Ethics and Representation/EA3 Flashcards
Preparer Tax Identification Number (PTIN) requirement
All paid tax return preparers (including attorneys, CPAs, and enrolled agents) must have a PTIN in order to prepare a federal tax return.
Tax return preparer
Any person who, for compensation, prepares a tax return or claim for refund.
A person is not a preparer if unpaid, the return is for an employer, or prepared as a fiduciary.
Tax return requirements
Preparer with primary responsibility for accuracy of return MUST sign the return, enter PTIN on return, and give a copy of the return to the taxpayer no later than when presented for signature.
Disclosure
Provide adequate disclosure to avoid portions of the accuracy-related penalty or understatements due to unreasonable positions.
Form 8275-R to disclose positions contrary to Treasury regulations.
Form 8275 for other disclosures.
When Form 8275 cannot avoid accuracy-related penalty
The accuracy-related penalty attributable to the following types of misconduct cannot be avoided by disclosure on Form 8275:
Negligence
Disregard of regulations
Any substantial understatement of income tax on a tax shelter item
Any substantial valuation misstatement under chapter one of the Internal Revenue Code
Any substantial overstatement of pension liabilities
Any substantial estate or gift tax valuation understatements
Negligence and Fraud
Negligence is a failure to make a reasonable attempt to comply with the provisions of the tax code or a failure to exercise the ordinary and reasonable care that a reasonable person would exercise when completing a tax return.
Fraud, unlike negligence, is a willful attempt to evade or defeat a lawful tax. Affirmative acts of fraud are actions taken by the taxpayer, return preparer and/or promoter to deceive or defraud.
Tax evasion
Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are. Common evasion schemes include:
Intentional understatement or omission of income
Claiming fictitious or improper deductions
False allocation of income
Improper claims, credits, or exemptions
Concealment of assets
Tax avoidance
Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent but shapes and preplans events to reduce or eliminate tax liability within the parameters of the law.
Standard of authority for tax shelter position
Tax shelters have a higher standard and must have a confidence level of at least more likely than not (greater than 50% likelihood) that one or more significant tax issues would be resolved in the taxpayer’s favor.
A tax shelter, for purposes of the substantial understatement portion of the accuracy-related penalty, is a partnership or other entity, plan, or arrangement, with a significant purpose to avoid or evade federal income tax.
Which standard of authority is the most stringent?
The substantial authority standard is less stringent than the more likely than not standard but more stringent than the reasonable basis standard. Most stringent to least stringent:
more likely than not
substantial authority
reasonable basis
