CPA Regulation: Ethics and Responsibilities Part 2

IRS Section 6713 and 7216: Wrongful Disclosure and/or Use of Tax Return Information, Exceptions

Exceptions to the penalty and/or fine for wrongful disclosure and/or use of tax return information include: a. allowable disclosures (disclosures allowed by any provision of the IRC and disclosures pursuant to a court order). b. allowable uses (preparation of state and local tax returns and preparation of declaration of estimated tax). c. disclosures and uses permitted by US Treasury regulations (these regulations permit disclosure and use for quality and peer reviews, computer processing, and administrative orders).

IRS Section 6695(g)

Failure to be diligent in determining a client's eligibility for the earned income tax credit

IRC Section 6695 and 6701

Failure to provide a completed copy of tax return

IRC Section 6695: Negotiation of IRS Refund Check

Generally, any tax return preparer who endorses or otherwise negotiates an IRS refund check issued to a taxpayer other than the tax return preparer shall pay a penalty of $500 with respect to each such check. This rule does not apply to banks if the bank deposits into the taxpayer's account at such bank the full amount of the IRS refund check.

IRS Section 6713 and 7216: Wrongful Disclosure and/or Use of Tax Return Information, General Rule

Generally, each tax return preparer who either (i) discloses information furnished to the preparer; or (ii) uses the information for any purpose other than to prepare a tax return shall pay a civil penalty of $250 for each such disclosure or use (maximum annual penalty shall not exceed $10,000) and be guilty of a misdemeanor and fined not more than $1,000 and/or be imprisoned for not more than 1 year, together with the costs of prosecution. (Note that a client may also bring a civil suit against the tax preparer.) A taxpayer shall be subject to additional penalties for: a. disclosure to enable a third party to solicit business; and b. knowing or reckless disclosure of information

IRC Section 6694(b)

Penalty for Understatement of Taxpayer Liability Due to Willful or Reckless Conduct of Tax Return Preparer

IRC Section 6694(a)

Understatement of Taxpayer's Liability Due to an Unreasonable Position by the Tax Return Preparer

IRS Form 8275-R

Used to disclose items and positions that are contrary to US Treasury regulations

IRS Form 8275

Used to disclose items and positions that are not contrary to US Treasury regulations.

Willful or Reckless conduct

Willful or Reckless conduct is conduct that is either: a. a willful attempt to understate the tax liability; or b. a reckless or intentional disregard of tax rules and regulations. (Note that the tax preparers declaration on the tax return indicates that the information contained on the return is true, correct, and complete to the best of the tax preparer's knowledge and belief.)

Exceptions to Client Consent Requirement

1. response to subpoena or summons, or to comply with law or regulation 2. peer review 3. Defense of disciplinary action 4. Disclosures required by other IRC provisions, Disclosures to IRS. Disclosures for preparation of taxpayers return; updating software, disclosures in the same office/firm, disclosures to subcontractors (restrictions on foreign firms). Disclosures to related taxpayers, to lawyers for legal advise, to fiduciaries for the taxpayer, to receive payment for tax preparation services, to record a crime, due to your disability or death 5. Use of information to prepare state & local returns or to respond to state and local audits 6. Record retention 7. Mailing lists for future years 8. Statistical compilations

Penalty for Understatement of Taxpayer Liability Due to Willful or Reckless Conduct of Tax Return Preparer

A compensated preparer is liable for the penalty if the preparer's understatement of taxpayer liability on a return or claim for refund is due to the preparer's negligent or intentional disregard of rules and regulations.

AICPA Rule 301

A member in public practice shall not disclose any confidential client information without specific consent of the client.

Penalty for Understatement of Taxpayer Liability Due to Unreasonable Position

A penalty equal to the greater of $1,000 or 50% of the income the preparer received for tax preparation services may be imposed on the preparer if (a) a position is taken on the tax return that understates the liability if there is no reasonable belief that the position would be sustainable based on its merit (i.e. the understatement is due to an unreasonable position); (b) the preparer had knowledge or should have had known about the unreasonable position; (c) disclosure of the position was not made; and (d) the position lacks reasonable basis. If a reasonable basis for the understatement exists and the preparer acts in good faith, the penalty will not apply.

Unreasonable Position

A position is deemed unreasonable unless: a. there is substantial authority for the position (whether or not the position is disclosed), and the person does not involve either a tax shelter or a reportable transaction; or b. the position is disclosed, there is a reasonable basis for the position, and the position does not involve either a tax shelter or a reportable transaction; or c. with respect to a tax shelter or a reportable transaction, it is reasonable to believe that the position would more likely than not be sustained on its merits ("the more likely than not"" standard is more stringent than the "substantial authority" standard).

Willful or Reckless Conduct: Not always required to obtain supporting documentation

A preparer is not required to obtain supporting documentation unless the preparer has reason to suspect the accuracy of the information provided by the taxpayer. However, the preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.

Failure to Provide a Completed Copy of Tax Return

A tax preparer is required to provide to the tax payer a copy of the tax return or a copy of the refund claim no later than the time the preparer gives the completed return or claim. the penalty does not apply to the extent the failure is due to reasonable cause and not due to willful neglect and is $50 for each such failure (maximum penalty of $25,000 per calendar year).

IRS Section 6713 and 7216: Wrongful Disclosure and/or Use of Tax Return Information, Consent of Client

Confidential client information may be disclosed to any party if the client specifically consents to the release of information.

IRS Section 6695(g): Penalty

Each tax return preparer who fails to comply with the IRS' "due diligence" requirements set forth in the US Treasury regulations with respect to determining eligibility for, or the amount of, the earned income tax credit shall pay a penalty of $500 for each such failure.

Penalty for "Willful or Reckless" Conduct

If the understatement of liability is due to willful or reckless conduct, the preparer must pay a penalty equal to the greater of $5,000 or 50% of the income the preparer derived with respect to the tax return or refund claim. The penalty is reduced to the extent the preparer pays for the penalty for understatement of a taxpayer's liability to an unreasonable tax position by the taxpayer.

IRS Section 6695(g): Due Diligence Requirements

The due diligence requirements address (i) eligibility checklists; (ii) computation worksheets; (iii) reasonable inquiries to the taxpayer; and (iv) record retention. The penalty will not apply with respect to a particular return or claim if the tax return preparer can demonstrate that the preparer's normal office procedures are reasonably designed and routinely followed to ensure due diligence compliance and the failure to meet the due diligence requirements was isolated and inadvertent.

IRC Section 6695: Failure to Furnish (Indicate on return or claim) the Tax ID Number of the Tax Return Preparer

The penalty does not apply to the extent the failure is due to reasonable cause and not due to willful neglect and is $50 for each such failure (maximum of $25,000 per calendar year).

IRC Section 6695: Failure to sign Tax Return or refund Claim

The penalty does not apply to the extent the failure is due to reasonable cause and not due to willful neglect and is $50 for each such failure (maximum penalty of $25,000 per calendar year).

IRC Section 6702 and 6703(a): Aiding and Abetting Understatement of Taxpayer Liability

The penalty for aiding and abetting understatement of tax liability applies to any person, not just to tax return preparers. The IRS has the burden of proof to establish that any person is liable for this civil penalty. The penalty applies whether or not the understatement is with the knowledge or consent of the persons authorized or required to file the claim, affidavit, claim, or other document. The IRC imposes a civil penalty ($1,000 for all taxpayers except corporations and $10,000 for corporations) on any person/entity who: 1. aids, assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document 2. knows (or has reason to know) that such portion will be used in connection with any material matter arising under IRC; and 3. knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

IRC Sections 6695, 6107, 6060: Failure to Retain Records Properly

The tax preparer is required to keep, for the 3 years following the last day of the return period (the 12 month period beginning on July 1 of each year), either a copy of the return or claim or a listing of the name and ID of each taxpayer for whom the preparer prepared a return or claim. Failure to do so results in a penalty of $50 for each such failure (maximum penalty of $25,000 per return period). The penalty does not apply to the extent the failure is due to reasonable cause and not due to willful neglect.