1 ethics what every tax preparer needs to engrave in their thoughts

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ETHICS ETHICS

What Every Tax Preparer Needs What Every Tax Preparer Needs to Engrave in Their Thoughtsto Engrave in Their Thoughts

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Presented By: Presented By:

Marcia L. Miller, MBA, EA Marcia L. Miller, MBA, EA Financial Horizons, Inc. Financial Horizons, Inc. Weston, Florida Weston, Florida [email protected]@aol.com

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Ethics has always been a requirement, but Ethics has always been a requirement, but will our clients agree not to control us by will our clients agree not to control us by swaying our ethical requirements?swaying our ethical requirements?

Frivolous tax arguments and tax scams Frivolous tax arguments and tax scams will always be a dilemma to be reckoned will always be a dilemma to be reckoned with, but now – more than ever – it is with, but now – more than ever – it is imperative that we not trust the client too imperative that we not trust the client too much. much.

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Imagine a Pyramid Imagine a Pyramid At the bottom appears the At the bottom appears the CodeCode ofof ProfessionalProfessional Conduct’s Conduct’s

six principles are the cornerstone of ethical behavior. six principles are the cornerstone of ethical behavior.

They include: They include:

1 - Responsibilities 1 - Responsibilities 2 - The Public Interest 2 - The Public Interest 3 - Integrity 3 - Integrity 4 - Objectivity and Independence 4 - Objectivity and Independence 5 - Due Care 5 - Due Care 6 - Scope and Nature of Services 6 - Scope and Nature of Services

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PrinciplesPrinciples

These are positive statements of These are positive statements of responsibility in the Code of responsibility in the Code of Professional Conduct that provide the Professional Conduct that provide the framework for the rules, which govern framework for the rules, which govern performance.performance.

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Next are the rules by which we are governed whether we are in the Next are the rules by which we are governed whether we are in the practice of accounting or merely providing professional services. practice of accounting or merely providing professional services.

Independence Independence Integrity and objectivity Integrity and objectivity General Standards General Standards Compliance with Standards Compliance with Standards Accounting Principles Accounting Principles Confidential Client Information Confidential Client Information Contingent Fees Contingent Fees Acts Discreditable Acts Discreditable Commissions and Referral Fees Commissions and Referral Fees Advertising and Other Forms of SolicitationAdvertising and Other Forms of Solicitation Form of Organization and Name Form of Organization and Name

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RULESRULES

Broad but specific descriptions of Broad but specific descriptions of conduct that would violate the conduct that would violate the

responsibilities stated in the responsibilities stated in the principles in the Code of principles in the Code of Professional Conduct. Professional Conduct.

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Now as the Pyramid narrows, you as Now as the Pyramid narrows, you as the professional, must make your the professional, must make your own interpretations of these own interpretations of these

specific rules, some of which may specific rules, some of which may require rulings for certain require rulings for certain circumstances. circumstances.

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INTERPRETATIONS INTERPRETATIONS

This refers to those pronouncements This refers to those pronouncements issued by organizations such as the issued by organizations such as the AICPA’s Division of Professional EthicsAICPA’s Division of Professional Ethics

to provide guidelines concerning the to provide guidelines concerning the scope and application of the rules of scope and application of the rules of conduct. conduct.

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ETHICS RULINGS ETHICS RULINGS

Rulings summarize the application of Rulings summarize the application of rules rules and interpretations to aand interpretations to a

particular set of factual particular set of factual circumstances.circumstances.

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““YOUR BEHAVIOR”YOUR BEHAVIOR”

Lastly, at the top of your pyramid is Lastly, at the top of your pyramid is the Behavior for which your peers the Behavior for which your peers are judging your actions. are judging your actions.

Your Behavior needs to be impacted Your Behavior needs to be impacted by the Code, Interpretations and by the Code, Interpretations and Rulings.Rulings.

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CIRCULAR 230CIRCULAR 230

In order to protect citizens from incompetent and In order to protect citizens from incompetent and unethical practitioners, governments have passed laws unethical practitioners, governments have passed laws and regulations regarding the professional conduct of and regulations regarding the professional conduct of certain professionals who provide accounting and tax certain professionals who provide accounting and tax services. In particular, Certified Public Accountants services. In particular, Certified Public Accountants (CPAs) and Public Accountants (PAs) are regulated by (CPAs) and Public Accountants (PAs) are regulated by State Boards of Accountancy; and professionals who are State Boards of Accountancy; and professionals who are authorized to practice before the Internal Revenue authorized to practice before the Internal Revenue Service (IRS) are regulated by Treasury Department Service (IRS) are regulated by Treasury Department Circular 230 and the IRS Office of Professional Circular 230 and the IRS Office of Professional Responsibility. The body of law which is intended to Responsibility. The body of law which is intended to protect citizens from unethical behavior is sometimes protect citizens from unethical behavior is sometimes referred to as referred to as regulatory ethicsregulatory ethics. Those who are . Those who are regulated and fail to uphold the required standards of regulated and fail to uphold the required standards of ethical and professional conduct are guilty of committing ethical and professional conduct are guilty of committing acts which are not only unethical, but also illegal. acts which are not only unethical, but also illegal.

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CIRCULAR 230 CIRCULAR 230 Many accounting and tax practitioners are not directly Many accounting and tax practitioners are not directly

regulated by State Boards of Accountancy or the Internal regulated by State Boards of Accountancy or the Internal Revenue Service. However, the standards of ethical and Revenue Service. However, the standards of ethical and professional conduct established by those authorities professional conduct established by those authorities represent the high expectations of the citizens who are represent the high expectations of the citizens who are served by the accounting profession. Because these served by the accounting profession. Because these standards are widely published and well known, they standards are widely published and well known, they may also be used in a court of law when a citizen sues to may also be used in a court of law when a citizen sues to obtain damages from a practitioner. Therefore, it is obtain damages from a practitioner. Therefore, it is important for all accounting and tax professionals, important for all accounting and tax professionals, whether regulated or not, to understand the high level of whether regulated or not, to understand the high level of ethical and professional conduct that is expected ethical and professional conduct that is expected because of the trust that is conveyed to them by the because of the trust that is conveyed to them by the individuals and businesses they serve. individuals and businesses they serve.

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Liability for FraudLiability for Fraud

Actual fraudActual fraud and and constructive fraudconstructive fraud present two different circumstances under present two different circumstances under which an accountant may be found liable. An accountant may be held liable for actual 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 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 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. 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 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 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 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 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 are potential sources of legal liability under which a client may bring an action against an accountant.an accountant.

When a client is dissatisfied with the performance of an accounting firm, he or she will 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 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 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 statements which are not necessarily consistent with each other. A plaintiff may sue on several theories. on several theories.

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CIRCULAR 230CIRCULAR 230 Treasury Department Circular 230Treasury Department Circular 230

Circular 230 provides regulations governing the practice of Attorneys, Circular 230 provides regulations governing the practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Retirement Plan Agents, and Appraisers before the Internal Revenue Service. As part of an ongoing effort to improve ethical standards for tax Service. As part of an ongoing effort to improve ethical standards for tax professionals and to curb abusive tax avoidance transactions, the Treasury professionals and to curb abusive tax avoidance transactions, the Treasury Department and the Internal Revenue Service have issued final regulations Department and the Internal Revenue Service have issued final regulations amending Circular 230 to achieve the strategic goal of ensuring that amending Circular 230 to achieve the strategic goal of ensuring that attorneys, accountants, enrolled agents, and other tax practitioners adhere attorneys, accountants, enrolled agents, and other tax practitioners adhere to professional standards and follow the law. Subpart B of Circular 230 to professional standards and follow the law. Subpart B of Circular 230 describes the duties and restrictions relating to practice before the Internal describes the duties and restrictions relating to practice before the Internal Revenue Service, the best practices for tax advisors, and standards with Revenue Service, the best practices for tax advisors, and standards with respect to tax returns, financial documents, and workpapers. Subpart C respect to tax returns, financial documents, and workpapers. Subpart C describes the sanctions for violation of the regulations, and defines describes the sanctions for violation of the regulations, and defines incompetence and disreputable conduct for which a practitioner may be incompetence and disreputable conduct for which a practitioner may be sanctioned. The most recent revision of Circular 230 is available on the sanctioned. The most recent revision of Circular 230 is available on the Internal Revenue Service website.Internal Revenue Service website.

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CIRCULAR 230CIRCULAR 230 Tax professionals who are authorized to practice before the Internal Revenue Service Tax professionals who are authorized to practice before the Internal Revenue Service

(that is, to represent clients) are regulated by the Office of Professional Responsibility (that is, to represent clients) are regulated by the Office of Professional Responsibility (OPR) and are legally obligated to follow Circular 230 requirements. Tax professionals (OPR) and are legally obligated to follow Circular 230 requirements. Tax professionals who are not authorized to practice before the Internal Revenue Service are not directly who are not authorized to practice before the Internal Revenue Service are not directly regulated by OPR. However, all tax professionals should be familiar with Circular 230 as regulated by OPR. However, all tax professionals should be familiar with Circular 230 as many of the standards and best practices discussed are universally applicable. Some of many of the standards and best practices discussed are universally applicable. Some of the most important requirements regarding professional conduct are summarized below.the most important requirements regarding professional conduct are summarized below.

Furnishing Information:Furnishing Information: A practitioner must furnish records or other information to the A practitioner must furnish records or other information to the IRS or OPR upon a proper and lawful request unless the practitioner believes in good IRS or OPR upon a proper and lawful request unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged. If the faith and on reasonable grounds that the records or information are privileged. If the practitioner does not possess the requested records, he/she must promptly notify the practitioner does not possess the requested records, he/she must promptly notify the requesting IRS officer or employee. The practitioner must ask the client where the requesting IRS officer or employee. The practitioner must ask the client where the requested records are located, and provide any information regarding the identity of any requested records are located, and provide any information regarding the identity of any person who the practitioner believes may have possession of the requested records to person who the practitioner believes may have possession of the requested records to the IRS officer or employee. the IRS officer or employee.

Knowledge of Client’s Omission:Knowledge of Client’s Omission: If a practitioner knows that a client has not complied If a practitioner knows that a client has not complied with the revenue laws or has made an error in or omission from any return or other with the revenue laws or has made an error in or omission from any return or other document submitted to the U.S. government, the practitioner is obligated to advise the document submitted to the U.S. government, the practitioner is obligated to advise the client promptly of the facts of such noncompliance, error, or omission. The practitioner client promptly of the facts of such noncompliance, error, or omission. The practitioner must also advise the client of the consequences of such noncompliance, error, or must also advise the client of the consequences of such noncompliance, error, or omission as provided under the Internal Revenue Code and regulations.omission as provided under the Internal Revenue Code and regulations.

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Diligence as to Accuracy:Diligence as to Accuracy: A practitioner must exercise due diligence as to A practitioner must exercise due diligence as to the accuracy of all returns, documents, other papers, and oral or written the accuracy of all returns, documents, other papers, and oral or written representations which relate to IRS matters. If the practitioner relies on the representations which relate to IRS matters. If the practitioner relies on the work product of another person, he/she will be presumed to exercise due work product of another person, he/she will be presumed to exercise due diligence if the practitioner has used reasonable care in engaging, diligence if the practitioner has used reasonable care in engaging, supervising, training, and evaluating the person, taking into account the supervising, training, and evaluating the person, taking into account the nature of the relationship between the practitioner and the person. nature of the relationship between the practitioner and the person.

Prompt Disposition of Pending Matters:Prompt Disposition of Pending Matters: A practitioner may not A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.Revenue Service.

Assistance from Disbarred or Suspended Persons:Assistance from Disbarred or Suspended Persons: A practitioner may A practitioner may not knowingly accept assistance regarding IRS matters, either directly or not knowingly accept assistance regarding IRS matters, either directly or indirectly, from any person who is under suspension or disbarment from indirectly, from any person who is under suspension or disbarment from practice before the Internal Revenue Service.practice before the Internal Revenue Service.

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CIRCULAR 230CIRCULAR 230 Notaries:Notaries: A practitioner may not act as a notary public with respect to any matter A practitioner may not act as a notary public with respect to any matter

administered by the IRS if the practitioner is also employed by the client regarding IRS administered by the IRS if the practitioner is also employed by the client regarding IRS matters or is in any way interested in the matter pending before IRS.matters or is in any way interested in the matter pending before IRS.

Fees:Fees: A practitioner may not charge unconscionable fees. Generally, a practitioner is not A practitioner may not charge unconscionable fees. Generally, a practitioner is not allowed to charge a contingent fee for tax return preparation or other matters before the allowed to charge a contingent fee for tax return preparation or other matters before the IRS. A contingent fee is a fee that is based on a percentage of the refund reported on a IRS. A contingent fee is a fee that is based on a percentage of the refund reported on a return, or is otherwise dependent on the result obtained. However, contingent fees are return, or is otherwise dependent on the result obtained. However, contingent fees are allowed in the following situations:allowed in the following situations:

Services rendered in connection with an examination or other challenge to a taxpayer’s Services rendered in connection with an examination or other challenge to a taxpayer’s original return.original return.

Services rendered in the preparation of an amended return or claim for refund or credit 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 which is filed within 120 days of the taxpayer receiving a notice of examination or a written challenge to the return.written challenge to the return.

Services rendered in connection with a claim for refund or credit regarding the Services rendered in connection with a claim for refund or credit regarding the determination of interest and penalties assessed by the IRS.determination of interest and penalties assessed by the IRS.

Services rendered in connection with any judicial proceeding arising under the Internal Services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.Revenue Code.

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CIRCULAR 230CIRCULAR 230 Return of Client’s Records:Return of Client’s Records: A practitioner is obligated A practitioner is obligated

to promptly return, upon request, any and all records that to promptly return, upon request, any and all records that belong to the client, or that the client needs to comply belong to the client, or that the client needs to comply with his/her federal tax obligations. The practitioner may with his/her federal tax obligations. The practitioner may retain copies of the records returned to the client. A retain copies of the records returned to the client. A dispute over fees does not relieve the practitioner of this dispute over fees does not relieve the practitioner of this responsibility. (There is an exception, where allowed by responsibility. (There is an exception, where allowed by state law, whereby the practitioner may retain the records state law, whereby the practitioner may retain the records subject to the fee dispute, but must provide the client with subject to the fee dispute, but must provide the client with reasonable access to review and copy the records.) The reasonable access to review and copy the records.) The practitioner is not required to release returns or other practitioner is not required to release returns or other documents which have been prepared by the practitioner documents which have been prepared by the practitioner or the practitioner’s firm if the return or document is being or the practitioner’s firm if the return or document is being withheld due to the client’s nonpayment of fees with withheld due to the client’s nonpayment of fees with respect to that return or document.respect to that return or document.

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Conflicting Interests:Conflicting Interests: A practitioner shall not represent a client before the A practitioner shall not represent a client before the IRS if the representation involves a conflict of interest. A conflict of interest IRS if the representation involves a conflict of interest. A conflict of interest exists if the representation of one client will be directly adverse to another exists if the representation of one client will be directly adverse to another client. There is also a conflict of interest if there is a significant risk that the client. There is also a conflict of interest if there is a significant risk that the representation of a client will be materially limited by the practitioner’s representation of a client will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by the responsibilities to another client, a former client or a third person, or by the practitioner’s own personal interests. practitioner’s own personal interests.

A practitioner may reasonably believe that he/she will be able to provide A practitioner may reasonably believe that he/she will be able to provide competent and diligent representation to clients where a potential conflict of competent and diligent representation to clients where a potential conflict of interest exists. The clients may consent to such representation if it is not 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 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 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 conflict. The practitioner must retain copies of the written consents for at least 36 months after the conclusion of the representation of the affected least 36 months after the conclusion of the representation of the affected clients, and must provide those consents upon request to any officer or clients, and must provide those consents upon request to any officer or employee of the IRS. employee of the IRS.

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SolicitationsSolicitations: A practitioner may not advertise or solicit clients, : A practitioner may not advertise or solicit clients, either publicly or privately, in any manner that could be considered either publicly or privately, in any manner that could be considered false, fraudulent, misleading, deceptive, or coercive. Any uninvited false, fraudulent, misleading, deceptive, or coercive. Any uninvited solicitation must clearly identify the solicitation as such, and also solicitation must clearly identify the solicitation as such, and also identify the source of information used in choosing the recipient. identify the source of information used in choosing the recipient.

If a practitioner publishes a fee schedule, he/she may not charge 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 more than the published fees for at least 30 days after the last date of publication. The practitioner must retain a copy of any of publication. The practitioner must retain a copy of any communication containing fee information, along with a list or communication containing fee information, along with a list or description of persons to whom the communication was distributed. description of persons to whom the communication was distributed. The practitioner must retain these copies for at least 36 months after The practitioner must retain these copies for at least 36 months after they were last used. This applies to all methods of communication – they were last used. This applies to all methods of communication – mailings, e-mails, radio, television, flyers, telephone directories, and mailings, e-mails, radio, television, flyers, telephone directories, and all others.all others.

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Clients’ Refund Checks:Clients’ Refund Checks: A practitioner who prepares tax returns may not endorse or otherwise A practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government with respect to a federal tax liability. negotiate any check issued to a client by the government with respect to a federal tax liability.

Best Practices: Best Practices: Tax professionals should adhere to best practices when preparing tax returns or Tax professionals should adhere to best practices when preparing tax returns or other documents or providing advice other documents or providing advice regarding federal tax matters. In addition to compliance with standards, best practices include regarding federal tax matters. In addition to compliance with standards, best practices include the following:the following:

Communicating clearly with clients and having a clear understanding with clients as to the scope Communicating clearly with clients and having a clear understanding with clients as to the scope of advice and assistance being given.of advice and assistance being given.

Establishing the facts, determining which facts are relevant, evaluating the reasonableness of Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions, relating the facts to the applicable law, and arriving at conclusions that are any assumptions, relating the facts to the applicable law, and arriving at conclusions that are supported by the law and the facts.supported by the law and the facts.

Advising clients regarding the importance and potential consequences of the conclusions Advising clients regarding the importance and potential consequences of the conclusions reached, including the avoidance of penalties if the taxpayer relies on the advice.reached, including the avoidance of penalties if the taxpayer relies on the advice.

Acting fairly and with integrity in the conduct of your business.Acting fairly and with integrity in the conduct of your business.

Developing procedures to ensure best practices are followed by all members, associates, and Developing procedures to ensure best practices are followed by all members, associates, and employees of the firm. employees of the firm.

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Standards with Respect to Tax ReturnsStandards with Respect to Tax Returns: Circular 230 : Circular 230 establishes certain standards with respect to tax returns establishes certain standards with respect to tax returns and other submissions to the Internal Revenue Service. and other submissions to the Internal Revenue Service. A tax professional may A tax professional may NOTNOT::

Advise a client to take a position on a return or document Advise a client to take a position on a return or document submitted to the IRS unless the position is not frivolous.submitted to the IRS unless the position is not frivolous.

Advise a client to submit a document to the IRS for the Advise a client to submit a document to the IRS for the purpose of impeding or delaying purpose of impeding or delaying

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Advise a client to submit a document to the IRS for the purpose of impeding Advise a client to submit a document to the IRS for the purpose of impeding or delaying administration of federal tax laws.or delaying administration of federal tax laws.

Advise a client to submit a return or document that is frivolous.Advise a client to submit a return or document that is frivolous.

Advise a client to submit a return or document that contains or omits Advise a client to submit a return or document that contains or omits information in a manner that demonstrates an intentional disregard of a rule information in a manner that demonstrates an intentional disregard of a rule or regulation (unless the client is also advised to submit documents that or regulation (unless the client is also advised to submit documents that evidence a good faith challenge to the rule or regulation).evidence a good faith challenge to the rule or regulation).

In order to comply with standards, a tax professional must:In order to comply with standards, a tax professional must:

Inform a client of any penalties that may reasonably apply to a position Inform a client of any penalties that may reasonably apply to a position taken on a tax return, if the practitioner gave advice regarding the position taken on a tax return, if the practitioner gave advice regarding the position or prepared or signed the tax return.or prepared or signed the tax return.

Inform a client of any opportunity to avoid penalties by disclosure, and of the Inform a client of any opportunity to avoid penalties by disclosure, and of the requirements of adequate disclosure.requirements of adequate disclosure.

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A tax professional may generally rely in good faith without verification upon A tax professional may generally rely in good faith without verification upon information furnished by the client. However, a practitioner may not ignore information furnished by the client. However, a practitioner may not ignore the implications of information furnished by the client or otherwise known by the implications of information furnished by the client or otherwise known by the practitioner. If the information provided by the client appears to be the practitioner. If the information provided by the client appears to be incorrect, inconsistent, or incomplete, the professional must make incorrect, inconsistent, or incomplete, the professional must make reasonable inquiries to obtain reliable information.reasonable inquiries to obtain reliable information.

Giving Written Advice:Giving Written Advice: When giving written advice to a client, a tax When giving written advice to a client, a tax professional may professional may NOTNOT::

Base the advice on unreasonable factual or legal assumptions;Base the advice on unreasonable factual or legal assumptions; Unreasonably rely on the representations or statements of the taxpayer Unreasonably rely on the representations or statements of the taxpayer

or any other person;or any other person; Ignore or fail to consider all relevant facts that the professional knows or Ignore or fail to consider all relevant facts that the professional knows or

should know; orshould know; or Take into account the risk of being audited or having the advice Take into account the risk of being audited or having the advice

challenged by the IRS.challenged by the IRS.

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Incompetence and Disreputable ConductIncompetence and Disreputable Conduct: Incompetence and/or disreputable conduct may : Incompetence and/or disreputable conduct may subject a tax professional who is authorized to practice before the IRS to sanctions for violation of 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: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 under the federal tax laws.

Conviction of any criminal offense involving dishonesty or breach of trust.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.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 Knowingly giving false or misleading information to the Department of the Treasury or its officers or employees.employees.

Soliciting employment or attempting to deceive a client or prospective client using false or 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 misleading representations, or intimating that the practitioner is able to obtain special consideration or action from the IRS or its officer or employee.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 Willfully failing to file a federal tax return, or participating in evading or attempting to evade any assessment or payment of any federal tax.assessment or payment of any federal tax.

Willfully assisting, counseling, or encouraging a client or prospective client to violate 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 law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade federal taxes.federal taxes.

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Misappropriation or failure to remit funds received from a client for the purpose of paying taxes or Misappropriation or failure to remit funds received from a client for the purpose of paying taxes or other government obligations.other government obligations.

Directly or indirectly trying to influence the official action of any IRS officer or employee by the use of Directly or indirectly trying to influence the official action of any IRS officer or employee by the use of threats, false accusations, duress or coercion, or by offering or promising gifts, favors, or anything of threats, false accusations, duress or coercion, or by offering or promising gifts, favors, or anything of value.value.

Disbarment or suspension from practice as an attorney, certified public accountant, public Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary by any state or other U.S. jurisdiction.accountant, or actuary by any state or other U.S. jurisdiction.

Knowingly aiding and abetting another person to practice before the IRS during a period of Knowingly aiding and abetting another person to practice before the IRS during a period of suspension, disbarment, or other period of ineligibility.suspension, disbarment, or other period of ineligibility.

Contemptuous conduct in connection with practice before the IRS, including the use of abusive Contemptuous conduct in connection with practice before the IRS, including the use of abusive language or malicious or libelous communications.language or malicious or libelous communications.

Knowingly, recklessly, or through gross incompetence giving a false opinion on questions arising Knowingly, recklessly, or through gross incompetence giving a false opinion on questions arising under Federal tax laws.under Federal tax laws.

Willfully failing to sign a tax return prepared by the practitioner.Willfully failing to sign a tax return prepared by the practitioner.

Willfully disclosing or otherwise using a tax return or tax information in a manner not authorized by Willfully disclosing or otherwise using a tax return or tax information in a manner not authorized by the Internal Revenue Code.the Internal Revenue Code.

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CIRCULAR 230CIRCULAR 230 Confidentiality, Privacy, and DisclosureConfidentiality, Privacy, and Disclosure

of Financial or Tax Informationof Financial or Tax Information

Citizens have a right to expect professionals who assist them with private financial matters to be Citizens have a right to expect professionals who assist them with private financial matters to be trustworthy. The accounting and tax professional has an obligation to maintain and respect the trustworthy. The accounting and tax professional has an obligation to maintain and respect the confidentiality of information obtained in the performance of all professional activities. The Gramm-confidentiality of information obtained in the performance of all professional activities. The Gramm-Leach-Bliley Act of 1999 requires each financial institution and tax preparer to disclose its privacy policy Leach-Bliley Act of 1999 requires each financial institution and tax preparer to disclose its privacy policy to those who trust them with nonpublic personal information. to those who trust them with nonpublic personal information.

In general, the tax preparer’s privacy policy should state that nonpublic personal information is not In general, the tax preparer’s privacy policy should state that nonpublic personal information is not disclosed without the client’s consent. Any exceptions should be explained in the privacy policy. The disclosed without the client’s consent. Any exceptions should be explained in the privacy policy. The following are some common exceptions that a tax preparation firm should explain in its privacy policy:following are some common exceptions that a tax preparation firm should explain in its privacy policy:

Disclosure to employees, technical advisors, software consultants, or electronic filing providers.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 federal, state, or local laws, or with licensing requirements.

Disclosures required to comply with legal subpoenas or other legal actions.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 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 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 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 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 in connection with the preparation of a tax return. Any disclosure or use of tax information requires the informed consent of the taxpayer.informed consent of the taxpayer.

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Due DiligenceDue Diligence

It probably doesn’t mean that practitioners It probably doesn’t mean that practitioners must use all measures possible to verify must use all measures possible to verify all information that client provides but the all information that client provides but the scope of our investigations has scope of our investigations has broadened.broadened.

It would be likely that facts and It would be likely that facts and circumstances would be considered.circumstances would be considered.

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Letter to ClientLetter to Client

Due to the tighter standards imposed by Due to the tighter standards imposed by the new rules, the cost of providing written the new rules, the cost of providing written tax opinions will likely be higher unless the tax opinions will likely be higher unless the disclaimer approach is taken.disclaimer approach is taken.

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Firm ResponsibilitiesFirm Responsibilities

Effective for all members, associates and Effective for all members, associates and employees there must be a conformity employees there must be a conformity with Circular 230.with Circular 230.

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Tax Return PreparationTax Return Preparation Tax return should not be signed as preparer if it Tax return should not be signed as preparer if it

contains a position that does not have a contains a position that does not have a realistic realistic possibility of being sustained on its merits.possibility of being sustained on its merits.

Audit roulette does not count.Audit roulette does not count.

Does it have a one in three chance (or greater) of being Does it have a one in three chance (or greater) of being sustained on its merits.sustained on its merits.

If position is improper it is frivolous.If position is improper it is frivolous.

Preparers must make taxpayers aware of the Preparers must make taxpayers aware of the penalties penalties involved.involved.

3333

PenaltiesPenalties

Reckless violation or incompetence is Reckless violation or incompetence is grounds for censure, suspension or grounds for censure, suspension or disbarment from practice.disbarment from practice.

All information, hearings, pleadings, All information, hearings, pleadings, evidence, reports decisions will be evidence, reports decisions will be made made available to the public.available to the public.

3434

Changing Face of Return PrepChanging Face of Return Prep

SBWOTA changesSBWOTA changes

SubstantialSubstantial or or GrossGross valuation valuation misstatement >$5,000 misstatement >$5,000 penalties to penalties to 20% or 40%, 20% or 40%, respectively respectively unless:unless:

Substantial authoritySubstantial authority or or

Adequately disclosedAdequately disclosed andand reasonable basis.reasonable basis.

3535

Understatement of Tax Liability by Understatement of Tax Liability by Return PreparersReturn Preparers

PriorPrior

11stst Tier penalty $250 for Tier penalty $250 for IncomeIncome Tax preparer if: Tax preparer if:

Not disclosed; Not ‘Not disclosed; Not ‘realisticrealistic possibility’ (1/3) possibility’ (1/3)

22ndnd Tier penalty if willful neglect; $1,000 preparer Tier penalty if willful neglect; $1,000 preparer penaltypenalty

3636

Tax return preparer penaltiesTax return preparer penalties

Old Law:Old Law: An income tax return preparer is An income tax return preparer is liable for penalties for failing to have a liable for penalties for failing to have a reasonable factual or legal basis for a reasonable factual or legal basis for a position taken on a return. position taken on a return.

Evolved intoEvolved into a a "realistic possibility of "realistic possibility of success" standard, as a one-in-three success" standard, as a one-in-three chancechance of prevailing on the merits of an of prevailing on the merits of an issue. issue.

3737

Tax return preparer penaltiesTax return preparer penalties

If the position did not meet the realistic If the position did not meet the realistic possibility possibility of success an income tax preparer of success an income tax preparer could could avoid the penalty for non-frivolous avoid the penalty for non-frivolous positions positions through adequate disclosure. through adequate disclosure.

Only subject to the penalty ifOnly subject to the penalty if an an understatement understatement arose as the result of :arose as the result of :

(1) a (1) a nondisclosednondisclosed position position that failedthat failed to meet to meet the the "realistic possibility of success""realistic possibility of success" standard, standard, oror

(2) a (2) a discloseddisclosed position that was position that was frivolousfrivolous..

3838

Understatement of Tax Liability by Understatement of Tax Liability by Return PreparersReturn Preparers

Now:Now:

ANYANY return prepared > 5/27/07 return prepared > 5/27/07 More Likely Than NotMore Likely Than Not sustained (51%+) sustained (51%+)

11stst Tier Tier is is greater ofgreater of $1,000 $1,000 or 50% of feesor 50% of fees 22ndnd Tier Tier is is greater ofgreater of $5,000 $5,000 or 50% of feesor 50% of fees

Change effectively applies penalties, due to Change effectively applies penalties, due to understatement of taxpayer liability, to understatement of taxpayer liability, to preparers ofpreparers of ALLALL returnsreturns ( (Gift, Estate, 941, Excise, 990-T, W-2’s, 1099’sGift, Estate, 941, Excise, 990-T, W-2’s, 1099’s))

3939

New Preparer Penalty New Preparer Penalty LegislationLegislation

Undisclosed PositionsUndisclosed Positions: : Preparer Preparer may be subject to penalties even may be subject to penalties even thoughthough the taxpayer would the taxpayer would not as a result ofnot as a result ofan understatementan understatement. .

Standard for TaxpayersStandard for Taxpayers: : Substantial Authority Substantial Authority

Standard for PractitionersStandard for Practitioners: : Higher level, was a realistic possibility of success, Higher level, was a realistic possibility of success, now is now is MORE LIKELY THAN NOTMORE LIKELY THAN NOT,, (more than 50% likely to succeed) (more than 50% likely to succeed)

4040


New Law: Return preparer is subject to a New Law: Return preparer is subject to a

penalty of up to 50% of the feespenalty of up to 50% of the fees for the for the assignment assignment if:if:

- the position was - the position was not disclosednot disclosed and the and the return preparer did return preparer did notnot have a have a

reasonable reasonable belief belief that the position was that the position was more likely more likely than not than not correct, or correct, or

- the position was - the position was disclosed butdisclosed but did did notnot have a have a reasonable basisreasonable basis. .

4141


Accounting firms may be forced to Accounting firms may be forced to changechange the the Engagement lettersEngagement letters, , Organizer LettersOrganizer Letters and even the and even the Circular 230 disclaimer onCircular 230 disclaimer one-mailse-mails and memoranda advising clients and memoranda advising clients

to to disclose any position that does not meet disclose any position that does not meet the the "more likely than not" standard. "more likely than not" standard.

Notice 2007-54 delayed application for all Notice 2007-54 delayed application for all

returns filed before 2008. returns filed before 2008.

4242


Tax professionals should react with caution to this change Tax professionals should react with caution to this change in the law. in the law.

It has been It has been suggestedsuggested that some practitioners in order to that some practitioners in order to protect themselves may protect themselves may disclose every position disclose every position

takentaken on a return on Form 8275 rather than risk the on a return on Form 8275 rather than risk the penalty.penalty.

Line-by-line basisLine-by-line basis, that there is no certainty that each number , that there is no certainty that each number reflected on the return is more likely than not correct……….. reflected on the return is more likely than not correct………..

AICPA Urged Congress to Reconsider….see article in Sept AICPA Urged Congress to Reconsider….see article in Sept Journal Of Accountancy, page 25.Journal Of Accountancy, page 25.

4343

Are YOU willing to GAMBLEAre YOU willing to GAMBLE$1,000 or 50% of professional fees $1,000 or 50% of professional fees

for……….for………. 10991099 issued to individual issued to individual in lieu ofin lieu of Form Form W-2?W-2? Asset is held for investment versus sale?Asset is held for investment versus sale? Expense Expense capitalized versus deductedcapitalized versus deducted?? Form Form W-2 issuedW-2 issued to self-employed to self-employed membermember (partner) (partner) of of

LLCLLC (partnership)? (partnership)? Value of non-cashValue of non-cash charitable charitable contributionscontributions?? Basis of asset soldBasis of asset sold?? Worthlessness of a Stock or Debt?Worthlessness of a Stock or Debt? ClaimingClaiming Real Estate ProReal Estate Pro when not? when not? Unreasonably Unreasonably LOW compensation of SLOW compensation of S shareholder? shareholder? Business Miles drivenBusiness Miles driven by taxpayer? by taxpayer?

4444

Getting the records and proof from Getting the records and proof from clients: don’t trust your client too muchclients: don’t trust your client too much

Suggested solutions for considerationSuggested solutions for consideration

Document, document, document!!!Document, document, document!!!

Form 8275 - Disclosure StatementForm 8275 - Disclosure Statement – – Disclose a position contrary to a ruleDisclose a position contrary to a rule such as a statutory position or such as a statutory position or IRS revenue ruling.IRS revenue ruling.

4545

IRS advice: avoid the ‘Dirty IRS advice: avoid the ‘Dirty Dozen’ tax scams of 2009Dozen’ tax scams of 2009

1.1. PhishingPhishing2.2. Economic Stimulus PaymentsEconomic Stimulus Payments3.3. Frivolous Tax Arguments- taxes are illegalFrivolous Tax Arguments- taxes are illegal4.4. Fuel Tax Credit ScamsFuel Tax Credit Scams5.5. Hiding Income OffshoreHiding Income Offshore6.6. Abusive Roth IRAsAbusive Roth IRAs7.7. Zero WagesZero Wages8.8. False claims for refunds and abatementsFalse claims for refunds and abatements9.9. Return Preparer FraudReturn Preparer Fraud10.10. Disguised Corporate OwnershipDisguised Corporate Ownership11.11. Trust MisuseTrust Misuse12.12. Use of Charitable Organizations to shield incomeUse of Charitable Organizations to shield income

4646

Update on Circular 230Update on Circular 230

1. 1. In general, Treasury Department proposed changes to Circular 230In general, Treasury Department proposed changes to Circular 230 on March 6, 2006on March 6, 2006

2. What is a contingent fee?2. What is a contingent fee?

Fee based in whole or part on a position taken on a tax return; Fee based in whole or part on a position taken on a tax return; includes refund or reimbursement of feesincludes refund or reimbursement of fees

Cannot chargeCannot charge contingent fee on Original contingent fee on Original Can chargeCan charge contingent free on: contingent free on: AmendedAmended return, return,

exam of originalexam of original return, return, or judicial proceedingor judicial proceeding

4747

Tax Return PreparationTax Return Preparation 230 regs forbid practitioners from signing a 230 regs forbid practitioners from signing a

return that contains a position that does notreturn that contains a position that does not

have have ‘realistic possibility’‘realistic possibility’ of being of being sustained.sustained.

Generally 1-in-3 or better chance of beingGenerally 1-in-3 or better chance of being

sustained.sustained. ‘‘Risk of audit’ cannot be considered.Risk of audit’ cannot be considered. Disclosure to client of potential penaltiesDisclosure to client of potential penalties Disclosure of position on return?Disclosure of position on return?

IRS sanctions include censure, suspension, or IRS sanctions include censure, suspension, or disbarment from practice before IRS.disbarment from practice before IRS.

4848

New Preparer Penalties UpdateNew Preparer Penalties Update

Standard is now “MLTN” or >50%Standard is now “MLTN” or >50%

Applies to all tax returnsApplies to all tax returns

IRS Notice 2008-13IRS Notice 2008-13 May rely on good faith upon information furnished by T/P May rely on good faith upon information furnished by T/P

or 3or 3rdrd party party You don’t have to audit your clientsYou don’t have to audit your clients

Make reasonable inquiriesMake reasonable inquiries Do not ignore other information you may haveDo not ignore other information you may have

4949

Pension Protection Act Pension Protection Act PenaltiesPenalties

1. Thresholds1. Thresholds for accuracy related for accuracy related penalties penalties reducedreduced

- From 200% to 150% for Substantial- From 200% to 150% for Substantial valuation misstatement (20% penalty)valuation misstatement (20% penalty)

- From 400% to 200% for Gross- From 400% to 200% for Gross valuation valuation misstatement (40% penalty)misstatement (40% penalty)

2. Appraisal penalties increased2. Appraisal penalties increased- $1,000 or 10% of tax understatement- $1,000 or 10% of tax understatement

- Max = 125% x appraisal fee unless ‘more - Max = 125% x appraisal fee unless ‘more likely likely than not’ correct appraisalthan not’ correct appraisal

5050

Accuracy Related PenaltyAccuracy Related PenaltyNOTE: Per the IRS general instructions:NOTE: Per the IRS general instructions:

The portion of the accuracy-related penalty The portion of the accuracy-related penalty attributable to the following types of misconduct attributable to the following types of misconduct cannot be avoided by disclosure on Form 8275: cannot be avoided by disclosure on Form 8275:

NegligenceNegligence

Disregard of rules or regulationsDisregard of rules or regulations

Any substantial understatement of income taxAny substantial understatement of income tax

Any substantial valuation misstatementAny substantial valuation misstatement

Any substantial overstatement of pension liabilitiesAny substantial overstatement of pension liabilities

Any substantial estate or gift tax valuation understatementsAny substantial estate or gift tax valuation understatements

5151

FIVE MINUTE FIVE MINUTE

MANAGEMENT COURSEMANAGEMENT COURSE

5252

Lesson 1:Lesson 1:

A man is getting into the shower just as his wife is A man is getting into the shower just as his wife is finishing up her shower, when the doorbell rings. finishing up her shower, when the doorbell rings.

The wife quickly wraps herself in a towel and runs The wife quickly wraps herself in a towel and runs downstairs. When she opens the door, there downstairs. When she opens the door, there stands Bob, the next-door neighbor. Before she stands Bob, the next-door neighbor. Before she says a word, Bob says, "I'll give you $800 to drop says a word, Bob says, "I'll give you $800 to drop that towel" After thinking for a moment, the that towel" After thinking for a moment, the woman drops her towel and stands naked in front woman drops her towel and stands naked in front of Bob, after a few seconds, Bob hands her $800 of Bob, after a few seconds, Bob hands her $800 and leaves. and leaves.

5353

The woman wraps back up in the towel The woman wraps back up in the towel and goes back upstairs. When she gets to and goes back upstairs. When she gets to the bathroom, her husband asks, "Who the bathroom, her husband asks, "Who was that?" was that?"

"It was Bob, the next door neighbor," she "It was Bob, the next door neighbor," she replies.replies.

"Great," the husband says, "did he say "Great," the husband says, "did he say anything about the $800 he owes me?" anything about the $800 he owes me?"

5454

Moral of the storyMoral of the story

If you share critical information pertaining If you share critical information pertaining to credit and risk with your shareholders in to credit and risk with your shareholders in time, you may be in a position to prevent time, you may be in a position to prevent avoidable exposure.avoidable exposure.

5555

Lesson 2Lesson 2 A priest offered a nun a lift. She got in and crossed her legs, A priest offered a nun a lift. She got in and crossed her legs,

forcing her gown to reveal a leg. forcing her gown to reveal a leg. The priest nearly had an accident. After controlling the car, The priest nearly had an accident. After controlling the car,

he stealthily slid his hand up her leg. The nun said, "Father, he stealthily slid his hand up her leg. The nun said, "Father, remember Psalm 129?" The priest removed his hand. But, remember Psalm 129?" The priest removed his hand. But, changing gears, he let his hand slide up her leg again. changing gears, he let his hand slide up her leg again.

The nun once again said, "Father, remember Psalm 129?" The nun once again said, "Father, remember Psalm 129?" The priest apologized "Sorry sister but the flesh is weak." The priest apologized "Sorry sister but the flesh is weak." Arriving at the convent, the nun sighed heavily and went on Arriving at the convent, the nun sighed heavily and went on her way. her way.

On his arrival at the church, the priest rushed to look up On his arrival at the church, the priest rushed to look up Psalm 129. It said, "Go forth and seek, further up, you will Psalm 129. It said, "Go forth and seek, further up, you will find glory." find glory."

5656

Moral of the story:Moral of the story:

If you are not well informed in your job, If you are not well informed in your job, you might miss a great opportunity.you might miss a great opportunity.

5757

Lesson 3:Lesson 3: A sales rep, an administration clerk, and the manager are walking to A sales rep, an administration clerk, and the manager are walking to

lunch when they find an antique oil lamp. They rub it and a genie lunch when they find an antique oil lamp. They rub it and a genie comes out. The genie says, "I'll give each of you just one wish." comes out. The genie says, "I'll give each of you just one wish." "Me first! Me first!" says the admin clerk. "I want to be in the "Me first! Me first!" says the admin clerk. "I want to be in the Bahamas, driving a speedboat, without a care in the world.“Bahamas, driving a speedboat, without a care in the world.“

Puff! She's gone. "Me next! Me next!" says the sales rep. "I want to Puff! She's gone. "Me next! Me next!" says the sales rep. "I want to be in Hawaii , relaxing on the beach with my personal masseuse, an be in Hawaii , relaxing on the beach with my personal masseuse, an endless supply of Pina Coladas and the love of my life." endless supply of Pina Coladas and the love of my life."

Puff! He's gone. "OK, you're up," the Genie says to the manager. Puff! He's gone. "OK, you're up," the Genie says to the manager. The manager says, "I want those two back in the office after lunch." The manager says, "I want those two back in the office after lunch."

5858


Always let your boss have the first say. Always let your boss have the first say. .

5959

Lesson 4Lesson 4

An eagle was sitting on a tree resting, doing An eagle was sitting on a tree resting, doing nothing. A small rabbit saw the eagle and nothing. A small rabbit saw the eagle and asked him, "Can I also sit like you and do asked him, "Can I also sit like you and do nothing?" nothing?"

The eagle answered: "Sure, why not." So, The eagle answered: "Sure, why not." So, the rabbit sat on the ground below the eagle the rabbit sat on the ground below the eagle and rested. All of a sudden, a fox appeared, and rested. All of a sudden, a fox appeared, jumped on the rabbit and ate it. jumped on the rabbit and ate it.

6060

Moral of the story: Moral of the story:

To be sitting and doing nothing, you must To be sitting and doing nothing, you must be sitting very, very high up. be sitting very, very high up.

6161

Lesson 5Lesson 5 A turkey was chatting with a bull. "I would love to be A turkey was chatting with a bull. "I would love to be

able to get to the top of that tree" sighed the turkey, able to get to the top of that tree" sighed the turkey, "but I haven't got the energy." "Well, why don't you "but I haven't got the energy." "Well, why don't you nibble on some of my droppings?" replied the bull. nibble on some of my droppings?" replied the bull. They're packed with nutrients.“They're packed with nutrients.“

The turkey pecked at a lump of dung, and found it The turkey pecked at a lump of dung, and found it actually gave him enough strength to reach the actually gave him enough strength to reach the lowest branch of the tree. The next day, after eating lowest branch of the tree. The next day, after eating some more dung, he reached the second branch. some more dung, he reached the second branch. Finally after a fourth night, the turkey was proudly Finally after a fourth night, the turkey was proudly perched at the top of the tree. He was promptly perched at the top of the tree. He was promptly spotted by a farmer, who shot him out of the tree. spotted by a farmer, who shot him out of the tree.

6262


Bull s**t might get you to the top, but it Bull s**t might get you to the top, but it won't keep you there..won't keep you there..

6363

Lesson 6Lesson 6 A little bird was flying south for the winter. It was A little bird was flying south for the winter. It was

so cold the bird froze and fell to the ground into a so cold the bird froze and fell to the ground into a large field. While he was lying there, a cow came large field. While he was lying there, a cow came by and dropped some dung on him. As the frozen by and dropped some dung on him. As the frozen bird lay there in the pile of cow dung, he began to bird lay there in the pile of cow dung, he began to realize how warm he was. The dung was actually realize how warm he was. The dung was actually thawing him out! He lay there all warm and happy, thawing him out! He lay there all warm and happy, and soon began to sing for joy. A passing cat and soon began to sing for joy. A passing cat heard the bird singing and came to investigate.heard the bird singing and came to investigate.

Following the sound, the cat discovered the bird Following the sound, the cat discovered the bird under the pile of cow dung, and promptly dug him under the pile of cow dung, and promptly dug him out and ate him. out and ate him.

6464

Morals of the story:Morals of the story:

(1) Not everyone who sh*ts on you is your (1) Not everyone who sh*ts on you is your enemy.enemy.

(2) Not everyone who gets you out of sh*t is (2) Not everyone who gets you out of sh*t is your friend.your friend.

(3) And when you're in deep sh*t, it's best to (3) And when you're in deep sh*t, it's best to keep your mouth shut! keep your mouth shut!

6565

THUS ENDS THE FIVE MINUTE THUS ENDS THE FIVE MINUTE MANAGEMENT COURSEMANAGEMENT COURSE

Send this to at least five bright, funny Send this to at least five bright, funny people you know and make their day! people you know and make their day!

6666

■ ■ General Overview of Sec. 7216General Overview of Sec. 7216

■ ■ Criminal Penalties ApplyCriminal Penalties Apply

■ ■ Tax Return Preparation & Auxiliary ServicesTax Return Preparation & Auxiliary Services

■ ■ Definition of Tax Return Information Definition of Tax Return Information

■ ■ Use and DisclosureUse and Disclosure

■ ■ Permitted Disclosures without ConsentPermitted Disclosures without Consent

■ ■ How do we protect ourselves?How do we protect ourselves?

Sec 7216 Sec 7216 Discussion PointsDiscussion Points

6767

IRS REGULATION 7216IRS REGULATION 7216Use and Disclosure of Tax Use and Disclosure of Tax

Information Information As of this filing Season 2009,As of this filing Season 2009, IRS Regulation 7216 provides guidance to tax IRS Regulation 7216 provides guidance to tax

preparers regarding the use and disclosure of their clients' tax information. This preparers regarding the use and disclosure of their clients' tax information. This regulation strengthens taxpayers' ability to control their tax information and to make regulation strengthens taxpayers' ability to control their tax information and to make informed decisions regarding the preparer's use of that information. informed decisions regarding the preparer's use of that information.

Tax preparers who fail to comply with this regulation face a $1,000 fine and one Tax preparers who fail to comply with this regulation face a $1,000 fine and one year in jail for each violation. year in jail for each violation.

The Consent to Use of Tax Return Information The Consent to Use of Tax Return Information requires the client’s permission to requires the client’s permission to use his or her tax information for purposes other than preparing and filing the tax use his or her tax information for purposes other than preparing and filing the tax return (such as determining whether bank or other financial products may be return (such as determining whether bank or other financial products may be available to the client). The Consent to Use of Tax Return Information explains this available to the client). The Consent to Use of Tax Return Information explains this requirement and must be signed before the return is prepared. requirement and must be signed before the return is prepared.

The Consent to Disclosure of Tax Return InformationThe Consent to Disclosure of Tax Return Information requires all tax preparers, to requires all tax preparers, to obtain the client’s permission to disclose his or her tax return information to third obtain the client’s permission to disclose his or her tax return information to third parties (such as to banks for bank products, or to service bureaus or franchisors). parties (such as to banks for bank products, or to service bureaus or franchisors). The Consent to Disclosure of Tax Return Information must be signed before sending The Consent to Disclosure of Tax Return Information must be signed before sending the return to the designated third party. the return to the designated third party.

6868

Section 7216 OverviewSection 7216 Overview New regulations under Internal Revenue Code Section 7216, became effective New regulations under Internal Revenue Code Section 7216, became effective

January 1, 2009.January 1, 2009.

The new regulations update regulations that have been substantially unchanged The new regulations update regulations that have been substantially unchanged since the 1970s, and give taxpayers greater control over their personal tax return since the 1970s, and give taxpayers greater control over their personal tax return information. information.

The statute limits tax return preparers’ use and disclosure of information obtained The statute limits tax return preparers’ use and disclosure of information obtained during the return preparation process to activities directly related to the during the return preparation process to activities directly related to the preparation of the return. preparation of the return.

Rev. Proc. 2008-35 provides guidance to tax return preparers regarding the Rev. Proc. 2008-35 provides guidance to tax return preparers regarding the format and content of consents to disclose and consents to use tax return format and content of consents to disclose and consents to use tax return information with respect to taxpayers filing a return in the Form 1040 series.information with respect to taxpayers filing a return in the Form 1040 series.

This revenue procedure also provides specific requirements for electronic This revenue procedure also provides specific requirements for electronic signatures when a taxpayer executes an electronic consent to the disclosure or signatures when a taxpayer executes an electronic consent to the disclosure or use of the taxpayer’s tax return information. use of the taxpayer’s tax return information.

6969

Sec 7216 overview continuedSec 7216 overview continued

Unless section 7216 or §301.7216-2 specifically permits the Unless section 7216 or §301.7216-2 specifically permits the disclosure or use of tax return information, a tax return disclosure or use of tax return information, a tax return preparer may not disclose or use a taxpayer’s tax return preparer may not disclose or use a taxpayer’s tax return information prior to obtaining a consent from the taxpayer. information prior to obtaining a consent from the taxpayer.

Consent must be knowing and voluntary.Consent must be knowing and voluntary.

There is form and content requirements that all consents to There is form and content requirements that all consents to disclose or use must include, as well as timing requirements disclose or use must include, as well as timing requirements and other limitations upon consents to disclose or use tax and other limitations upon consents to disclose or use tax return information.return information.

There is a limitation upon consents to disclose a taxpayer’s There is a limitation upon consents to disclose a taxpayer’s social security number to a tax return preparer located social security number to a tax return preparer located outside of the United States. outside of the United States.

7070

Sec 7216 overview continuedSec 7216 overview continued

The Secretary may, by publication in the Internal Revenue The Secretary may, by publication in the Internal Revenue Bulletin, prescribe additional requirements for tax return Bulletin, prescribe additional requirements for tax return preparers regarding the format and content of consents to preparers regarding the format and content of consents to disclose and consents to use tax return information with disclose and consents to use tax return information with respect to taxpayers filing a return in the Form 1040 series, respect to taxpayers filing a return in the Form 1040 series, as well as the requirements for a valid signature on an as well as the requirements for a valid signature on an electronic consent under section 7216. electronic consent under section 7216.

The Secretary may, by publication in the Internal Revenue The Secretary may, by publication in the Internal Revenue Bulletin, describe the requirements of an “adequate data Bulletin, describe the requirements of an “adequate data protection safeguard” for purposes of removing the limitation protection safeguard” for purposes of removing the limitation upon consents to disclose a taxpayer’s social security upon consents to disclose a taxpayer’s social security number to a tax return preparer located outside of the United number to a tax return preparer located outside of the United States. This revenue procedure provides additional consent States. This revenue procedure provides additional consent format and content requirements and defines an “adequate format and content requirements and defines an “adequate data protection safeguard.” data protection safeguard.”

7171

Form and Content of a Consent to Disclose or a Form and Content of a Consent to Disclose or a Consent to Use Form 1040 Tax Return InformationConsent to Use Form 1040 Tax Return Information

Separate Written Document. A taxpayer’s consent to each separate disclosure or use of tax Separate Written Document. A taxpayer’s consent to each separate disclosure or use of tax return information must be contained on a separate written document, which can be return information must be contained on a separate written document, which can be furnished on paper or electronically. For example, the separate written document may be furnished on paper or electronically. For example, the separate written document may be provided as an attachment to an engagement letter furnished to the taxpayer.provided as an attachment to an engagement letter furnished to the taxpayer.

Special rule for multiple disclosures or uses within a single consent form. Multiple Special rule for multiple disclosures or uses within a single consent form. Multiple disclosures and uses can be authorized within a single forms, only if the document provides disclosures and uses can be authorized within a single forms, only if the document provides the taxpayer with the opportunity to affirmatively select each disclosure or use, and must be the taxpayer with the opportunity to affirmatively select each disclosure or use, and must be provided any information required for each specific disclosure or use. provided any information required for each specific disclosure or use.

A consent furnished to the taxpayer on paper must be provided on one or more sheets of A consent furnished to the taxpayer on paper must be provided on one or more sheets of 81/2 inch by 11 inch or larger paper. All of the text on each sheet of paper must pertain 81/2 inch by 11 inch or larger paper. All of the text on each sheet of paper must pertain solely to the disclosure or use the consent authorizes, and the sheet or sheets, together, solely to the disclosure or use the consent authorizes, and the sheet or sheets, together, must contain all the elements described in section 4.04 and, if applicable, comply with must contain all the elements described in section 4.04 and, if applicable, comply with section 4.06. All of the text on each sheet of paper must also be in at least 12-point type (no section 4.06. All of the text on each sheet of paper must also be in at least 12-point type (no more than 12 characters per inch). more than 12 characters per inch).

7272

Form and Content continuedForm and Content continued

An electronic consent must be provided on one or more computer An electronic consent must be provided on one or more computer screens. All of the text placed by the preparer on each screen must screens. All of the text placed by the preparer on each screen must pertain solely to the disclosure or use of tax return information authorized pertain solely to the disclosure or use of tax return information authorized by the consent, except for computer navigation tools. The text of the by the consent, except for computer navigation tools. The text of the consent must meet the following specifications: the size of the text must consent must meet the following specifications: the size of the text must be at least the same size as, or larger than, the normal or standard body be at least the same size as, or larger than, the normal or standard body text used by the website or software package for direction, text used by the website or software package for direction, communications or instructions and there must be sufficient contrast communications or instructions and there must be sufficient contrast between the text and background colors. In addition, each screen or, between the text and background colors. In addition, each screen or, together, the screens must:together, the screens must:

- contain all the elements described in section 4.04 and, if - contain all the elements described in section 4.04 and, if applicable, comply with section 4.06, applicable, comply with section 4.06,

- be able to be signed as required by section 5 and dated by - be able to be signed as required by section 5 and dated by the the taxpayer, andtaxpayer, and

- be able to be formatted in a readable and printer-friendly - be able to be formatted in a readable and printer-friendly manner. manner.

7373


Consents MustConsents Must::

Identify the intended purpose of the disclosure or use;Identify the intended purpose of the disclosure or use;

Identify the recipient(s) and describe the particular authorized information Identify the recipient(s) and describe the particular authorized information to be disclosed or used;to be disclosed or used;

Include the name of the tax return preparer and the name of the taxpayer;Include the name of the tax return preparer and the name of the taxpayer;

Include the applicable mandatory language set forth in section 4.04(a)-(c) Include the applicable mandatory language set forth in section 4.04(a)-(c) of Revenue Procedure 2008-35 that informs the taxpayer that he is not of Revenue Procedure 2008-35 that informs the taxpayer that he is not required to sign the consent and if he signs the consent, he can set a required to sign the consent and if he signs the consent, he can set a time period for the duration of that consent;time period for the duration of that consent;

Include the mandatory language set forth in section 4.04(d) of Revenue Include the mandatory language set forth in section 4.04(d) of Revenue Procedure 2008-35 that refers the taxpayer to the Treasury Inspector Procedure 2008-35 that refers the taxpayer to the Treasury Inspector General for Tax Administration if he believes that his tax return General for Tax Administration if he believes that his tax return information has been disclosed or used improperly.information has been disclosed or used improperly.

7474


Consents MustConsents Must::

Where applicable, include the appropriate mandatory Where applicable, include the appropriate mandatory statement set forth in section 4.04(e) of Revenue Procedure statement set forth in section 4.04(e) of Revenue Procedure 2008-35 that informs the taxpayer that his tax return 2008-35 that informs the taxpayer that his tax return information may be disclosed to a tax return preparer located information may be disclosed to a tax return preparer located outside the U.S;outside the U.S;

Be in 12-point type on 8 1/2 by 11 inch paper. Electronic Be in 12-point type on 8 1/2 by 11 inch paper. Electronic consents must be in the same type as the web site’s consents must be in the same type as the web site’s standard text; andstandard text; and

Contain the taxpayer’s affirmative consent (as opposed to an Contain the taxpayer’s affirmative consent (as opposed to an “opt-out” clause); and“opt-out” clause); and

Be signed and dated by the taxpayer.Be signed and dated by the taxpayer.

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4 Types of Consents4 Types of Consents::

Consent to disclose tax return information in context other than tax Consent to disclose tax return information in context other than tax preparation or auxiliary services. preparation or auxiliary services.

Consent to disclose tax return information in tax preparation or auxiliary Consent to disclose tax return information in tax preparation or auxiliary services context. services context.

Consents for disclosure of tax return information to a tax return preparer Consents for disclosure of tax return information to a tax return preparer outside of the United States if the tax return information to be disclosed outside of the United States if the tax return information to be disclosed does not include the taxpayer’s social security number, or if the social does not include the taxpayer’s social security number, or if the social security number is fully masked or otherwise redacted. security number is fully masked or otherwise redacted.

Consents for disclosure of the taxpayer’s tax return information including Consents for disclosure of the taxpayer’s tax return information including a social security number to a tax return preparer outside of the United a social security number to a tax return preparer outside of the United States. States.

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Form and Form and ContentContent continued continued

Adequate data protection safeguardAdequate data protection safeguard

A tax return preparer located within the United States, including any A tax return preparer located within the United States, including any territory or possession of the United States, may disclose a taxpayer’s territory or possession of the United States, may disclose a taxpayer’s SSN to a tax return preparer located outside of the United States or any SSN to a tax return preparer located outside of the United States or any territory or possession of the United States with the taxpayer’s consent territory or possession of the United States with the taxpayer’s consent only when both the tax return preparer located within the United States only when both the tax return preparer located within the United States and the tax return preparer located outside of the United States maintain and the tax return preparer located outside of the United States maintain an adequate data protection safeguard at the time the taxpayer’s consent an adequate data protection safeguard at the time the taxpayer’s consent is obtained and when making the disclosure. is obtained and when making the disclosure.

An “adequate data protection safeguard” is a security program, policy and An “adequate data protection safeguard” is a security program, policy and practice that has been approved by management and implemented that practice that has been approved by management and implemented that includes administrative, technical and physical safeguards to protect tax includes administrative, technical and physical safeguards to protect tax return information from misuse or unauthorized access or disclosure and return information from misuse or unauthorized access or disclosure and that meets or conforms to one of the privacy or data security frameworks that meets or conforms to one of the privacy or data security frameworks listed in Rev. Proc. 2008-35. listed in Rev. Proc. 2008-35.

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Form and Form and ContentContent continued continued

ELECTRONIC SIGNATURESELECTRONIC SIGNATURES

If a taxpayer furnishes consent to disclose or use tax If a taxpayer furnishes consent to disclose or use tax return information electronically, the taxpayer must return information electronically, the taxpayer must furnish the tax return preparer with an electronic furnish the tax return preparer with an electronic signature that will verify that the taxpayer consented signature that will verify that the taxpayer consented to the disclosure or use. The regulations under to the disclosure or use. The regulations under §301.7216-3(a) require that the consent be knowing §301.7216-3(a) require that the consent be knowing and voluntary. Therefore, for an electronic consent and voluntary. Therefore, for an electronic consent to be valid, it must be furnished in a manner that to be valid, it must be furnished in a manner that ensures affirmative, knowing consent to each ensures affirmative, knowing consent to each disclosure or use.disclosure or use.

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Electronic signatures continuedElectronic signatures continued

A tax return preparer seeking to obtain a taxpayer’s consent to the disclosure or A tax return preparer seeking to obtain a taxpayer’s consent to the disclosure or use of tax return information electronically must obtain the taxpayer’s signature on use of tax return information electronically must obtain the taxpayer’s signature on the consent in one of the following manners: the consent in one of the following manners:

(a) Assign a personal identification number (PIN) that is at least 5 characters long (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 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 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 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 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 consent to be furnished. The taxpayer must affirmatively enter the PIN for the electronic signature to be valid; electronic signature to be valid;

(b) Have the taxpayer type in the taxpayer’s name and then hit “enter” to authorize (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 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 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 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 (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 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 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 question regarding a shared secret could be the type of information by which the taxpayer authorizes disclosure or use of tax return information. taxpayer authorizes disclosure or use of tax return information.

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Criminal PenaltiesCriminal Penalties

A violation of section 7216 is a misdemeanor, with a maximum penalty A violation of section 7216 is a misdemeanor, with a maximum penalty of up to one year imprisonment or a fine of not more than $1,000, or of up to one year imprisonment or a fine of not more than $1,000, or both, together with the costs of prosecution. both, together with the costs of prosecution.

Section 7216(b) establishes exceptions to the general rule in section Section 7216(b) establishes exceptions to the general rule in section 7216(a) and also authorizes the Secretary to promulgate regulations 7216(a) and also authorizes the Secretary to promulgate regulations prescribing additional permitted disclosures and uses.prescribing additional permitted disclosures and uses.

Section 6713(a) prescribes a related civil penalty for unauthorized Section 6713(a) prescribes a related civil penalty for unauthorized disclosures or uses of information furnished in connection with the disclosures or uses of information furnished in connection with the preparation of an income tax return. The penalty for violating section preparation of an income tax return. The penalty for violating section 6713 is $250 for each disclosure or use, not to exceed a total of 6713 is $250 for each disclosure or use, not to exceed a total of $10,000 for a calendar year. Section 6713(b) provides that the $10,000 for a calendar year. Section 6713(b) provides that the exceptions in section 7216(b) also apply to section 6713. exceptions in section 7216(b) also apply to section 6713.

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Tax Return Preparation & Auxiliary ServicesTax Return Preparation & Auxiliary Services

A “tax return preparer” is anyone who is engaged in the A “tax return preparer” is anyone who is engaged in the business of preparing tax returns or providing auxiliary business of preparing tax returns or providing auxiliary services in connection with the preparation of income tax services in connection with the preparation of income tax returns.returns.

That is true even if the preparation of tax returns or That is true even if the preparation of tax returns or provision of auxiliary services is not the principal provision of auxiliary services is not the principal business of the organization, as well as if no fee is business of the organization, as well as if no fee is charged specifically for the preparation of income tax charged specifically for the preparation of income tax returns. returns.

It also includes those that do such returns “on the side” It also includes those that do such returns “on the side” outside the course of business, if done for outside the course of business, if done for compensation.compensation.

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Tax Return InformationTax Return Information

Tax return information includes any and all information Tax return information includes any and all information provided to a tax return preparer in connection with the provided to a tax return preparer in connection with the preparation of a taxpayer’s tax return.preparation of a taxpayer’s tax return.

It also includes information received from third parties in It also includes information received from third parties in connection with the preparation of the taxpayer’s tax return, connection with the preparation of the taxpayer’s tax return, including items received from the IRS.including items received from the IRS.

Statistical compilations of tax return information also Statistical compilations of tax return information also constitutes tax return information, even if the information is constitutes tax return information, even if the information is maintained in a form that cannot be associated with the maintained in a form that cannot be associated with the taxpayer, unless it is for internal management and support of taxpayer, unless it is for internal management and support of the taxpayer’s business.the taxpayer’s business.

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Use & DisclosureUse & Disclosure Use of tax return information is defined as any circumstance Use of tax return information is defined as any circumstance

where the preparer refers to or relies upon tax return where the preparer refers to or relies upon tax return information as to the basis to take or permit an action.information as to the basis to take or permit an action.

IRS Example:IRS Example: Tax preparer inquires of taxpayers about whether they wish to Tax preparer inquires of taxpayers about whether they wish to

make an IRA contribution after determining if the taxpayer is make an IRA contribution after determining if the taxpayer is eligible to make an IRA contribution. Only those taxpayers eligible to make an IRA contribution. Only those taxpayers that are eligible to make an IRA contribution receive the that are eligible to make an IRA contribution receive the inquiry. This is a use of tax return information potentially inquiry. This is a use of tax return information potentially subject to the consent rules.subject to the consent rules.

Disclosure of tax return information includes the act of Disclosure of tax return information includes the act of making tax return information known to any person in any making tax return information known to any person in any manner whatever. An extremely broad definition.manner whatever. An extremely broad definition.

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Permitted Disclosures without ConsentPermitted Disclosures without Consent Regulation 301.7216-2 provides a list of cases where tax return Regulation 301.7216-2 provides a list of cases where tax return

information may be used for disclosed without taxpayer consent.information may be used for disclosed without taxpayer consent.

CPAs need to review their state’s regulations.CPAs need to review their state’s regulations.

The following are permitted:The following are permitted:

1) Disclosures pursuant to other provisions of the Internal Revenue Code 1) Disclosures pursuant to other provisions of the Internal Revenue Code or Regulations.or Regulations.

2) Disclosures to Officers or Employees of the IRS.2) Disclosures to Officers or Employees of the IRS.

3) Disclosures or Uses for the Preparation of a Taxpayer’s Tax Return.3) Disclosures or Uses for the Preparation of a Taxpayer’s Tax Return.

4) Disclosure to Other Preparers.4) Disclosure to Other Preparers.

5) Related Taxpayers5) Related Taxpayers

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Permitted Disclosures without ConsentPermitted Disclosures without Consent

6) Courts & Regulatory bodies.6) Courts & Regulatory bodies.

7) Attorney for purposes of securing legal advice.7) Attorney for purposes of securing legal advice.

8) Officer of the Court.8) Officer of the Court.

9) Certain disclosures by Attorneys & Accountants.9) Certain disclosures by Attorneys & Accountants.

10) Corporate Fiduciaries.10) Corporate Fiduciaries.

11) Taxpayer’s Fiduciary.11) Taxpayer’s Fiduciary.

12) Employee of the Treasury Dept. for use in investigation of 12) Employee of the Treasury Dept. for use in investigation of the tax return preparer.the tax return preparer.

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Permitted Disclosures without ConsentPermitted Disclosures without Consent

13) Other Tax Returns/Tax Obligations.13) Other Tax Returns/Tax Obligations.

14) Payment for Tax Preparation Services.14) Payment for Tax Preparation Services.

15) Retention of Taxpayer records.15) Retention of Taxpayer records.

16) Lists for solicitation of Tax Return Business.16) Lists for solicitation of Tax Return Business.

17) Production of Statistical information for return 17) Production of Statistical information for return preparation business.preparation business.

18) Quality or Peer Reviews.18) Quality or Peer Reviews.

19) Disclosure to Report the Commission of a Crime.19) Disclosure to Report the Commission of a Crime.

20) Due to Tax Return Preparer’s Incapacity or Death.20) Due to Tax Return Preparer’s Incapacity or Death.

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How Do We Protect Ourselves?How Do We Protect Ourselves?

Know the Rules.Know the Rules. Use disclosure letters.Use disclosure letters. When in doubt, use disclosure letters.When in doubt, use disclosure letters. Inform your staff and all return preparers.Inform your staff and all return preparers. Have a company written policy and procedures Have a company written policy and procedures

document that all employees must sign.document that all employees must sign. Inform your clients as you meet with them during tax Inform your clients as you meet with them during tax

season.season. Use NSA’s Tax Talk forum. It’s a free member Use NSA’s Tax Talk forum. It’s a free member

benefit.benefit.

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Today’s Course has been presented by: Today’s Course has been presented by:

Marcia L. Miller, MBA, EA Marcia L. Miller, MBA, EA Financial Horizons, Inc. Financial Horizons, Inc. Weston, Florida Weston, Florida [email protected]@aol.com

Thank you for attending today. Thank you for attending today.

1 ethics what every tax preparer needs to engrave in their thoughts

Documents

rules of conduct

professional services

nature of services slide

code of professional

application of rules

specific rules

ethics rulings rulings

rules broad