R5 - big topic 1 of 3 - Ethics

Question 1

what are the major topics under R5 - 1. Ethics and professional responsibilities in tax services?

Answer 1

1. tax return Preparers
2. tax return practioner - Circular 230
3. Role of State boards of Accountancy
4. Requirements of regulatory agencies

Question 2

I. Tax return preparers - Primary Authoritative Sources

Answer 2

Internal Revenue Code (IRC) and related US. Treasury regulations govern those individuals who prepare federal tax return for a fee.

Primary Authoritative Sources -

1. Applicable provision of the IRC and other statutory provisions
2. proposed, temp, and final regulations construing such statues.
3. revenue rulings and revenue procedures
4. Court cases

**IRS information, publication, and press releases are not primary.

Question 3

I. Tax return preparers - Negligence vs Fraud

Answer 3

Ordinary negligence is NOT fraud.

Fraud is willful + reckless.
Negligence = any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.

Question 4

I. Tax return preparers - Listed Transaction and Reportable Transaction

Answer 4

listed transaction - tax avoidance only (legal)

reportable transaction needs -
information is required to be included with a return because such transaction is identified as a “tax avoidance” or “tax evasion”.

“tax avoidance” - legal
“tax evasion” - illegal

Question 5

I. Tax return preparers - more than likely than not; substantial authority; and reasonable basis

Answer 5

more than likely than not = >50%
vs.
reasonable basis = >20%
vs. 
substantial authority 33%< x < 50%

Question 6

I. Tax return preparers - Tax preparer and tax practitioner

Answer 6

“tax preparer” - anyone prepares tax for compensation

“tax practitioner” - individuals who practice before the IRS: attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents.

Question 7

I. Tax return preparers - Tax shelter

Answer 7

Tax shelter -

i) partnership or other entity
ii) investment plan or arrangement
iii) other plan or arrangement for tax avoidance (legal) or tax evasion (illegal)

Question 8

I. Tax return preparers - understatement due to “Unreasonable Position”

Answer 8

A position is deemed unreasonable UNLESS:

the followings are reasonable -

1. either disclosed or not + substantial authority (33%-50%) position + no tax shelter + no reportable transactions
2. disclosed + reasonable basis (20%+) position + no tax shelter + no reportable transactions
3. (HIGHEST) more than likely not (50%+) position + Tax shelter or reportable

Otherwise, your position is unreasonable. Tax preparer will be liable.

Penalty for understatement of taxpayer liability:
The Greater of $1,000 or 50% of income of taxpreparer.
a) unreasonable position
b) preparer had knowledge about the unreasonable position
c) lack of reasonable basis

*** if a reasonable basis for the understatement exists and the preparer acted in good faith, no penalty.

Question 9

I. Tax return preparers - understatement due to “willful or reckless conduct”

Answer 9

“willful or reckless, intentional” = Fraud

Supporting docs - A preparer is not required to obtain supporting docs unless the preparer has reason to suspect the accuracy of the information provided by the tax preparer (client). -> this is not a audit.

Penalty for “willful and reckless”
GREATER of $5,000 or 50% of income (higher than “unreasonable basis” penalty)

Question 10

I. Tax return preparers - 6 Fails

Answer 10

1. gotta give a client a copy of tax return. Fail to do so = penalty = $50 for each failure
2. Fail to sign = $50 for each failure
3. Fail to indicate the Tax Identification Number = $50 each fail
4. Preparer must keep record for 3 years. Fail = $50 each fail
5. fail to file correct information returns - $50 for each failure
6. fail to be due diligent for client’s income credit = $500 for each failure (penalty wont apply if tax preparer can demonstrate normal office procedures are reasonable designed and follow due diligence compliance.)

• *due diligence requirement
  1. eligibility checklists
  2. computation worksheets
  3. reasonable inquiries
  4. record retention

MAX penalty = $25,000

Question 11

I. Tax return preparers - 2 Cants

Answer 11

1. cannot negotiate a IRS refund check = $500 for each check
2. cannot aiding and abetting (helping) - APPLY to ANY person, not just tax preparer
   civil penalty = 1,000 for individuals and 10,000 for corp.

Question 12

I. Tax return preparers - Confidential information wrongful disclosure

Answer 12

GR - penalty = $250 for each disclosure
additional penalty if - 1) solicit business for 3rd party; 2) reckless disclosure of information

EXCEPTION -

1. allowable disclosure for COURT Order
2. Allowable uses for state and local tax return or estimated tax
3. use for quality and peer reviews, computer processing

Consent of client - confidential info can disclosed to any party if clients consents.

Question 13

II. Circular 230 for Tax Practitioner - duties -conflict of interests

Answer 13

tax practitioner - practice before IRS

• Potential “conflict of interest”. previously were employed by US Government.

Level 1 - “Personally and substantially participate” previous government employee can NEVER represent those parties.

Level 2 - “Official responsibility”. cannot represent within 2 years.

Level 3 - “participated in the development of the particular rule” -> within 1 year, cannot appear. he/she has the official responsibility for that rule.

Question 14

II. Circular 230 for Tax Practitioner - duties -Fees

Answer 14

unconscionable fee - NO

contingent fee - YES

Question 15

II. Circular 230 for Tax Practitioner -duties - Solicitation

Answer 15

Advertising

• Cannot use false or misleading advertising
• must clearly identify the solicitation and identify the source of the information the practitioner used to choose the recipient.

Question 16

II. Circular 230 for Tax Practitioner -duties - Best Practise

Answer 16

1. communicating the engagement
2. conclusion based on the facts laws
3. the importance of the conclusions (ex - whether the client will be able to avoid penalties)
4. Making sure that all members, associates, and employees of the firm following the same

Question 17

II. Circular 230 for Tax Practitioner - duties - others

Answer 17

1.Referral agreements

any compensation agreement or referral agreement between the promoter and the practitioner must be disclosed.

Question 18

II. Circular 230 for Tax Practitioner - Standards with respect to tax returns and docs, affidavits, and other papers

Answer 18

1. practitioner cannot advise client to take a tax return position unless the position is not frivolous. 当tax issue不必要的时候 practitioner不能建议客户使用不必要的return。
2. knowledge of omission by a client (practitioner must advice the client promptly of any noncompliances. if client ignores, think about withdrawal. dont need to notify IRS)
3. practitioner due diligence
   i) preparing returns and other docs
   ii) determining the correctness of her representations to irs
4. must return all client records

Question 19

II. Circular 230 for Tax Practitioner - Covered Opinions

Answer 19

written or electronic advice from practitioner from following issues

1. listed transaction for tax avoidance
2. tax shelter for tax avoidance or evasion
3. reliance opinion or marketed opinion on listed transactions, tax avoidance or evasion (tax shelter)

Question 20

II. Circular 230 for Tax Practitioner - Covered Opinions - Reliance Opinion

Answer 20

Covered opinion - Reliance Opinion (only a opinion, not a guarantee)

• > Written advice concluding
• > at a confidence level of at least likely than not (>50%)
• > the issue will be resolved in taxpayer’s favor.
• > thus avoid penalties

Question 21

II. Circular 230 for Tax Practitioner - Covered Opinions - Marketed Opinion

Answer 21

advice to promote, market, or sell a partnership, investment plan, or arrangement.

market opinion is only about listed transactions, tax shelters (tax avoidance or evasion)

market opinion Must disclose that it was not intended to be used, and cannot be used to avoid penalties.

Question 22

II. Circular 230 for Tax Practitioner - Covered Opinions - Requirements for a covered opinion

• must reach conclusion + reason
  or not reach conclusion + reason

Answer 22

1) reach the overall conclusion + reason for that conclusion OR state unable to reach the conclusion + reason
2) opinion must consider and identify all facts
3) opinion cannot based on unreasonable assumptions
4) opinion must relate to law
5) opinion must have likelihood (confidence level)
6) no confidence level, opinion must disclose a) not reach confidence level of at least more like than not; b) taxpayer cannot use opinion for avoiding penalties
7) cannot take into account “oh wont get audit”
8) marketed opinion -> confidence level must be more likely than not
9) Limited Scope Opinion (break opinion into each tax issue is okay, and less than all federal tax issues is okay)
- must both agree
- disclose
- opinion does not address listed transaction, tax shelter, marketed opinion.

Question 23

II. Circular 230 for Tax Practitioner - Covered Opinions - Competence to provide opinion

Answer 23

a. must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered.
b. practitioner may reasonable rely upon the opinion of another practitioner
c. DONT give written advice if -
- based on unreasonable factual assumption
- unreasonable rely
- does not consider all relevant facts
- think about “wont be audited”
- know written advice will be used to promote tax avoidance and evasion.

Question 24

II. Circular 230 for Tax Practitioner - Sanctions

Answer 24

may censure, suspend or disbar any practitioner from practice if practitioner

1) shown to be incompetent or disreputable
2) fails to comply with Circular 230
3) with intent to defraud, willingly and knowingly mislead a client

Keyword for “Not in good faith”
convicted, false, misleading, willingful, knowingly, recklessly, bribing, aiding, abetting, assisting to evade

Question 25

III. Role of State board of Accountancy

Answer 25

Sole Power - to license, suspend, and revoke a CPA licence.

Step 1 - Professional misconduct

1. misconduct while performing accounting services (negligence, fraud, dishonesty)
2. misconduct outside the scope of accounting (drug, impair ability)
3. criminal

Step 2 - investigation, formal hearing.
Yes - state board to suspend your license is “more likely than not”. dont have to proof.
Yes - accountant is entitled to due process of law
Yes - judicial review

Step 3 - Penalty

1. suspension or revoke
2. fine
3. censure
4. probation
5. required additional CPE course

NO criminal no jail

Question 26

IV. Other Regulatory Agencies

1. AICPA and State CPA Societies (not state board)
2. IRS
3. SEC -> SOX, 1933, 1934

Answer 26

1. AICPA and State CPA Societies
   no criminal penalties
   no civil penalties
   only can suspend membership etc.

“JEEP” AICPA + 49 State cpa societies Joint Ethics Enforcement Program -> enforcement of their codes of conduct by a single investigation and action.

2. IRS
   Criminal penalties - any person
   Civil Penalties
3. SEC
   Civil Penalties, investigate criminal
4. State board
   suspend and revoke license
   civil penalties

Question 27

A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except:

Answer 27

Circular 230 does not prohibit a practitioner’s holding the check for safe keeping and awaiting the client’s return.