Statements on Standards for Tax Services

Question 1

What is an unreasonable position?

26 U.S.C. Section 6694

Answer 1

anything that does not have substantial authority supporting it is unreasonable position.

• If there is at least 40% chance of being sustained by the IRS - it is substantial authority.
• If the position is case of tax shelter, then the “more likely than not” rule at least 50% chance of being sustained y the IRS

Question 2

What is the difference between “realistic possibility” for sustaining a position and “reasonable basis”?

Answer 2

“Realistic possibility” is when there is greater than 33% chance of sustaining a position by the IRS.

However, Even if there is no “realistic possibility” the tax preparer can still recommend a tax position, prepare and sign the return if he believes in good faith that 1) there is “reasonable basis” 20-33% 2) the position is disclosed to the IRS

Question 3

Why should Tax Preparers make reasonable efforts to obtain information to answer questions on the return?

Answer 3

1) to determine correct taxable income, loss and tax liability
2) to obtain disclosures required to avoid penalties
3) member signs the return is true, correct and complete

Question 4

When is omission of answers to questions on the return permitted?

Answer 4

1) when obtaining information is not practical
2) When the meaning of the question in relation to the tax payer’s circumstances is not understood
3) When the information is voluminous and it is disclosed on the return that the information will be provided when asked by the IRS

Question 5

What are the procedural aspects of preparing a return?

Answer 5

1) Can rely on information provided without verification
2) Do not ignore Red Flags
3) Compare previous years’ returns
4) Reasonable investigations to ensure any conditions imposed by Tax laws for taking certain positions are met
5) Can take lessons from other people’s returns

Question 6

Use of Estimates - What is the General Rule? What are the limitations? What are the disclosures required?

Answer 6

Gen Rule - Unless prohibited by law, estimates can be used 1) If actual numbers cannot be obtained 2) Member is sure that they are reasonably estimates.

Limitations - Tax payer cannot imply greater accuracy than exists (1296.19 is wrong)

Disclosures - Usually no disclosures required Unless
1) Tax payer is ill or dead at the time of preparing the return 2) He has not received the K-1 from a pass through entity 3) Pending litigation affecting the return 4) Natural disasters, fire or computer failure destroyed records

Question 7

What is the General rule, Possible grounds and exceptions to “Departures from a Previous Position”

Answer 7

General Rule - It is OK to re-take a position if the tax payer and preparer believe in good faith that the position satisfies the SSTS1

Possible Grounds - 1) New tax ruling, court judgments supporting the tax payer position 2) no documentation available the last year to support the position but available this year 3) Tax payer settled the case previous year to avoid litigation although, believed in good faith that, the position was legitimate

Exceptions - Tax payer has signed an agreement with The IRS that such a position wouldn’t be taken again

Question 8

What do you know about “Knowledge of significant error on prior year return subject to administrative proceedings”?

Answer 8

1) Must inform the taxpayer about the issue and recommend to correct the mistake. Must not contact the IRS or prior CPA without client’s permission, unless required by law
2) Once permission is given, member must act promptly
3) If no permission is given - must consider severing relationship or try to avoid making the same mistake in the current year and future years’ returns
4) If client facing criminal charges, advise them to contact an attorney
5) Member can ignore if the effect of the error on the accuracy of the return is insignificant

Question 9

What are the Rules regarding advice and information communication to tax payers?

Answer 9

1) Important, unusual, substantial $$ value and complicated matters in writing
2) Must consider - i) return reporting and Disclosure standards like SSTS1 ii) Potential penalties for recommending certain positions
3) No duty to update tax payers of any changes in tax laws that occurred later unless i) it happened when the member is currently assisting the tax payer ii) He has explicitly agreed to update any changes that happend later

Question 10

What are penalties against an Income tax preparer?

Answer 10

Penalty for

1) Willful and/or reckless disclosure of tax information unless it was for preparing a return - upto 1000$
2) Willful understatement of tax liability - greater of 5000$ or 50% f income earned from the return