R5 Ethics and Professional Responsibilities PT1

Question 1

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

9 Items

Answer 1

1. IRC and other Fed statutes
2. US Treasury Regulations
3. IRS revenue ruling & procedures; tax treaties and US treasury Dept. explanations of such treaties
4. Federal court cases
5. Congressional intent set forth in committee reports, statements of managers including in conference committee reports, and bill manager’s floor statements.
6. Explanations prepared by joint committee on Taxation (the “blue book”)
7. Private letter ruling and technical advice memoranda
8. Actions on decisions and general counsel memoranda
9. IRS info or press release and notices, announcements and other admin pronouncements

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 US Department of 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 US 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 reasonable 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 standard.

Question 5

What is the “substantial authority” standard?

Answer 5

An objective standard involving application of the law to relevant facts; 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 US Court of Appeals to which the TP has a right of appeal with respect to the item.

The TP’s belief that there is substantial authority for the tax treatment an item is not relevant.

Question 6

What is a tax shelter?

3 Items

Answer 6

Any (1) PS or other entity
(2) investment plan or arrangement or (3) other plan or arrangement if a significant purpose of such PS, 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 TP’s liability due to an unreasonable position by the tax return preparer.

Penalty for understatement of TP’s liability due to willful or reckless conduct of the Tax return preparer.

Penalty for aiding and abetting understatement of tax.

Question 8

List the paid income tax preparers responsibilities to the client and the IRS.

9 Items

Answer 8

1. Providing to the client a completed copy of the tax return
2. Signing the TR or refund claims.
3. Indicating on the return or refund claim the tax id number of the tax return preparer
4. Retaining tax returns records (copies or lists) properly and for at least 3 years.
5. Filing with the IRS the yearly information returns regarding other tax returns preparers employed by the tax return preparer.
6. Not negotiating the client’s IRS refund check
7. Diligently determining the client’s eligibility for the EIC
8. Not disclosing, except as permitted by law, client tax return information
9. 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.

4 Items

Answer 9

1. Disclosures allowed by any provision of the IRC and disclosures 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 US treasury regulations (disclosure and use for quality and peer review, computer processing, and administrative orders).
4. Consent of the client

Question 10

What is Circular 230?

Answer 10

Circular 230 is an IRS publication containing the US Treasury regulations governing the authority of a tax practitioner to practice before the IRS, the duties and restrictions relating to practices before the IRS, the sanctions for violation of the regulations and the rules applicable to IRS disciplinary proceedings.

Question 11

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

3 Items and a Note

Answer 11

1. IRS examination (audit)
2. Claim solely for a refund of interest and / or penalties or
3. A judicial proceeding arising under the IRC

Note: These are the only situations before the IRS when a tax practitioner may charge a contingent fee.

Question 12

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

3 Items

Answer 12

Practitioner may represent both (all) clients if:

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