I-1 Ethics and Responsibility in Tax Practice

Question 1

What is the IRS’ rule that governs CPAs?

Answer 1

Circular 230.

Question 2

What does Circular 230 do?

Answer 2

Censure, fine, suspend or disbar tax advisors from practice.

Question 3

What does “practicing” entail?

Answer 3

Preparing and filing documents, communicating and meeting with IRS reps on behalf of a taxpayer, rendering written advice, presenting a client.

Question 4

What does Subpart A of Circular 230 cover?

Answer 4

Rules governing authority to practice before IRS.

Question 5

Who can practice before the IRS?

Answer 5

Those who are not under suspension or disbarment.
Attorneys, CPAs, Enrolled agents, Enrolled actuaries, Enrolled retirement plan agents (limited to issues related to employee plans etc), Registered Tax Return Preparers (RTRP).

Question 6

What does Subpart B of Circular 230 cover?

Answer 6

Rules that govern tax practitioners.

Question 7

What does Subpart C and D of Circular 230 cover?

Answer 7

C: Sanctions for violations.
D: Procedural rules for disciplinary proceedings.

Question 8

Subpart B: What does furnishing information mean?

Answer 8

Practitioner must promptly submit properly/legally requested info unless he believes in good faith the info is privileged.

Question 9

Subpart B: What does client’s omission mean?

Answer 9

Section 10.21 - practitioner must notify the client when an error or omission on a previous return is found, but not need to notify IRS and may not do so without the client’s permission.

Question 10

Subpart B: What does due diligence and reliance on others mean?

Answer 10

Must exercise due diligence. Reliance on others’ work is permitted if the practitioner used reasonable care in engaging, supervising, training, and evaluating them with the exception of aggressive tax shelters.

Question 11

Subpart B: What does delays mean?

Answer 11

May not unreasonably delay the response to IRS.

Question 12

Subpart B: What does assistance from the disbarred mean?

Answer 12

May not knowingly accept even indirect assistance from disbarred.

Question 13

Subpart B: What does practice by former IRS agents mean?

Answer 13

Prevent conflict of interest. They may not assist or represent a client (they had knowledge of) for 2 yrs after leaving IRS.

Question 14

Subpart B: What does notaries mean?

Answer 14

A practitioner must not act as a notary public before IRS in which he/she is involved or interested.

Question 15

Subpart B: What are 2 types of fees?

Answer 15

Unconscionable fees and contingent fees.

Question 16

Subpart B: what must a practitioner do re: unconscionable fees?

Answer 16

may not charge for representing a client before IRS.

Question 17

Subpart B: Is contingent fees allowed in general?

Answer 17

No.

Question 18

Subpart B: What are 3 situations contingent fees are allowed?

Answer 18

1. Services in connection with IRS examination of or challenge to either (1) an original tax return or (2) an amended return or claim for refund that were filed within 120 days of the notice.
2. A claim for refund is filed solely in connection with determination of statutory interest or penalties.
3. A practitioner is representing the client at court.

Question 19

Subpart B: Return of client records: what’s the general rule? Exceptions?

Answer 19

Must return promptly.
If applicable state law permits retention in the case of a fee dispute, only those record that must be attached to the taxpayer’s return must be returned.

Question 20

Subpart B: Conflicts of interest: what’s the general rule? Exceptions?

Answer 20

May not represent the client before IRS.
Yes he can, if the practitioner reasonably believe that he can provide competence and diligent representation to the client, the representation is not prohibited by law, and the affected client gives informed consent in writing (must keep it on file for 3 yrs).

Question 21

Subpart B: Check negotiation?

Answer 21

May not endorse or negotiate any check issued to a client by IRS.

Question 22

Subpart B: 5 Best practices?

Answer 22

1. Communicate clearly re: terms, purpose, use, scope and form of the advice.
2. Establish facts, evaluate relevance, reasonableness, relating to laws. Conclusions must be based on facts/laws.
3. Advise the client re: the import of conclusions, including whether taxpayers may avoid accuracy related penalties if they rely on the advice.
4. Act fairly and with integrity
5. Exercise firm supervisory powers to ensure that firm employees act in accordance with best practices.

Question 23

Subpart B: Tax return standards?

Answer 23

Not to advise clients to take frivolous positions and inform them penalties related to them.
Can rely in good faith on info provided by client, but not ignore inconsistent information.

Question 24

Subpart B: what is competence?

Answer 24

Appropriate level of knowledge, skill, thoroughness, and preparation necessary.

Question 25

What had many provisions that relate solely or largely to Tax Return Preparers (TRPs)?

Answer 25

The Internal Revenue Code (IRC).

Question 26

IRC: Who is a TRP?

Answer 26

Anyone who prepares for compensation or employs people to prepare for compensation all or a substantial portion of any tax return or claim for refund under IRC.

Question 27

IRC: What are TRP subtypes?

Answer 27

Signing TRPs: bear primary responsibility for the overall accuracy.
Nonsigning TRPs: other than signing TRPs who prepares all or a substantial portion.

Question 28

IRC: What is an example of substantial portion nonsigning TRP are liable for?

Answer 28

When they give advice re: just one large deduction on a return unless the deduction involves either (a) less than $10,000 or (b) less than $400,000, which is also less than 20% of the gross income indicated on the return.

Question 29

IRC: People are not TRPs when?

Answer 29

1. Furnish typing, reproducing, or other mechanical assistance.
2. Prepare as a fiduciary a return or claim for return.
3. Prepare taxes as part of a volunteer income tax assistance or a low income tax clinic program.
4. Prepare with no explicit or implicit agreement for compensation even if the person receives an insubstantial gift, return service or favor.
5. Prepare for refund of the employer by whom he is regularly and continuously employed.

Question 30

IRC: Who is a TRP when a firm employs only one TRP?

Answer 30

He is the sole signing TRP.

Question 31

IRC: Who is a TRP when there are multiple people working on a return?

Answer 31

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

Question 32

IRC: Who is a TRP when it’s unclear?

Answer 32

The one with overall supervisory responsibility for the return.

Question 33

IRC: Civil provision: When does a penalty imposed against a TRP?

Answer 33

When an unreasonable position causes an understatement.

Question 34

IRC: Civil provision: is a position unreasonable? When the position is related to a tax shelter?

Answer 34

If there is no substantial authority (less than 40% chance of being sustained) for the position.
If it is disclosed yet there is no reasonable basis (less than 20% of being sustained) for it.

It’s unreasonable unless it is more likely than not (more than 50% chance) that the position will be sustained.

Question 35

IRC: Civil provision: (b) of 6694 imposes harsher penalties when?

Answer 35

negligent conduct, for willful and reckless understatements. Ex: TRP fabricates deductions or ignores information provided by taxpayer.

Question 36

IRC: Civil provision: does the section 6695 cover?

Answer 36

Punishments on TRPs for, among other things:

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

Question 37

IRC: Civil provision: is a defense for a TRP?

Answer 37

Reasonable cause defense - TRP had reasonable cause (an objective stds) for the position and acted in good faith (a subjective stds)

Question 38

IRC: Civil provision: are other civil provisions punish TRPs and others for?

Answer 38

1. Organizing and promoting abusive tax shelters
2. Aiding and abetting understatement
3. Disclosing client’s info for any purpose other than to prepare a return

Question 39

IRC: what is the burden of proof for Civil and Criminal provisions:

Answer 39

Civil: a mere preponderance of the evidence
Criminal: the burden of proof is on the government to establish the crime beyond a reasonable doubt

Question 40

IRC: Criminal provisions: what does tax evasion include?

Answer 40

Failure to file a return
Falsifying income
Falsifying amounts that reduce taxable income

Question 41

IRC: Criminal provisions: tax evasion: what must the government prove?

Answer 41

1. An affirmative act constituting an attempt to evade or defeat payment of a tax
2. Willfulness, and
3. Existence of a tax deficiency

Question 42

IRC: Criminal provisions: what does tax fraud include?

Answer 42

1. Willfully making and subscribing to any documents made under penalty of perjury that the CPA does not believe to be true as to every material matter
2. Willfully aiding the preparation of any tax related matter that is fraudulent as to any material matter
3. Removing or concealing a client’s property with intent to defeat taxes

Question 43

Who is the solo authority of CPA licensing?

Answer 43

State Boards of Accountancy

Question 44

What is the licensing requirements?

Answer 44

Education, Examination, Experience (1 yr - a least 2,000hrs).

Question 45

What is the area of service one can’t perform without a license?

Answer 45

Attest related service:

• Any audit or other engagement in accordance with SAS (Statements on Auditing Standards).
• Any review of financial stmts based on SSARS (Stmts on Stds on Accounting and Review Services).
• Any examination of prospective financial information based on SSAE (Stmts on Stds for Attest Engagements).
• Any engagement based on stds of PCAOB (Public Company Accounting Oversight Board).

Question 46

What kind of service one can perform without a license?

Answer 46

Non-attest services:
Preparation of tax returns.
Management advisory services (Consulting).
Preparing FS without issuing a report.

Question 47

What are AICPA disciplinary mechanism?

Answer 47

• Professional Ethics Division: investigate violations and sanctions minor cases.
• Joint Trial Board: more serious cases and has power to admonish, suspend or expel.
• Joint Ethics Enforcement Program (JEEP): State handles minor cases. AICPA handles national concern, issue involving more than one state, and in litigation.