Ethics and Responsibility in Tax Practice

Question 1

Circular 230

Answer 1

Contains IRS’s rules of practice governing CPAs and others who practice before the agency; Gov’t may censure, fine, suspend, or disbar tax advisors from practice before IRS if Circular 230’s standards of conduct violated

Question 2

Who may practice before IRS?

Answer 2

1. Attorneys
2. CPAs
3. Enrolled agents
4. Enrolled actuaries
5. Enrolled retirement plan agents

Question 3

10.20: Furnishing Information

Substantive Procedures

Answer 3

Practitioner must promptly submit to IRS any records or info that its agents/officers request properly and lawfully, unless believes in good faith/on reasonable grounds that records/info are priveleged

Question 4

10.21: Client Omission

Substantive Procedures

Answer 4

Practitioner must promptly notify the client of error and potential consequence, BUT may not notify IRS without client’s permission

Question 5

10.22: Due Diligence and Reliance on Others

Substantive Procedures

Answer 5

Must exercise due diligence and can rely on work of others if engaged/supervised/trained/evaluated them

Question 6

10.23: Delays

Substantive Procedures

Answer 6

May not unreasonably delay the prompt disposition of any matters before the IRS

Question 7

10.24: Assistance from Disbarred

Substantive Procedures

Answer 7

Should not knowingly accept assistance from disbarred/suspended person

Question 8

10.25: Practice by Former IRS Agents

Substantive Procedures

Answer 8

Extensive rules meant to prevent conflicts of interests

Question 9

10.26: Notaries

Substantive Procedures

Answer 9

Must not act as a notary with respect to matters before the IRS in which he/she is involved/interested

Question 10

Unconscionable fees

Answer 10

Not permitted

Question 11

10.27: Contingent Fees

Substantive Procedures

Answer 11

May not charge contingent feel with the exception of:

1. Services rendered in connection with IRS examination/challenge to (i) original tax return or (ii) amended return/claim for refund
2. Where claim for refund is filed solely in connection with determination of statutory interest/penalties
3. When accountant is representing client in judicial proceedings

Question 12

10.28: Return of Client Records

Substantive Procedures

Answer 12

Upon client’s request, promptly return any/all recorded needed for client to comply with Federal tax obligations

If state law permits retention b/c fee dispute, need to return only records that must be attached to return

Question 13

10.29: Conflicts of Interest

Substantive Procedures

Answer 13

May not represent client before IRS if create conflict of interest

Question 14

10.33: Best Practices

Substantive Procedures

Answer 14

1. Communicate clearly with client regarding terms of engagement
2. Establish the facts (Do your homework - Facts vs Law)
3. Advise client regarding import of conclusions reached
4. Act fairly and with integrity
5. Exercise any firm supervisory powers

Question 15

10.34: Tax Return Standards

Substantive Procedures

Answer 15

Not to advise clients to take frivolous positions & inform clients of any penalties that are reasonably likely with positions taken

Question 16

Subpart C of Circular 230

Answer 16

Sets forth rules/penalties for disciplinary proceedings

Question 17

10.50: Monetary Penalty

Answer 17

Maximum penalty = 100% of gross income derived from the conduct + other penalties (suspensions/censures) + 50% penalty of gross income authorized by 26 USC Sec. 6694

Question 18

When is it proper to delay as long as possible in fulfilling an IRS request for records or info under Circ.230?

Answer 18

You have investigated and believe in good faith that the info is privileged

Question 19

Pursuant Treasury Circ.230, can the practitioner retain copies of the client’s records?

Answer 19

Yes

Question 20

Who is a Tax Return Preparer (TRP)?

Answer 20

Any person who:

1. are paid;
2. to prepare, or retain employees to prepare;
3. A substantial portion;
4. of any federal tax return or refund claim

Question 21

Subtypes of TRPs

Answer 21

1. Signing TRPs

2. Nonsigning TRPs

Question 22

Signing TRPs

Answer 22

Individual TRPs who bear “primary responsibility” for the overall accuracy of the return/claim for refund

Question 23

Nonsigning TRPs

Answer 23

Those other than the signing TRP who prepare all or a substantial portion of a return/claim for refund

Question 24

Substantial portion

Answer 24

Non-signing TRPs may be liable for a “substantial proportion” unless the deduction involves either:

1. Less than $10,000 or
2. Less than $400,000, which is also less than 20% of gross income indicated on return

Question 25

Safe harbors

Answer 25

Not a TRP merely b/c:

1. Furnishes typing, reproducing, or other mechanical assistance
2. Prepares a return for employer, or
3. Prepares as a fiduciary a return or claim for refund for any person

Question 26

When multiple people are working on a return where there is an understatement, who is the one that will be punished?

Answer 26

The one who is primarily responsible for the position giving rise to the understatement

IF UNCLEAR who is responsible, the one with overall supervisory responsibility for return/position will be TRP

Question 27

IRC Sec 6694(a): Understatement of taxpayer’s liability

Answer 27

imposes a penalty against TRP when an “unreasonable” position causes an understatement of tax liability

Focuses on negligent conduct

Question 28

When is a position “unreasonable”?

Answer 28

If there is no substantial authority (<40% chance of being sustained) for the position

If it is disclosed yet there is no reasonable basis (<20% chance of being sustained)

If position relates to a tax shelter, it is unreasonable unless is is more likely than not (<50% chance) that the position will be sustained

Question 29

IRC Sec 6694(b)

Answer 29

Imposes larger penalty if the understatement is due to willful or reckless conduct

Question 30

IRC Sec 6695

Answer 30

Punishes TRPS for:

1. Failure to furnish copy of return to taxpayer;
2. Failure to sign return and show own identity;
3. Failure to furnish preparer’s identifying number to IRS;
4. Failure to keep copy of return