ETHICS . What Every Tax Preparer Needs to Engrave in Their Thoughts. Presented By: Marcia L. Miller, MBA, EA Financial Horizons, Inc. Weston, Florida [email protected]
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What Every Tax Preparer Needs to Engrave in Their Thoughts
six principles are the cornerstone of ethical behavior.
1 - Responsibilities
2 - The Public Interest
3 - Integrity
4 - Objectivity and Independence
5 - Due Care
6 - Scope and Nature of Services
to provide guidelines concerning the scope and application of the rules of conduct.
particular set of factual circumstances.
Actual fraud and constructive fraud present two different circumstances under which an accountant may be found liable. An accountant may be held liable for actual fraud when he or she intentionally misstates a “material fact” to mislead his or her client, and the client detrimentally relies on the misstated fact. A material fact is one that a reasonable person would consider important in deciding whether to act. Constructive fraud, on the other hand, will be found when an accountant is grossly negligent in the performance of his or her duties. The intentional failure to perform a duty in reckless disregard of the consequences of such a failure would constitute gross negligence on the part of an accountant. Both actual and constructive frauds are potential sources of legal liability under which a client may bring an action against an accountant.
When a client is dissatisfied with the performance of an accounting firm, he or she will often sue on all three common law theories in the alternative. The Federal Rules of Civil Procedure permit a pleader, in a claim or defense, to make two or more statements which are not necessarily consistent with each other. A plaintiff may sue on several theories.
Circular 230 provides regulations governing the practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service. As part of an ongoing effort to improve ethical standards for tax professionals and to curb abusive tax avoidance transactions, the Treasury Department and the Internal Revenue Service have issued final regulations amending Circular 230 to achieve the strategic goal of ensuring that attorneys, accountants, enrolled agents, and other tax practitioners adhere to professional standards and follow the law. Subpart B of Circular 230 describes the duties and restrictions relating to practice before the Internal Revenue Service, the best practices for tax advisors, and standards with respect to tax returns, financial documents, and workpapers. Subpart C describes the sanctions for violation of the regulations, and defines incompetence and disreputable conduct for which a practitioner may be sanctioned. The most recent revision of Circular 230 is available on the Internal Revenue Service website.
Services rendered in connection with an examination or other challenge to a taxpayer’s original return.
Services rendered in the preparation of an amended return or claim for refund or credit which is filed within 120 days of the taxpayer receiving a notice of examination or a written challenge to the return.
Services rendered in connection with a claim for refund or credit regarding the determination of interest and penalties assessed by the IRS.
Services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.
A practitioner may reasonably believe that he/she will be able to provide competent and diligent representation to clients where a potential conflict of interest exists. The clients may consent to such representation if it is not prohibited by law. Each affected client must waive the conflict of interest and give informed consent in writing within 30 days after being informed of the conflict. The practitioner must retain copies of the written consents for at least 36 months after the conclusion of the representation of the affected clients, and must provide those consents upon request to any officer or employee of the IRS.
If a practitioner publishes a fee schedule, he/she may not charge more than the published fees for at least 30 days after the last date of publication. The practitioner must retain a copy of any communication containing fee information, along with a list or description of persons to whom the communication was distributed. The practitioner must retain these copies for at least 36 months after they were last used. This applies to all methods of communication – mailings, e-mails, radio, television, flyers, telephone directories, and all others.
regarding federal tax matters. In addition to compliance with standards, best practices include the following:
Incompetence and Disreputable Conduct: Incompetence and/or disreputable conduct may subject a tax professional who is authorized to practice before the IRS to sanctions for violation of the regulations. Incompetent and/or disreputable acts include the following:
Conviction of any criminal offense under the federal tax laws.
Conviction of any criminal offense involving dishonesty or breach of trust.
Conviction of any felony under federal or state law which would render a practitioner unfit to practice.
Knowingly giving false or misleading information to the Department of the Treasury or its officers or employees.
Soliciting employment or attempting to deceive a client or prospective client using false or misleading representations, or intimating that the practitioner is able to obtain special consideration or action from the IRS or its officer or employee.
Willfully failing to file a federal tax return, or participating in evading or attempting to evade any assessment or payment of any federal tax.
Willfully assisting, counseling, or encouraging a client or prospective client to violate any federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade federal taxes.
Disclosure to employees, technical advisors, software consultants, or electronic filing providers.
Disclosures required to comply with federal, state, or local laws, or with licensing requirements.
Disclosures required to comply with legal subpoenas or other legal actions.
The Internal Revenue Service also has requirements regarding the disclosure of tax information. These requirements are found in Revenue Procedure 2008-35, published in the Internal Revenue Bulletin on July 21, 2008. Section 7216(a) of the Internal Revenue Code imposes criminal penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or uses of information furnished in connection with the preparation of a tax return. Any disclosure or use of tax information requires the informed consent of the taxpayer.
It probably doesn’t mean that practitioners must use all measures possible to verify all information that client provides but the scope of our investigations has broadened.
It would be likely that facts and circumstances would be considered.
Due to the tighter standards imposed by the new rules, the cost of providing written tax opinions will likely be higher unless the disclaimer approach is taken.
Effective for all members, associates and employees there must be a conformity with Circular 230.
Tax return should not be signed as preparer if it contains a position that does not have a realistic possibility of being sustained on its merits.
Audit roulette does not count.
Does it have a one in three chance (or greater) of being sustained on its merits.
If position is improper it is frivolous.
Preparers must make taxpayers aware of the penalties involved.
Reckless violation or incompetence is grounds for censure, suspension or disbarment from practice.
All information, hearings, pleadings, evidence, reports decisions will be made available to the public.
Substantial or Gross valuation misstatement >$5,000 penalties to 20% or 40%, respectively unless:
Substantial authority or
Adequately disclosedandreasonable basis.
(1) a nondisclosed position that failed to meet the "realistic possibility of success" standard, or
(2) a disclosed position that was frivolous.
1st Tier is greater of $1,000 or 50% of fees
Preparer may be subject to penalties even
though the taxpayer would not as a result of
Higher level, was a realistic possibility of success, now is MORE LIKELY THAN NOT,
(more than 50% likely to succeed)
penalty of up to 50% of the fees for the
- the position was not disclosed and the return preparer did not have a reasonable belief that the position was more likely than not correct, or
- the position was disclosed but did not have a reasonable basis.
e-mails and memoranda advising clients to disclose any position that does not meet the "more likely than not" standard.
Line-by-line basis, that there is no certainty that each number reflected on the return is more likely than not correct………..
Document, document, document!!!
Disclose a position contrary to a rule
such as a statutory position or
IRS revenue ruling.
1. In general, Treasury Department proposed changes to Circular 230
on March 6, 2006
2. What is a contingent fee?
Fee based in whole or part on a position taken on a tax return; includes refund or reimbursement of fees
Cannot charge contingent fee on Original
Can charge contingent free on:
exam of original return,
or judicial proceeding
return that contains a position that does not
have ‘realistic possibility’ of being sustained.
IRS sanctions include censure, suspension, or disbarment from practice before IRS.
1. Thresholds for accuracy related penalties reduced
- From 200% to 150% for Substantial valuation misstatement (20% penalty)
- From 400% to 200% for Gross valuation misstatement (40% penalty)
2. Appraisal penalties increased
- $1,000 or 10% of tax understatement
- Max = 125% x appraisal fee unless ‘more likely than not’ correct appraisal
NOTE: Per the IRS general instructions:
The portion of the accuracy-related penalty
attributable to the following types of misconduct cannot be avoided by disclosure on Form 8275:
■ General Overview of Sec. 7216
■ Criminal Penalties Apply
■ Tax Return Preparation & Auxiliary Services
■ Definition of Tax Return Information
■ Use and Disclosure
■ Permitted Disclosures without Consent
■ How do we protect ourselves?
- contain all the elements described in section 4.04 and, if applicable, comply with section 4.06,
- be able to be signed as required by section 5 and dated by the taxpayer, and
- be able to be formatted in a readable and printer-friendly manner.
4 Types of Consents:
Adequate data protection safeguard
(a) Assign a personal identification number (PIN) that is at least 5 characters long to the taxpayer. To consent to the disclosure or use of the taxpayer’s tax return information, the taxpayer may type in the pre-assigned PIN as the taxpayer’s signature authorizing the disclosure or use. A PIN may not be automatically furnished by the software so that the taxpayer only has to click a button for consent to be furnished. The taxpayer must affirmatively enter the PIN for the electronic signature to be valid;
(b) Have the taxpayer type in the taxpayer’s name and then hit “enter” to authorize the consent. The software must not automatically furnish the taxpayer’s name so that the taxpayer only has to click a button to consent. The taxpayer must affirmatively type the taxpayer’s name for the electronic consent to be valid; or
(c) Any other manner in which the taxpayer affirmatively enters 5 or more characters that are unique to that taxpayer that are used by the tax return preparer to verify the taxpayer’s identity. For example, entry of a response to a question regarding a shared secret could be the type of information by which the taxpayer authorizes disclosure or use of tax return information.
Tax preparer inquires of taxpayers about whether they wish to make an IRA contribution after determining if the taxpayer is eligible to make an IRA contribution. Only those taxpayers that are eligible to make an IRA contribution receive the inquiry. This is a use of tax return information potentially subject to the consent rules.
1) Disclosures pursuant to other provisions of the Internal Revenue Code or Regulations.
2) Disclosures to Officers or Employees of the IRS.
3) Disclosures or Uses for the Preparation of a Taxpayer’s Tax Return.
4) Disclosure to Other Preparers.
5) Related Taxpayers
6) Courts & Regulatory bodies.
7) Attorney for purposes of securing legal advice.
8) Officer of the Court.
9) Certain disclosures by Attorneys & Accountants.
10) Corporate Fiduciaries.
11) Taxpayer’s Fiduciary.
12) Employee of the Treasury Dept. for use in investigation of the tax return preparer.
13) Other Tax Returns/Tax Obligations.
14) Payment for Tax Preparation Services.
15) Retention of Taxpayer records.
16) Lists for solicitation of Tax Return Business.
17) Production of Statistical information for return
18) Quality or Peer Reviews.
19) Disclosure to Report the Commission of a Crime.
20) Due to Tax Return Preparer’s Incapacity or Death.