Ethics & Responsibility in Tax Practice Flashcards
Under Circular 230, when a tax practitioner becomes aware of a client’s noncompliance with revenue laws OR an error/omission on a filing with IRS, practitioner is required to:
1) Promptly advise the client of the error
2) Advise the client of the potential consequences of that error
Tax practitioners cannot charge unconscionable fees/contingent fees for matters before the IRS. HOWEVER, a contingent fee may be charged for:
1) Services related to a claim/refund in connection with statutory interest or penalties charged by the IRS
2) Administrative examination or challenge to an original tax return, amended return, or claim for refund
3) Services related to a judicial proceeding under the IRC
Understatement of tax caused by undisclosed position that lacks substantial authority (amount of penalty):
Greater of $1,000 or 50% of return prep fee
Understatement caused by reckless or willful disregard of rules (amount of penalty)
greater of $5,000 or 75% of return prep fee
- Failure to sign return (amount of penalty)
- Failure to retain a copy of return for 3 years or maintain a list of names and ID numbers of returns prepared (amount of penalty)
$50 per return/up to a significant dollar amount cap, adjusted annually for inflation
Improper disclosure of return info (amount of penalty)
- $250 per disclosure, maximum of $10,000
- Criminal penalty of up to $1,000 or 1 year in prison, or both
As part of best practices when giving tax advice, a tax practitioner is required by circular 230 to:
- Establish the facts relevant to a tax issue
- Evaluate the reasonableness of any assumption made by the client
- Advise the client of the consequences of relying on the tax advice
When giving written advice, a practitioner must not:
- rely on the client’s representations, statements, findings, or documents, AS LONG AS relying on them would be unreasonable
- the practitioner can rely on these only if it is reasonable to do so
Tax preparer’s duty to verify taxpayer info
- May rely in good faith and without verification provided by taxpayer
- Must make reasonable inquiries if info appears to be incorrect
- Inquire about appropriate documentation if IRC requires it
- NOT Required to:
1) Audit the taxpayer
2) Review or examine books, records, or operations
3) Copy all underlying documents to independently verify the info
Which of the following activities requires the CPA to file a written declaration with the IRS indicating the CPA is currently qualified as a CPA and authorized to represent the party?
- Practice before the IRS
**The CPA may provide written tax advice without filing a written declaration with the IRS
Preparer penalty for endorsing/negotiating a client’s tax refund check
- Preparer may not endorse/negotiate client tax refund checks
- $500 penalty for each improper endorsement
Who must be required to register for a PTIN?
A CPA preparing returns in exchange for services but receiving no monetary compensation
Can more than 1 person be deemed to be a preparer of a tax return?
YES!
Tax return preparer DOES the following:
- Prepare tax returns for compensation (money, barter)
- Employs others to prepare tax returns
Tax return preparer DOES NOT do the following:
(in other words, you cannot be called a tax preparer if you do the following)
- Prepare returns for family, friends free of charge
- Provide tax return admin tasks (data entry)
- Prepare entity’s return as an employee of that entity
Circular 230 contingent fees are allowed only for specific types of services relating to:
- Refund claims, and original/amended returns that have been challenged by the IRS
- Claims for refund/credit filed to reduce interest and penalties charged by the IRS
- Judicial proceedings under the IRS
Can CPAs unreasonably delay the prompt disposition of any matter before the IRS?
NO
Penalties are imposed on tax return preparers who understate their client’s tax liabilities due to an unreasonable or reckless tax position. HOWEVER:
There is no penalty if there was reasonable cause for the understatement and the tax practitioner acted in good faith
When retaining records of client tax matters, preparers have the option of:
- either retaining copies of completed returns (for 3 years)
- keeping a list of names and SSN for all returns prepared (for 3 years)
When the IRS requests client info from a CPA:
Is the info privileged? -> Yes - Do not provide the info
Is the info privileged? -> No–Does CPA possess the info? -> Yes= Provide the info
Does CPA possess the info? -> No: then CPA must
1) notify IRS that the CPA doesn’t possess the info
2) Identify parties who might possess the info
3) Ask client to identify parties that might possess the info
Under Circular 230, a CPA rely on info obtained from a client in good faith without verification. HOWEVER:
- If the info furnished by the client appears incorrect, incomplete, the CPA may not ignore it
- CPA must investigate to verify the info
Circular 230 solicitation rules
- No false, fraudulent, or coercive statements
- Uninvited solicitations must identify if it is a solicitation and indicate the source of info used to select recipients
- Fee info is not required
- Fee info cannot be misleading
A practitioner is in violation of Circular 230 if the practitioner:
- charges a contingent fee for preparing and filing an original tax return
Permitted fee communications
- Professional lists
- Phone directories
- Print media
- Mailings
- Radio
- TV
Circular 230 Requirements for a tax practitioner to return client records
General rule
- Must retain all client records when requested by client
- May retain copies
If there is a fee dispute
- May temporarily withhold some records
- Must return records necessary for client to comply with tax obligations and allow access to others
Types of records
- written and electronic documents from client
- Material prepared by client or client’s other representatives
- Prior returns and refund claims
- Other material prepared and used for client’s tax matter
Tax return preparer understatement penalties
Unreasonable position
- Penalty is greater of: $1,000 or 50% of return prep fee
Willful or reckless conduct
- Penalty is greater of $5,000 or 75% of the return prep fee
What are client records?
- Material given to the tax preparer that existed prior to the tax preparer’s current engagement with the client
- Items prepared by the client or 3rd party
- Anything prepared by the tax preparer and previously provided to the client, that the client needs to file the current year return
A PTIN is required for:
Preparing a tax return in exchange for compensation (cash, services)
What is a reportable transaction?
It is a transaction in which additional info is required to be included with a federal return because the transaction is of a type, that has the potential for TAX AVOIDANCE OR EVASION
