ethics for state tax professionals · • subtlety may deceive you; integrity never will. • there...

Ethics for State Tax Professionals

Nicole Crighton, Principal, KPMG LLP

Glenn C. McCoy, Jr., Director, KPMG LLP

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. NDPPS 162717

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR CTO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

KPMG LLP does not provide legal services.

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Ethics for State Tax Professionals

2014 FTA Annual Meeting

St. Petersburg, Florida

June 8 – 11, 2014


Overview

Agenda

•  Goals of this Session

•  Sources of Guidance

•  Proposed Analytical Framework

•  Real-Life Examples

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Introduction

•  Ethics is not definable, is not implementable, because it is not conscious; it involves not only our thinking, but also our feeling.

•  Relativity applies to physics, not ethics.

•  The time is always right to do what is right.

•  Subtlety may deceive you; integrity never will.

•  There is no such thing as a minor lapse of integrity.

•  The internal revenue code has made more liars out of the American public than golf.

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Sources of Guidance

•  Professional Organizations

•  Government-Imposed Rules

•  Rules Imposed on Revenue Departments

•  Corporate Policies

•  Personal Convictions

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Rules of Professional Organizations

•  American Bar Association

–  http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional conduct_table_of_contents.html

•  American Institute of CPAs

–  http://www.aicpa.org/Research/Standards/Tax/Pages/default.aspx

•  Tax Executives Institute

–  http://www.tei.org/membership/Pages/StandardsofConduct.aspx

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Rules of Professional Organizations (continued)

•  Institute for Professionals in Taxation

–  http://www.ipt.org/learncenter.asp?id=178410&page=29

•  Professional Oaths

–  e.g., California Attorney’s Oath

–  (http://www.calbarxap.com/applications/CalBar/PDFs/code_section_6068.pdf)

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Government-Imposed Rules

•  Sarbanes-Oxley

–  http://www.sec.gov/about/laws.shtml#sox2002

•  Circular 230

–  http://www.irs.gov/pub/irs-utl/circular_230.pdf

•  State-specific rules of professional conduct

•  Rules within tax laws

•  Taxpayer Bills of Rights

•  State Level Codes of Conduct

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Corporate Policies

•  Company’s own ethics policies or codes

•  Association of Corporate Counsel

–  http://www.acc.com/advocacy/keyissues/legalethics.cfm

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Personal Convictions

•  Individual Moral Code

–  Often the first level of scrutiny of a potential action

•  Individual Character

–  Internal moral barometers

–  Only the starting point; must navigate the whole framework

•  Disincentive of Public Disclosure

–  “What-would-your-mother-say” test

–  “Wall Street Journal” Test

–  “The Red Face Test”

–  “What do you do when no one is watching?”

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Purpose and Function of Ethics Codes

•  Reflect organizational values

•  Articulate principles and standards

•  Advise members of accepted conduct—and conduct that is not acceptable (Behavior may be branded unethical even though it is not unlawful.)

•  Aspiration to members and, through enforcement measures, protects integrity of the organization

•  Assist members in identifying ethical issues and provide framework for resolution

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Select ABA Model Rules Provisions

•  ABA Model Rules

–  The complete table of contents for the ABA Model Rules has been provided in the detailed outline that accompanies this Power Point presentation. Today will cover issues concerning the actions of the individual attorney in the context of:

•  Client-Lawyer Relationship: Communications, Fees, Confidentiality of Information, Conflicts of Interest, and Duties to Former Clients.

•  Candor Toward a Tribunal

•  Truthfulness in Statements to Others

•  Communications with Person Represented by Counsel

•  Unauthorized or Multijurisdictional Practice of Law

•  Advertising and

•  Misconduct

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Rule 1.1 Competence

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Rule 1.5 Fees

(e) A division of a fee between lawyers who are not in the same firm may be made only if:

(1) The division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;

(2) The client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and

(3) The total fee is reasonable.

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Rule 1.6 Confidentiality Of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1) to prevent reasonably certain death or substantial bodily harm;

(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;

(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer’s services; (4-7 omitted)

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(c)  A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.

Rule 1.7 Conflict Of Interest: Current Clients

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

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Rule 1.7 Conflict Of Interest: Current Clients (cont.)

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.

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Rule 1.8 Conflict Of Interest: Current Clients: Specific Rules

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction. (b though k omitted)

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Rule 1.9 Duties To Former Clients

(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

(b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client

(1) whose interests are materially adverse to that person; and

(2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter;

unless the former client gives informed consent, confirmed in writing.

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Rule 3.1 A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law.

Rule 3.3 Candor Toward The Tribunal (a) A lawyer shall not knowingly:

(1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer;

(2) fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel; or

(3) offer evidence that the lawyer knows to be false. If a lawyer, the lawyer’s client, or a witness called by the lawyer, has offered material evidence and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal. A lawyer may refuse to offer evidence, other than the testimony of a defendant in a criminal matter, that the lawyer reasonably believes is false.

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Rule 4.1 Truthfulness In Statements To Others

In the course of representing a client a lawyer shall not knowingly:

(a) make a false statement of material fact or law to a third person; or

(b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.

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Rule 4.2 Communication With Person Represented By Counsel

In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.

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Rule 5.5 Unauthorized Practice Of Law; Multijurisdictional Practice Of Law (a) A lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction, or assist another in doing so. (b) A lawyer who is not admitted to practice in this jurisdiction shall not:

(1) except as authorized by these Rules or other law, establish an office or other systematic and continuous presence in this jurisdiction for the practice of law; or (2) hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction.

(c) A lawyer admitted in another United States jurisdiction, and not disbarred or suspended from practice in any jurisdiction, may provide legal services on a temporary basis in this jurisdiction that:

(1) are undertaken in association with a lawyer who is admitted to practice in this jurisdiction and who actively participates in the matter; (2) are in or reasonably related to a pending or potential proceeding before a tribunal in this or another jurisdiction, if the lawyer, or a person the lawyer is assisting, is authorized by law or order to appear in such proceeding or reasonably expects to be so authorized; [(c) 3-4, d and e omitted]

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Rule 7.2 Advertising

(b) A lawyer shall not give anything of value to a person for recommending the lawyer’s services except that a lawyer may

(1) pay the reasonable costs of advertisements or communications permitted by this Rule;

(2) pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service. A qualified lawyer referral service is a lawyer referral service that has been approved by an appropriate regulatory authority;

(3) pay for a law practice in accordance with Rule 1.17; and

(4) refer clients to another lawyer or a non-lawyer professional pursuant to an agreement not otherwise prohibited under these Rules that provides for the other person to refer clients or customers to the lawyer, if

(i) the reciprocal referral agreement is not exclusive, and

(ii) the client is informed of the existence and nature of the agreement.

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Rule 8.4 Misconduct. It is professional misconduct for a lawyer to:

(a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another;

(b) commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects;

(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation;

(d) engage in conduct that is prejudicial to the administration of justice;

(e) state or imply an ability to influence improperly a government agency or official or to achieve results by means that violate the Rules of Professional Conduct or other law; or

(f) knowingly assist a judge or judicial officer in conduct that is a violation of applicable rules of judicial conduct or other law.

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Select AICPA Standards and Ethic Rules

Professional Standards for Ethics—SSTS #1. American Institute of Certified Public Accountants (AICPA) Statement on Standards for Tax Services (SSTS or “Standards”)

•  Tax Return Position

–  A Certified Public Accountant (CPA) must have a good-faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged

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Professional Standards for Ethics, Cont. AICPA Statement on Standards for Tax Services (SSTS or “Standards”)


–  Realistic Possibility Test

•  If a tax return position is warranted by existing law, or can be supported by a good-faith argument for an extension, modification, or reversal of existing law through administrative or judicial processes

•  It can be based on a well-reasoned interpretation of the statute if no other authority exists

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Professional Standards for Ethics, Cont.

AICPA Statement on Standards for Tax Services (“SSTS” or “Standards”)


–  If client insists on taking the position, a CPA may prepare and sign the return, but the position must be disclosed on the return

–  Consistent tax treatment is not always required from year to year

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Professional Standards for Ethics, Cont. (ABA Formal Opinion 85-352 Standards of the American Bar Association (ABA), Section of Taxation, Model Rules of Professional Conduct •  Lawyers may advise their clients in reporting a position and/or filing methodology

on a return favorable to the client as long as they believe, in good faith, that the position is warranted within existing law or can be supported in a good faith argument against existing law

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Professional Standards for Ethics, Cont. Standards of the ABA, Section of Taxation, Model Rules of Professional Conduct, Cont. •  “Good faith” is defined as believing there is at least a 33% possibility of success if

the matter is litigated •  A lawyer has a duty not to mislead the IRS deliberately by misstatements or silence

or by permitting a client to mislead the IRS in both preparation of returns and negotiating settlements

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

•  The tax return position with respect to an item as determined in an administrative proceeding or court decision does not restrict a member from recommending a different tax position in a later year’s return, unless the taxpayer is bound to a specified treatment in the later year, such as by a formal closing agreement. Therefore, the member may recommend a tax return position or prepare or sign a tax return that departs from the treatment of an item as concluded in an administrative proceeding or court decision with respect to a prior return of the taxpayer provided the requirements of Statement on Standards for Tax Services (SSTS) No. 1, Tax Return Positions, are satisfied.

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Knowledge of Error: Return Preparation and Administrative Proceedings—

SSTS No. 6.

•  A member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken. Such advice and recommendation may be given orally. The member is not allowed to inform the taxing authority without the taxpayer’s permission, except when required by law.

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Form and Content of Advice to Taxpayers—SSTS No. 7.

•  A member should use professional judgment to ensure that tax advice provided to a taxpayer reflects competence and appropriately serves the taxpayer’s needs. When communicating tax advice to a taxpayer in writing, a member should comply with relevant taxing authorities’ standards, if any, applicable to written tax advice. A member should use professional judgment about any need to document oral advice. A member is not required to follow a standard format when communicating or documenting oral advice.

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Florida Chapter 112, Part III, Code of Ethics for Public Employees

F.S. s. 112.3185(4) (4)An agency employee may not, within 2 years after retirement or termination, have or hold any employment or contractual relationship with any business entity other than an agency in connection with any contract for contractual services which was within his or her responsibility while an employee. If the agency employee’s position is eliminated and his or her duties are performed by the business entity, this subsection may be waived by the agency head through prior written approval for a particular employee if the agency head determines that the best interests of the state will be served thereby.

F.S. s. 112.3217 Contingency fees; prohibitions; penalties. (1)“Contingency fee” means a fee, bonus, commission, or nonmonetary benefit as compensation which is dependent or in any way contingent on the enactment, defeat, modification, or other outcome of any specific executive branch action.


Florida Chapter 112, Part III, Code of Ethics for Public Employees

F.S. s. 112.3217 Contingency fees; prohibitions; penalties. (cont.) (2) No person may, in whole or in part, pay, give, or receive, or agree to pay, give, or receive, a contingency fee. However, this subsection does not apply to claims bills. (3) Any person who violates this section commits a misdemeanor of the first degree, punishable as provided in s. 775.082 or s. 775.083. If such person is a lobbyist, the lobbyist shall forfeit any fee, bonus, commission, or profit received in violation of this section and is subject to the penalties set forth in s. 112.3215. When the fee, bonus, commission, or profit is nonmonetary, the fair market value of the benefit shall be used in determining the amount to be forfeited. All forfeited benefits shall be deposited into the Executive Branch Lobby Registration Trust Fund. (4) Nothing in this section may be construed to prohibit any salesperson engaging in legitimate state business on behalf of a company from receiving compensation or commission as part of a bona fide contractual arrangement with that company.


Illinois State Officials and Employees Ethics Act—5 ILCS 430

S 1-5. Definitions. As used in this Act: “Gift” means any gratuity, discount, entertainment, hospitality, loan, forbearance, or other tangible or intangible item having monetary value including, but not limited to, cash, food and drink, and honoraria for speaking engagements related to or attributable to government employment or the official position of an employee, member, or

Officer.

S 10-10. Gift ban. Except as otherwise provided in this Article, no officer, member, or State employee shall intentionally solicit or accept any gift from any prohibited source or in violation of any federal or State statute, rule, or regulation. This ban applies to and includes the spouse of and immediate family living with the officer, member, or State employee. No prohibited source shall intentionally offer or make a gift that violates this Section. S 10-15. Gift ban; exceptions. The restriction in Section 10-10 does not apply to the following: (Twelve exceptions listed)


Illinois State Officials and Employees Ethics Act—5 ILCS 430

S 5-10. Ethics training.

(a) Each officer, member, and employee must complete, at least annually beginning

in 2004, an ethics training program conducted by the appropriate State agency. Each ultimate jurisdictional authority must implement an ethics training program for its officers, members, and employees. These ethics training programs shall be overseen by the appropriate Ethics Commission and Inspector General appointed pursuant to this Act in consultation with the Office of the Attorney General.


Massachusetts Ethics Rules Chapter 268A

Section 2. (a) Whoever, directly or indirectly, corruptly gives, offers or promises anything of value to any state, county or municipal employee, or to any person who has been selected to be such an employee, or to any member of the judiciary, or who offers or promises any such employee or any member of the judiciary, or any person who has been selected to be such an employee or member of the judiciary, to give anything of value to any other person or entity, with intent

(1) to influence any official act or any act within the official responsibility of such employee or member of the judiciary or person who has been selected to be such employee or member of the judiciary, or

(2) to influence such an employee or member of the judiciary or person who has been selected to be such an employee or member of the judiciary, to commit or aid in committing, or collude in, or allow, any fraud, or make opportunity for the commission of any fraud on the commonwealth or a state, county or municipal agency, or

(3) to induce such an employee or member of the judiciary or person who has been selected to be such an employee or member of the judiciary to do or omit to do any act in violation of his lawful duty;


Massachusetts Ethics Rules Chapter 268A

Section 3.

(a) Whoever knowingly, otherwise than as provided by law for the proper discharge of official duty, directly or indirectly, gives, offers or promises anything of substantial value to any present or former state, county or municipal employee or to any member of the judiciary, or to any person selected to be such an employee or member of the judiciary: (i) for or because of any official act performed or to be performed by such an employee or member of the judiciary or person selected to be such an employee or member of the judiciary; or (ii) to influence, or attempt to influence, an official action of the state, county or municipal employee or to any member of the judiciary; or

(b) Whoever knowingly, being a present or former state, county or municipal employee or member of the judiciary, or person selected to be such an employee or member of the judiciary, otherwise than as provided by law for the proper discharge of official duty, directly or indirectly, asks, demands, exacts, solicits, seeks, accepts, receives or agrees to receive anything of substantial value: (i) for himself for or because of any official act or act within his official responsibility performed or to be performed by him; or (ii) to influence, or attempt to influence, him in an official act taken;


New York Public Officers Law §73, §73-a and §74

The Ethics in Government Act was passed and signed into law to restore the public's trust and confidence in government through the prevention of corruption, favoritism, undue influence and abuses of official position. As part of the Act, the ethics law was amended to establish standards of conduct for state officers and employees.

It restricts certain business and professional activities, both while in state service and after separation. The governing provisions are set forth in §73, §73-a and §74 of the Public Officers Law.

• Gifts. You may not receive a gift of more than nominal value if it could reasonably be assumed that the gift was meant to influence you in performing your public duties, for example, a gift of more than nominal value from someone whose public business comes before you. POL §74(2)


New York Public Officers Law §73, §73-a and §74

• Conflicts of Interest. You may not have any interest or engage in any business or transaction or professional activity or incur any obligation of any nature which is in substantial conflict with the proper discharge of your public duties. POL §74(2)

• Confidential Information. You may not disclose confidential State information or use it for your personal interests. POL §74(3)(b)(c)

• Misuse of Office. You may not use your official position to secure unwarranted privileges or exemptions for yourself or others. POL §74(3)(d)

• Appearance of Impropriety. You may not do anything that would give the public a reasonable basis to think that anyone can improperly influence you in your official duties by reason of kinship, rank, position or influence. POL §74(3)(f)

• Contingent Fees. You may not be paid for services where your fee is dependent or contingent on State agency action. POL §73(2)

Ethical Issues for Practitioners


Issues for Attorneys

False or misleading advertising

Fee issues:

•  Are there really more than 24 hours in a day for billing purposes?

•  Fee Splitting

•  Contingent Fees

•  Multiple Year Appeals

•  Fees Must Be Reasonable

Settlement offers must be reported

Unauthorized use of refunds

Unwarranted appeals

Revealing confidential information

Conflicts of interest

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Issues for Certified Public Accountants

•  The handling of tax returns

•  Withholding tax information

•  Qualifications

•  Those “things of value”

•  Gifts

•  Lavish entertainment

•  Hiring practices

•  Unwarranted protests or appeals

•  Reporting false information

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Issues for the Corporate Tax Professional

The handling of tax returns

Withholding information

Reporting false information

Qualifications

•  Do you have to be licensed or just a corporate officer?

Those “things of value”

•  Gifts


Hiring practices

Unwarranted appeals or law suits

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Issues for the State Tax Commission Professional

The handling of tax returns

Withholding information

Qualifications

Those “things of value”

•  Gifts


Hiring practices

Unwarranted protests or appeals

Reporting false information

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Applying Ethics: Practical Scenarios


Applying Ethics: Practical Scenarios

•  Unless otherwise stated, the following scenarios will be analyzed under the AICPA Code of Ethics, including the Statements on Standards for Tax Services, and/or the ABA Model Rules of Professional Conduct.

•  Any conclusions expressed by the presenters are theirs alone.

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questions which will appear on the screen.

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(max: $0.20).

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Poll Everywhere


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Poll Everywhere


Presenter Contact Information

Nicole Crighton KPMG LLP 212-954-8696 [email protected] Glenn C. McCoy, Jr. KPMG LLP 212-954-2668 [email protected]

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© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

ethics for state tax professionals · • subtlety may deceive you; integrity never will. • there...

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