Ethics

Professional

responsibility Making ethical

and effective

decisions

Key factors

1. Knowing the rules (applicable professional code of conduct)

2. Following the rules (using decision-making framework)

Standards

Circular 230 applies to all who practice before the IRS.

State licensing authorities adopt rules of conduct.

Professions publish guidance. Internal Revenue Code includes

penalty provisions.

Circular 230

Subpart A: Authority to Practice Subpart B: Duties and Restrictions

Relating to Practice before the IRS Subpart C: Sanctions for Violations Subpart D: Disciplinary Proceedings Subpart E: General Provisions

Changes

Revisions effective 9/26/2007. Prior rules still apply to returns

filed before changes effective. Some proposed changes were

not finalized because of legislative changes.

Authority to practice

Attorney or CPA licensed and in good standing under state law

Actuary enrolled by Joint Board for the Enrollment of Actuaries

Individuals who have passed an examination or otherwise qualified as an enrolled agent or an enrolled retirement plan agent

Limited authority (must prove relationship)

Member of taxpayer’s immediate family Employment relationship with taxpayer

▪ Regular full-time employee of sole proprietor▪ General partner or regular full-time employee of

partnership ▪ Officer or regular full-time employee of

corporation (includes affiliated corporations)▪ Regular full-time employee of trust, receivership,

guardianship, or estate▪ Officer or regular employee of government unit

Limited authority for unenrolled return preparers

Anyone for representation outside the U.S. An unenrolled preparer for representation

before revenue agents, customer service representatives, or similar IRS employees during an examination of the return he or she prepared and signed as preparer.

An unenrolled preparer cannot represent taxpayers before appeals officers, revenue officers, or counsel.

Definition of practice

Preparing a tax return, replying to an information request, and appearing as a witness are not practice before the IRS.

Practice includes1. Communicating with the IRS for a

taxpayer regarding the taxpayer’s rights, privileges, or liabilities under federal tax laws

2. Representing a taxpayer at conferences, hearings, or meetings

3. Preparing and filing taxpayer documents

Third-party designee

Authorized on original return Resolve return-processing

issues Valid for only 1 year from original

due date of return Includes amended return during

same time period

Representation

Requires power of attorney Representative must sign to accept

authority Recorded on IRS’s CAF (but keep a

signed copy) IRS generally copies representative

on notices sent to taxpayer IRS communication through POA

required for collection issues

CPE requirements

Circular 230 requires attorneys, CPAs to maintain state license.

EAs and ERPAs must earn 16 hours of CPE, including 2 hours of ethics, each year; must earn 72 hours during a 3-year enrollment period.

Topics must enhance professional knowledge of federal tax-related matters, including taxation, accounting, tax preparation software, and ethics.

Supplying records

Promptly submit requested records to the IRS unless there is good-faith belief (on reasonable grounds) that the information is privileged.

Regions Financial Corporation v. United States.

Due diligence/accuracy

Preparing, approving, and filing tax returns and other documents

Determining correctness of statements regarding any matter administered by the IRS

Verification is not required, but implications may not be ignored.

Allowable fees

Fee may not be unconscionable Contingent fee allowed only in

limited circumstances See Notice 2008-43

Return of client records

Upon request, a practitioner must return to a client “any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations.”

Copies of the records may be retained. There is no requirement to supply the

practitioner’s work product to the client if fees are unpaid.

Conflict of interest

1. Representation of one client will be directly adverse to another client.

2. Significant risk that representation will be materially limited by duties to

a. Another clientb. A former clientc. A third persond. A personal interest

Dual representation

1. Reasonable belief that representation of one client will not adversely affect relationship with other client

2. Potential positive and negative factors fully disclosed to both clients

3. Both clients consent in writing (waiver)

Potential conflicts

Divorced or separated spouses Entity and owners New client and former client Practitioner’s own interest

Absolute prohibitions

Endorsing or otherwise negotiating any check issued to a client by the government in respect of a federal tax liability

Practice of law by individuals who are members of the bar

Best practices

1. Communicate clearly with the client regarding the terms of the engagement.

2. Establish facts, determine relevance, evaluate reasonableness, relate applicable law, and reach conclusion supported by law and facts.

3. Advise the client about import.4. Act fairly and with integrity.

Submissions to IRS

A practitioner may not advise a client to:1. Take a frivolous position 2. Submit anything that contains or

omits information with intentional disregard of a rule or regulation, unless it includes a good-faith challenge to the rule or regulation

3. Submit anything to delay or impede administration of federal tax law

Reliance on client

A practitioner generally may rely on information furnished by a client, without independent verification.

However, a practitioner must make reasonable inquiries if that information appears to be incorrect, inconsistent, or incomplete.

Sanctions

Incompetence or disreputable conduct:

Tax crimes Breach of trust conviction Some other felonies Deceiving Treasury or tribunal Deceiving clients

Sanctions

Willful failure to file Counseling tax evasion Misappropriating client’s payment Bribery or threats to IRS employee Disbarment or suspension Abetting ineligible practitioner

Sanctions

Contemptuous conduct Giving a false opinion knowingly,

recklessly, or through gross incompetence

Willfully failing to sign a tax return Willful unauthorized disclosure or

use of tax return information

Penalties

2007 changes to I.R.C. §§ 6694, 6695 1. Penalties extended to all tax return

preparers (not just income tax return preparers)

2. Level of authority needed to avoid penalty for preparing tax return that understates liability was heightened

3. Penalty amounts increased substantially

2008 Extenders Act

Preparer standard for taking an undisclosed position on a tax return is back to “reasonable basis”

“More likely than not” standard retained for listed and reportable transactions

Notice 2008-12

A paid preparer must sign a return or refund claim after it is completed and before it is presented to the taxpayer for signature.

Notice 2008-12 (summarized on p. 610) lists returns and claims that paid preparers must sign to avoid an I.R.C. § 6695 penalty.

Notice 2008-13

Notice 2008-13 covers: Types of returns and refund claims

subject to preparer penalties Definition of tax return preparer Date return is considered prepared Reasonable belief, reasonable basis,

reasonable cause, and good faith

REG-129243-07

“The Treasury Department and the IRS recognize that the majority of tax return preparers serve the interests of their clients and the tax system by preparing complete and accurate returns.”

“Tax return preparers are critical to ensuring compliance with the federal tax laws.”

Who is preparer?

Signing preparer—the person with primary responsibility for a return’s overall substantive accuracy

Non-signing preparer—a person other than the signing preparer whose advice is directly relevant to the existence, character, or amount of an entry on a return or claim (with respect to events that had occurred at the time the advice was rendered).

Substantial portion

Facts and circumstances determine whether a schedule, entry, or other portion of a return or claim for refund is substantial.

A single tax entry may be substantial. Consider the item’s size, complexity

relative to the taxpayer’s gross income. Compare the resulting understatement

to the total tax liability.

Penalty standard

A preparer penalty for an understatement of tax due to an unreasonable position may be imposed if 3 conditions exist:

1. Preparer knew of the position.2. Preparer did not disclose the

position.3. Preparer did not reasonably believe

that the position would more likely than not be sustained on its merits.

2008 Extenders Act

Preparer standard for taking an undisclosed position on a tax return is back to “reasonable basis”

“More likely than not” standard retained for listed and reportable transactions

More-likely-than-not standard for tax position

Analyze facts and authorities and conclude in good faith that the position has a greater-than-50% likelihood of being sustained on its merits.

Use well-reasoned construction of statute if it is the only authority.

Authorities: Code, regulations, cases, rulings, legislative history

Confidence levels

Frivolous Merely arguable Reasonable basis (no penalty imposed

if position is disclosed) Realistic possibility of success Substantial authority (no penalty for

taxpayer even if position not disclosed) More likely than not to succeed

Penalty avoidance

File return that includes required disclosure

If authority is not substantial, give client return that includes disclosure

If authority is substantial, explain different penalty standards to client

If tax shelter, advise client of potential penalty even with disclosure (document)

Firm’s liability

IRS looks at positions when imposing preparer penalties.

Only one person in a firm is primarily responsible for a position (and thus subject to the penalty for that portion of the tax).

An additional penalty may be imposed on a firm if its review procedures were disregarded through willfulness, recklessness, or gross indifference.

Normal practice

Penalty relief provisions take into account whether a preparer’s normal office practice, considered with other facts/circumstances, indicates that the error would rarely occur.

Certified financial planner (CFP) principles

1. Integrity

2. Objectivity

3. Competence

4. Fairness and reasonableness

5. Confidentiality

6. Professionalism

7. Diligence

CFP rules of conduct

Groups of responsibilities:1. Relationships with clients2. Disclosures to clients 3. Client information and property4. Obligations to clients5. Obligations to employers6. Obligations to CFP Board

Joe Paterno

Success without honor is an unseasoned dish; it will satisfy your hunger, but it won't taste good.

Making ethical decisions

Taking choices seriously 7-step decision-making process 6 Pillars of Character SM

Rationalizing a wrong act Ethical decision-making Being the person you want to be

Core principles

We all have the power to decide what we do and what we say.

We are morally responsible for the consequences of our choices.

Recognizing important decisions

Could the decision hurt your reputation, undermine your credibility, or damage important relationships?

Could the decision impede the achievement of any important goal?

Ethical and effective

A decision is ethical when it is consistent with core ethical values.

A decision is effective if it accomplishes something we want to happen or if it advances our purposes.

Critical aspects

Good decisions require discernment: knowledge and judgment.

Good decisions require discipline: the strength of character to do what should be done even when it is costly or uncomfortable.

7 steps

1. Stop and think.

2. Clarify your goals.

3. Determine the facts.

4. Develop options.

5. Consider the consequences.

6. Choose.

7. Monitor and modify.

6 Pillars of CharacterSM

1. Trustworthiness: Think “true blue”2. Respect: Think of the Golden Rule3. Responsibility: Think of being solid and

reliable like an oak4. Fairness: Think of dividing an orange

to share fairly with friends5. Caring: Think of a heart6. Citizenship: Think of regal purple as

representing the state

Pillar 1: Trustworthiness

The most complex of the core ethical values, it encompasses▪ Honesty▪ Integrity▪ Reliability▪ Loyalty

Pillar 2: Respect

Regard for the worth of people▪ Civility▪ Courtesy▪ Decency▪ Autonomy▪ Tolerance▪ Acceptance

Pillar 3: Responsibility

Recognizing that what we do and what we do not do matters▪ Accountability▪ Pursuit of excellence▪ Exercising self-restraint

Pillar 4: Fairness

A range of morally justifiable outcomes rather than one fair answer▪ Justice▪ Open processes▪ Impartiality▪ Equity

Pillar 5: Caring

The heart of ethics Ethics is ultimately about our

responsibilities toward other people.

It is easier to love humanity than it is to love people.

Pillar 6: Citizenship

Civic virtues and duties Behaving as part of a community Good citizen gives more than he

or she takes.

Pillar talk: Good character is TRRFCC

Trustworthiness Respect Responsibility Fairness Caring Citizenship

Avoid rationalization

Relativity applies to physics, not ethics.Albert Einstein

The time is always right to do what is right. Martin Luther King, Jr.

In matters of style, swim with the current. In matters of principle, stand like a rock.

Thomas Jefferson

It’s a process

Perceive and eliminate unethical options that subordinate ethical values to unethical values.

Select the best ethical alternative; although there may be several ethical responses to a situation, not all responses are equal.

Character

Character is ethics in action. Character is what you are. Reputation is what people say

you are.

Character

Leadership is a combination of strategy and character. If you must be without one, be without the strategy.

H. Norman Schwarzkopf

Penalty Flag

Volunteer Tax Preparers

Nearly 1/3 of income tax returns prepared by volunteer preparers for the IRS VITA program were incorrect. TIGTA

Judge Bars Two San Diego Firms from Preparing Returns

Roosevelt Kyle & Rebecca Tyree 200 returns understated tax liability

by using fabricated or inflated deductions.

IRS undercover operation $18 million in lost tax revenue

Court Bars Houston Woman

Linda McMiller of Pearland, TX Claimed false deductions for

contributions, job-related expenses and medical as well as high legal and professional fees.

230 returns filed costing the U.S. Treasury $5 million in tax dollars

Dallas, TX – Preparer Involved in $1.2 Million Bogus Fuel Tax Credits

Farai Chihota, Chihota’s Quick Return Tax Service

A janitor claimed a fuel credit based on 53,454 gallons of gasoline, requiring he spend 5 X annual income on gasoline.

Would have required 2,900 miles per day travel.

Example Two

Driver claimed purchase of 54,000 gallons of gasoline.

Taxpayer reported no income but would have had to purchase $108,000 of gasoline.

He would have had to travel 2,220 miles per day, 7 days a week – 365 days a year.

California Woman Barred from Return Preparation

Bonnie Arnel claimed false and inflated deductions, frequently amending their returns, knowing it was fraudulent.

Told taxpayers, “she could find deductions the IRS did not want them to know about.”

Arnel Plead Guilty to 43 counts of filing false returns

Promised taxpayers to represent them.

Filed 82 returns with loss in tax revenue of $303,014.

Guilty plea included charges from 1987.

Received 16 months’ incarceration and 5 years of probation.

Former IRS – Prepared Two Sets of Returns

Debra Windham, former IRS Secretary in Criminal Investigation

Prepared returns with false deductions and applied for “refund anticipation loans” in taxpayer’s names without their knowledge.

Filed two returns and took additional refund.

Estimated loss of $850,000 in tax revenue.

Minnesota Return Preparer Guilty of Criminal Contempt

Nash Sonibare of St. Paul, MN Violated a March 2006 injunction barring him

from preparation. Repeatedly prepared federal income tax

returns with false or inflated Schedule C expenses, false Schedule C businesses, false or inflated Schedule C business losses, false education credits, false dependency exemptions and other fraudulent items.

Orlando, Florida

Humberto N. Collazo, et al Prepared returns with false information in order

to reduce their clients’ tax liabilities. Overstated deductions, claimed tax credits,

deducted non-deductible expenses, claimed non-qualifying individuals as dependents and misrepresented the filing statuses.

Failed to disclose their name and social security number on the returns.

15,000 returns – tax loss with interest - $20 m

Bogus “Decoding” Tax Scheme

Sharon Kukhahn of Tacoma, WA Represented taxpayers were not required

to pay tax unless they live in a U.S. territory and that U.S. residents may be taxed only by a federal excise tax and only if they are involved in an excise-taxable enterprise.

Charged between $1,750 & $3,195 for “decoding”

Bogus “Decoding”

Cost to Treasury - $4.9 million DOJ sued Kukhahn. Kukhahn told taxpayers she had

transferred funds to the DOJ to pay taxpayers for “any harm relying on her services and to make claim to the DOJ.”

328 of her customers filed claims.

Houston, TX – Fuel Credit Fraud

Kyle C. Kasten, Houston, TX Fabricated claims for the federal fuel tax

credit. Claimed one taxpayer used 44,005 gallons

when only earning $802 that year. Taxpayer would have spent $88,010 on gas. 80 returns loosing $700,000 in tax revenue

Baltimore, MD

Raymond Ekpedeme, Laurel, MD Prepared false tax returns and

made false statements on tax returns.

Operated Erickson Tax Service from 2003 to 2006.

N Y CPA Charged with Conspiracy

Steven M. Pordy, NY CPA Conspiracy to steal $170,742 in NY

sales tax by preparing false sales tax returns.

Failed to report $2,108,655 in taxable sales.

Also faces a felony perjury charge. Faces 15 years in prison

Allen, Michigan

Joyce Stone and son, Charles Freed charged with 83 counts of fraudulent return preparation.

$25 million in loss taxes. Continued to prepare returns and

give advice in violation of federal court order.

North Carolina Preparer

Herbert McMillan, Fayetteville, NC Charged with 25 counts of aiding or

assisting in the preparation of fraudulent state tax returns and two counts of willful failure to file income tax returns.

Filed returns for 11 clients. Failed to file his own return.

Pensacola, Florida

Female tax return preparer plead guilty to 31 counts of preparing and filing false federal income tax returns and 13 counts of identity theft.

Fraudulently filed returns with false wages, withholding and deductions to increase refund. Deposited refund in her own account and transferred refund taxpayer expected to their account.

Also filed completely fraudulent returns with refunds to her of $102,000.

The Good, Ethical Preparer

Operates from a position of KNOWLEDGE,

Middle name is DUE DILIGENCEAndQUESTIONS until the answer

makes good sense!