Tax Practice, Regulation, and Ethics • Elements of tax practice • Rules and ethics in tax practice • Circular 230 • AICPA Code of Professional Conduct • AICPA Statements on Standards for Tax Services (SSTS) • Sarbanes-Oxley and taxation • Texas State Board of Public Accountancy • Non-regulatory ethical behavior models
Elements of Tax Practice • Tax compliance • Tax planning • Tax litigation • Tax research
Tax Compliance • Gathering, evaluating, and classifying information for • Filing tax returns • Representing clients before the IRS during tax return audits
Tax Planning • Arranging transactions to minimize tax liability • Tax avoidance - Legitimate • Tax evasion - Illegal • Planning undertaken for • Open transaction - Plan for a pending (future) transaction • Closed transaction - Minimize liability for a past transactions
Tax Litigation • Settling disputes with the IRS in court • CPAs can serve in a support capacity • Attorneys usually handle litigation beyond initial appeal of an IRS audit
Tax Practice, Regulation, and Ethics • Elements of tax practice • Rules and ethics in tax practice • Circular 230 • AICPA Code of Professional Conduct • AICPA Statements on Standards for Tax Services (SSTS) • Sarbanes-Oxley and taxation • Texas State Board of Public Accountancy • Non-regulatory ethical behavior models • Tax research by CPAs
Circular 230 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service
Circular 230 New regulations effective in 2011 require all paid tax return preparers including attorneys, CPAs and enrolled agents to have a Preparer Tax Identification Number.
Circular 230 • Governs those who practice before the IRS • Divided into the following subparts: A: Rules Governing Authority to Practice B: Duties & Restrictions Relating to Practice before the IRS C: Sanctions for Violation of the Regulations D: Rules Applicable to Disciplinary Proceedings E: General Provisions • Requires tax preparers to be competent and to adhere to ethical standards in order to protect taxpayers and the IRS.
What is Practice? (Circular 230) • Who may practice before the IRS? (§ 10.3) • Attorneys • CPAs • Enrolled agents (EA) • Certain nonenrolled persons
Who May Practice (Circular 230) • Practice before IRS (§ 10.2) • Represent client during audit • Presentation to IRS relating to client’s rights, privileges, or liabilities under laws or regulations administered by the IRS • Conferences, hearings, meetings, correspondence, communication, etc. • Preparation and filing of necessary documents • Written advice covered under §§ 10.35 or 10.37 (see §10.3) • Does not include tax return preparation or furnishing info to IRS in response to a request.
Enrolled Agents (§§ 10.4, 10.5 & 10.6) • One who is not a CPA or attorney and has • Passed an IRS exam or • Has worked for the IRS for at least 5 years • Same rights as attorneys and CPAs to practice before the IRS • May also be CPA or attorney • Allows practice before IRS in any state
Nonenrolled Persons • Limited practice (§ 10.7) • Nonenrolled tax return preparers (next slide) • Represent oneself • Represent immediate family • Employee may represent employer • General partner may represent partnership • Tax matters partner - Certain partnerships must have a tax matters partner (TMP) who is also a general partner. • Trustee may represent trust
Nonenrolled Tax Return Preparers(§ 10.7(c)(viii) • Only before Examination Division • May not • Represent taxpayer before Appeals Division and Collection Division (Pub. 947) • Do any of the following (Rev. Proc. 81-38): • Execute refund claims or receive refund checks for clients • Agree to suspend statute of limitations • Execute closing agreements • Waive restriction on assessment or collection of tax deficiency
Practice Before the IRS (Circ. 230) • Must furnish information to the IRS on request. (§ 10.20(a) & (b)) • If knowledge of client’s omission, must advise client of both error and remedy. (§ 10.21) • Exercise due diligence(§ 10.22) • Must make a reasonable effort to comply with tax laws. • Failure to exercise due diligence is more than simple error, but less than willful and reckless conduct.
Practice Before the IRS (Circ. 230) • No unreasonable delays in matters before IRS. (§ 10.23) • Cannot be a notary for clients. (§ 10.26) • Contingent or unconscionable fees (§ 10.27) • Contingent fees (§ 10.27(b)) • Not on original tax return • Acceptable on an amended return or refund claim • Unconscionable fees (§ 10.27(a)) • Fee should not be out of line with value of service provided to client
Practice Before the IRS (Circ. 230) • No representation of conflicting interests, unless fully disclosed. (§ 10.29) • Prompt return of client records. (§ 10.28) • May retain copies.
Solicitation and Advertising (Circ. 230) (§ 10.30) • Most media permissible. • Cannot contain false, fraudulent, coercive, or unfair statements. • Must comply with ethical standards of other authorities (e.g., ABA, AICPA, state CPA societies, state regulatory agencies, National Association of Enrolled Agents, etc.).
Solicitation and Advertising (Circ. 230) (§ 10.30) Thursday, May 13, 2010 Houston-based "Tax Resolution" Firm Charged With Unlawful Conduct, Misleading Customers Texas Attorney General files enforcement action against TaxMasters, Inc.; cites nearly 1,000 complaints about defendants’ conduct and business practices HOUSTON – Texas Attorney General Greg Abbott today charged Houston-based TaxMasters, Inc., and its chief executive officer, Patrick Cox, with multiple violations of the Texas Deceptive Trade Practices Act and Texas Debt Collection Act.
TaxMasters, Inc. Adapts Business Model Based on New FTC Telemarketing Sales Rule SFGate October 26, 2010 04:00 AM Tuesday, October 26, 2010
Practice of Law (Circ. 230) (§ 10.32) • When does undertaking tax research become the unauthorized practice of law? • General rule: CPAs should avoid providing general legal services. • Various tests/standards • Not wholly within the field of law • Merely incidental to accounting practice
Authorized Activities • Prepare tax returns • Tax research • Provide tax advice • Practice before the IRS
Unauthorized Activities • Express a legal opinion on a nontax matter • Draft wills or trusts • Draft contracts • Draft incorporation papers or partnership agreements
Best Practices (Circ. 230) (§ 10.33) • Aspirational standards to help tax advisors provide clients with the highest quality representation concerning Federal tax issues. Standards address: • Communications with clients • Establishing relevant facts • Evaluating reasonableness of assumptions • Relating the law to the facts • Arriving at supported conclusions • Advising clients of the conclusions • Acting fairly and with integrity before the IRS
Tax Return Positions (Circ. 230) (§ 10.34) • A practitioner should not recommend a position (or sign a return), unless the position has a more-likely-than-not possibility of being sustained on its merits • More-likely-than-not? • > 50% chance of being sustained (§ 6694) • May recommend a lesser position if it is not frivolous and is disclosed on the return.
Covered Opinions (Circ. 230) (§ 10.35) • Strict standards for written communication encompassing a covered opinion • A “covered opinion” is written advice that concerns • A tax avoidance transaction • A transaction where the principal purpose is tax avoidance or tax evasion • Reliance or marketed opinion • A transaction subject to confidentiality provisions • A transaction subject to contractual protection
Other Written Advice (Circ. 230) (§ 10.37) No written advice concerning Federal tax issues may be given if • Based on unreasonable factual or legal assumptions • Includes assumptions as to future events • Unreasonable reliance on information from taxpayer or any other person • Does not consider of all relevant facts practitioner knows or should know • Takes into account (1) possibility return will not be audited, (2) an issue will not be raised on audit, or (3) issue will be resolved through settlement if soraised