Ethics, Professional Responsibilities, and Federal Tax Procedures (10-20%) Flashcards
what are the regulations governing practice before the Internal Revenue Service?
Tax practitioners are subject to a variety of statutes, rules, and codes of professional conduct. Some examples include the American Institute of CPA’s (AICPA) Code of Professional Conduct, the AICPA’s Statements on Standards for Tax Services (SSTS), the IRS’s Circular 230, and statutes enacted by a CPA’s specific state board of accountancy.16 Tax practitioners should absolutely have a working knowledge of these statutes, rules, and guidelines because (1) they establish the professional standards for the practitioner and (2) failure to comply with the standards could result in adverse consequences for the tax professional, such as being admonished, suspended, or barred from practicing before the IRS; being admonished, suspended, or expelled from the AICPA; or suffering suspension or revocation of the CPA license. Given the voluminous nature of applicable statutes, rules, and codes, we will simply provide a brief overview of the major common sources of tax professional standards.
CPAs who are members of the AICPA are bound by the AICPA Code of Professional Conduct and SSTS. Other tax professionals use these provisions as guidance of professional standards. The AICPA Code of Professional Conduct is not specific to tax practice and provides broader professional standards that are especially relevant for auditors—that is, for those independent CPAs charged with examining an entity’s financial statements. Provisions included in the Code of Professional Conduct address the importance of a CPA maintaining independence from the client and using due professional care in carrying out responsibilities. Additional provisions limit the acceptance of contingent fees, preclude discreditable acts such as signing a false return, and prohibit false advertising and charging commissions. Most of these provisions rightly fall under the heading of common sense. Nonetheless, a regular review should prove useful to the practicing CPA.
The AICPA’s SSTS recommend appropriate standards of practice for tax professionals and are intended to complement other provisions that govern tax practice (e.g., Circular 230, discussed below). One objective of these standards is to encourage increased understanding by the Treasury, IRS, and the public of a CPA’s professional standards. Many state boards of accountancy have adopted similar standards, thus making the SSTS especially important. Currently, seven SSTS describe the tax professional standards when recommending a tax return position, answering questions on a tax return, preparing a tax return using data supplied by a client, using estimates on a tax return, taking a tax return position inconsistent with a previous year’s tax return, discovering a tax return error, and giving tax advice to taxpayers. Exhibit 2-11 provides a brief summary of each SSTS. Most important from a research perspective, SSTS No. 1 provides that a tax professional must comply with the standards imposed by the applicable tax authority when recommending a tax return position or preparing or signing a tax return. Section 6694 provides these standards for federal tax purposes.
what are the Internal Revenue Code and Regulations related to tax return preparers?
- Tax Return Preparers. A person who prepares for compensation, or employs other persons to prepare for compensation, all or a substantial portion of any tax return or refund claim is a “tax return preparer”
Preparers are divided into two categories for purposes of the return preparer penalties (fl 2807): signing tax return preparers and non signing tax return preparers. A signing tax return preparer is the individual preparer with primary responsibility for the overall substantive accuracy of the preparation of tax returns or refund a non signing tax return preparer is any preparer who is not a signing tax return preparer but who prepares a substantial portion of a return or refund claim regarding events that have occurred at the time advice is rendered.
what are situations that would result in tax return preparer penalties?
Tax Return Preparer Penalties. Several penalties may be imposed on a tax return preparer (1] 2517) in addition to the prohibition against disclosure of return information and promoting abusive tax shelters.
Understatement 0f Taxpayer’s Liability. A penalty is imposed against a tax return preparer for each tax return or claim for refund that understates the taxpayer’s liability due to an unreasonable position that the preparer knew or reasonably should have It own. The penalty is the greater of $1,000 or 50 percent of the income derived.
If the preparer Willfully attempts to understate liability if he or she disregards information furnished by the taxpayer in an attempt taxpayer’s liability or wrongfully reduce the tax.
A preparer recklessly or intentionally disregards a rule or regulation if he or she takes a position on the return or claim for refund that is contrary to a rule or regulation the preparer knows of, or is reckless in not knowing of the rule or regulation in question A preparer IS not considered to have recklessly or intentionally disregarded a rule on a
regulation if the position contrary to the rule or regulation is adequately disclosed and has a reasonable basis.
Aiding or Abetting Understatement. A penalty of $1,000 may also be imposed on persons for aiding or abetting in an understatement of tax liability on a return, claim or other document. The penalty increases to $10,000 for aiding or abetting an understatement of liability on a corporate return (Code Sec. 6701)
refer to “tax returns preparers” exhibit
what is the role and authority of state boards of accountancy?
what are audits, appeals. and the judicial process?
refer to “IRS audits” and “IRS audit selection” exhibits
- IRS Appeals. A taxpayer who does not agree with the result of an IRS examination may seek administrative review through the IRS Independent Office of Appeals (Code Sec. 7803 (e); Reg. §601.106). Independent Appeals is established by the Code and is under the supervision and direction of the Chief of Appeals.
Once the IRS has issued a preliminary 30-day letter, the taxpayer has the right to appeal to a local Appeals Office by filing a written request for appellate consideration. This is the only level of appeal within the IRS, disregarding the functions of the National Taxpayer Advocate (11 2707). Appeals conferences are conducted in an informal manner.
A taxpayer who requests a conference may also need to file a formal written protest. However, if the protested amount is $25,000 or less for any tax period, a taxpayer may make a small case request instead of a formal written protest (IRS Pub. 556). A taxpayer who wishes to forego the right to submit a protest to the Appeals Office after receiving a 30 day letter can file a petition in the T ax Court within 90 days after the receipt of a statutory notice of deficiency.
The IRS is required to develop certain appeals dispute resolution procedures (Code Sec. 7123). Accordingly, the IRS procedures are provided under which any taxpayer may request early referral of issues from the examination or collection division to the Office of Appeals (Rev. Proc. 99-28). Additionally, procedures have been developed under
which either a taxpayer or the Office of Appeals may request nonbinding mediation of any unresolved issue at the conclusion of the appeals procedure or an unsuccessful
Small business and self—employed taxpayers can resolve certain tax disputes through fast—track mediation (Rev. Proc. 2016-57). Disputes are resolved through this expedited process within 30 to 40 days, compared to several months using the regular appeals process.
Large— and mid—size businesses can resolve their tax disputes through a fast-track settlement program (Rev. Proc. 2003-40). The goal of this program is to reach settlement within 120 days. A similar fast—track settlement program exists for small businesses.
what are situations in which disclosure of tax return positions is required?
refer to “the key facts - tax professional responsibilities” exhibit
when is substantiation sufficient given a specific tax scenario?
Substantiation by Adequate Records. A contemporaneous log is not required, but a record of the elements of the expense or the business use of the listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibility. Adequate accounting generally requires
records such as an account book, expense diary or log, or similar record maintained by employee and recorded at or near the time the expense is incurred.
The Cohan rule, which allows the courts to estimate the amount of a taxpayer’s business expenses if adequate records do not exist, does not apply to expenses covered by the substantiation rules. If a taxpayer has paid and establishes that the records were lost due to circumstances beyond the taxpayer’s income nonaccountable control, such as destruction by fire or flood, then the taxpayer has a right to substantiate accountable p Ian that re-establishes claimed deductions by a reasonable construction of the expenditures or use.
what are situations that would result in taxpayer penalties relating to tax returns?
For Failure to File Returns. A penalty (addition to tax) is imposed for failure for any tax return within the time prescribed extensions, unless the failure is due to reasonable cause. (1)). The penalty is five percent of the unpaid tax
one month and an additional five percent for each month or part of month not filed failure continues, up to maximum of 25 percent.
Penalty for Failure to Pay Tax. A penalty or addition to tax is imposed for failure to pay taxes shown on a return within the time prescribed (including extensions) (1] 2529), unless the failure is due to reasonable cause and not willful neglect (Code Sec. 6651 (a) (2)). A penalty is also imposed for failure to pay a deficiency of tax required to be Shown on the return within 21 calendar days of IRS demand and notice (10 business days if the amount assessed and demanded is $100,000 or more) (Code Sec. 6651(a) (3)). In the case of the failure to pay tax shown on the return, the penalty is imposed on the amount shown on the return less amounts that have been withheld, estimated tax payments, partial payments, and other applicable credits.
The penalty for failure to pay tax is 0.5 percent of the tax not paid, for each month or part of a month the tax remains unpaid, up to a maximum of 25 percent. The penalty increases to one percent per month beginning after the earlier of the 10th day after notice of levy is given or the day that notice and demand is made by the IRS in the case
of a jeopardy assessment (1] 2713). If a taxpayer enters into an installment agreement with the IRS (1] 2529), the penalty for failure to timely pay taxes is reduced to 0.25 percent of the unpaid tax (Code Sec. 6651 (h); Reg. §301.6651—1(a) (4)). If both the failure to file penalty and failure to pay taxes shown on a return apply, the failure to pay penalty
may offset the failure to file penalty (1] 2801).
The failure—to—pay penalty is not imposed if the taxpayer can show that the failure was due to reasonable cause and not willful neglect. Reasonable cause exists if the taxpayer exercised ordinary business care and prudence and was nevertheless either unable to pay the tax within the prescribed time or would suffer an undue hardship (Reg. §301.6651—1(c)). In assessing ordinary business care and prudence, the IRS will consider the nature of the tax that the taxpayer has failed to pay. It will also examine the taxpayer’s reason for failure to comply, whether the taxpayer has a history of complying with the tax law, the length of time between the event and the cited reason for the failure
to comply, and whether the circumstances were beyond the taxpayer’s control. Reliance on a tax return preparer generally is not reasonable cause for failure to pay taxes as the duty is on the taxpayer (IRM 20.1.1.3 (10-19—2020); R.W. Boyle, SCt, 85-1 USTC 1] 13,602).
An automatic extension of time to file a tax return (1] 2509) is not an extension of time to pay the tax due on the return. However, an individual taxpayer can avoid a failure—to—pay penalty by making an estimate of the tax due and paying that estimate with the request for extension of time to file. The estimate may be reduced by any amounts
already paid through withholding or estimated tax payments over the course of the tax year. If the balance of tax due is remitted when the income tax return is filed by an individual or corporation, no penalty for failure to pay will apply unless the unpaid amount is more than 10 percent of the total tax liability (Reg. §301.6651-1(c) (3) and (4)).
refer to “taxpayers” exhibit
what are tax return preparer penalties?
Tax Return Preparer Penalties. Several penalties may be imposed on a tax return preparer (1] 2517) in addition to the prohibition against disclosure of return information and promoting abusive tax shelters.
Understatement of Taxpayer’s Liability. A penalty is imposed against a tax return preparer for each tax return or claim for refund that understates the taxpayer’s liability due to an unreasonable position that the preparer knew or reasonably should have It own. The penalty is the greater of $1,000 or 50 percent of the income derived.
If the preparer Willfully attempts to understate liability if he or she disregards information furnished by the taxpayer in an attempt taxpayer’s liability or wrongfully reduce the tax.
A preparer recklessly or intentionally disregards a rule or regulation if he or she takes a position on the return or claim for refund that is contrary to a rule or regulation the preparer knows of, or is reckless in not knowing of the rule or regulation in question A preparer IS not considered to have recklessly or intentionally disregarded a rule on a
regulation if the position contrary to the rule or regulation is adequately disclosed and has a reasonable basis.
Aiding or Abetting Understatement. A penalty of $1,000 may also be imposed on persons for aiding or abetting in an understatement of tax liability on a return, claim or other document. The penalty increases to $10,000 for aiding or abetting an understatement of liability on a corporate return (Code Sec. 6701).
what is the authoritative hierarchy for tax purposes?
refer to “judicial authorities” exhibit
what are the requirements to report foreign bank accounts?
- Reporting Foreign Financial Accounts (FBAR). A US. person is required to disclose any financial interests in, or signature authority or other authority over, foreign financial accounts if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year (31 CFR §§1010.306(c) and 1010.350). The information is reported electronically on FinCEN Report 114 (commonly referred to as the FBAR) through the Treasury’s Financial Crimes Enforcement Network (F inCEN) BSA E—Filing System. The filing of the FBAR does not relieve a taxpayer of the requirement to file Form 8938 to report specified foreign financial assets (11 2572).
The FBAR for a calendar year is required to be filed by the due date for filing federal income tax returns (April 15 of the succeeding year), but with an automatic extension of six months (October 15). Any penalty for failure to timely file a request for an extension to file the FBAR may be waived by the IRS for first—time filers (Act Sec. 2006 (b) (11) of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 11441)). FinCEN allows all FBAR filers an automatic filing extension to October 15, and does not require specific requests for this extension
(FinCEN Form 114 Instructions, Release Date January 2017 (V. 1.4)). Relief from FEAR reporting is provided for certain individuals who have signature authority over, but no financial interest in, one or more foreign financial accounts. Under this relief, the deadline for filing the FBAR for reporting signature authority held during the 2020
calendar year (as well as the reporting deadlines previously extended for 2011 through 2019) is extended to April 15, 2022 (FinCEN Notice 2020-1).
U.S. persons subject to FBAR reporting are US. citizens, resident aliens, and entities created, organized, or formed under US. laws, including but not limited to domestic corporations, partnerships, limited liability companies (LLCs), trusts, and estates. The federal tax treatment of a person or entity does not determine whether an FBAR filing is required. For example, an entity disregarded for federal tax purposes must still file an FBAR if otherwise required. Participants and beneficiaries in qualified retirement plans, including individual retirement accounts (IRAs), are not required to file FEARS With respect to a foreign financial account held by or on behalf of the plan. A beneficiary of a trust in which a US. person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year is not required to file FEAR if the trust, trustee, or agent of the trust is a US. person that files
an FEAR for the trust’s foreign financial assets.
FinCEN Form 114a, Record of Authorization to Electronically File FBARs, is used by a US. person to authorize a third party preparer (CPA, enrolled agent, or attorney) to file the FBAR on his or her behalf, or to jointly file the FBAR with his or her spouse. Form 114a is not filed with the Treasury, but must be maintained by the foreign account
holder and the filer and made available upon request by the Treasury or IRS.
- Reporting Specified Foreign Financial Assets (Form 8938). Under the Foreign Account Tax Compliance Act (FATCA), any individual who holds an interest in a specified foreign financial asset during the tax year must attach Form 8938 to his or her tax return to report certain information for each asset if the total value of all such assets exceeds an applicable threshold amount (Code Sec. 6038B). The requirement applies to any US. citizen, and any individual who is a resident alien of the United States for any part of the tax year. A nonresident alien Who elects to be treated as a resident alien (11 2410) must also file Form 8938, as well as a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. Form 8938 must also be filed by any domestic entity that is formed or used to hold, directly or indirectly, specified foreign financial assets. Specified domestic entities subject to the reporting requirement include certain closely—held domestic corporations or partnerships, as well as certain domestic trusts (Reg. §1.6038D-6).
A specified foreign financial asset includes (1) a depository, custodial, or other financial account maintained by a foreign financial institution, (2) a stock or security fined by a person other than a US. person, (3) a financial instrument or contract held jar investment that has an issuer or counterparty other than a US person, and (4) an interest in an entity that is not a US. person. Filing Form 8938 does not relieve the file
what are the SSTS 1-7 or the summary of AICPA statements on standards for tax services?
refer to “the summary of AICPA statements on standards for tax services” exhibits
what are the tax return preparer’s common law duties and liabilities to clients and third parties?
refer to business law sections of becker
what are tax preparer responsibilities?
Tax practitioners are subject to a variety of statutes, rules, and codes of professional conduct. The AICPA’s seven Statements on Standards for Tax Services (SSTS) recommend appropriate standards of practice for tax professionals. Many state boards of accountancy have adopted standards similar to the SSTS standards. Circular 230 provides regulations governing tax practice and applies to all persons practicing before the IRS. There is a good bit of overlap between Circular 230 and the AICPA SSTS.
Circular 230, issued by the IRS, provides regulations governing tax practice and applies to all persons practicing before the IRS. There are five parts of Circular 230. Subpart A describes who may practice before the IRS (CPAs, attorneys, enrolled agents) and what practicing before the IRS means (tax return preparation, representing clients before the IRS, and so on).18 Subpart B describes the duties and restrictions that apply to individuals governed by Circular 230. Included in Subpart B are provisions discussing the submission of records to the IRS, guidelines when a practitioner discovers a tax return error, restrictions on charging contingency fees, prohibition of sharing employment with someone suspended from practicing before the IRS, stringent rules relating to providing advice for tax shelters, and standards for when a practitioner can recommend a tax return position.19 Subparts C and D explain sanctions and disciplinary proceedings for practitioners violating the Circular 230 provisions. Subpart E concludes with a few miscellaneous provisions (such as the Circular 230 effective date). There is a good bit of overlap between Circular 230 and the AICPA SSTS.
Although Circular 230 provides many rules governing tax practice, the Internal Revenue Code and other Treasury regulations often contain requirements specific to tax professionals. Thus, it is important for tax professionals to keep abreast of all applicable guidance, regardless of the specific authoritative source. A good example of this is the tax-preparer registration requirement in Reg. §1.6109-2, which requires that all paid tax return preparers apply for and receive a preparer tax identification number (PTIN). Although not a particularly daunting registration requirement, it is important nonetheless as failure to include the tax-return preparer’s PTIN on tax returns is subject to a $50 penalty per violation.
Are there other provisions that govern tax practice? You bet! Tax practitioners are also legally governed by common law. Issues that may arise include breach of contract (e.g., tax practitioner failing to complete a tax return for a client, client providing tax data timely but tax practitioner filing a return late, tax practitioner filing incomplete or incorrect returns), negligence (e.g., tax practitioner’s careless actions in filing returns or giving tax advice), or fraud (e.g., tax practitioner intentionally committing reckless action in tax return filing or advice). In each case, the client may sue the tax practitioner for compensation for damages incurred, and in some cases a third party can do so (e.g., intended beneficiary of a trust or estate). Best advice for a tax practitioner to avoid these issues: Use appropriate due care to execute their professional responsibilities in a timely and complete manner.
refer to “the summary of AICPA statements on standards for tax services” exhibit
what are the rules regarding privileged communications as they relate to tax practice?
refer to “privileged communications” exhibit
