R5 - big topic 1 of 3 - Ethics Flashcards
what are the major topics under R5 - 1. Ethics and professional responsibilities in tax services?
- tax return Preparers
- tax return practioner - Circular 230
- Role of State boards of Accountancy
- Requirements of regulatory agencies
I. Tax return preparers - Primary Authoritative Sources
Internal Revenue Code (IRC) and related US. Treasury regulations govern those individuals who prepare federal tax return for a fee.
Primary Authoritative Sources -
- Applicable provision of the IRC and other statutory provisions
- proposed, temp, and final regulations construing such statues.
- revenue rulings and revenue procedures
- Court cases
**IRS information, publication, and press releases are not primary.
I. Tax return preparers - Negligence vs Fraud
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.
I. Tax return preparers - Listed Transaction and Reportable Transaction
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
I. Tax return preparers - more than likely than not; substantial authority; and reasonable basis
more than likely than not = >50% vs. reasonable basis = >20% vs. substantial authority 33%< x < 50%
I. Tax return preparers - Tax preparer and tax practitioner
“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.
I. Tax return preparers - Tax shelter
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)
I. Tax return preparers - understatement due to “Unreasonable Position”
A position is deemed unreasonable UNLESS:
the followings are reasonable -
- either disclosed or not + substantial authority (33%-50%) position + no tax shelter + no reportable transactions
- disclosed + reasonable basis (20%+) position + no tax shelter + no reportable transactions
- (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.
I. Tax return preparers - understatement due to “willful or reckless conduct”
“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)
I. Tax return preparers - 6 Fails
- gotta give a client a copy of tax return. Fail to do so = penalty = $50 for each failure
- Fail to sign = $50 for each failure
- Fail to indicate the Tax Identification Number = $50 each fail
- Preparer must keep record for 3 years. Fail = $50 each fail
- fail to file correct information returns - $50 for each failure
- 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
I. Tax return preparers - 2 Cants
- cannot negotiate a IRS refund check = $500 for each check
- cannot aiding and abetting (helping) - APPLY to ANY person, not just tax preparer
civil penalty = 1,000 for individuals and 10,000 for corp.
I. Tax return preparers - Confidential information wrongful disclosure
GR - penalty = $250 for each disclosure
additional penalty if - 1) solicit business for 3rd party; 2) reckless disclosure of information
EXCEPTION -
- allowable disclosure for COURT Order
- Allowable uses for state and local tax return or estimated tax
- use for quality and peer reviews, computer processing
Consent of client - confidential info can disclosed to any party if clients consents.
II. Circular 230 for Tax Practitioner - duties -conflict of interests
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.
II. Circular 230 for Tax Practitioner - duties -Fees
unconscionable fee - NO
contingent fee - YES
II. Circular 230 for Tax Practitioner -duties - Solicitation
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.
II. Circular 230 for Tax Practitioner -duties - Best Practise
- communicating the engagement
- conclusion based on the facts laws
- the importance of the conclusions (ex - whether the client will be able to avoid penalties)
- Making sure that all members, associates, and employees of the firm following the same
II. Circular 230 for Tax Practitioner - duties - others
1.Referral agreements
any compensation agreement or referral agreement between the promoter and the practitioner must be disclosed.
II. Circular 230 for Tax Practitioner - Standards with respect to tax returns and docs, affidavits, and other papers
- 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。
- 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)
- practitioner due diligence
i) preparing returns and other docs
ii) determining the correctness of her representations to irs - must return all client records
II. Circular 230 for Tax Practitioner - Covered Opinions
written or electronic advice from practitioner from following issues
- listed transaction for tax avoidance
- tax shelter for tax avoidance or evasion
- reliance opinion or marketed opinion on listed transactions, tax avoidance or evasion (tax shelter)
II. Circular 230 for Tax Practitioner - Covered Opinions - Reliance Opinion
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
II. Circular 230 for Tax Practitioner - Covered Opinions - Marketed Opinion
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.
II. Circular 230 for Tax Practitioner - Covered Opinions - Requirements for a covered opinion
- must reach conclusion + reason
or not reach conclusion + reason
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.
II. Circular 230 for Tax Practitioner - Covered Opinions - Competence to provide opinion
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.
II. Circular 230 for Tax Practitioner - Sanctions
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
