Ethics & Responsibilities in Tax Practice
If a tax return preparer fails to endorse or if he/she negotiates a taxpayer's refund check (this gets tested a lot)
$540 per check (2020) - unlimited (this one gets tested a lot)
An accuracy-related penalty can be imposed on a taxpayer
if the underpayment of tax is attributable to negligence.
If a tax return preparer improperly uses or discloses return information
$250 find for each instance / up to $10,000 per year -if minor criminal offense, $1,000 max penalty or 1 year in prison, or both -if identity theft related, $1,000 each instance up to $50,000 per year
Circular 230 Section 10.28 Return of Client's Records
A practitioner is generally required to return any and all client records needed for the client to comply with tax obligations, although copies may be retained. A dispute over fees does not justify retention of client records. (although some states allow retention as a result of a dispute over fees)
Circular 230 Section 10.37 Requirements for Other Written Advice
A practitioner is prohibited from -giving written advice that is based on unreasonable assumptions -Unreasonably relies on representation, statements, findings, or agreements of the taxpayer or another -Does not consider all relevant information that is know, or should be knows -considers the possibility that the position or the return on which it is taken will not be audited or will be resolved through settlement
Circular 230 Section 10.29 Conflicting Interests
A practitioner may not represent a client before the IRS when there is a conflict of interest, such as when representation of one client would be adverse to another, or there is a risk that representation will be limited as a result of responsibilities to other clients or others. There are exceptions despite a conflict of interest: -It is reasonable for the practitioner to believe that representation will be competent and diligent -Representation is not prohibited by law -All clients affected waive the conflict of interest, giving a written informed consent
Circular 230 Section 10.8 Return Prep & Application of Rules to Other Individuals
A preparer tax identification number (PTIN) is required in order to prepare a tax return or claim for refund in exchange for compensation. Only attorneys, CPAs, EAs and registered tax return preparers may obtain PTINs
Circular 230 Section 10.31 Negotiation of Taxpayer Checks
A tax preparer may not endorse or otherwise negotiate a government check issued in relation to a federal tax liability
Circular 230 Section 10.34 Standards with Respect to Tax Returns & Documents, Affidavits & Other Papers
A tax return should not be filed with a tax position that lacks a reasonable basis; is an unreasonable position; or represents a willful attempt to understate the liability or constitutes an intentional disregard for rules or regulations. A tax practitioner may not advise a client or take a frivolous tax position on a document, affidavit or other paper submitted to the IRS. Nor may advise a client to submit if: -it is intended to delay or impede administration of federal tax laws -It is frivolous -It contains or omits information indicating an intentional disregard for a rule or reg Must advise clients regarding potential penalties that are reasonable likely to be assessed and the opportunity to avoid penalty through disclosures. A practitioner may, in good faith, rely on information obtained from a client without verification
Circular 230 Section 10.30 Solicitation
Any lawful solicitation by or on behalf of a practitioner before the IRS must: -Identify that it is a solicitation -Indicate the source of information used to choose the recipient, if applicable A practitioner may not make false, fraudulent, or coercive statements or claims; or misleading or deceptive statements or claims with respect to any IRS matter in any form of public communication or private solicitation
Circular 230 Section 10.60 Institution of Proceeding
Any violation of laws relative to practice before the IRS may result in reprimand or a proceeding for sanctions. Instituting a proceeding requires that the respondent be advised in writing of the law, facts, and conduct warranting such action; and is given an opportunity to dispute facts, assert additional facts, and make arguments
Exceptions to rule on confidential client information for tax return preparers
Comply with subpoena or summons Comply with quality control peer review (eg, peer review, review prior to potential sale of CPA practice) Comply with laws and regulations Initiate, pursue, or defend against actual or potential lawsuits Initiate or respond to complaints with AICPA ethics division or trial board Use the information to prepare related tax returns (eg, state, local)
Disclosure will reduce or eliminate an accuracy-related penalty if the position does not involve a tax shelter, is not frivolous, has a reasonable basis, and is properly substantiated.
Disclosure cannot ameliorate penalties relating to tax shelters because disclosure is already required for tax shelters.
A tax practitioner may not advise a client to take a frivolous tax position on a document, affidavit, or other paper submitted to the IRS.
Disclosure will not reduce or eliminate an accuracy-related penalty if the position is frivolous.
Tax preparers may be penalized for failing to comply with IRS rules and regulations.
For all returns they prepare, tax preparers must sign the preparer's declaration and include their tax preparer identification numbers. They also must retain copies of completed tax returns or a list of returns prepared and provide taxpayers with copies of their returns.
Most court decisions involving tax disputes have precedential value.
However, decisions by the Small Claims Division of the Tax Court (ie, cases involving $50,000 or less) may not be used as precedent.
Tax preparers generally are subject to a penalty for disclosing confidential information obtained through the preparation of a return.
However, exceptions exist, including the provision of information to permit electronic preparation or submission of a return. This allows software companies to transmit tax returns to the IRS for tax preparers.
Circular 230 Section 10.21 Knowledge of Client's Omission
If a practitioner becomes aware of an incident of a client's noncompliance with revenues laws, or of an error or omission on a filing with the IRS, the practitioner is required to: -Promptly advise the client of the circumstance -Advise the client as to the potential consequences
Penalty of $50 per return up to $27,000 per year in 2020
If a tax return preparer fails to: -furnish a copy of return to taxpayer -sign the return -furnish an identifying number of preparer on return -retain a copy of return for 3 yrs or maintains a list of names and ID numbers of the taxpayers for whom the returns were prepared -retain and make available a list of the tax return preparers employed
The IRS has a well-established process for settling tax disputes. After the IRS assesses a deficiency, it sends the taxpayer a 30-day letter explaining its reasoning along with a copy of the audit examination report. This gives the taxpayer 30 days to decide whether to accept the proposed change and, if not, whether to request a conference with an appeals officer.
If the taxpayer disagrees with the IRS assessment or does not respond to the 30-day letter, the IRS issues a notice of deficiency (ie, 90-day letter). The 90-day letter gives the taxpayer 90 days (150 days for nonresident taxpayers) to either pay the deficiency or dispute it in court.
A taxpayer may legally seek to minimize his or her tax liability. However, a taxpayer may not willfully or deliberately attempt to evade tax.
If the taxpayer does attempt to evade taxes, the taxpayer may be subject to a civil and/or criminal fraud penalty.
A CPA is prohibited from giving written advice that is based on unreasonable assumptions, unreasonably relies on the taxpayer's representations, or does not consider all relevant information that is known or should be known.
In addition, the CPA may not consider the possibility that the return will not be audited or that the issue will be resolved through settlement.
o practice before the IRS, the CPA must not be suspended or disbarred from doing so.
In general, the CPA must file a declaration with the IRS indicating the CPA is qualified as a CPA and authorized to represent the party. Although providing written tax advice (eg, tax opinion) is considered practice before the IRS, an exception is made for the written declaration requirement.
Circular 230 Section 10.3 Who May Practice
In order for a CPA to practice before the IRS, the CPA: -Must not be currently under suspension or disbarment from practice before the IRS -Must file a declaration with the IRS indicating the CPA is currently qualified as a CPA an authorized to represent the party -A CPA not currently under suspension or disbarment may provide written advice without filing a written declaration
Circular 230 Section 10.27 Fees
May not charge either an unconscionable fee or a contingent fee for matters before the IRS. A contingent fee may be charged in relation to: -ad administrative exam or a challenge to an original return, an amended return, or a claim for refund (not for preparing original return) -Services related to a claim for credit or refund in connection with stat interest or penalties charged by the IRS -Services related to a judicial proceeding under the IRC
Federal Tax Authoritative Hierarch -Internal Revenue Code -Treasury Regulations -Internal Revenue Bulletin -Written Determinations -Other IRS Publications and Information
Internal Revenue Bulletin is Binding on the IRS -Revenue rulings -Revenue procedures -Notices -Announcements
Federal Tax Authoritative Hierarch -Internal Revenue Code -Treasury Regulations -Internal Revenue Bulletin -Written Determinations -Other IRS Publications and Information
Internal Revenue Code and Treasury Regulations, the first and second highest tax authority respectiveley are binding on the IRS
Circular 230 solicitation
No false, fraudulent, or coercive statements Uninvited solicitations must identify it is a solicitation and indicate the source of information used to select recipients Fee information is not required Fee information cannot be misleading
Taxpayers can ask the IRS to interpret and apply tax laws to the taxpayer's specific tax situation. The tax situation usually involves a proposed complex transaction that lacks definitive tax treatment. The resulting IRS interpretation is called a private letter ruling (PLR).
Once the PLR is issued, the taxpayer can proceed with the transaction knowing how it will be taxed. For instance, a taxpayer contemplates a complex series of corporate mergers and acquisitions. By asking the IRS to issue a PLR, the taxpayer will know how the IRS thinks those transactions should be taxed, and the taxpayer will be able to expect the appropriate taxes.
Federal Tax Authoritative Hierarch -Internal Revenue Code -Treasury Regulations -Internal Revenue Bulletin -Written Determinations -Other IRS Publications and Information
Other IRS Publications and Information is not binding on the IRS -Forms and publications -News releases and fact sheets -FAQs -Online help and resources -Videos
To encourage compliance by tax preparers, the IRS can assess civil and criminal penalties. Monetary civil penalties are the most common penalties levied.
Penalties generally relate to preparation activities (eg, retaining copies, signing the return) or to positions taken on tax returns (eg, unreasonable positions).
A tax return preparer is required to advise clients of any penalty that is reasonably likely to be assessed against them. As part of this requirement, the preparer (eg, CPA) must also disclose ways to change the client's tax position so the IRS will not assess a penalty.
Preparers must disclose potential penalties to the client if they signed or prepared the tax return or merely advised the client to take the position on the return.
Written tax advice involves a CPA providing an opinion on the tax ramifications of a financial transaction for a client. The opinion is for the client and is never filed with the IRS.
Providing a written declaration for every instance of written tax advice would be too onerous on the CPA and IRS. As such, a CPA who is not currently under suspension or disbarment may provide written tax advice without filing a written declaration.
Circular 230 Section 10.20 Information to be Furnished
Records properly and lawfully requested by the IRS must be promptly submitted (unless records or info are privileged). When records are not in the possession of the practitioner: -the IRS should be notified -Inquiry should be made of the client as to who does have custody
Circular 230 is a set of U.S. Treasury regulations that governs practice before the IRS. It applies to tax practitioners who prepare tax returns, represent taxpayers before the IRS, or provide tax advice.
Section 10.30 addresses solicitation regulations. A practitioner may not make false, fraudulent, or coercive statements or claims. In addition, a practitioner may not make misleading or deceptive statements or claims with respect to any IRS matter in any form of public communication or private solicitation. Clearly a guarantee to obtain a tax refund meets the criteria of a misleading and deceptive claim because no one can guarantee a refund.
Circular 230 Section 10.51 Incompetence & Disreputable Conduct
See the complete list at: https://www.law.cornell.edu/cfr/text/31/10.51
Probability of Success Reasonable Basis (equals 20%)
Significance of Threshold -$5,000 penalty applies for positions that do not meet this threshold (ie, frivolous tax positions). -Positions meeting this threshold must be disclosed to avoid penalty
Probability of Success Realistic Possibility (equals 33%)
Significance of Threshold AICPA SSTSs require members to meet this threshold as a minimum for undisclosed tax positions
Probability of Success More Likely Than Not (greater than 50%)
Significance of Threshold Understatement penalty applies for reportable transactions that do not meet this threshold
Probability of Success Substantial Authority (equals 40%)
Significance of Threshold Understatement penalty applies for undisclosed tax positions that do not meet this threshold
Under Circular 230, tax practitioners may not make false, fraudulent, or coercive statements or claims.
Solicitations must be clearly identified and must indicate the source of the information used to select recipients. Practitioners may, but are not required to, disseminate information about fees.
According to the AICPA Statements on Standards for Tax Services,
Tax preparers do not need to verify any information they receive from the their clients, unless the tax preparer has reason to believe the information is incorrect.
Circular 230 Section 10.50 Sanctions
The Secretary of the Treasury has the authority to censure, suspend, or disbar a practitioner from practice before the IRS if the practitioner: -is shown to be incompetent or disreputable -Violates requirements eithe rwillfully or as a result of gross incompetence -Willfully and knowingly misleads or threatens a client or prospective client with the intent to defraud Also has the uauthority to impose a monetary penalty on any practitioner who engages in the prhobited conduct indicated above
Treasury Department Circular 230 is a set of regulations governing practice before the IRS. It affects tax practitioners including attorneys, CPAs, and enrolled agents.
The regulations cover the requirements for representing taxpayers before the IRS, providing tax advice, and preparing tax returns.
Individuals must pay their income tax throughout the year through withholding or estimated tax payments.
The safe harbor amount is the lesser of 100% of the prior year tax liability (110% if the prior year's AGI is over $150,000) or 90% of the current year tax liability.
If a tax return preparer commits fraudulent or deceptive conduct, including misrepresentation of eligibility to practice before the IRS
The courts may enjoin such person from further engaging in such conduct
To avoid underpayment penalties, a taxpayer must pay a safe harbor amount.
The general safe harbor amount is the lesser of 100% of the prior year's tax liability (110% if the prior year's AGI is over $150,000) or 90% of the current year tax liability. There is no penalty if the balance due on the return is less than $1,000.
A 30-day letter is issued by the IRS after a tax audit is completed and the IRS has determined there is a deficiency.
The taxpayer has 30 days to pay the proposed deficiency or appeal the audit results.
A tax return preparer (eg, CPA) can avoid an understatement penalty for a reportable transaction (eg, tax shelters) if it is more likely than not that the tax position taken in the return will be upheld if challenged.
This is the highest threshold applied to tax positions (ie, > 50% likelihood).
The IRS rules governing tax return preparers state that a CPA is subject to civil and criminal penalties if the CPA knowingly or recklessly discloses a taxpayer's tax return information or uses the information other than to prepare the taxpayer's return. In addition, the CPA is also bound by the AICPA client confidently rules.
Under both sets of rules, with limited exceptions, a CPA is not permitted to provide a client's tax return information to third parties. This includes a mortgage broker or a client's fiancé. The CPA is also prohibited from providing the information to a potential purchaser of the CPA's practice.
Understating a client's tax liability as a result of an error in calculation will not result in a CPA incurring a penalty from the IRS.
Unless the error resulted from the preparer's negligence, there is no penalty for an honest mistake.
Circular 230 Section 10.22 Diligence as to Accuracy
While required to exercise due diligence in preparing or assisting in the preparation of filings with the IRS, and in determining the correctness of representations made by the practitioner to the IRS and to clients. If relying on another person, must exercise reasonable care and due diligence in engaging, supervising, training and evaluating the individual
Federal Tax Authoritative Hierarch -Internal Revenue Code -Treasury Regulations -Internal Revenue Bulletin -Written Determinations -Other IRS Publications and Information
Written Determinations is binding on the IRS to specific taxpayer only -Private letter ruling (PLR) -Technical advice memoranda (TAM) -General counsel memoranda (GCM, no longer issued)
A tax return preparer includes anyone (eg, CPA, enrolled agent) who prepares for compensation, or who employs one or more persons to prepare,
all or a substantial portion of any tax return or claim for refund. Does not qualify if Prepares return for friends or family free of charge Providing tax return administrative tasks (eg, data entry) Prepares entity's return as an employee of that entity
Negligence means
any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code.
Current tax liability method - no penalty is assessed if the payments
covered at least 90% of the current tax liability
Disclosure cannot ameliorate penalties relating to tax shelters because disclosure
is already required for tax shelters, regardless of whether there is substantial authority for the position.
A corporation that maintains false records and reports fictitious transactions to minimize its tax liability
may be subject to a civil fraud penalty.
Of all the types of courts that decide tax cases, only three types of federal trial courts have original jurisdiction to hear tax disputes:
the U.S. Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims (Claims Court).
Only three types of federal trial courts have original jurisdiction to hear tax disputes:
the U.S. Tax Court, the U.S. District Courts, and the U.S. Court of Federal Claims.
Annualized Income Method - No penalty is assessed if
the cumulative payments for each quarter cover the tax on the income to date (assuming it continues at the same rate for the remainder of the year)
So long as information received from the client does not clearly appear to be incorrect or incomplete,
the tax preparer is justified in relying on information that a client represents as correct. The preparer may rely on written or oral representations concerning the accuracy of information provided by a tax client. The preparer is not liable for willful understatement regardless of the amount, if the preparer reasonably relied on the client's information. A preparer is not required to examine documentation supporting information provided by the client.
If a taxpayer omits income as a result of inadequate recordkeeping,
the taxpayer may be subject to an accuracy-related penalty.
Disclosure will not reduce or eliminate an accuracy-related penalty if the position is not properly substantiated.
true
Prior Year Tax Liability Method - No penalty will be assessed if the withholdings and estimated payments totaled at least 100% of the prior tax liability
unless the taxpayer had more than $150,000 of AGI in the prior year. In this case, payments must exceed 110% of the prior year tax liability to utilize this exception in the current year
the statute of limitations is
unlimited if the taxpayer fails to file a return
If a tax return preparer understates tax liability caused by an undisclosed position lacking substantial authority
will result in a penalty of > of $1,000 or 50% of return prep fee
If a tax return preparer understates tax liability caused by preparer's reckless or intentional disregard of rules or regulations
will result in a penalty of > of $5,000 or 75% of return prep fee