REG 5
Read page 17 for items subject to sanction
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officers cannot have ANY improper influence on the conduct of audits
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Primary Authoritative Sources
1) Applicable Provisions of the IRC and the statutory provisions 2) Proposed, temporary, and final regulations construing such statutes 3) Revenue rulings and revenue procedures, tax treaties and regulations thereunder, and US Treasury Department and other official explanations of such treaties 4) Court Cases
Federal Legislation of tax legislation process
1) Ways and Means Committee- HOR 2) Voted on and approved by full house 3) Senate finance committee 4) Full Senate 5) Difference resolved by joint conference committee 6) Compromise bill voted on by both the full house and senate 7) President signs or vetoes in total the bill 8) if vetoed, can be voted on by 2/3 of both house and senate
Penalties state board can invoke
1) suspension or revocation of license 2) Monetary fine 3) Reprimand or censure 4) Probation 5) additional CPE
Notice of deficiency
90 day notice Needed to go to tax court
Reasonable Basis
> 20% tax position upheld Relatively high standard of tax reporting; the standard is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable charm
Substantial tax authority
>33% but <50% Less stringent than the more likely than not standard
Unreasonable position of tax return preparer
A position will be deemed unreasonable unless substantial authority for the position (whether or not the position is disclosed) and the position does not involve either a tax shelter or a reportable transaction or (>33% or <50%) 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 (>20% chance) If there is tax shelter involved 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" (Evasion or avoidance)
Not frivolous
A practitioner cannot advise a client to take a tax return position unless the position is not frivolous
Tax Shelter defintion
A tax shelter is 1) any partnership or other entity 2) Investment plan or arrangement 3) other plan or arrangement if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax
Covered Opinion definition
ANY written or electronic advice by a practitioner concerning one or more federal tax issues and arising from: a LISTED TRANSACTION or ARRANGEMENT THE PRINCIPLE PURPOSE OF WHICH IS A FEDERAL TAX AVOIDANCE OR EVASION (tax shelter) or RELIANCE OPINION OR MARKETED OPINION
Tax return preparer=
ANYONE who prepares a tax return for compensation
Who must registered firms report to at the client
AUDIT COMMITTEE
Referral agreements
Any compensation agreement between the promoter, if any, and the practitioner must be disclosed OK
Criminal penalties for securities fraud
Any individual who knowingly executes, or attempts to execute, securities fraud will be fined, imprisoned but not for more than 25 years or both
Appeals division
Appeals division is authorized to settle all tax disputes based on the hazards of litigation. Technical advice memorandum Small cases division option Agreement in appeals-form 870 AD- normally considered binding on both parties If no agreement in appeals, TP can take the case to one of the 3 1) US tax court 2) US court of federal claims 3) US district court
Disclosure of audit committee financial expert
At least one member of AC must financial expert disclose existence of expert, not name or why there is no financial expert Serve as a resource for AC
Return of client records
At request of client, must return ALL client records but must maintain copies for 3 years
Each registered firm must adhere to the following auditing standards
Audit documentation (workpapers) must be maintained for 7 years- otherwise criminal penalties can be applied Provide a concurring or second review of each audit report describe in audit reports the scope of the testing of the issuer's internal control structure and procedures
Conflicts of interest with accounting firms and clients
Audit firm cannot have employed issuers CEO, CFO, Controller, or Chief Accounting Officer, or any person serving in an equivalent position, for a one year period after the audit
Auditor Independence and Audit partner rotation
Auditors can only provide tax services if they are pre-approved by the audit committee Cannot do any other types of functions Cannot audit their own work Audit partner rotation must occur every 5 years
PCAOB investigations and sanctions
CIVIL NOT CRIMINAL temporary suspension or permanent revocation of PCAOB revocation Monetary penalties Censure Extra CPE
Disciplinary actions by AICPA and State CPA societies
Can sanction their members- not revoke or suspend license Can be suspended or terminated without a hearing for 1) conviction of crime punishable for more than one year 2) conviction for willful failure to file a tax return 3) conviction for filing a false or fraudulent income tax return or aiding in the prep of a false or fraudulent income tax return of a client 4) suspension or revocation of a member's license
Requirements for written advice
Cannot give written federal tax advice if he or she bases the advice on the "unreasonable" factual or legal assumptions Unreasonably relies on statements or findings of others Does not consider all relevant facts the practitioner knows or should know takes into account the possibility that the tax return will not be audited
Best practices for tax advisors
Communicating with the client regarding the "terms of the engagement" Establishing the facts and arriving at a conclusion supported by the law and the facts Advising the client about the the importance of the conclusions reached (for example, whether the client will be able to avoid penalties) All members of firms are following procedures
Exceptions to disclosure of taxpayer information
Court order/subpoena allowable uses- prep of state or local tax return allowed for peer reviews, computer processing and administration of order OR Disclosure is allowed with client permission
Enhanced financial disclosure
Disclosures in periodic reports- quarterly or annually All material correcting adjustments identified by auditor should be reflected in the financial statements should also disclose all material off balance sheet transactions- contingent obligations, unconsolidated subsidiary relationships
Earned income credit
EIC requires that tax return preparers due diligence 1) eligibility checklists 2) computation worksheets 3) reasonable inquires to the taxpayers 4) record retention $500 line
Audit=
Examination of a return
Audit process IRS for returns
Federal tax system is a self assessed tax system Audits are required to ensure that voluntary tax system assessment is occurring
General rule about supporting documentation
GENERAL RULE: not required to obtain supporting documentation unless the preparer has reason to suspect the accuracy of the information provided business and travel related expenses
US Tax Court
Hears only tax cases (Unlike district court) Unique Taxpayers may litigate without paying tax in full 19 judges- travel to hear cases No jury trials, just judge Cannot be tax court until 90 day letter
Penalty for willful or reckless conduct
Higher than for penalty for negligence $5000 or 50% of income preparer derived with respect to income
Code of ethics must promote
Honest and ethical conduct full, fair, accurate and timely disclosures compliance with laws, rules and regulations
IRS disciplinary actions- Criminal
IRC provides for criminal penalties for any person who counsels or prepares a tax return in a fraudulent or false manner cannot be imprisoned for more than 3 years and not fined more than $100,000
Preliminary notice and administrative appeal request
If agreement cannot be reach at the revenue agent level, the taxpayer receives a copy of the agent's report and a 30 day notice with right to appeal
Conflict of interest provisions
Issuers are generally prohibited from making "personal loans" to directors or executive officers, unless the loan is made in the ordinary course of business
Joint Ethics Enforcement Program
JEEP Enforcement of codes of conduct by means of a single investigation and action Uniformity in the codes of conduct of the AICPA and state CPA societies
Corporate responsibility for financial reports
Management has responsibility CEO and CFO have to sign certain representations - reviewed report - do not contain untrue statements or omit MM - fairly present in all material respects - responsibility for internal controls over financial reporting- designed, evaluated for effectiveness - all significant deficiencies are reflected in financial statements - disclosure of ANY fraud regardless of materiality
Management assessment of Internal controls
Management is responsible for internal controls 10k and 10q must include an internal control report stating - management is responsible for establishing and maintaining an adequate internal control - assessment of effectiveness of internal controls Auditor must ATTEST to management's assessment of internal control
PCAOB
Must have 2 CPAs and 3 non CPAs on board subject to oversight by SEC - register public accounting firms - establish rules relating to the preparation of audit reports for issuers - conduct inspections, investigations, and disciplinary proceedings concerning registered public accounting firms
Record Retention for Tax Preparer
Must retain records for 3 years
Possible sanctions by state CPA societies or AICPA
NO MONETARY OR CRIMINAL Expulsion from the AICPA or state CPA society Suspension of membership in the AICPA or state CPA society Requirement the CPE course be taken as a remedial measure
US court of federal claims
Nation wide court Jurisdiction over most claims for money damages against the US, one type of which is tax refunds Taxpayer must pay disputed tax NO JURY TRIAL Follows decisions of federal court of appeals not geographic court of appeals
Negligence
Negligence is Ordinary Not fraud Fraud is willful and reckless Negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise authority and reasonable care in the preparation of the tax return. Negligence also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly.
Practitioner fees
Never charge an unconscionable fee but can charge a contingent fee
Reliance opinion
No guarantee type of covered opinion type of WRITTEN advice concluding at a confidence level of at least more likely than not (greater than 50 percent) likelihood that the significant federal tax issue would be resolved in the taxpayers favor- thus avoiding penalties
Limited Scope Opinions
OK May consider less than all the significant federal tax issues if: the practitioner and the taxpayer agree that both the scope and the opinion and the taxpayer's reliance on the opinion (for purposes of avoiding penalties) are limited to the issues addressed in the opinion
Formal Examination
Office Audit- Local Field Audit
Registration with PCAOB
Only a firm registered with PCAOB can audit SEC issuer
Penalty to preparer for understatement of taxpayer liability
Penalty equal to the greater of $1000 or 50% of the income the preparer received for tax preparation services Penalty will be imposed if: - understatement is due to unreasonable position - preparer had knowledge of the unreasonable position - or lacks reasonable basis
Aiding and Abetting Understatement of Tax Liability
Penalty is for ANYONE, not just tax return preparers. IRS has burden of proof to establish taxpayer or other person is liable for this civil penalty
Diligence of Accuracy
Practitioner must exercise due diligence in preparing returns and documents and accuracy and correctness of his or her representations to the IRS
Tax return preparer vs. Tax practitioner
Practitioner= an individual whom practices before the IRS aka attorneys, CPAs, enrolled agents, enrolled actuaries , and enrolled retirement plan agents
Solicitations
Practitioners may not use false or misleading advertising "Get a better result b/c...."
Burden of proof
Preponderance of the evidence Most litigation cases- party bringing case has the burden of proof Most civil cases- taxpayer has burden of proof but may shift to IRS if taxpayer introduces credible evidence
Disclosure of transactions involving management and principal stockholders
Principal stockholders- those owning more than 10 percent related party transactions
PCAOB of inspections
Public accounting firms must be inspected annually if they have more than 100 clients others must be inspected every 3 years
Selection of returns for audits
Ran through DIFS software- discrimination inventory function system finds returns most likely to contain errors and yield significant amounts of additional tax revenue upon audit Not disclosed criteria Evidence for: individuals with gross income over $100,000, SE individuals cash businesses
Requirements for a covered opinion
Reach or not reach a conclusion but state why practitioners opinion cannot be based upon unreasonable factual assumptions Must relate applicable law to the facts Must set forth the likelihood that the taxpayer will prevail the merits with respect to each significant federal tax issue. Opinion must reflect scope issues OPINION'S EVALUATION OF A SIGNIFCANT FEDERAL TAX ISSUES CANNOT TAKE INTO ACCOUNT THE POSSIBILITY THAT THE TAX RETURN WILL NOT BE AUDITED
Deductions that exceed the established norms
Red flag an individual's itemized deductions are in excess are in excess of norms established for certain income levels
Whistleblower protection
Reinstatement with same seniority status back pay with inters compensation for any special damages
Unresolved issues post audit
Revenue agent cannot settle an unresolved issue based on the probability of winning the case in court Questions involving facts can typically be settled with the revenue agent if not administrative appeals process begins
Enhanced review of periodic disclosures by issuers
SEC is required to review disclosures made by issuers in 10K regular and systematic basis SEC should consider the following: -material restatements - significant volatility - largest market capitalization - disparities in price to earnings ratios - significantly affect any material sector of economy
SOX- criminal penalties
SOX is a federal law Criminal penalties for altering documents
Sanctions Circular Rule 230
Secretary of the treasury or her or his delegate, after conducting a proceeding, may censure (publicly reprimand), suspend, or disbar any practitioner from practice before the IRS if the practitioner is 1) shown to be incompetent or disreputable 2) fails to comply with circular 230 3) intent to defraud willingly and knowingly misleads or threatens a client
Wrongful Disclosure and/or use of tax return information
Subject penalty for disclosure to 3rd party to solicit business and knowing or reckless disclosure of information
Failure to provide a completed copy of tax return
Tax return preparer is required to provide a copy of tax return or a copy of the refund claim
Reportable transaction
The term reportable transaction means any transaction with respect to which information is required to be included with a return or statement because such transaction is a type which the secretary of the US treasury department has determined as having a potential for either tax avoidance or tax evasion
Disciplinary power of state boards
Three broad categories of misconduct 1) misconduct while performing accounting services (negligence, fraud, and dishonesty) 2) Misconduct outside the scope of accounting services (intoxication from drugs or alcohol significantly impairing their ability) 3) Criminal conviction State board can conduct a formal investigation Not a criminal case- more likely than not Proof beyond a reasonable doubt is not required accountant is entitled to due process of law Adverse opinions are subject to judicial review
Failure to sign return or refund claim or furnishing TIN
Tprep will incur a fine for not signing return or not furnishing TIN
Marketed Opinion
Type of covered opinion Marketed opinion is advice that will be used to promote, market, or sell a partnership, investment plan or arrangement DOES NOT INCLUDE: written advice which is not about 1) listed transactions 2) any partnership or any other entity, plan, or arrangement the principle purpose of which is federal tax avoidance or evasion
Decisions of tax court
US tax court issues two types of decisions Regular Memorandum Small tax case decisions are published as Summary Opinions
Appeals from tax court
US tax court, is a national court, and its decisions (other than small tax cases) may be appealed to various US court of appeals Tax court will follow the court of appeals that has direct jurisdiction over the taxpayer in question
US District Court
Unique- Jury trial Hear all types of cases- not just tax district court has jurisdiction over the location in which the taxpayer lives or conducts business MUST FIRST PAY DISPUTED TAX AND THEN SUE IRS FOR REFUND One judge and jury trial is option Appeals made to court of appeals in the federal judicial circuit in which the district court is located
Information return discrepancy
W-2s and 1099s do not match the amount reported on return- audit may be triggered
Federal Court System
When taxpayer and the IRS cannot reach agreement on a tax matter using the admin appeals process (either with a revenue agent or with the appeals division) the dispute must be settled in the federal court system Taxpayer or IRS can initiate the process
Practitioner reliance upon client furnished information
YES Generally a practitioner who signs the tax return or other document may relay in good faith without verification" upon client furnished information Practitioner cannot ignore contradictory information Must make reasonable inquiries if TP information in questionable or incomplete
What is a listed transactions?
a reportable transaction (defined below) which is the same as, or substantially similar to, a transaction specifically identified by the secretary of the US treasury department as a tax avoidance situation
Negotiation of IRS refund check
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
AICPA Professional code of conduct
applies to all members of AICPA
Circular 230
applies to tax PRACTITIONERS attorneys CPAs Enrolled agents Enrolled actuaries enrolled retirement plan agents appraisers
IRS publications...
are not primary sources
SEC Civil Penalties
can revoke or censure any accountants right to practice before the SEC including right to sign documents required by the 1933 or 1934 act Can occur is: lack of qualifications lacks character unethical behavior willfully violated federal security laws convicted of felony May impose fines of $100,000 or $500,000 for a firm Can also issue cease and desist order
Knowledge of omission by a client
consider withdrawing if client does not rectify error Preparer does not have to notify IRS Must notify and advise taxpayer of consequences under tax law
Code of ethics for senior financial officers
disclose whether or not the issuer has adopted a code of conduct for senior officers If no code of conduct has been adopted, the issuer must disclose why
Tax evasion
efforts, by illegal means and methods, to not pay taxes ILLEGAL
Audit committee of issuers
helps to address the problems of inadequate board oversight directly responsible for the appointment, compensation, and oversight of the work of the public accounting firm Auditor reports directly to the audit committee Need financial expert because audit committee is responsible for resolving disputes between the auditor and management Audit committee members are to be members of the issuers board of directors but are to otherwise be independent aka no officers
Practice by former government employees, partners and associates Conflicts of interest
if an individual, while a government employee, "personally and substantially participated" in a particular matter involving specific parties, that individual can never represent or assist those parties with respect that particular matter Those with official responsibility but not personally and substantially participating- 2 years one whom participated in development- one year
After the IRS examination of return
if taxpayer and IRS agent reach agreement- no change report TP signs form 870 which is a waiver waives right to receive certain statutory notices and to petition the US tax court and waives the right to the appeal process form 870 normally closes case, but can be reopened and reexamined if there are additional deficiencies- like fraud
More likely than not standard
is met when there is a greater than 50 percent likelihood of a tax position being upheld by the court. More stringent than substantial authority standard
Forfeiture of certain bonuses and profits
issuer required to prepare an accounting restatement due to material non-compliance in this case- CEO and CFO may be required to reimburse company/issuer for: - bonuses or incentive-based or equity-based compensation - gains on sale
Tax avoidance
legal use and application of the tax laws and cases in order to reduce the amount of tax due LEGAL
IRS disciplinary actions- Civil
may prohibit accountant before the IRS may impose fines for various infractions
Competence to provide opinion and reliance on opinions of others
practitioner must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered are you an expert? practitioner may reasonably rely upon the opinion of another practitioner
Financial expert
qualifies through education and past experience Knowledge: GAAP & experience with IC
Review of returns for mathematical errors
reviewed immediately upon submission for mathematical accuracy and check that social security numbers and signatures are not missing If math is wrong- taxpayer sent revised computation or new tax bill if additional tax is still due or refund check No meeting will be required- considered a direct correspondence audit
State board of accountancy
sole licensing and revoking power for certified public accountants because only entity that can license a CPA also the only entity with the power to suspend or revoke a license
Willful or reckless conduct and understatement of taxpayer liability
willful attempt to understate liability reckless or intentional disregard No penalty if error in calculation is made in good faith
