1. Chapter 1 Copyright ©2006 Thomson South-Western, Mason, Ohio William A. Raabe, Gerald E. Whittenburg, & Debra L. Sanders With additions and updates by Professor Nellen Introduction to Tax Practice

2. Question #1 What guidance and rules should tax accountants be aware of wrt ethical matters and procedures in doing tax work for clients?

3. Rules & Ethics in Tax Practice  Circular 230  AICPA Code of Professional Conduct  AICPA Statements on Standards for Tax Services (SSTS)  Sarbanes-Oxley and Taxation  State CPA Society Rules  MOST IMPORTANT – CA Business & Professions Code governing the issuance of the CA CPA license

4. Circular 230 Governs all who practice before the IRS  Divided into these Subparts: A: Rules Governing Authority to PracticeAuthority to Practice B: Duties & Restrictions Relating to Practice before the IRSPractice before the IRS C: Sanctions for Violation of the Regulations D: Rules Applicable to Disciplinary Proceedings E: General Provisions

5. Circular 230  Version in textbook is 2002, final regs have been issued in 2004, 2005 and 2007 that amend  According to an IRS press release, the 2005 revisions:  provide standards for written advice that reflect current best practices  are intended to restore and maintain public confidence in tax professionals  ensure that tax professionals do not provide inadequate advice  require tax professionals to make disclosures if the advice is incomplete

6. Practice before the IRS  “comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion, and representing a client at conferences, hearings and meetings.” [10.2(a)(4)]

7. Q8 – Who is subject to Circular 230?  Attorneys  CPAs  Enrolled agents  Enrolled actuaries  Enrolled retirement plan agents  Nonenrolled persons (10.7)

8. Enrolled Agents  One who passed an IRS exam  or one who has worked for the IRS for at least 5 years  Same rights as attorneys & CPAs  May also be CPA or attorney  Allows one to practice before IRS in any state

9. Nonenrolled Persons  Limited practice  Nonenrolled tax return preparers  Represent oneself  Represent immediate family  Employee may represent employer  General partner may represent partnership  Trustee may represent trust

10. Nonenrolled Tax Return Preparers  May not  Represent taxpayer before appeals & collection division  Execute refund claims or receive refund checks for clients  Agree to suspend statute of limit  Execute closing agreements  Waive restriction on assessment

11. Conduct Before the IRS  Must furnish information to the IRS  If knowledge of client’s omission  Must advise client of noncompliance  Exercise due diligence  No unreasonable delays

12. Exercise Due Diligence  Must make a reasonable effort to comply with tax laws  Failure to exercise due diligence is:  More than simple error  But less than willful & reckless conduct

13. More on diligence Preamble to 2002 final regs (TD 9011): (emphasis added) “It is expected that practitioners will use common sense and experience in guiding their conduct under this section. The section applies both in the context of a firm and in circumstances involving a practitioner’s engagement of an outside practitioner.” [explanation of 10.22]

14. Contingent Fees  Contingent fees  Not on for services rendered for any matter before the IRS  OK in connection with IRS exam or challenge to original return or amended return or claim for refund where filed within 120 days of t/p receiving a written notice of exam or written challenge to original return

15. Solicitation & Advertising  Most media permissible  Cannot contain false, fraudulent, coercive, or misleading or deceptive statements or claims  Must comply with other authorities  ABA, AICPA, State CPA societies, state regulatory agencies, National Association of Enrolled Agents, etc.

16. Modern Advertising  Ok to use:  MySpace?  YouTube?  http://www.myspace.com/theentertainmentattorney http://www.myspace.com/theentertainmentattorney  http://profile.myspace.com/index.cfm?fuseaction=user.vie wprofile&friendID=90523916  http://profile.myspace.com/index.cfm?fuseaction=user.vie wprofile&friendID=59983843

17. Tax Return Positions  IRC §6694 - MLTN  SSTS #1 – can’t recommend a position unless have good faith belief that position has a realistic possibility of being sustained administratively or judicially on its merits if challenged  If lesser std, and not frivolous, ok if disclosed  Circ 230, 10.34 – must not be frivolous

18. Realistic Possibility  NOTE – not updated for changes made by P.L. 110-28  §1.6694-2(b) Realistic possibility of being sustained on its merits.  (1) A position is considered to have a realistic possibility of being sustained on its merits if a reasonable and well-informed analysis by a person knowledgeable in the tax law would lead such a person to conclude that the position has approximately a one in three, or greater, likelihood of being sustained on its merits (realistic possibility standard). In making this determination, the possibility that the position will not be challenged by the Internal Revenue Service (e.g., because the taxpayer's return may not be audited or because the issue may not be raised on audit) is not to be taken into account. The analysis prescribed by §1.6662-4(d)(3)(ii) for purposes of determining whether substantial authority is present applies for purposes of determining whether the realistic possibility standard is satisfied.

19. Tax Return Positions Circ 230, proposed 10.34(a) [Preamble to Prop Regs. 9/26/2007. Fed. Reg. Vol. 72, No. 186, p. 54621] “a practitioner may not sign a tax return as a preparer unless the practitioner has a reasonable belief that the tax treatment of each position on the return would more likely than not be sustained on its merits, or there is a reasonable basis for each position and each position is adequately disclosed to the Internal Revenue Service. A practitioner may not advise a client to take a position on a tax return, or prepare the portion of a tax return on which a position is taken, unless: (1) The practitioner has a reasonable belief that the position satisfies the more likely than not standard; or (2) the position has a reasonable basis and is adequately disclosed to the Internal Revenue Service. The definitions of “more likely than not” and “reasonable basis” under §10.34(e) also are proposed to be amended to reflect these changes in accordance with the well-established definitions of these terms under the section 6662 penalty regulations.“ “ These regulations are proposed to apply to returns filed or advice provided on or after the date that final regulations are published in the Federal Register, but no earlier than January 1, 2008.”

20. Circular 230’s Best Practices  [§10.33] Aspirational standards that should help tax advisors provide clients with the highest quality representation concerning Federal tax issues that cover:  Clear communications with clients  Establishing relevant facts  Evaluating reasonableness of assumptions or representations  Relating the law to the facts  Arriving at supported conclusions  Advising clients of the conclusions  Acting fairly and with integrity before the IRS

21. Question #9 Could a CPA be “disbarred” from practice before the IRS for failure to file tax returns? [Circular 230; 10.51]

22. Preparer Duties  Q – individual client has fairly large donations to a church. Client casually mentions that children attend St. Patrick’s Community School. Do you have duty to ask more questions?  IRC §6694 and 6662  Rev Proc 80-40 and Brockhouse case  Circ 230 - §10.33 and others  SSTS #1 and #3

23. Violation of Circular 230  Various forms of reprimand  Published in IRB – see example

24. AICPA Code of Professional Conduct (1 of 2)  Governs AICPA members  All services provided by CPAs  Purpose is to provide:  Enforceable comprehensive code of ethical & professional conduct  Guide for members in answering complex questions  Assurance to the public

25. AICPA Code of Professional Conduct (2 of 2)  Rules apply to CPAs, their employees, partners/shareholders, & others acting on behalf of CPAs  Other guidance comes in the form of:  Interpretation of the rules  Ethics rulings  Ethics features  Members must justify departure from Ethics Rulings

26. Question #2 The AICPA Code of Professional Conduct is the _________________ behavior expected of a member of the AICPA. A.Maximum B.Minumum

27. Question #4 What is meant by the “principle” of “integrity” as used in the AICPA Code?

28. Integrity & Objectivity (Rule 102)  Services must be provided with objectivity & integrity and avoid conflict of interest  Resolving doubt in favor of a client in an advocacy engagement does not impair integrity & objectivity

29. General Standards (Rule 201)  Competence  Due professional care  Adequate planning & supervision  Obtain sufficient relevant data for conclusions or recommendations

30. Compliance With Standards (Rule 202) Must comply with all AICPA standards for all engagements  Tax, management advisory, auditing, review, compilation

31. Confidential Client Information (Rule 301)  No disclosure without client consent  Exceptions  Conflict with rules 202 & 203  CPA served with subpoena or summons

32. Question #12 IRC §6713 imposes a $250 penalty per disclosure of information furnished to prepare a return or to use information other than to prepare a return ($1,000 if willful). There is an exception if the disclosure was compelled by court order. AICPA Code of Conduct Rule 301 also deals with treatment of confidential client information. General ethical principals should encourage tax practitioners to treat client tax and financial data in a confidential manner. What office procedures would you recommend to ensure confidentially of client information?

33. Question #13 Your client, Mr. and Mrs. Smith, have had Refi Co. send you a request to send a copy of their last tax return for purposes of the Smiths obtaining a home loan. They also want you to complete a sheet detailing wages and Schedule C income for the prior two years. What should you do?

34. Contingent Fees (Rule 302)  No fees contingent on findings of services (e.g., type of audit opinion)  Fees not considered contingent  Fees fixed by public authority  Fees for resolution of a tax controversy with findings of a government agency (not tax returns)

35. Acts Discreditable (Rule 501) Cannot commit acts discreditable to the profession  Commitment of a felony  Failure to return client records after a client request  Signing a false concern  Issue a misleading audit opinion

36. Question #3 May an AICPA member advertise in the newspaper that his practice concentrates in tax services?

37. Advertising & Solicitation (Rule 502)  Cannot use false, misleading, or deceptive advertising/solicitation  Any type, media, frequency ok  May not imply influence over courts or regulatory agencies  May not cause a reasonable person to be deceived

38. Question #5 When an ethics interpretation or ruling is issued, how are members to know of its existence?

39. Statements on Standards for Tax Services (SSTS)  Issued by AICPA  Enforceable standards  Replaced Statements on Responsibilities in Tax Practice (SRTPs) in August 2000 SRTPs were advisory in nature  Intended to supplement AICPA Code of Professional Conduct and Circular 230

40. Tax Return Positions (SSTS 1)  Should have good-faith belief that position has realistic possibility of being sustained  Authority does not have to meet §6662 definition  If standard is not met:  Disclose position on the return, and  The position must not be frivolous  Two interpretations exist  1.1 Realistic possibility standard  1.2 Tax planning

41. Answers to Questions on Returns (SSTS 2)  Reasonable effort to obtain information to answer all questions  Exceptions  Data not readily available  Meaning of question uncertain  Answer too voluminous Not acceptable on Form 1120

42. Certain Procedural Aspects of Preparing Returns (SSTS 3)  May rely on client information without verification unless information appears to be incorrect, incomplete, inconsistent  Not required to examine supporting documents

43. Use of Estimates (SSTS 4)  Use estimates if impractical to obtain exact data & if estimates appear reasonable  Disclosure of estimates may be necessary:  Records destroyed by disaster  K-1’s not received

44. Question #6 Mr. A, your client, wants to file his return on 4/15, but has not yet received a K-1 from a partnership in which he has a small interest. What should you do?

45. Question #7 What do the SSTS, Circular 230, and any other pertinent guidance tell you about procedures to take when you discover an error on a client’s tax return?

46. Departing from Prior Concluded Positions (SSTS 5)  Prior year disposition may not prevent recommending a different treatment of a similar item in a later year  CPA & IRS not bound to act consistency IRS usually is consistent, however

47. Knowledge of Error: Return Preparation (SSTS 6)  CPA must inform client upon discovery of an error  Recommend appropriate measures for client to take

48. Knowledge of Error: Administrative Proceedings (SSTS 7)  Request client’s permission to disclose error to the IRS  If client refuses, CPA should consider withdrawing from engagement

49. Form & Content of Advice to Clients (SSTS 8)  Judgement reflects professional competence  Use written communication for complex matters  Oral communication OK for simple matters

50. Question #10 If the California State Board of Accountancy Rules and the AICPA Rules of Conduct are in conflict, such as with the rule on commissions and contingent fees, which rule should the CPA follow?  a. California  b. AICPA

51. Question #11 Tax issues account for about _____% of all malpractice insurance claims.

52. Sarbanes-Oxley and Taxation  Auditors may not provide certain services to audit clients  The Sarbanes-Oxley Act of 2002 listed nine such prohibited services (pp 23-24 of textbook)  Tax services may be provided if approved in advance by the audit committee

53. Nonregulatory Ethics  Morality  Social Responsibility  Business Ethics  Tax Planning Ethics  Common Sense

54. Tax Research by CPAs Solving tax problems or the unauthorized practice of law?

55. Authorized Activities  Prepare tax returns  Tax research  Provide tax advice  Practice before the IRS

56. Question #22 When might you have to refer your client to an attorney?  Unauthorized Activities  Express legal opinion on nontax matter (EX – what is a theft under local law?)  Draft wills or trusts  Draft contracts  Draft incorporation papers  Draft partnership agreements

57. Question #14 Closely-held corporation C wants your accounting firm to prepare the corporate tax returns and those of the four equal individual shareholders. The shareholder/CFO requests that all charges be billed to C on one bill. What should you do? What are your concerns?

58. Question #15 What does “more likely than not” at §6694(a) mean?

59. Question #16  Rank these standards with 1 being the highest:  _______ Realistic possibility of success on the merits  _______ More likely than not  _______ Substantial authority

60. Question #17 At what date should a preparer measure whether a position on a return has a realistic possibility of being sustained on its merits?

61. Question #18 How can a client avoid a substantial understatement of tax penalty under §6662?

62. Question #19 You do not have substantial authority to support a position taken on your client’s return, but the potential tax liability involved is not “substantial,” thus you have decided not to disclose it. Will this course of action also be enough to protect you against a preparer penalty?

63. Question #20 Which of the following are considered to be “authority” for purposes of determining whether substantial authority exists? a. Tax Court Memorandum decision b. private letter ruling issued to another taxpayer in 1980 c. proposed regulations d. GCM issued in 1990 e. instructions to a tax form f. the Blue Book g. article in Taxation for Accountants

64. Question #21 Is it possible to have substantial authority for a potential reasonable compensation issue, or is this impossible because it is a factual issue?

65. Question #23 What should a tax practitioner do to better ensure against errors and potential malpractice claims?