Duties of Tax Professionals

Chapter 14

Hunter LipskiKatelyn Lydens

Dan WilsonLinyi Shi

Part 1

Professional Responsibilities

Hunter Lipski

Governing Sources in Tax Practice

Statements of Standards for Tax Services (SSTS)

●standards that describe the ethical duties in tax return preparation

●applies to all federal, state and local tax practice

●technically only applies to AICPA members

●comprised of seven standards

SSTS No. 1, Tax Return Positions

• Provides standards for members when advising tax return positions and signing or preparing tax returns

• Standards recognize members’ responsibilities to both the taxpayers and the IRS

• Requires a member to determine and comply with the IRS’s reporting standards

• Should not recommend a tax return position unless the member has a good-faith belief that the position has at least a realistic possibility of being sustained

• If not realistic possibility, the position must have a reasonable basis and be properly disclosed

Interpretations 1-1 and 1-2

Interpretation No. 1-1 Clarifies Realistic Possibility Standard

• Explains various aspects of the realistic possibility standard and provides examples

Interpretation No. 1-2 Tax Planning

• Clarifies how the Standards apply to tax planning, including tax shelters

SSTS No. 2, Answers to Questions on Returns

• Members must make a “reasonable effort” to answer all questions on a tax return

• If the information is not “readily available and the answer is not significant…” it may be reasonable to omit the answer

• Members should not omit answers because they are disadvantageous to the taxpayer

SSTS No. 3, Certain Procedural Aspects of Preparing Returns

• Members are expected to do their due diligence

• If information appears to be inaccurate, incomplete or inconsistent, then the member should ask for the underlying documentation

SSTS No. 4, Use of Estimates

• Member may use a taxpayer’s estimates unless prohibited by statute or rule

• Estimates are also valid when exact data is unobtainable

SSTS No. 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision

Member needs justification to depart from a ruling of an administrative proceeding or court decision based on a specific tax treatment on a prior tax return

Justification comes in the form of:

i. Supporting documentation becomes available or subsequent rulings support the taxpayer’s current position

ii. Taxpayer yielded because of a settlement

SSTS No. 6 Knowledge of Error: Return Preparation and Administrative Proceedings

When a member finds an error in the tax return

• Inform Taxpayer Promptly

• Advise of Potential Consequences

• Recommend Corrective Measures

Members aren’t obligated to inform the taxing authority of the error, and are restricted from notifying the taxing authority without consent from the taxpayer

SSTS No. 7 Form and Content of Advice to Taxpayers

• Members should use professional judgment to guarantee that that tax advice given reflects competence

• There is no standard format for communicating tax advice

Part 2

Duties of the Tax Preparer

Katelyn Lydens

Obtaining Client Information“In good faith rely, without verification, on information furnished by the taxpayer or

by third parties.”Rule:

Generally do not have a duty to verify that client information is accurate

Exceptions:

1. When information appears incomplete, inaccurate, or inconsistent

2. When information appears unreliable based on other facts known

What about Privacy Rules?

Filling in Information GapsTap Dancing around Documentation

Rule:

Generally may prepare tax returns based on reasonable client estimates

Limitations:

1. Must avoid creating an impression of factual accuracy

2. Disclosure is required when estimates impact the overall accuracy of the tax return

3. Prohibited for specified expense activities that are commonly exaggerated deductions

Formulating Tax Return PositionsComplexity in the pursuit of

fairness

Rule:

Preparers have to exercise sound professional judgement in deciding whether to claim a tax return position.

What if the position is uncertain?

Understanding the Threshold Standards

Not Frivolou

s

Reasonable Basis

Realistic Possibility of Success

Substantial Authority

More Likely Than Not

least restrictive

most restrictive

Applying the Threshold Standards

Three Steps:

1.Apply the Substantial Authority Standard

2.Check to see if the taxing authority prescribes a standard higher than the Substantial Authority Standard. If so, apply this standard.

3.If the position does not meet the required standards, insure it meets the Reasonable Basis Standard and prominently disclose all relevant facts in the tax return.

Inconsistency with Prior-Year Returns

Rule:

Income and expense items should be treated in a consistent manner from year to year

Exceptions:

1.Position was disallowed due to inadequate supporting documentation

2.Position has been approved in a new court case or IRS pronouncement

3.Position was a compromise in prior year to resolve a minor matter quickly

Completing a Tax Return

Rule:

Tax preparer must sign the tax return attesting that it is complete

Issues:

1.Tax returns are complete without the inclusion of supporting documentation

2.Tax return is not complete unless all non numerical questions have been answered.

Making Corrections

Past Tax Returns

Preparer’s duty can extend after the tax return is filed.

Unintentional Errors

Duty to correct major errors not minor errors.

Intentional Misstatements

Confidentiality prevents that tax professional from informing the taxing authority.

Completing the Client Engagement

Rule:

Tax preparer must return all client records to permit the client to fulfill its filing responsibilities

this duty is absolute

Part 3

Ethical Duties of Tax Reporting

Dan Wilson

Ethics of Tax ReportingTreasury Department Circular No. 230:

Regulations Governing Practice before the Internal Revenue Service

Purpose:1. Regulate the practice of representatives of persons before the Department

of the Treasury

2. Before admitting a representative to practice, require that the representative demonstrate-

a. Good character b.Good reputation c. Necessary qualifications to enable the representative to provide to persons valuable service

d. Competency to advise and assist persons in presenting their cases

Treasury Circular No. 230

Four Subparts:

A.Rules Governing Authority to Practice

B.Duties and Restrictions Relating to Practice Before the Internal Revenue Service

C.Sanctions for Violation of the Regulations

D.Rules Applicable to Disciplinary Proceedings

A.Rules Governing Authority to Practice

Establishes the Office of Professional Responsibility

Six specific types of practitioners

Forms of Practice include:

Preparing documents Filing documents

Corresponding or communicating with the IRS Rendering written advice

Representing a client in conferences, hearings, and meetings

Application and Eligibility Requirements

B. Duties and Restrictions Relating to Practice Before the Internal Revenue ServiceDuties and Restrictions directly related to Certified Public Accountants deal with:

• Solicitation of Business

• Required Response to IRS Requests for Information

• Knowledge of Client Omissions

• Requirement for Practitioner Accuracy

• Practitioner’s Return of Client Records

• Conflicting Interests

C. Sanctions for Violations of the Regulations

The Office of Professional Responsibility has the authority to:

• Censure, suspend, or disbar

• Disqualify

• Impose a monetary penalty

Based on actions within list titled “Incompetence and Disreputable Conduct”

D. Rules Applicable to Disciplinary Proceedings

• Goes over legal proceedings in taking actions against practitioners

• Primarily used by Officers in the Office of Professional Responsibility

Importance of Truthful Reporting

Outside use of tax returns

Stakeholders include

Yourself The IRS

Potential lenders Potential landlords

Potential buyers

Tax returns are unaudited

Responsibility lies with the taxpayer

Part 4

Other Duties in Tax Reporting

Linyi Shi

Duties as an AdvocateTax professionals have both the right and the responsibility to

advocate for their clients as long as recommended tax positions comply with established reporting standards

Being an advocate has its limits:

A tax adviser should never recommend a tax position if it ”exploits the audit selection process of a taxing authority”

A tax adviser should never recommend a tax position to merely create an “arguing point advanced solely to obtain leverage in a negotiation with tax authority”

Tax Planners should follow five steps

1. Understand relevant background facts

2. Evaluate whether assumptions and underlying transactions are reasonable

3. Apply relevant sources of tax authority to the facts

4. Determine whether a transaction complies only with the letter of the law

5. Reach a well-reasoned conclusion

Taxpayer Advocate Service

• Independent office within the IRS

• Employees of TAS personally help taxpayers in dealing with their problems with the IRS

• Identifies systemic problems that exist within the IRS

Duties as Taxplanner

To give clients advice concerning:• The tax impact of a previously

consummated transaction

• Structuring and implementing a proposed transaction

General Professional Duties

• Maintain the highest standard of honesty, integrity, objectivity and due care

• Always remaining free of conflicts of interest

• Preserving client confidentiality

Maintain Integrity, Objectivity and Due Care

• Integrity • Objectivity• Professional competence and due care

Remain Free of Conflicts of Interest

IRS Rules Differ from AICPA Professional Standards:

Federal tax practitioners having conflicts of interest such as:○ Representation of one client that is directly adverse to that of

another client;

○ Representing a client in circumstances that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to other parties.

● However, according to the AICPA Professional Standards:

○ A practitioner may represent a client despite a conflict of interest.

Preserve Client Confidentiality

To respect the confidentiality of information acquired as a result of professional and business relationships

To not disclose any confidential information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose

To not use the information for the personal advantage of the professional accountant or third party

Questions?

References

"Code of Ethics A." Code of Ethics General Application. 2011. Web. 1 Dec. 2015.

Everett, John O., Cherie J. Hennig, and Nancy Nichols. "Tax Practice - Procedures, Administration and Sanctions." Contemporary Tax Practice: Research, Planning and Strategies. 3rd ed. Chicago: Wolters Kluwer CCH, 2013. 9033.09-9037. Print.

Klein, Gordon (2016). Ethics in Accounting: A Decision-Making Approach. Wiley, Hoboken, NJ.

M. Horwitz, Kenneth. "Conflicts of Interest: IRS Rules Differ from AICPA Professional Standards." The Tax Adviser. 1 Nov. 2011.

Web. 1 Dec. 2015.

"Treasury Department Circular No. 230." Regulations Governing Practice before the Internal Revenue Service (2014): 1-19. www.irs.gov.

United States Treasury Department. Web. 28 Nov. 2015.