Document 7292591
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Transcript Document 7292591
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 includes
1. 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 client
b. A former client
c. A third person
d. 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.
2.
3.
Penalties extended to all tax return
preparers (not just income tax return
preparers)
Level of authority needed to avoid
penalty for preparing tax return that
understates liability was heightened
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.
2.
3.
4.
5.
6.
7.
Integrity
Objectivity
Competence
Fairness and reasonableness
Confidentiality
Professionalism
Diligence
CFP rules of conduct
Groups of responsibilities:
1. Relationships with clients
2. Disclosures to clients
3. Client information and property
4. Obligations to clients
5. Obligations to employers
6. 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 Rule
3. Responsibility: Think of being solid and
reliable like an oak
4. Fairness: Think of dividing an orange
to share fairly with friends
5. Caring: Think of a heart
6. 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 excisetaxable 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 DILIGENCE
And
QUESTIONS until the answer
makes good sense!