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!