Ehtics and Professional Responsiblities in Tax Services

Question 1

List the various “authorities” for purposes of determining whether there is substantial authority for the income tax treatment of an item.

Answer 1

• The Internal Revenue Code and other federal statutes
• U.S. Treasury regulations
• IRS revenue rulings and procedures; tax treaties, and U.S. treasury Dept. explanations of such treaties.
• Federal court cases
• Congressional intent set forth in committee reports, statements of manager’s floor statements.
• Explanations prepared by the Joint Committee on Taxation (the “Blue Book”)
• Private letter rulings and technical advice memoranda.
• Actions on decisions and general counsel memoranda
• IRS info or press releases and notices, announcements and other administrative pronouncements.

Question 2

What is a “listed transaction”?

Answer 2

The term “listed transaction” means a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the U.S. department of the treasury as a tax avoidance transaction.

Question 3

What is a “reportable transaction”?

Answer 3

Any transaction which the Sec. of U.S. Treasury has determined as having a potential for either tax avoidance (the legal use and application of the tax laws and cases in order to reduce the amount of tax due) or tax evasion (efforts by illegal means and methods to not pay taxes).

Question 4

What is the “reportable basis” standard?

Answer 4

Reasonable basis is a relatively high standard of tax reporting and 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 claim.

If a return position is reasonable based on one or more acceptable authorities, the return positon will generally satisfy the reasonable basis standard even though the position may not satisfy the substantial authority standard.

Question 5

What is the “substantial authority” standard?

Answer 5

An objective standard involving application of the law to relevant facts; less stringent than the “more likely than not” standard.

Substantial authority exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment.

There is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a U.S. court of appeals to which the taxpayer has a right of appeal with respect to the item.

The taxpayer’s belief that there is substantial authority for the tax treatment of an item is not relevant.

Question 6

What is a tax shelter?

Answer 6

Any (1) partnership or other entity, (2) investment plan or arrangement, or (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.

Question 7

List the various penalties the IRS can impose on a tax return preparer who understates the taxpayer’s income tax liability.

Answer 7

Penalty for Understatement of Taxpayer’s Liability Due to an Unreasonable Position by the Tax Return Preparer.

Penalty for understatement of taxpayer’s liability due to willful or reckless conduct of the tax return preparer.

Penalty for aiding and abeting understatement of tax.

Question 8

List the paid income tax preparer’s responsibilities to the client and to the IRS.

Answer 8

• Providing to the client a completed copy of the TR.
• Signing the tax return or refund claim.
• Indicating on the return or refund claim the tax identification number of the tax return preparer.
• Retaining tax return records (copies or lists) properly and for at least 3 years.
• Filing with the IRS the yearly information returns regarding other tax return preparers employed by the tax return preparer.
• Not negotiating the client’s IRS refund check.
• Diligently determing the client’s eligibility for the EIC.
• Not disclosing, except as permitted by law, client tax return info.
• Not using, except as permitted by law, client tax return info. for any purpose other than to prepare a tax return.

Question 9

List the exceptions to the penalty and/or fine for wrongful disclosure and/or wrongful use of tax return info.

Answer 9

1. Disclosure allowed by any provision of the IRC and disclosures pursuant to a court order.
2. Use in preparing state and local tax returns and declaration of estimated tax.
3. Disclosures and uses permitted by U.S. treasury regulaitons (disclosure and use for quality and peer reviews, computer processing, and administrative orders).
4. Consent of the client.

Question 10

Under what situations before the IRS may a tax practitioner charge a contingent fee?

Answer 10

1. IRS examination (audit)
2. Claim solely for a refund of interest and/or penalties; or
3. A judicial proceeding arising under the IRC.

(These are the only situations before the IRS when a tax practitioner may charge a contingent fee.)

Question 11

If a conflict of interest exits, under what circumstances may a tax practitioner represent the clients for which there is a conflict of interest?

Answer 11

The practitioner may represent both (all) clients if:

1) The practitioner reasonably believes that she/he can competently represent the clients;
2) No state or federal law prohibits such representation; and
3) each affected client waives the conflict of interest and with respect to the waiver so confirms in writing within 30 days after so waiving.

Question 12

What are the requirements for advertising?

Answer 12

• No false or misleading advertising
• Each solicitation must identify the solicitation as such.
• If applicable, identify the source of the info used to choose the recipient.
• If advertising by radio and/or TV, keep for at least 36 months a recording of the actual broadcast transmission.
• If advertising by direct mail and/or e-commerce, keep for 36 months a copy of the communication and listing of those to whom the communication was sent.

Question 13

What are the requirements for written fee schedules?

Answer 13

If a practitioner publishes a written fee schedule, charge no more than the published fees for the 36-day period following the last date that the fees were published.

Any statement of fee info concerning matters in which fees may be incurred (such as fees for the practitioner’s use of a tax return processor) must include a statement disclosing whether clients will be responsible for such costs.

Question 14

What are the “best practices” for tax advisors?

Answer 14

• 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 importance of the conclusions reached (i.e. whether the client will be able to avoid penalties).
• Making sure that all members, associates, and employees of the firm follow procedures that are consistent with the above.

Question 15

Under what circumstances must the tax practitioner advise the client of penalties reasonably likely to apply?

Answer 15

With respect to penalties reasonably likely to apply for a position taken on a tax return, the practitioner must so advise if the practitioner either;

1) advised the client with respect to the position
2) prepared or signed the tax return

Further the practioner must inform the client of any penalties “reasonable likely” to apply with respect to any document submitted to the IRS.

Question 16

Once the tax practioner has informed the client of penalties reasonably likely to apply, what additional info must the practitioner provide to the client?

Answer 16

Must inform client:

• the opportunity to avoid such penalties if the client so discloses the position taken, and
• the requirements for adequate disclosure.

Question 17

To what extent may the tax practitioner rely upon client-provided information?

Answer 17

General Rule: The practitioner may rely “in good faith without verification: upon client-furnished information.

However the practitioner cannot ignore contradictory information known to the practitioner.

The practitioner must make reasonable inquires if client-furnished information appears questionable or incomplete.

Question 18

Does the tax practitioner have any obligation to inform the client about the client’s tax return errors or omissions?

Answer 18

Yes. The practitioner must advise the client promptly of any noncompliance, errors, or omissions in tax returns and other documents.

The practitioner must advise the client of the consequences under the law with respect to such noncompliance, errors, or omissions.

Question 19

What is a “covered opinion”?

Answer 19

Any written or electronic advice, other than excluded advice, concerning one or more federal tax issues and arising from:

1) A tax avoidance transaction that the IRS identified in IRS publications as a listed transaction; or
2) Any partnership or any other entity, plan, or arrangement whose principal purpose is federal tax avoidance or evasion; or
3) Any partnership or any other entity, plan, or arrangement having as a significant purpose federal tax avoidance or evasion if the advice is (i) a reliance opinion, (ii) a marketed opinion, (iii) subject to conditions of confidentiality, or (iv) subject to contractual protection.

Question 20

What is a federal tax issue?

Answer 20

A question concerning (1) the federal tax treatment of any item or transaction, or (2) the value of property for federal tax purposes.

Question 21

What is a “significant federal tax issue”?

Answer 21

A federal tax issue for which:

1) the IRS has a reasonable basis for successful challenge, and
2) the resolution of the issue has a significant tax impact under any reasonably foreseeable circumstance.

Question 22

Who published the “Statements on Standards for Tax Services” and what are they?

Answer 22

The AICPA’s Tax Executive Committee published the seven Statements on Standards for Tax Services. The SSTSs set forth the ethical tax practice standards for members of the AICPA.

Question 23

List the sections of each standard.

Answer 23

• Introduction
• Statement (often consisting of several pghs)
  and
• Explanation

Question 24

List the topics covered in the Standards.

Answer 24

• Tax Return positions
• Answers to questions on returns
• Certain procedural aspects of preparing returns.
• Use of Estimates
• Departure from a position previously concluded in an administrative or court hearing.
• Knowledge of error: return preparation and administrative proceedings.
• Form and content of advice to taxpayers.

Question 25

If a tax return position does not have at least a realistic possibility of being sustained, the tax preparer may nevertheless recommend that position under what circumstances?

Answer 25

The tax preparer;

1) concludes that there is a reasonable basis for the position, and
2) advises the taxpayer to disclose appropriately that position.

Question 26

If a tax return reflects a tax return position which the tax preparer has concluded has only a reasonable basis, under what circumstances may the preparer sign that return?

Answer 26

Sign the return only if that return position is appropriately disclosed.

Question 27

List the levels of support from the least stringent to the most stringent.

Answer 27

1) Reasonable Basis standard (least stringent)
2) Realistic possibility standard
3) Substantial authority standard
4) More-likely-than-not standard (most stringent)

Question 28

What is the tax preparer’s responsibilities with respect to answering questions on the return?

Answer 28

Make a reasonable effort to answer all questions on tax returns; there must be a reasonable grounds for omission of an answer.

Question 29

Summarize the procedural aspects of preparing a return.

Answer 29

Generally, no responsiblility to verify information provided by taxpayer.

However, make reasonable inquires if the information appears to be incomplete, incorrect, or inconsistent.

Also determine whether the tax payer (i) maintains appropriate books and records when required by statute or rule, and (ii) possesses substantiating documentation when required by statute or rule.

Whenever possible, review one or more returns from previous years in order to obtain information concerning the taxpayer.

Question 30

What is the standard regarding the tax practitioner’s use of estimates?

Answer 30

The tax preparer may use estimates provided by the taxpayer, and disclosure of estimates is not generally required.

Question 31

When can a tax practitioner depart from a position previously concluded in an administrative proceeding or in a court decision?

Answer 31

A tax preparer may recommend a tax position that is different from the treatment as concluded in an administrative proceeding or in a court decision with respect to a previous year’s return if (i) the taxpayer is not bound to a specified treatment in the later year and (ii) the tax return perparer follows Statement on Standards for Tax Services No. 1, “Tax Return Positions.”

Question 32

What is required of the tax return preparer who becomes aware of an error in a previously filed return?

Answer 32

Notify the taxpayer but do not notify any taxing authorities regarding an error without first obtaining permission from the taxpayer, except when required by law.

Question 33

What is required of the tax return preparer who becomes aware that the taxpayer has failed to file a tax return?

Answer 33

Notify the taxpayer but do not notify any taxing authority regarding the non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 34

What is required of the tax preparer who, while representing the taxpayer in the administrative proceeding, becomes aware of an error or non-filing?

Answer 34

Request the taxpayer’s agreement to disclose to the taxing authority the error or non-filing. If the taxpayer does not agree, the tax preparer should consider whether it is appropriate to continue the professional relationship.

Do not notify any taxing authority regarding the error or non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 35

When must the tax preparer notify the taxpayer about new or changing tax developments occurring after the preparer has given advice to the client?

Answer 35

When assisting a taxpayer in implementing a plan associated with advice previously given, revise the plan if there are new developments.

If not assisting in implementing the plan, there is no requirement to notify the taxpayer of subsequent developments that may affect the advice previously given.