take reasonable care. 

“But we certainly see errors from the minor all the way through to the top end – that very small number of agents who are quite egregious, push boundaries and make false claims.”

“We deal very strongly with them but are more likely to work with those making simple mistakes to highlight the kinds of things they are getting wrong and assist them to change the way they operate so that they don’t [continue to] get them wrong.”

A summary by the TPB of reasonable care and the responsibilities of tax practitioners can be read here.

Want to learn more? Check out these further resources on the CPA Australia website.

Webinar recording: Understanding the TASA Code of Professional Conduct
Webinar recording: Client verification and engagement


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