Chapter 5 Section 1: Ethics and Professional Responsibilities in Tax Services Flashcards
Who falls under the authority of the standard-setters for tax law?
People who prepare returns for a fee
What are the four primary authoritative sources?
IRC and statutory provisions
Regulations
Revenue rulings and procedures
Court cases
Are IRS publications a primary authority?
No
Define disregard in the context of malpractice?
Any careless, reckless, or intentional disregard of rules or regulations
Define listed transaction
Reportable transaction that is (basically) the same as a transaction specifically identified by the Secretary of the US Treasury Department as a tax avoidance transaction.
Define more likely than not
Greater than 50% chance of a position being upheld by the courts
Define negligence
Any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. Includes failure by the taxpayer to keep adequate books and records or to substantiate items properly
What is the difference between ordinary negligence and fraud?
Fraud is willful and reckless
Define reasonable basis
Greater than a 20% chance of a position being upheld by the courts
Define reportable transaction
A transaction for which information is required to be included with a return or statement because it has potential to b used for tax avoidance or evasion.
What is the difference between tax avoidance and tax evasion?
Tax avoidance is legal, and CPAs should do it
Tax evasion is illegal and punishable by law
Define substantial authority
Between a 33% and 50% chance of being upheld by the courts
Define tax return preparer
Someone who prepares for compensation
What is the difference between a tax preparer and tax practitioner?
A practitioner is more - they practice before the IRS
Give examples of tax practitioners
CPAs Attorneys Enrolled agents Enrolled actuaries Enrolled retirement plan agents
Define tax shelter
Anything that has a significant purpose to avoid or evade federal income tax
What are the exceptions to a position being deemed unreasonable?
If undisclosed, there is substantial authority backing it up
If disclosed, there is a reasonable basis for the position
If it’s a tax shelter or reportable transaction, it needs to be more likely than not
Who can be punished for the understatement of taxpayer liability?
The preparer
Is there a penalty if an error was made in calculation in good faith?
No
Define willful or reckless conduct
Basically, fraud
Willful attempt to understate the liability or reckless disregard of the rules
Do preparers need to obtain supporting documents?
What is the exception?
Give an example of a good exception
Usually, no
Unless the preparer has reason (or should know they have reason) to doubt the taxpayer
Business/travel related expenses
What is the penalty for understatement of a liability due to an unreasonable position?
Due to willful or reckless conduct?
Greater of $1,000 or 50% of fees earned
Greater of $5,000 or 50% of fees earned
Give 7 additional examples of things we can be penalized for
Failure to:
- Provide client with a completed copy of the return
- Sign return
- Give tax ID number of preparer
- Retain records properly
- File correct information returns
- Diligently determine eligibility for EIC
- If you negotiate a refund check
How long do you need to keep records?
What do you need to keep?
3 years
Either a copy of the return or a listing of the name and ID of each taxpayer
What are the 4 requirements for determining eligibility for the EIC?
Checklists
Computation worksheets
Inquiries to taxpayer
Record retention
Who can be held liable for aiding and abetting evasion?
ANYONE
Who has the burden of proof for establishing aiding and abetting?
The IRS
What are the exceptions to the duty of confidentiality?
Subpoena/court order
Allowable uses like preparing other returns and estimates
Quality and peer reviews
Computer processing
Admin
Anytime the client specifically says you can
What is Circular #230?
It addresses practitioners
What if you, while a gov’t employee, personally and substantially participated in a matter involving specific parties?
You can never again represent or assist those parties with that matter
What if you, while a gov’t employee, had official responsibility for a particular matter involving specific parties?
You can’t represent them within two years (can assist)
How long after leaving gov’t employment can you appear before the IRS to influence an employee regarding rules if you participated in the development of the rule or had official responsibility within one year for that rule?
One year
Are contingent fees okay?
Are unconscionable?
Yes
No
How long must you maintain prices listed in a written fee schedule?
30 days since the last publishment
List the 5 best practices
- Communicate terms of engagement to determine client’s purpose and use for advice
- Establish facts and arrive at conclusion supported by the facts and the law
- Advise the client about the importance of conclusions reached (like avoiding penalties)
- Act fairly and with integrity
- Ensure that all people at the firm follow best practices
Can you advise a client to take a frivolous position?
No
What does the practitioner need to do if there is noncompliance, an error, or an omission?
Advise the client promptly. Do not notify the IRS, but do tell the client what possible consequences are
Can you retain client records in the case of a fee dispute?
Usually not. Sometimes you can, but the general rule is that you need to return records at their request.
Does emailed advice qualify as written advice?
Yes
What are the six requirements for written advice?
- Base it on reasonable facts and legal assumptions.
- Consider all relevant facts and circumstances that you know or should know.
- Try to identify facts relevant to written advice.
- Don’t rely on anything that is not reasonable.
- Relate the law and authorities to your advice.
- Don’t take into account the possibility that they won’t be audited.
When can you rely on the advice of others?
If your reliance is in good faith and they are competent with no conflict of interest
If you are deemed incompetent, what can you do?
You can get competent through various methods.
What are the three potential failures to comply with internal controls regarding Circular 230?
- Fails to have adequate procedures
- Fails to ensure that procedures are followed
- Knows or should know of noncompliance and doesn’t correct it.
What is the general concept regarding incompentence?
Not acting in good faith
What is the role of the state board of accountancy?
Give and revoke license
What is the only entity with the power to revoke or suspend licenses?
The state board of accountancy
What are the three broad categories of misconduct?
- While performing accounting services (negligence, fraud)
- Outside the scope of services that impairs your ability to perform services (intoxication, drugs)
- Criminal conviction regarding moral turpitude.
Is proof beyond a reasonable doubt necessary for disciplinary action by the state board?
No - just a more likely than not standard
Are accountants entitled to due process in disciplinary hearings?
Are the decisions subject to judicial review?
Yes
Yes
What are the five penalties a state board can impose for misconduct?
- Suspension or revocation of license
- Monetary fine
- Censure
- Probation
- Additional CPE
What is the Joint Ethics Enforcement Program?
Program to enforce codes of ethics
What are the two ways a society can punish members?
Sanction
Suspend or terminate membership
**Can’t revoke license
What are the grounds for suspending or terminating a member without a hearing from a society?
Conviction of a crime
Suspension or revocation of license
What are the sanctions a society can impose?
Expulsion from society
Suspension or membership
Additional CPE
**No money or criminal
What types of penalties can the IRS impose?
Civil and criminal
What penalties can the SEC impose?
Civil. They investigate criminal
