Chapter 1Chapter 1

Copyright ©2006 Thomson South-Western, Mason, Ohio

William A. Raabe, Gerald E. Whittenburg, &

Debra L. Sanders

Introduction to Tax Introduction to Tax PracticePractice

Elements of TaxationElements of Taxation

Elements of Tax PracticeElements of Tax Practice

Tax ComplianceTax Compliance Tax PlanningTax Planning Tax LitigationTax Litigation Tax ResearchTax Research

Tax ComplianceTax Compliance

Gathering, evaluating, & classifying Gathering, evaluating, & classifying information for information for Filing tax returnsFiling tax returns Representing clients before the IRS Representing clients before the IRS

during tax return auditsduring tax return audits

Tax PlanningTax Planning

Arrange to minimize tax liabilityArrange to minimize tax liability Tax avoidance: legitimateTax avoidance: legitimate Tax evasion: illegalTax evasion: illegal Open transactionsOpen transactions

Plan for a pending (future) transactionsPlan for a pending (future) transactions Closed transactionsClosed transactions

Minimize liability for past transactionsMinimize liability for past transactions

Tax LitigationTax Litigation

Settling disputes with the IRS in Settling disputes with the IRS in courtscourts

Attorneys usually handle litigation Attorneys usually handle litigation beyond initial appeal of an IRS auditbeyond initial appeal of an IRS audit

Tax ResearchTax Research

Analyze and determine answers for tax Analyze and determine answers for tax situations:situations: Identify issuesIdentify issues Determine proper authoritiesDetermine proper authorities Evaluate appropriateness of authoritiesEvaluate appropriateness of authorities Apply authority to specific factsApply authority to specific facts

Rules & Ethics in Tax Rules & Ethics in Tax PracticePractice

Circular 230Circular 230 AICPA Code of Professional ConductAICPA Code of Professional Conduct AICPA Statements on Standards for AICPA Statements on Standards for

Tax Services (SSTS)Tax Services (SSTS) Sarbanes-Oxley and TaxationSarbanes-Oxley and Taxation ABA Model Code of Professional ABA Model Code of Professional

ResponsibilityResponsibility

Circular 230Circular 230

Governs all who practice before the Governs all who practice before the IRSIRS Divided into these Subparts:Divided into these Subparts:

A: Rules Governing A: Rules Governing Authority to PracticeAuthority to Practice B: Duties & Restrictions Relating to B: Duties & Restrictions Relating to

Practice before the IRSPractice before the IRS C: Sanctions for Violation of the RegulationsC: Sanctions for Violation of the Regulations D: Rules Applicable to Disciplinary D: Rules Applicable to Disciplinary

ProceedingsProceedings E: General ProvisionsE: General Provisions

Circular 230 - Authority to Circular 230 - Authority to PracticePractice

Practice before IRSPractice before IRS Representing clients during auditsRepresenting clients during audits

Who may practiceWho may practice AttorneysAttorneys CPAsCPAs Enrolled agentsEnrolled agents Enrolled actuariesEnrolled actuaries Nonenrolled personsNonenrolled persons

Circular 230 - Enrolled AgentsCircular 230 - Enrolled Agents

Have either passed a special IRS exam or Have either passed a special IRS exam or have worked for the IRS for at least 5 have worked for the IRS for at least 5 yearsyears

Have the same rights as attorneys & CPAs Have the same rights as attorneys & CPAs in representing clients before the IRSin representing clients before the IRS

May also be CPA or attorneyMay also be CPA or attorney Allows one to practice before IRS in any state Allows one to practice before IRS in any state

Must meet continuing education Must meet continuing education requirementsrequirements

Circular 230 - Nonenrolled Circular 230 - Nonenrolled PersonsPersons

Limited practice without enrollmentLimited practice without enrollment Represent oneselfRepresent oneself Represent immediate family Represent immediate family Employee may represent employerEmployee may represent employer General partner may represent General partner may represent

partnershippartnership Trustee may represent trustTrustee may represent trust

Circular 230 - Nonenrolled Tax Circular 230 - Nonenrolled Tax Return PreparersReturn Preparers

May not May not Represent taxpayer before appeals & Represent taxpayer before appeals &

collection division collection division Execute refund claims or receive Execute refund claims or receive

refund checks for clientsrefund checks for clients Agree to suspend statute of limitationsAgree to suspend statute of limitations Execute closing agreementsExecute closing agreements Waive restriction on assessment Waive restriction on assessment

Circular 230 - Conduct Before Circular 230 - Conduct Before the IRSthe IRS

(1 of 2)(1 of 2)

Must furnish information to the IRS Must furnish information to the IRS upon requestupon request

If knows of client’s noncompliance, If knows of client’s noncompliance, error, or omission, must advise client error, or omission, must advise client of thisof this

Must exercise due diligenceMust exercise due diligence Must not unreasonably delay mattersMust not unreasonably delay matters

Circular 230 - Conduct Before Circular 230 - Conduct Before the IRSthe IRS

(2 of 2)(2 of 2)

Cannot be a notary for clientsCannot be a notary for clients Fees must not be contingent or unconscionableFees must not be contingent or unconscionable Limits on solicitation and advertisingLimits on solicitation and advertising Tax return positions must meet Tax return positions must meet realistic realistic

possibilitypossibility standard standard At least a 1 in 3 likelihood of being sustained on its At least a 1 in 3 likelihood of being sustained on its

meritsmerits

Circular 230 - Exercise Due Circular 230 - Exercise Due DiligenceDiligence

Must make a reasonable effort to Must make a reasonable effort to comply with tax laws comply with tax laws

Failure to exercise due diligence is:Failure to exercise due diligence is: More than simple errorMore than simple error But less than willful & reckless conductBut less than willful & reckless conduct

Circular 230 - Contingent & Circular 230 - Contingent & Unconscionable FeesUnconscionable Fees

Contingent feesContingent fees Not on an original tax returnNot on an original tax return Acceptable on an amended return or refund Acceptable on an amended return or refund

claim (other than a claim for refund made on claim (other than a claim for refund made on an original return)an original return)

Unconscionable feesUnconscionable fees Fee is out of line with value of service Fee is out of line with value of service

provided to clientprovided to client

Circular 230 - Solicitation & Circular 230 - Solicitation & AdvertisingAdvertising

Most media permissibleMost media permissible Cannot contain false, fraudulent, Cannot contain false, fraudulent,

coercive, or unfair statementscoercive, or unfair statements Must be tastefulMust be tasteful Must comply with other authoritiesMust comply with other authorities

ABA, AICPA, State CPA societies, state ABA, AICPA, State CPA societies, state regulatory agencies, National regulatory agencies, National Association of Enrolled Agents, etc.Association of Enrolled Agents, etc.

Circular 230 - Tax Return Circular 230 - Tax Return PositionsPositions

A position must have a realistic A position must have a realistic possibility of being sustained on its possibility of being sustained on its merits:merits: It has at least a “one in three” chance of It has at least a “one in three” chance of

being sustained on its meritsbeing sustained on its merits May recommend position with less than May recommend position with less than

“one in three” chance if position is not “one in three” chance if position is not frivolous & is disclosed on the returnfrivolous & is disclosed on the return

Circular 230’s Best Circular 230’s Best PracticesPractices

Aspirational standards (not rules) that Aspirational standards (not rules) that should help tax advisors provide clients should help tax advisors provide clients with the highest quality representation with the highest quality representation concerning federal tax issues that cover:concerning federal tax issues that cover: Communications with clientsCommunications with clients Establishing relevant factsEstablishing relevant facts Evaluating reasonableness of assumptionsEvaluating reasonableness of assumptions Relating the law to the factsRelating the law to the facts Arriving at supported conclusionsArriving at supported conclusions Advising clients of the conclusionsAdvising clients of the conclusions Acting fairly and with integrity before the IRSActing fairly and with integrity before the IRS

AICPA Code of Professional AICPA Code of Professional ConductConduct

(1 of 2)(1 of 2)

Governs AICPA membersGoverns AICPA members All services provided by CPAsAll services provided by CPAs

Purpose is to provide:Purpose is to provide: Enforceable comprehensive code of Enforceable comprehensive code of

ethical and professional conductethical and professional conduct Guide for members in answering Guide for members in answering

complex questionscomplex questions Assurance to the publicAssurance to the public

AICPA Code of Professional AICPA Code of Professional ConductConduct

(2 of 2)(2 of 2)

Rules apply to CPAs, their employees, Rules apply to CPAs, their employees, partners/shareholders, and others acting partners/shareholders, and others acting on behalf of CPAson behalf of CPAs

Other guidance comes in the form of:Other guidance comes in the form of: Interpretation of the rulesInterpretation of the rules Ethics rulingsEthics rulings

Members must justify departure from Members must justify departure from Ethics RulingsEthics Rulings

AICPA Code of Conduct RulesAICPA Code of Conduct Rules(1 of 2)(1 of 2)

Independence (Rule 101)Independence (Rule 101) Integrity & objectivity (Rule 102)Integrity & objectivity (Rule 102) General standards (Rule 201)General standards (Rule 201) Compliance with standards (Rule 202)Compliance with standards (Rule 202) Accounting principles (Rule 203)Accounting principles (Rule 203) Confidential client information (Rule Confidential client information (Rule

301)301)

AICPA Code of Conduct RulesAICPA Code of Conduct Rules(2 of 2)(2 of 2)

Contingent fees (Rule 302)Contingent fees (Rule 302) Acts discreditable (Rule 501)Acts discreditable (Rule 501) Advertising & solicitation (Rule 502)Advertising & solicitation (Rule 502) Commissions and referral fees (Rule Commissions and referral fees (Rule

503)503) Form of organization & name (Rule Form of organization & name (Rule

505)505)

Statements on Standards Statements on Standards for Tax Servicesfor Tax Services

(SSTS)(SSTS)

Issued by AICPA Issued by AICPA Enforceable standardsEnforceable standards

Replaced Statements on Responsibilities in Replaced Statements on Responsibilities in Tax Practice (SRTPs) in August 2000Tax Practice (SRTPs) in August 2000

SRTPs were advisory in natureSRTPs were advisory in nature Intended to supplement AICPA Code of Intended to supplement AICPA Code of

Professional Conduct and Circular 230Professional Conduct and Circular 230

SSTSSSTS(1 of 2)(1 of 2)

Tax return positions (SSTS 1)Tax return positions (SSTS 1) Answers to questions on returns (SSTS 2)Answers to questions on returns (SSTS 2) Certain procedural aspects of preparing Certain procedural aspects of preparing

returns (SSTS 3)returns (SSTS 3) Use of estimates (SSTS 4)Use of estimates (SSTS 4)

SSTSSSTS(2 of 2)(2 of 2)

Departure from a position previously Departure from a position previously concluded in an administrative proceeding concluded in an administrative proceeding or court decision (SSTS 5)or court decision (SSTS 5)

Knowledge of error: Return preparation Knowledge of error: Return preparation (SSTS 6)(SSTS 6)

Knowledge of error: Administrative Knowledge of error: Administrative proceedings (SSTS 7)proceedings (SSTS 7)

Form & content of advice to clients (SSTS 8)Form & content of advice to clients (SSTS 8)

Sarbanes-Oxley and Sarbanes-Oxley and TaxationTaxation

Auditors may not provide certain Auditors may not provide certain services to audit clientsservices to audit clients The Sarbanes-Oxley Act of 2002 listed The Sarbanes-Oxley Act of 2002 listed

nine such prohibited servicesnine such prohibited services

Tax services may be provided if Tax services may be provided if approved in advance by the audit approved in advance by the audit committeecommittee

ABA Code of Professional ABA Code of Professional ResponsibilityResponsibility

Canons: are statements of Canons: are statements of principlesprinciples

Ethical considerations set objectives Ethical considerations set objectives for each canonfor each canon

Disciplinary rules: minimum Disciplinary rules: minimum standards of conductstandards of conduct

Tax Research by CPAsTax Research by CPAs

Tax problems are legal problemsTax problems are legal problems This raises the question of whether This raises the question of whether

CPAs are violating the prohibition CPAs are violating the prohibition against the unauthorized practice of against the unauthorized practice of lawlaw

Authorized ActivitiesAuthorized Activities

Prepare tax returns Prepare tax returns Tax researchTax research Provide tax adviceProvide tax advice Practice before the IRSPractice before the IRS

Unauthorized ActivitiesUnauthorized Activities

Express legal opinion on nontax Express legal opinion on nontax mattermatter

Draft wills or trustsDraft wills or trusts Draft contractsDraft contracts Draft incorporation papersDraft incorporation papers Draft partnership agreements Draft partnership agreements