EthicsChapter 15 pp. 579 - 605

2015 National IncomeTax Workbook™

Ethics p. 579

Ethical Decision Making General Ethical Obligations IRS Regulations of Return

Preparers Circular 230 Case Studies Conclusion

Introduction p. 579

Ethical decision making requires:▪ A sensitivity to perceive ethical

implications.▪ Ability to evaluate complex, ambiguous &

incomplete facts.▪ Skill to implement ethical decisions

without jeopardizing one’s career.

Introduction pp. 579 - 580

IRS sets standards for tax professionals including Attorneys, CPAs, Enrolled Agents, Enrolled Actuaries and Appraisers in its ▪ Circular 230.

AICPA sets out guidelines for ethical standards in its:▪ Code of Professional Conduct and▪ Standards for Tax Services

American Bar Association sets out standards for attorneys in its:▪ Model Rules of Professional Conduct

Ethical Decision Making pp. 580 - 581

Several motivators may lead tax practitioners to make ethical decisions including:▪ Ethics Codes▪ Obligations to Clients▪ Obligations to the Government▪ Obligations to Taxpayers▪ Duty to Profession▪ Consequences of Noncompliance

Tax Minimization and Ethics p. 582

Return preparers have power and influence since we impact money via tax refunds, tax liabilities, etc.

A client may be happy if you produce a larger refund, but does he or she expect or want you to be unethical in securing a larger return?

But pressure is there to provide the smallest legal tax liability.▪ Catherine Pilkington argues that the “tax practitioner,

acting as an agent of a client, has a professional ethical duty to that client to minimize the client’s tax liability by legal means” [Catherine Pilkington, “Taxation and Ethical Issues,” in Ethical Issues in Accounting, ed. John Blake and Catherine Gowthorpe (London: Routledge, 1998), 88].

Rationalizations for a Wrong Act pp. 582 - 583

If It’s Necessary, It’s Ethical (The ends justify the means) The False Necessity Trap If It’s Legal (Permissible), It’s Proper I Was Just Doing It for You It’s Just Part of the Job It’s All for a Good Cause I’m Just Fighting Fire with Fire It Doesn’t Hurt Anyone Everyone’s Doing It It’s Okay If I Don’t Gain Personally I’ve Got It Coming I Can Still Be Objective

GENERAL ETHICAL OBLIGATIONS p. 584

1. The practitioner must know his or her limitations2. The practitioner must keep up-to-date on

changing laws3. The practitioner must safeguard the client’s tax

information 4. The practitioner has a duty to ask enough

questions.5. The practitioner must seek out legitimate tax

benefits. 6. The practitioner must never omit or overstate

income, deductions and credits.

Disclosure of Information p. 584

I.R.C. § 7216 prohibits tax return preparers from disclosing or using a client’s information for any purpose other than tax preparation without the client’s specific consent.

Tax return information is all the information tax return preparers obtain from taxpayers or other sources in any form or manner that is used to prepare tax returns or is obtained in connection with the preparation of returns.

Return preparers can use information for certain reasons including creating lists for solicitation of tax return business or to produce statistical information.

Safeguarding Data p. 585

Take responsibility or assign an individual or individuals to be responsible for safeguards.

Assess the risks to taxpayer information in your office, including your operations, physical environment, etc

Write a plan of how you will safeguard taxpayer information; put appropriate safeguards in place

Use only service providers who have policies in place to also maintain an adequate level of information protection.

Monitor, evaluate, and adjust your security program for business or circumstances changes.

Ethical Obligations to Self p. 585

If a client wants to make bad choices the practitioner should terminate the practitioner-client relationship.

The practitioner must not try to prepare too many returns.

The practitioner must be careful to not get too involved on a personal level with clients.

A practitioner also has an obligation to be compliant with his or her own business and personal tax filings.

Ethical Obligations to the Government pp. 585 - 586

The practitioner must file accurate tax returns. The return should be complete and filed on time, including extensions. The practitioner should handle any IRS matters or correspondence in a timely manner.

The ethical practitioner must exercise due diligence.

The practitioner must submit any nonprivileged information as required in response to IRS requests.

IRS REGULATION OF RETURN PREPARERS pp. 586 - 587

As a result of the court’s decision in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), the Registered Tax Return Preparer Program was replaced by the Annual Filing Season Program (AFSP). The AFSP is a voluntary program that allows the IRS to regulate unenrolled preparers who are not attorneys, CPAs, or enrolled agents.

Although there are challenges to the IRS’s authority the secretary of the Treasury has the authority to regulate the practice of representatives of persons before the Department of the Treasury

CIRCULAR 230 pp. 587 - 588

Subpart A deals with the rules governing the authority to practice.

Subpart B regulates the duties and restrictions relating to practice before the IRS.

Subpart C deals with sanctions for violation of the regulations.

Subpart D focuses on rules applicable to disciplinary proceedings.

Subpart E is for general provisions (which are not discussed in this issue).

CIRCULAR 230 pp. 587 - 588

The Office of Public Responsibility (OPR) is responsible for matters related to practitioner conduct and the authority to practice before the IRS.

The OPR, which generally has responsibility for:▪ Practitioner conduct and has exclusive

responsibility for discipline and sanctions. ▪ Matters related to authority to practice before

the IRS, including acting on applications for enrollment to practice before the IRS and administering competency tests and continuing education.

CIRCULAR 230 pp. 587 - 589

The Office of Public Responsibility (OPR):▪ Has goals and objectives.▪ Is Committed to standards.

And is over any individual who, for compensation, prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer’s tax liability for submission to the IRS.

Exceptions to OCR control include:▪ IRS employees performing official duties.▪ VITA individuals, etc…..See pages 588 -589

Subpart B—Duties and Restrictions Relating to Practice before the IRS

Ex. 15.1 p. 589

Under Circular 230 § 10.20, a practitioner must, on a proper and lawful request by a duly authorized officer or employee of the IRS, promptly submit records or information in any matter before the IRS unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

Subpart B—Duties and Restrictions Relating to Practice before the IRS

Ex 15.2 p. 590

A practitioner who has been retained by a client with respect to a matter administered by the IRS, and who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper that the client submitted or executed under the revenue laws, must promptly advise the client of such noncompliance, error, or omission. The practitioner must also advise the client of the legal consequences of such noncompliance, error, or omission

Subpart B—Duties and Restrictions Relating to Practice before the IRS

Ex 15.2 p. 590

Question 1: EA reviews prior year return and sees that

contributions were claimed as advertising on Sch C.

Should EA report error to IRS? No but should advise client of error and

explain consequences of error. Can offer to prepare amended return but not force client to do so.

Subpart B—Duties and Restrictions Relating to Practice before the IRS

Ex 15.2 p. 590

Question 2: EA reviews prior year return and sees that

previous preparer claim large nonexistent deduction and a fraudulent return.

Should EA report fraud to IRS? EA should report the fraud but is not

required to report the fraud. To report use Form 3949-A.

Diligence as to Accuracy p. 590

Practitioner must use due diligence in:1.Preparing or assisting in the preparation of, approving, and filing tax returns and other papers relating to IRS matters 2.Determining the correctness of oral or written representations made by the practitioner to the Depart of the Treasury 3.Determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS.

Circular 230 § 10.22

Diligence as to AccuracyEx. 15.3 p. 590

Client drops off organizer to CPA that shows:▪ $12,083 increase in sale to $37,364.00▪ $6,275.00 in travel expenses.

Does preparer need to verify income and expenses?

No but the practitioner must make reasonable inquiries if the information furnished appears to be incorrect, inconsistent, or incomplete.

Diligence as to AccuracyReliance on Professionals p. 591 A practitioner will be presumed to have

exercised due diligence if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person.

A practitioner may rely on the advice of another person only if the advice was reasonable and the reliance is in good faith considering all the facts and circumstance.

Diligence as to AccuracyReliance on Professionals p. 591 Inquiries May Be Needed: ▪ A practitioner who is relying on the advice

of another person may have an obligation to inquire about that person’s background.

Conflict of Interest May Be Waived:▪ Reliance is not permitted when the

practitioner knows or reasonably should know that the other person has a conflict of interest unless the practitioner knows the conflict has been waived.

Prompt Disposition of Pending Matters Ex. 15.4 p. 591 Client received Final Notice of Intent to Levy. Client asks CPA to request a due process hearing

to give client time to pay the taxes. Question. Is the CPA unreasonably delaying the prompt

disposition of a matter before the IRS by filing for the collection due process hearing?

Yes. Client received several notices prior to the final notice and had ample time to address the delinquency and an installment plan, etc so requesting a hearing to delay collection is not reasonable. Speaker Comment – Do you agree?

Notaries pp. 591 - 592

A practitioner may not take acknowledgments, administer oaths, certify papers, or perform any official act as a notary public with respect to any matter administered by the IRS and for which he or she is employed as counsel, attorney, or agent, or in which he or she may be in any way interested

Notaries Ex. 15.5 pp. 592 Ryan is an attorney and a notary. Ryan represents client to whom an SND

was issued. Ryan wants a statement from Client’s

employees to present to IRS. Can Ryan take statements and notarize

them? He cannot notarize such statements.

Fees Ex. 15.5 pp. 592 A practitioner generally may not charge

an unconscionable fee in connection with any matter before the IRS.

With some limited exceptions, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS.▪ But see text page 264

Contingent Fees Ex. 15.6 pp. 592 Calvin prepared return with $2,550.00 refund

for client and charged 10% of the refund = $255.00.

Calvin prepared a similar return for another client and with the EIC the refund was $11,972.00.

Does Calvin violate Cir 230 if he charges 10% ($1,197.20) for preparing this return.

Yes, he has violated Cir 230.

Return of Client’s Records pp. 592 - 593

A practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her federal tax obligations. The practitioner may retain copies of the records returned to a client….

Even if there is a dispute over fees.▪ Exception: Only access to the records is

required if there is a dispute over fees and State law so provides only access is required.

Return of Client’s Records pp. 592 - 593

Records includes:1. All documents or written or electronic materials

provided to the practitioner.2. Materials that were prepared by the client or a

third party and provided to preparer.3. Any return, claim for refund, schedule, or any

other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current federal tax obligations

Retention of RecordsEx. 15.7 p. 593

Client gave his 2015 income tax documents to preparer on March 4, 2016.

Only income is $85,390 on 1099-MISC. Client provides mileage log, receipts, etc. Client owes $10,000 in taxes and preparer

tried to reach client several times. Client came in on April 14th, was unhappy

with amount owed, requested his documents and refused to pay $212.00 prep fee.

Retention of RecordsEx. 15.7 p. 593

Question 1. Can preparer retain Client’s records until he pays the return preparation fee? ▪ No.

Question 2. Can preparer charge Client for copying the records?▪ If preparer is required to return all records and

wishes to retain a copy of those records for its files, it cannot charge client to make the copies.

Question 3. Does preparer have to give Tom the return that it prepared for him? ▪ No.

Conflicting Interests pp. 593 - 594

A conflict of interest exists if:▪ The representation of one client will be

directly adverse to another client; or ▪ There is a significant risk that the

representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client, or a third person; or by a personal interest of the practitioner.

Conflicting Interests pp. 593 - 594

If a conflict of interest exists the practitioner may represent a client if:1.The practitioner reasonably believes that he or she will be able to provide competent and diligent representation to each affected client;

2.The representation is not prohibited by law; and

3.Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner.

Conflicting Interests p. 594

The following are examples of potential conflicting interests:

■ Divorcing couples ■ Married couples filing joint returns ■ Partnerships and partners ■ Corporations and shareholders ■ Owners and employees ■ Trusts and beneficiaries ■ Business competitors ■ Family members of family-owned business ■ Tax practitioner and client

Conflict of Interest— Family Members

Ex. 15.8 p. 594 Preparer recognizes that long time client does not

seem well and cannot recall information. Preparer asks client to bring his son with him. Client agrees to bring son. Question 1: Is there a conflict of interest? No. At this point, Oscar is Joe’s client, and Joe

does not provide services for Junior. However, Joe must be careful to safeguard Oscar’s confidential communications.

Conflict of Interest— Family Members

Ex. 15.9 p. 594 Bill, his wife own 99% and son own 1% of the stock

in a corporation. Bill wants to sell stock of his company. Attorney recommends an S election prior to sale to

limit NIIT on sale proceeds. Election must be sign by all shareholders. Son took form to CPA who CPA for the

corporation. Question: Can CPA advise son about signing election? There is a conflict of interest. CPA should explain

and secure a waiver in writing before advising.

Solicitation p. 594

Circular 230 restricts advertising and solicitation. A practitioner may not, with respect to any IRS matter, in any way use or participate in the use of any form of public communication or private solicitation containing a false, fraudulent, or coercive statement or claim; or a misleading or deceptive statement or claim.

Logos Practitioner Note p. 594 Commencing in the 2014 calendar

year, practitioners may not use logos, slogans, and advertising on Form W-3, Copy A of Form W-2, or any employee copies reporting wages paid.

Rev. Proc. 2014-58, 2017-45 I.R.B. 793.

Negotiation of Taxpayer Checks

p. 595A practitioner may not endorse

or otherwise negotiate any check (including directing or accepting payment by any means) issued to a client by the government in respect of a federal tax liability.

Depositing RefundEx. 15.10 p. 595 Taxpayer owes preparer $250.00. Taxpayer expects a $630.00 Fed tax refund. Taxpayer has no bank account. Taxpayer suggests direct deposit to

preparer’s bank account and that preparer then give her a check for $380.00.

Question: Can preparer do this? No.

Depositing RefundEx. 15.11 p. 595 Taxpayers won a Tax Court case. IRS agreed to pay $7,500 in attorney fees

and issued check payable to taxpayers. IRS mailed check to attorney. Question: Can attorney deposit funds into her client

trust account and apply it to fees owed to her?

No. Attorney must give check to clients and bill for fees.

Practice of Law p. 595

Under Circular 230 § 10.32, practitioners who are not

attorneys cannot give legal advice.

Practice of LawEx. 15.12 pp. 595 - 596

Client is buying business and wants to limit liability.

CPA advises client to speak with an attorney about forming an entity.

Client cannot get a timely meeting with attorney. Question: Can the CPA draft and file articles of organization

for Bill, as long as Bill’s attorney prepares the operating agreement and other company formation documents?

No.

Best Practices for Tax Advisers p. 596

1. Communicating clearly with the client regarding the terms of the engagement.

2. Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law.

3. Advising the client regarding the import of the conclusions reached.

4. Acting fairly and with integrity in practice before the IRS.

Standards with Respect to Tax Returns, Documents, Affidavits, and Other Papers

p. 5961. A practitioner may not willfully, recklessly, or through

gross incompetence sign a tax return or claim for refund that lacks reasonable basis, takes an unreasonable position, or is a willful attempt to understate the lability for tax.

2. A practitioner may not advise a client to take a position on a document, affidavit, or other paper submitted to the IRS unless the position is not frivolous.

3. A practitioner must inform the client of any penalties that are reasonably likely to apply.

4. A practitioner generally may rely in good faith without verification on information furnished by the client but must make reasonable inquiries if information furnished appears to be incorrect, inconsistent, or incomplete.

Competence Standard p. 597

Circular 230 § 10.35 Competence.

A practitioner must possess the necessary competence to engage in practice before the

Internal Revenue Service.

Competent practice requires the appropriate level of knowledge, skill, thoroughness, and

preparation necessary for the matter for which the practitioner is engaged.

Appropriate Preparation p. 597

Competence requires the appropriate level of knowledge, skill, thoroughness, and

preparation necessary for the matter for which the practitioner is engaged.

Practitioners are expected to advise clients to obtain other counsel when the practitioner is not competent or cannot become competent

to provide advice requested on a matter within the scope of Circular 230.

Written Advice pp. 597 - 598

1. Base written advice on reasonable factual and legal assumptions.

2. Reasonably consider all relevant facts and circumstances.3. Use reasonable efforts to identify and ascertain the facts4. Not rely upon representations, statements, findings, or

agreements of the taxpayer or any other person if reliance on them would be unreasonable.

5. Relate applicable law and authorities to facts.6. Not, in evaluating a federal tax matter, take into account

the possibility that a tax return will not be audited or that a matter will not be raised on audit

Subparts C and D—Sanctions and Disciplinary Proceedings p. 598

Conduct for which a practitioner may be sanctioned: 1.Conviction of any criminal offense under federal tax laws.2.Conviction of any criminal offense involving dishonesty or breach of trust.3.Conviction of any felony under federal or state law.4.Giving false or misleading information.5.The use of false or misleading representations.6.Willfully failing to make a federal tax return or evasion.7.Willfully assisting, counseling, encouraging a client or prospective client in violating any federal tax law.8.Misappropriation of, or failure properly or promptly to remit, funds.9. Giving a false opinion.

Recent OPR DecisionsFig. 15.1 p. 599

Fig 15.1 lists recent sanctions including two from Virginia:

CPA VA Suspended indefinitely for failing to file his

client’s personal and business payroll tax

returns, failing to return client records after

many requests and court orders, and failing

to remit the client’s personal and business

payroll tax deposits to the proper taxing

authorities 03/03/15

CPA VA Suspended indefinitely for embezzling more

than $900,000 from his firm’s trust and

estate clients since 2004 03/03/15

Recent Preparer Convictions p. 600

Louisiana Tax Preparer Sentenced for Tax Fraud.

Texas Tax Return Preparer Sentenced for False Returns.

Indiana Man Sentenced for Filing False Tax Returns and Identity Theft

Case Study 1 pp. 600 – 601

CPA is also a minister. Client talks to CPA after Church about gambling

problem. CPA cannot recall ever reporting gambling activity

on returns prepared for client.

Questions: Must CPA ask about gambling when they discuss

preparing clients tax returns? What if clients files MFJ and tells CPA wife does

not know of his gambling?

Case Study 2 p. 601

CPA on family vacation. Family member asked CPA to do return. CPA did return and did not want or ask for

compensation. Relative insisted on giving CPA $150.00 CPA used the cash to but the family lunch. Question: Does CPA need to report the $150.00 as

income and if so what could happen if he does not report it?

Case Study 4 pp. 601 - 602 Same sex married couple want help in

knowing impact of marriage and in acquiring and improving a building.

CPA is opposed to same sex marriage and is not up on the new repair regulations.

Questions: Should CPA decline to represent the

couple? Is CPA competent to advise the couple?

Case Study 5 p. 602

CPA & Attorney is preparing return. Client asks : “How much can we deduct for

clothing contributions?” Preparer explains documentation need if any one

donation exceeds $250.00. Client says: “We gave $250.00 to 10 different

charities for a total deduction of $2,450.00.” Questions: What should Candy do to ensure due diligence? Is Candy assisting, soliciting, inducing, or advising

a violation of the law?

Case Study 6 pp. 602 - 603 New clients ask CPA to go to IRS audit. CPA did not prepare the audited return. New client says he made about $15,000 on

the side which he did not put on the return. Questions: What should CPA do about this revelation?

Would it matter if it had been $1,500? If you fail to disclose, are you suppressing

evidence that the new clients have a legal obligation to reveal or to produce?

Case Study 7 p. 603

New clients from Case 6 refuse to pay CPA after audit because of results from disclosing unreported income.

CPA has prepared the next year’s return and a P&L statement from client’s records which CPA has in her possession.

Questions: What documents (if any) can CPA withhold as CPA

attempts to collect your fees? Does CPA have a duty to promptly release all of

the clients’ papers and property?

Case Study 8 pp. 603 - 604 IRS Revenue Officer (RO) asks CPA with POA to submit 12

specific records in 2-weeks. CPA has trouble getting records & asks for 1-week

extension but only sends 3 items at the end of the extension.

2 more weeks go by, RO calls 5 times & send certified letter setting appointment.

CPA does not go to appointment, calls RO next day and says has been unable to get records.

Questions: Was the request for an extension reasonable? Has the practitioner unreasonably delayed the prompt

disposition of matters pending before the IRS?

Speakers Question

How come CPA only gets 2-weeks to respond while IRS RO gets 4-months to

respond?

Case Study 9 p. 604

Client and CPA both contribute $1,000 to University and each gets a football ticket.

CPA gets letter that 80% of payment was contribution. Client’s year end statement shows $1,000 donation. CPA explains only $800 is deductible. Client says his sister is a CPA and deducted the $1,000.

Questions: What will CPA do if Client threatens to take his business

elsewhere if you do not deduct the full $1,000? What if Client says he will use Marge Machinator at Easy

Tax Prep Service, a return preparer who was recently censured by the OPR for filing fraudulent returns?

Case Study 10 pp. 604 - 605 Client reports home day care business on Sch C. Client is entitled to and claims EIC each year. Client says decline in gas prices increased her

business which increased her food costs. Food costs on Client’s organizer are listed as $100. This has an impact on EIC. Questions: Does preparer have a duty to inquire further about

the food costs? Can preparer omit the $600 in actual food

expense?

Conclusion p. 605

Ethics in practice can present numerous challenges both in and out of the office. The study and application of ethics is constantly evolving. Tax practitioners

must know the guidelines and apply the principles in an effort to fulfil their

obligations to their clients, themselves, and the government.

Conclusion

What is your reputation worth?