2020 NATIONAL INCOME TAX WORKBOOK

CHAPTER2: ETHICS P. 33

Due Diligence

Understatement of Liability

Referrals

Whistleblower Awards

Electronic Document Management

Case Studies - Covered in first day and second hour of ethics

CHAPTER 2: ETHICS P.33

Q: REFERRAL SERVICE – Can you pay for referrals?

A: YES – But comply w/ advertising rules and disclose payment

◦ Referral service should have basis for recommending (years,

geography, etc.)

◦ Disclose amount to client, in writing

RECEIVING REFERRALS PP. 49-50

Do your due diligence

Provide several referrals

Put responsibility on client to investigate

Follow up, in writing (Figure 2.4)

Disclose fee, in writing

CHECK STATE LAW – FEE MAY NOT BE ALLOWED

MAKING REFERRALS PP. 50-52

IRS says do not inform on a client

Third party? Consider harm to

reported party, family, employer,

employees, owners, investors, clients,

lenders, suppliers, vendors

WHISTLEBLOWING – CONFLICT OF INTEREST P. 56

Confidentiality◦ Internet faxing – at a minimum review privacy policy

◦ Online backup/ storage – reasonable care to protect

◦ Client portals – use when highly sensitive info or email is not

secure

ELECTRONIC DOCUMENT MANAGEMENT PP. 57-59

Duty to preserve documents

◦Record retention requirements (Outlook calendar)

◦Check cloud storage provider policy (fax Figure 2.6)

◦Have a record retention policy (Figure 2.7)net operating loss returns can be audited until the loss is no longer available for use

◦ IRS requirements for taxpayers

ELECTRONIC DOCUMENT MANAGEMENT, CONT. PP. 59-62

FIGURE 2.7 Sample Record Retention Policy

Application. This Record Retention Policy (“Policy”) applies to ABC Accounting, Inc. (ABC).

All records and documentation, both physical and electronic are subject to the retention

requirements of this Policy.

Purpose. The purpose of this Policy is to ensure that records and documents are

adequately retained in accordance with statutory and regulatory authority, and

operational needs. This Policy is also intended to help ABC employees understand their

obligations to retain electronic documents, including email, web files, text files, sound

and movie files, PDF documents, and all other files.

Administrator.

FIGURE 2.7 RECORD RETENTION POLICY P.67

Record retention policy should be shared with all employees. How do you dispose of expired documents?

1. 1.) I close my eyes and hope for the best

2. 2.) I have the newest person in the office pull and shred paper documents

3. 3.) Electronic jump drives are wiped after 7 years, unless litigation is pending

POLLING QUESTION CH 2 B QUESTION1

We put this at the end of the day, in case you have met the continuing

education credits for this cycle.

Good luck in applying your

ethical standards.

SELECTED CASE STUDIES ARE COVERED BY THE OTHER TEAM

This Photo by Unknown Author is licensed under CC BY-SA-NC

FOR: a discussion of ethical guidelines and

education

NOT FOR: malice, discrimination or favoritism

TOTALLY (ALMOST) FICTITIOUS AND HYPOTHETICAL

10 CASE STUDIES PP. 63-71

Whitehall Accounting going paperless◦ Intern scans and shreds

◦ IT person ensures security and backup

Linda hires Whitehall for help with examination of 2019 return – gives all her docs

IRS asks for info to support residential energy credit

Gary Whitehall posts a request in Linda’s client portal – automatically emails Linda – no response

Additional IRS request for mileage documentation

Gary remembers seeing a mileage log, but can’t find it

CASE STUDY 4 – ELECTRONIC DOC MANAGEMENT P. 64

Can Gary rely on the client portal to communicate important info?

Can Gary help Linda recreate a new driving log and indicate

contemporaneous?

How to avoid these problems?

CASE STUDY 4 CON’T P. 64

Client portal protects info – but not great for time sensitive info – Gary should

have tried to call or email Linda

Gary can help Linda recreate a new driving log based on her appointment

calendar or other corroborating records – but can’t represent that it is original

Avoid these problems: have an electronic document management policy that

requires return of original documents to client, client portal access agreement

limits use as sole source of communication for time-sensitive info

CASE STUDY 4 RESPONSE P. 69

Are you aware that we are posting our PowerPoint slides on the

web?

◦ Yes, see MSU Income Tax Class and click on instructor, authored

documents and find their power points

◦ No

◦ I don’t use them after I have heard the class.

POLLING QUESTION CH 2 NUMBER 2

Jim does tax prep and bookkeeping for Jennifer

Jennifer asks Jim to recommend a financial adviser

Jim recommends Robert because Robert sends him business

Jim says Robert makes his clients lots of money

Jim, Robert, and Jennifer meet

Jennifer gives Robert 30K to invest in a company that promised huge returns

Investment is a scam, Robert is convicted, Jennifer loses all her money

CASE STUDY 5 – REFERRAL P. 65

Does Jennifer have a claim against Jim?

If so, what could Jim have done differently?

CASE STUDY 5 CONT. P. 65

Jim made representations about Robert’s success rate and Jennifer

relied on those representations – she could claim that Jim

contributed to her loss

Jim should have

◦ Investigated Robert’s background, license, training, reputation, etc.

◦ Given Jennifer several names as referrals

◦ Put the burden on Jennifer to make her own determination

◦ Followed up in writing (Figure 2.4)

CASE STUDY 5 RESPONSE P. 69

Abacus Tax Prep joins online referral service, pays $35 per referral. Service

advertises

Our referral team will find an expert tax professional for your business. Each of our

referrals are hand-selected specifically for your small business, based on your

individual needs, and will save you time and money. We guarantee your full

satisfaction.

Referral service randomly generates referrals based on geography

CASE STUDY 6 – ONLINE REFERRAL SERVICE P. 65

Abacus also sends out this email to its clients

CASE STUDY 6 CONT. P. 65

Should Abacus participate in the online referral

service?

Does the $50 referral program violate any ethical

rules?

CASE STUDY 6 CONT. P. 65

Online referral service - false, misleading, or deceptive?◦ No objective basis for referral

◦ Not hand selected

◦ Use of the term “expert” may be prohibited

◦ “Save time and money” and “guarantee results” may create false expectations

$50 referral program allowed?

◦Disclose payment to referral clients

◦Encourage them to make only objective recommendations

◦Email likely violates CAN-SPAM Act

CASE STUDY 6 RESPONSE P. 69

Susan is a doctor with a good income

Craft beer brewing business generated a loss

Susan has a narrative of activities dated 4/14/20◦ Shows 500+ hours research, procuring supplies, brewing, bottling, and tasting

Can tax practitioner Joe rely on the narrative?

What other due diligence should Joe conduct?

CASE STUDY 7 – ESTIMATING PARTICIPATION PP. 65-66

Joe can typically rely on info provided, BUT

◦ Narrative is not contemporaneous

◦ How does Susan have that much time to brew beer?

◦ Beer sampling sounds recreational

Ask for substantiation:

Appointment books, when did she start? Does she have any sales or did the beer get sampled until it was gone?

Calendar

Phone records

Credit card/bank statements

CASE STUDY 7 RESPONSE P. 70

J&T Accounting Instagram launch – only 112 followers

◦ Buys 1,000 followers for $100

J&T LinkedIn network – wants to increase

◦ Draft reviews and offer clients incentives to post them?

◦ Create a fake account and write its own reviews?

◦ Pay a third party to write reviews?

Instagram and LinkedIn marketing strategy problems?

CASE STUDY 8 – ADVERTISING/SOLICITATION P. 66

Social media advertising can’t be false or deceptive

Fake followers give the impression that they are clients, or endorse J&T

OK to ask clients for reviews – objective and true

Fake reviews are misleading

CASE STUDY 8 RESPONSE P. 70

Case study 9

Are you qualified to value a going concern with underlying assets?

◦Yes

◦No

POLLING QUESTION CH. 2 NUMBER 3

Mark was a manufacturer

Daughter Jessica has successful career and son Niles to take over the family

business

Mark dies and his Will directs distribution of the business to Niles and an equalizing

distribution to Jessica

Ellen is Mark’s CPA – extensive knowledge of the business

Can Ellen perform the valuation for Jessica?

What due diligence steps should she take?

CASE STUDY 9 – VALUATIONS P. 66

Ellen can perform the valuation if she is:

Experienced & competent, and

No conflict of interest

It’s in Jessica’s interest to have a high valuation, which is likely consistent with the

company’s interest, but contrary to Niles’s interest who would like to pay less

GET A WRITTEN CONFLICT WAIVER

CASE STUDY 9 RESPONSE PP. 70-71

Greta is a full-time nurse

17-year-old son Grant competes in motocross competitions

Greta looking to buy a motocross complex

Operates at a loss, but she wants to add a restaurant, bar, hotel – make $$

4/4/20 Greta emails Kris a “quick question” from her work address:

◦ Will losses offset other income? Any other tax advice for me?

Greta needs a response ASAP. How should Kris respond?

CASE STUDY 10 – TAX ADVICE PP. 66-67

Email from work may not be confidential

Best practices – establish facts, evaluate, apply the law, reach conclusion

Simple “yes” won’t suffice

AICPA – written advice must contain sufficient explanation

Sample response addresses material participation and hobby loss rule

7-year depreciation for motorsports expires

Research before answering (a hotel is not included in the definition of

motorsports entertainment complex)

CASE STUDY 10 RESPONSE P. 71

Thinking about next year, do you prefer in person or webinar classes for MSU

Income Tax Schools?

•Webinar

•In Person

•Either

•Both

POLLING QUESTION CH. 2 NUMBER 4

QUESTIONS?