CHAPTER 3B Ethics and Circular 230

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1 CHAPTER 3B Ethics and Circular 230 Disclaimer The contents of this communication are not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties. 2 1

2 Agenda Introduction August 2011 Changes in Circular 230 Overview/Discussion of Key Points for the Case Studies Case Studies ERPA PTIN Update For Reference: Circular 230, Practice Before the IRS 3 Introduction 2

3 Definition Introduction Ethics Definition The basic principals of right action. Ethics of a Profession are the general body of rules, written or unwritten, relative to the conduct of the members of the profession intended to guide them in maintaining certain basic standards of behavior. (as defined in The Attorney s Pocket Dictionary) 5 Introduction There is no one set of rules for all retirement plan professionals; since practitioners from multiple professions operate in the field. Attorneys Accountants Actuaries Consultants Contract Service Providers (TPAs) Enrolled Retirement Plan Agents Fiduciaries Institutional Trustees Investment Advisors Investment Product Purveyors Different sets of rules apply depending on individual involved and what industry they are in and if they belong to a professional organization which has a Code of Professional Conduct. 6 3

4 Introduction Attorneys are subject to oversight, licensing, and discipline at the state level. However, the American Bar Association provides the Model Code of Professional Responsibility and the Model Rules of Professional Conduct. Accountants are likewise subject to state oversight. However, they are also expected to adhere to the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct and Statements on Responsibility in Tax Practice. 7 Introduction Actuaries may belong to several different professional groups, many of which h have adopted d a Code of Professional Conduct. American Society of Pension Professionals and Actuaries (ASPPA) has a code for actuarial conduct as adopted by the other actuarial societies. Since ASPPA s membership has expanded beyond actuaries, it has its own Code of Conduct for its members and those holding its certifications. The National Institute of Pension Administrators (NIPA) also has its own Code of Ethics, which is similar to ASPPA s. 8 4

5 Introduction Are individuals subject to government agency oversight where there could be sanctions for behavior outside the norm? Are individuals subject to professional licensing and oversight? An employer adopting a qualified retirement plan may be working with one or more professionals with regard to their plan. 9 Introduction What is the inter-relationship between the parties? How does one professional act with regard to other professionals that are involved with the same plan. For example, the plan trustee or recordkeeper interacting with the outside auditor for the Form 5500 annual report? What standards apply? 10 5

6 Introduction Due to changes brought about by the IRS Restructuring and Reform Act of 1998 (IRSRRA) not all industry professionals may represent employers with the Internal Revenue Service. Many industry professionals working closely with employer plans are not attorneys, actuaries or accountants and therefore there was a gap in representation. The gap was filled with the creation of the Enrolled Retirement Plan Agent (ERPA) 11 Introduction ERPAs (and others who may represent employers with regard to their retirement t plans before the IRS) must comply with the provisions of Circular 230. Circular 230 lays out the duties of those who practice before the IRS. 12 6

7 August 2011 Changes in Circular 230 Circular 230 Update August 2, 2011, Circular 230 updated, effective immediately (48 pages) Final regulations for individuals who present before the IRS were in June 3, 2011, federal register Effective in Circular 230 on August 2, 2011 Substantive ti Changes Prior update was 2008, introduction of ERPA 14 7

8 2011 Circular 230 Revisions Expansion of Jurisdiction Major change: paid tax preparers added Division of Labor RPO = Processing OPR Practice Standards Oversight Independent Investigations Propose Disciplinei Administrative Hearings and Appeals (c) Return Preparation & Application of Rules to Other Individuals (new) Any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer s tax liability for submission to the Internal Revenue Service is subject to the duties and restrictions relating to practice in subpart B, as well as subject to the sanctions for violation of the regulations in subpart C. Unless otherwise a practitioner, however, an individual may not prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund, or sign tax returns and claims for refund. 16 8

9 Procedures to ensure compliance (b) (new) New (b) Requirements for tax returns and other documents. Any practitioner who has (or practitioners who have or share) principal authority and responsibility for overseeing a firm s practice of preparing tax returns, claims for refunds, or other documents for submission to the Internal Revenue Service must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with Circular 230. Any practitioner who has (or practitioners who have or share) this principal authority will be subject to discipline for failing to comply with the requirements of this paragraph if-- 17 Procedures to ensure compliance (b) (new) 1. The practitioner through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures to comply with Circular 230, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with Circular 230; or 18 9

10 Procedures to ensure compliance 10.36(b) (cont.) 2. The practitioner knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, who does not comply with Circular 230, and the practitioner, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance. 19 Overview/Discussion of Key Overview/Discussion of Key Points for the Case Studies 10

11 Circular 230 A practitioner must submit records or information promptly upon request by the IRS, unless the representative believes in good faith and on reasonable grounds that the information is privileged. At a client s request, a practitioner must promptly return records that the client needs to comply with their federal tax obligations. The practitioner may retain copies of the returned records. 21 Circular 230 A return, claim for refund, schedule, affidavit, appraisal or other document prepared by the practitioner or the practitioner s firm,employee or agent is not considered a client record if the practitioner is withholding the document pending the client s payment of fees required by its contractual obligation to the practitioner. A practitioner may not charge an unconscionable fee for representing clients before the IRS

12 Section Information to be Furnished Are you compelled to provide information? What if you are not in possession of information? What about privilege? Interference with requests 23 Section Knowledge of Client s Omissions Practitioner: Retained by client with respect to a matter administered by IRS Who knows that the client has not complied with U.S. revenue laws, or made an error in or omission from any Return, document, affidavit or other document the client submitted or executed under US revenue laws Must advise the client promptly of the fact of such noncompliance, error, or omission and of the consequences under the Code What must you do to comply with Circular 230? Documentation 24 12

13 10.22(a) Diligence as to Accuracy In General Practitioner must exercise due diligence: Preparing/assisting preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters determining the correctness of oral or written representations made by a practitioner to: Department of Treasury, and clients with reference to any matter administered by IRS (b) Diligence as to Accuracy Reliance on Others Except as provided in 10.34,.35 and.37 a practitioner will be presumed to have exercised due diligence, if: the practitioner relies on the work product of another person, and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between practitioner and the person 26 13

14 Section 10.23, Prompt Disposition of Pending Matters A practitioner may not unreasonably delay the prompt disposition iti of any matter before the IRS What is an unreasonable delay of pending matters? By-passing an otherwise valid Power of Attorney 27 Section (1) A practitioner may not advise a client to take a position on a document, affidavit or other paper submitted to the Internal Revenue Service unless the position is not frivolous. (2) A practitioner may not advise a client to submit a document, affidavit or other paper to the Internal Revenue Service (i) The purpose of which is to delay or impede the administration of the Federal tax laws; (ii) That is frivolous; or (iii) That contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation unless the practitioner also advises the client to submit a document that evidences 28 14

15 Section Standards Tax Returns, Documents, Affidavits, Other - What is frivolous? Reliance on information furnished by Client Advise on potential penalties Documentation 29 Case Studies 15

16 Case Study One Client hires you as TPA and during takeover, you learn that the owner borrowed money from the plan, defaulted on repaying the loan during the prior year, did not include the loan on Form 5500, and the owner did not pay tax on the defaulted loan. What is your responsibility? What if the owner is willing to repay the loan at that time but does not want to amend the Form 5500 nor her Form 1040? 31 Case Study Two Client hires you as TPA and when asked for documents client provides all except the EGTRRA good faith amendment. What do you do? What if the client provide the EGTRRA good faith amendment but it is not signed. What do you do? What if the client finds the amendment dated June 30, 2003, and the client tells you that the prior vendor prepared the document, but the client just got to signing it. What do you do? 32 16

17 Case Study Three Take Over Plan Failed dacp Top Heavy, but hasn t made top heavy contribution Partial termination Where s the money?? 33 Case Study Four Where s my money? Retained as TPA for profit sharing plan by employer Former vice President of company calls and says he cannot get a distribution even though he has a distributable event and the plan provides for distributions as soon as administratively possible Cousin of owner gets loan even though there are no loan provisions i in the plan 34 17

18 Question Question- What should be done with the records of former clients? Can you charge for later production of the records? 35 Question Duties as a document sponsor Employer s refusal to restate plan document Resigning as document sponsor Resigning as trustee Firing the client Duties owed 36 18

19 ERPA Updates 10.3(e) ERPA Practice Limits Scope of ERPA Practice Before the IRS Limited to: Preparing and filing Requests for Master, Prototype and Volume Submitter programs Determination Letter program Compliance Resolution System (EPCRS) Representing taxpayers with respect to: IRS forms under the 5300 and 5500 series Qualified Plan Examinations Strictly regarding retirement plan matters 38 19

20 10.3(e) ERPA Practice Limits ERPA Practice Before IRS Does NOT Include: Representing taxpayers with respect to actuarial forms or schedules Form 5500 Schedule SB or MB (or the old schedule B) Non-retirement plan matters 39 IRS Notice : Certain ERPAs Not Required to Obtain PTIN Treasury and IRS intend to amend Circular 230 to remove the requirement for individuals to have a PTIN prior to applying for enrollment/renewing enrollment as ERPAs. Effective immediately, ERPAs and applicants to become ERPAs are not required to have a PTIN to apply for enrollment or renew enrollment as an enrolled retirement plan agent

21 IRS Notice : Certain ERPAs Not Required to Obtain PTIN ERPAs must obtain a PTIN if, for compensation, they prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund that is not on the list of forms exempt from the PTIN requirement as provided in section 1.03 of Notice or any future guidance. 41 IRS Notice : Certain ERPAs Not Required to Obtain PTIN Thus, ERPAs who prepare only Form 5300 or Form 5500 series do not require a PTIN However, PTIN will soon be used for an IRS on-line tracking of CPE PTIN might be good to have for that reason 42 21

22 For Reference Circular 230 Practice Before the IRS 31 U.S.C (1884) Practice before the Department a. Subject to section 500 of title 5, the Secretary of the Treasury may (1)regulate the practice of representatives of persons before the Department of the Treasury; and 44 22

23 31 U.S.C Practice before the Department a. 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; and D. competency to advise and assist persons in presenting their cases U.S.C Practice before the Department b. After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative who: 1. is incompetent; 2. is disreputable; 3. violates regulations prescribed under this section; or 4. with intent t to defraud, d willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented

24 Penalties Secretary may impose a monetary penalty on any representative If representative acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the Secretary may impose a monetary penalty on such employer, firm, or entity if it knew, or reasonably should have known, of such conduct. Such penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment, or censure of the representative. 47 Circular 230 Oversight Enrolled Agents Enrolled Retirement Plan Agents Enrolled Actuaries Paid Tax Return Preparers, Defined in Treasury Regulation Appraisers who submit appraisals supporting tax positions CPAs who practice before the IRS Attorneys who practice before the IRS 10.8(c) Individuals 48 24

25 The Regulations 31 C.F.R. Part 10 (cir. 1986) Treasury Circular No. 230 (cir Pamphlet) Four subparts Authority to Practice Duties and Restrictions Relating to Practice Sanctions for Violations Disciplinary Procedures 49 25