R4 Ethics & Professional Responsibilities in Tax Services

Question 1

List the various authorities for purposes of determining whether there is substantial authority for the income tax treatment of an item

Answer 1

1. The IRC and other federal statutes
2. U.S Treasury regulations
3. IRS revenue rulings and procedures; tax treaties, and U.S. Treasury Department explanations of such treaties
4. Federal Court cases
5. Congressional intent set forth in committee reports, statements of managers included in conference committee reports and bill manager’s floor statements
6. Explanations prepared by the Joint Committee of Taxation (Blue Book)
7. Private letter ruling and technical advice memo
8. Actions on decisions and general counsel memo
9. IRS information or press releases and notices, announcements, and other administrative pronouncements
   DO NOT USE IRS PUBLICATIONS!

Question 2

What is a listed transaction?

Answer 2

The term listed transaction means a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the U.S. Department of the Treasury as a tax avoidance transaction

Question 3

What is a reportable transaction?

Answer 3

The term reportable transaction means any transaction which the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance (the legal use and application of the tax laws and cases in order to reduce the amount of tax due) or tax evasion (efforts by illegal means and methods to not pay taxes?

Question 4

What is the reasonable basis standard?

Answer 4

Reasonable basis is a relatively high standard of tax reporting and is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.

If a return position is reasonably based on one or more acceptable authorities, the return position will generally satisfy the reasonable basis standard even though the position may not satisfy the substantial authority.

Question 5

What is substantial authority standard?

Answer 5

An objective standard involving the application of the law to relevant fact; less stringent than the “more likely than not” standard.

Substantial authority exist only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment.

There is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a U.S. Court of Appeals to which the taxpayer has a right of appeal with respect to the item.

The taxpayer’s belief that there is a substantial authority for the tax treatment of an item is not relevant

Question 6

What is a tax shelter?

Answer 6

The term tax shelter means any:

1. Partnership or other entity
2. Investment plan or arrangement or
3. Other plan or arrangement if a significant purpose of such partnership, entity, plan or arrangement is the avoidance or evasion of federal income tax.

Question 7

List the various penalties the IRS can impose on a tax return preparer who understates the taxpayer’s income tax liability

Answer 7

Penalty for Understatement of Taxpayer’s Liability Due to an UNREASONABLE Position by the Tax Return Prepared

Penalty for Understatement of Taxpayer’s liability due to WILLFUL and RECKLESS Conduct of the Tax Return Preparer

Penalty for Aiding and Abetting Understatement of Tax

Question 8

List the paid income tax preparer’s responsibilities to the client and to the IRS

Answer 8

• Providing to the client a complete copy of the tax return
• Signing the tax return or refund claim
• Indicating on the return or refund claim the TIN of the tax return preparer
• Retaining tax return records (copies or lists) properly and for at least 3 years
• Filing with the IRS the yearly information returns regarding other tax return preparers employed by the tax return preparer
• Not negotiating a client’s IRS refund check
• Diligently determining the client’s eligibility for the earned income credit
• Not disclosing, except as permitted by law, client tax return information
• Not using, except as permitted by law, client tax return information for any purpose other than to prepare a tax return

Question 9

List the exceptions to the penalty and/or fine for wrongful disclosure and/or wrongful use of tax return information

Answer 9

1. Disclosures allowed by any provision of the IRC and disclosure pursuant to a court order
2. Use in preparing state and local tax returns and declaration of estimated tax
3. Disclosures and uses permitted by U.S. Treasury regulations (disclosure and use for quality and peer reviews, computer processing, and administrative orders)
4. Consent of the client

Question 10

What is Circular 230?

Answer 10

Is an IRS publication containing the U.S. Treasury regulations governing the authority of a tax practitioner to practice before the IRS, the duties and restrictions relating to practice before the IRS, the sanctions for violation of the regulations, and the rules applicable to IRS disciplinary proceedings.

Question 11

Under what situations before the IRS may a tax practitioner charge a contingent fee?

Answer 11

• IRS examination (audit)
• Claim solely for a refund of interest and/or penalties
• A judicial proceeding arising under the Internal Revenue Code

Question 12

If a conflict of interest exists, under what circumstances may a tax practitioner represent the clients for which there is a conflict of interest?

Answer 12

The practitioner may represent both (all) clients if:

1. the practitioner reasonably believes that he can competently represent the clients
2. No state of federal law prohibits such representation
3. Each affected client waives the conflict of interest and with respect to the waiver so confirms in writing withing 30 days after waiving

Question 13

What are the requirements for advertising?

Answer 13

• No false or misleading advertising
• Each solicitation must identify the solicitation as such
• If applicable, identify the source of the information used to choose the recipient
• If advertising by radio and/or TV keep for at least 36 months a recording of the actual broadcast transmission
• If advertising by direct mail and/or e-commerce, keep for 36 months a copy of the communication and a listing of those to whom the communication was sent

Question 14

What are the requirements for written fee schedules?

Answer 14

If a practitioner publishes a written fee schedule, charge no more than the published fees for the 36 day period following the last date that the fees were published

Any statement of fee information concerning matters in which fees may be incurred (such as fees for the practitioner’s use of a tax return processor) must include a statement disclosing whether the clients will be responsible for such costs.

Question 15

What are the best practices for tax advisors?

Answer 15

1. Communicating with the client regarding the terms of the engagement
2. Establishing the fact and arriving at a conclusion supported by the laws and the facts
3. Advising the client about importance of the conclusions reached (whether the client will be able to avoid penalties)
4. Making sure that all members, associates, and employees of the firm follow procedures that are consistent with the above

Question 16

Under what circumstances must the tax practitioner advice the client of penalties reasonably likely to apply?

Answer 16

With respect to penalties reasonably likely to apply for a position taken on a tax return, the practitioner must so advise if the practitioner either:

1. Advised the client with respect to the position or
2. Prepared or signed the tax return

Further, the practitioner must inform the client of any penalties “reasonably likely” to apply with respect to any document submitted to the IRS

Question 17

Once the tax practitioner has informed the client of penalties reasonably likely to apply, what additional information must the practitioner provide to the client?

Answer 17

The practitioner must inform the client of:

1. Opportunity to avoid such penalties if the client so discloses the position taken, and
2. The requirement for adequate disclosure

Question 18

To what extent may the tax practitioner rely upon client-provided information?

Answer 18

General Rule: the practitioner may rely “in good faith without verification” upon client furnished information

However, the practitioner cannot ignore contradictory information known to the practitioner, the practitioner must make reasonable inquiries if client furnished information appears questionable or incomplete

Question 19

Does the tax practitioner have any obligation to inform the client about the client’s tax return errors or omissions?

Answer 19

YES, the practitioner must advice the client promptly of any noncompliance, errors, or omissions in tax returns and other documents

The practitioner must advise the client of the consequences under the law with respect to such noncompliance, errors or omissions.

Question 20

What is a covered opinion?

Answer 20

A covered opinion is any written or electronic advice, other than excluded advise, concerning one or more federal tax issues and arising from:

1. A tax avoidance transaction that the IRS identified in IRS publications as listed transaction
2. Any partnership or any other entity, plan or arrangement whose principal purpose is federal tax avoidance or evasion, or
3. Any partnership or any other entity, plan or arrangement having as a significant purpose federal tax avoidance or evasion, if the advice is: i) reliance of an opinion, ii) a marketed opinion, iii) subject to conditions of confidentiality or iv) subject to contractual protection

Question 21

What is a federal tax issue?

Answer 21

A question concerning:

1. the federal tax treatment of any item or transaction
2. the value of property for federal tax purposes

Question 22

What is a significant federal tax issues?

Answer 22

A federal tax issues for which:

1. the IRS has a reasonable basis for successful challenge and
2. the resolution of the issue has a significant tax impact under any reasonably foreseeable circumstance

Question 23

With respect to the practitioner’s having procedures in place to assure compliance with Circular 230, when will the IRS institute disciplinary actions?

Answer 23

Failure to have these procedures in place will result in IRS disciplinary actions under either the following circumstances:

1. these procedures are not in place, and the result is a failure to comply. or
2. the practitioner knows or should have know that other in the firm are not complying and fails to correct the noncompliance

Question 24

Who publishes these standard and what are they?

Answer 24

The AICPA’s Tax Executive Committee published the 7 Statements on Standards for Tax Services. The SSTSs set forth the ethical tax practice standards for members of the AICPA.

Question 25

List the sections of each standard

Answer 25

Introduction
Statement (often several paragraphs)
and Explanation

Question 26

List the topics covered in the Standards

Answer 26

1. Tax return positions
2. Answers to questions on returns
3. Certain procedural aspects of preparing returns
4. Use of estimates
5. Departure from a position previously concluded in an administrative or court hearing
6. Knowledge or error: return preparation and administrative proceedings
7. From and content of advice to taxpayers

Question 27

If a tax return positions does not have at least a realistic possibility of being sustained, the tax preparer may nevertheless recommend that position under what circumstance?

Answer 27

The tax preparer:

1. Concludes that there is a reasonable basis for the position and
2. Advises the taxpayer to disclose appropriately that position

Question 28

If a tax return reflects a tax return position which the tax preparer has concluded has only a reasonable basis, under what circumstances may the preparer sign that return?

Answer 28

Sign the return only if that return position is appropriately disclosed

Question 29

List the levels of support from the least stringent to the most stringent

Answer 29

Reasonable basis standard (least stringent)
Realistic possibility standard
Substantial authority basis
More likely than not standard (most stringent)

Question 30

What is the tax preparer’s responsibilities with respect to answering questions on the return?

Answer 30

Make a reasonable effort to answer all questions on tax returns; there must be reasonable grounds for omission of an answer

Question 31

Summarize the procedural aspects of preparing a return

Answer 31

Generally, no responsibility to verify information provided by taxpayer, however, must make reasonable inquiries if the information appears to be incomplete, incorrect on inconsistent.

Also, determine whether the taxpayer maintains appropriate books and records when required by statute or rule, and possesses substantiating documentation when required by statute or rule.

Whenever possible, review one or more returns from previous years in order to obtain information concerning the taxpayer.

Question 32

What is the standard regarding the tax practitioner’s use of estimates?

Answer 32

The tax preparer may use estimates provided by the taxpayer and disclosure of estimates is not generally required but must present information in a way that it does not imply the information is exact

Question 33

When can a tax practitioner depart from a position previously concluded in an administrative proceeding or in a court decision?

Answer 33

A tax preparer may recommend a tax position that is different from the treatment as concluded in an administrative proceeding or in a court decision with respect to a previous year’s return if:

1. Taxpayer is not bound to a specified treatment in the later year
2. The tax return preparer follows the SSTS #1 standards to Tax Return Positions (enough documentation)

Question 34

What is required of the tax return preparer who becomes aware of an error in a previously filed return?

Answer 34

Notify the taxpayer but do not notify any taxing authority regarding an error without first obtaining permission from the taxpayer, except when required by law.

Question 35

What is required of the tax return preparer who becomes aware that the taxpayer has failed to file a tax return?

Answer 35

Notify the taxpayer but do not notify any taxing authority regarding the non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 36

What is required of the tax preparer, who while representing the taxpayer in the administrative proceeding, becomes aware of an error or non-filing?

Answer 36

Request the taxpayer’s agreement to disclose to the taxing authority the error or non-filing, If the taxpayer does not agree, the tax preparer should consider whether it is appropriate to continue the professional relationship.

Do not notify any taxing authority regarding the error or non-filing without first obtaining permission from the taxpayer except when required by law

Question 37

When must the tax preparer notify the taxpayer about new or changing tax developments occurring after the preparer has given advice to the client?

Answer 37

When assisting a taxpayer in implementing a plan associated with advice previously given, revise the plan if there are new developments

If not assisting in implementing the plan, there is no requirement to notify the taxpayer of subsequent developments that may affect the advice previously given