THE ELITE QUARTERLY Ethics for Enrolled Agents Published by CPElite, T.M. Inc The Leader in Continuing Professional Education Tax Newsletters

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1 THE ELITE QUARTERLY Ethics for Enrolled Agents Published by CPElite, T.M. Inc The Leader in Continuing Professional Education Tax Newsletters Special Edition Ethics and Professional Conduct for Enrolled Agents 2 Hours of CPE Credit Phone and fax # , cpeliteinc@aol.com, web site Enrolled Agents must complete two hours of continuing education on ethics or professional conduct each year. If you order any of our subscriber options for 2015 unlimited, EA package, or annual subscription there is no additional cost for the 2015 Special Edition. Otherwise, the cost is $20 (2 hours of CPE credit at $10 per hour). If you need non-ethics hours, please see our web site ( for CPE hours through our newsletters and courses. As always, we thank you for being a customer we appreciate your business! LEARNING OBJECTIVE AND CONTENT LEVEL The primary objectives of this Special Edition are to familiarize accounting and tax practitioners with selected sections of Circular 230 (Part I), and selected court decisions and an alert issued by the Office of Professional Responsibility (Part II). PREREQUISITES There are no prerequisites nor is advance preparation required for this Special Edition. PART I SELECTED CIRCULAR 230 SECTIONS Circular 230 contains rules governing the regulation of attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents, and other persons representing taxpayers before the IRS. The Office of Professional Responsibility (OPR) generally has responsibility for matters related to practitioner conduct, and has exclusive responsibility for discipline, including disciplinary proceedings and sanctions. Practice before the IRS comprehends all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer s rights, privileges, or liabilities under laws or regulations administered by the IRS. Presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the IRS; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and, representing a client at conferences, hearings, and meetings. Selected sections of Circular 230 not covered in our 2013 and 2014 ethics issues are covered in the balance of Part I. Section Information to be Furnished Generally, on a proper and lawful request by an authorized IRS officer or employee, a practitioner must promptly submit records or information in any matter before the IRS. However, this requirement does not apply if the practitioner believes in good faith and on reasonable grounds that the records or information is privileged. IRC Section 7525: The Code grants attorney / client privilege to certain communications involving tax advice between a taxpayer and any federally authorized tax practitioner (FATP). A FATP is any individual who is authorized to practice before the IRS, which includes enrolled agents. Tax advice is advice given by an individual with respect to a matter which is within the scope of the individual s authority to practice under Circular 230. There are several limits on the privilege. The privilege may only be asserted in any noncriminal tax matter before the IRS, and in any noncriminal tax proceeding in federal court brought by or against the United States. The privilege does not apply to communications regarding tax shelters. See the discussion of the Veolia case (Part II, first item) for more on records and Section Also under Section 10.20, where requested records or information is not in the possession of, or subject to the control of, the practitioner or the practitioner s client, the practitioner must promptly notify the requesting IRS officer or employee. In this case, the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information. The practitioner is required to make reasonable inquiry of his client regarding the identity of any person who may have possession or control of the requested records or information. However, the practitioner is not required to make inquiry of any other person. Also, the practitioner is not required to independently verify any information provided by the client regarding the identity of the person(s). Another area regarding furnishing information involves an alleged violation of the Circular 230 rules governing duties and restrictions of those who practice before the IRS. When a proper and lawful request is made by an authorized IRS officer or employee concerning such an alleged violation, the practitioner must provide any information he has concerning the violation, and testify regarding the information in any proceeding that is instituted under Circular 230. With respect to all situations in which the practitioner may be required to furnish the IRS with information, he or she may not interfere with any proper and lawful effort by the IRS to obtain any record or information. As for all cases when the IRS properly seeks practitioner information, the practitioner s belief that the record or information is privileged excuses interference.

2 Section Knowledge of Client s Omission What if the practitioner knows that his or her client has not complied with the federal tax laws? Or, what if he or she knows the client has made an error in or omission from any return, document, affidavit, or other paper which the client submitted to or executed under the federal tax laws? Section of Circular 230 imposes two requirements on the practitioner. The practitioner must advise the client promptly of any noncompliance, error, or omission. Also, the practitioner must advise the client of the consequences under the Code and regulations of the noncompliance, error, or omission. Potential consequences for the client can include additional tax liability, interest, civil and / or criminal penalties, and an extension of the statute of limitations for assessment of tax. Section Prompt Disposition of Pending Matters A practitioner may not unreasonably delay the prompt disposition of any matter before the IRS. Section Return of Client s Records Generally, at the client s request, a practitioner must promptly return client records that are necessary for the client to comply with the client s federal tax obligations. The practitioner may retain copies of the returned records. What about a fee dispute between the practitioner and his or her client? Under Section 10.28, the dispute does not relieve the practitioner of the responsibility to return the necessary records. However, if applicable state law allows or permits the practitioner to retain the client s records in a fee dispute over services the practitioner has provided, the practitioner is only required to return the records that must be attached to the client s tax return. Nevertheless, the practitioner must provide the client with reasonable access to review and copy any additional client records retained by the practitioner, if they are necessary for the client to comply with his or her federal tax obligations. What are client records? Section identifies client records as all documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of his or her representation of the client that existed before the client retained the practitioner. Also included are materials prepared by the client or a third party (not including the practitioner s employee or agent) at any time, and provided to the practitioner with respect to the subject matter of the representation. Records also include any return, affidavit, appraisal, or any other document that the practitioner prepares (or that his or her employee or agent prepares), that was presented to the client with respect to a prior representation, if the document is necessary for the taxpayer to comply with current federal obligations. Client records do not include any return, claim for refund, schedule, affidavit, appraisal or any other document that the practitioner or his or her firm prepares, if the practitioner is withholding the document pending the client s performance of the contractual obligation to pay fees with respect to the document. In other words, the practitioner is not required to give the client the practitioner s work product (for example, a return, schedule, or other document) if the client has a contractual obligation to pay for the product before the product is delivered. Section Conflicting Interests Generally, the practitioner is prohibited by Circular 230 from representing a client before the IRS if the representation involves a conflict of interest. There is a conflict of interest 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 practitioner s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner. However, the practitioner may represent a client if three conditions are satisfied: (1) the practitioner reasonably believes that he or she will be able to provide competent and diligent representation to each affected client, (2) the representation is not prohibited by law (federal and state), and, (3) each affected client waives the conflict of interest and gives informed consent at the time that the practitioner knows that a conflict of interest exists. The consent must be confirmed in writing by each affected client. The confirmation may be made within a reasonable period of time after the informed consent, but in no event later than 30 days. The practitioner must retain copies of the written consents for at least 36 months from the date of the conclusion of his or her representation of the affected clients The written consents must be provided if requested by an IRS officer or employee. Here are some examples of conflict of interest situations to consider: (1) joint returns: if divorce or separation is imminent, communication for the engagement is limited to one spouse, or only one spouse signs the engagement letter; (2) business returns: practitioner prepares returns for a passthrough entity (e.g., S Corporation, partnership, LLC, or LLP), and one or more of the entity s owners; and, (3) IRS examinations: a recommended position is currently under review by the IRS, and a client questions a position that is raised in an exam. Section Solicitation In this section of Circular 230, the IRS covers (1) advertising and solicitation restrictions, (2) publication of fee information, and (3) communication of fee information. Advertising and Solicitation Restrictions With respect to any IRS matter, a practitioner may not use or participate in the use of any form of public communication or private solicitation that contains a false, fraudulent, or coercive statement or claim, or a misleading or deceptive statement or claim. In describing his or her professional designation, an enrolled agent may not utilize the term certified, or imply that he or she has an employer / employee relationship with the IRS. Here are examples of acceptable descriptions for enrolled agents: enrolled to represent taxpayers before the Internal Revenue Service, enrolled to practice before the Internal Revenue Service, 2

3 and admitted to practice before the Internal Revenue Service. Publication of Fee Information A practitioner may publish the availability of a written schedule of fees and disseminate the following fee information: (1) fixed fees for specific routine services, (2) hourly rates, (3) range of fees for particular services, and (4) fee charged for an initial consultation. Any statement of fee information that concerns matters in which costs may be incurred must include a statement disclosing whether clients will be responsible for such costs. The practitioner may not charge more than the published rates for at least 30 calendar days after the last date on which the fee schedule was published. Communication of Fee Information Section lists a number of methods that can be used to communicate fee information: professional lists, telephone directories, print media, and mailings, and electronic mail, facsimile, hand-delivered flyers, radio, and television. The IRS indicates the list of methods that it provides is not all-inclusive. A practitioner may not persist in trying to contact a prospective client if the prospective client has made it known to the practitioner that he or she does not want to be solicited. For radio and television broadcasting, the practitioner must record the broadcast, and retain a recording of the actual transmission. For direct mail and e-commerce, the practitioner must retain a copy of the actual communication for at least 36 months from the date of the last transmission or use. Also, the practitioner must keep a list or other description of the persons to whom the communication was mailed or otherwise distributed. If the practitioner knows that a person or entity obtains clients or otherwise practices in a manner that is forbidden by Section 10.30, the practitioner may not assist or accept assistance from that person or entity in IRS matters. Section Sanctions An enrolled agent, and any other practitioner who practices before the IRS, may be sanctioned for certain behaviors. The sanctions include censure (a public reprimand), suspension, or disbarment from practicing before the IRS, and / or monetary penalties. Specific behaviors are incompetence or disreputable conduct (Section 10.51), willful violation of any part of Circular 230 except Section 10.33, recklessly or through gross incompetence violating Sections 10.34, 10.35, 10.36, or 10.37, and, with intent to defraud, willfully and knowingly misleading or threatening a client or prospective client. Section contains the aspirational standards of conduct, that is the best practices for tax advisors. These are: (1) clearly communicating with the client regarding the terms of engagement; (2) establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law to the relevant facts, and arriving at a conclusion that is supported by the law and the facts; (3) advising the client regarding the import of the conclusions reached, including whether a taxpayer may avoid accuracy penalties (Section 6662) if the taxpayer relies on the advice; and, (4) acting fairly and with integrity in practice before the IRS. Though the practitioner may not be sanctioned for lack of adherence to the best practices, such practices should mark each client engagement. Section contains the standards with respect to preparing, signing, or advising on tax returns, and advising with respect to documents, affidavits, and other papers. Section deals with competence. Section deals with procedures for one who oversees a firm s practice to ensure compliance with Circular 230. Section deals with requirements for written advice. A monetary penalty may be imposed in addition to censure, suspension, or disbarment. The penalty is limited to the gross income derived from the conduct that draws the penalty. If a practitioner is subject to penalty, and is acting on behalf of an employer or firm, the employer or firm may also be subject to penalty if it knew, or reasonably should have known, of the conduct. Section Incompetence and Disreputable Conduct Section contains 18 non-all-inclusive examples of incompetence and disreputable conduct. One example is if the practitioner gives false or misleading information to the IRS or a court in connection with any matter pending or likely to be pending before them, knowing that the information is false or misleading. Another example is if the practitioner willfully assists, counsels, or encourages a client or prospective client to violate any federal tax law, or knowingly counsels or suggests to a client or prospective client an illegal plan to evade federal taxes. A third example is if the practitioner misappropriates or fails to remit properly or promptly, funds received from a client for the purpose of paying taxes or other obligations due the United States. A fourth example is if the practitioner willfully fails to file on magnetic or other electronic media a tax return that the practitioner prepares, when the practitioner is required to do so, unless the practitioner s failure is due to reasonable cause and not due to willful neglect. A fifth example is if the practitioner willfully discloses or otherwise uses a tax return or tax return information in a manner not authorized by the Code. A sixth example is if the practitioner gives a false opinion knowingly, recklessly, or through gross incompetence. This conduct includes an opinion which is intentionally or recklessly misleading. This conduct also includes engaging in a pattern of providing incompetent opinions on questions arising under the federal tax laws. Reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances. One s pattern of conduct will be taken into account in determining if the practitioner acted knowingly, recklessly, or through gross incompetence. The term gross incompetence shows up eight other times in Circular 230 in describing behavior that should be avoided or could be penalized. Gross incompetence is defined in Section as conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations for the client. Note: The misconduct in the fifth example could create a double whammy: Circular 230 sanction under Section 10.50, and a penalty under Section 6713 of the Internal Revenue Code! 3

4 **REVIEW QUESTIONS AND SOLUTIONS** Questions 1. With respect to the Circular 230 requirement for the practitioner to furnish the IRS information that is not in the practitioner s possession, which one of the following statements is false? a. The practitioner is required to make reasonable inquiry of the client regarding who may have possession of the information. b. The practitioner is not required to independently verify information the client provides the practitioner regarding the identity of any person who may possess the information. c. The practitioner must notify the requesting IRS employee within six months of the request. 2. Which one of the following is not a client record for purposes of Circular 230? a. Electronic schedules which had been generated for the client before the practitioner s current representation of the client, and provided by the client to the practitioner for the current representation. b. An affidavit prepared by the practitioner for the client s return, where the client has agreed contractually to pay for it, but has not yet paid the practitioner. c. A spreadsheet prepared by the client relating to the current representation that the client had provided to the practitioner. 3. Regarding a conflict of interest and solicitation under Section 230, which one of the following statements is true? a. There is a conflict of interest if the practitioner s representation of one client will be directly adverse to another client. b. One of the conditions which must be satisfied to enable the practitioner to represent a client in a potential conflict of interest situation is that the representation is not prohibited only by state law. c. Certified enrolled agent is an acceptable term for describing an enrolled agent s professional designation. 4. Regarding fee rules in Circular 230, which one of the following statements is false? a. Fee information may be published in telephone directories. b. For fee information that is communicated by , the enrolled agent must retain a copy of the for at least 36 months from the last such transmission. c. The practitioner may not charge more than published fee rates for at least 36 months after the last date on which his or her fee schedule was published. 5. Regarding incompetence and disreputable conduct and Circular 230, which one of the following statements is true? a. An example of incompetence and disreputable conduct is if the practitioner willfully uses tax return information in a way not authorized by the Code. b. The practitioner s pattern of conduct is not considered in determining if he or she acted recklessly. c. If a practitioner is sanctioned under Circular 230, he or she will not be subject to penalty under the Code. Solutions 1. "C" is the correct response. The practitioner must notify the requesting IRS employee promptly. A" is an incorrect response. The practitioner is required to make reasonable inquiry of the client regarding the identity of any person who may have possession of the IRS-requested information. B" is an incorrect response. The practitioner is not required to independently verify any information the client provides regarding the identity of the person who may possess information. Section 10.20, Circular "B" is the correct response. Client records do not include an affidavit that the practitioner prepares, if the practitioner is withholding the document pending the client s performance of the contractual obligation to pay fees with respect to it. A" is an incorrect response. Client records include all electronic materials provided to the practitioner in the course of his or her representation of the client that existed before the client retained the practitioner. C" is an incorrect response. Client records include materials prepared by the client at any time, and provided to the practitioner with respect to the subject matter of the current representation. Section 10.28, Circular "A" is the correct response. This is one of two situations in Circular 230 when there exists a conflict of interest. B" is an incorrect response. The representation must not be prohibited by law state and federal. C" is an incorrect response. In describing his or her professional designation, an enrolled agent may not 4

5 use the term certified. Sections and 10.30, Circular "C" is the correct response. The practitioner may not charge more than published fee rates for at least 30 calendar days from the last date the fee schedule was published. A" is an incorrect response. Telephone directories are one of many methods that are acceptable means to communicate fee information. B" is an incorrect response. For direct mail and e- commerce, the practitioner must retain a copy of the actual communication for at least 36 months from the last transmission or use. Section 10.30, Circular "A" is the correct response. One of 18 examples in Circular 230 of incompetence and disreputable conduct is if the practitioner willfully discloses or otherwise uses a tax return or tax return information in a manner that is not authorized by the Internal Revenue Code. B" is an incorrect response. The practitioner s pattern of conduct is taken into account in determining if he or she acted knowingly, recklessly, or through gross incompetence. C" is an incorrect response. There is no Circular 230 prohibition on a penalty in the Code being imposed together with a sanction under Circular 230. Section 10.51, Circular 230. PART II SELECTED COURT DECISIONS AND AN ADMINISTRATIVE ITEM AFFECTING TAX PREPARERS CO U R T C O N SID E R S W H E THER CERTAIN DOCUMENTS WERE PROTECTED FROM THE IRS As noted in Part 1, Section of Circular 230 requires a tax practitioner to submit records or information in any matter before the IRS unless the practitioner believes in good faith and on reasonable grounds that the records or information is privileged. In Veolia Environment North Amer. Operations [10/31/2014], a Delaware District Court considered whether certain documents prepared by the client, and the client s attorneys, tax practitioners, and other experts were protected from the IRS. The case involved a $4.5 billion worthless stock deduction in 2006 related to the purchase of an affiliated corporation. The corporation hired a legal firm, an international CPA firm, and two valuation firms for advice on this matter before it claimed the deduction. A third valuation firm was hired in 2007 to provide an independent valuation of the affiliated corporation s stock. In 2008, the IRS issued summonses for a variety of documents in the taxpayer's possession. While the taxpayer produced thousands of pages of information for the IRS, it initially withheld 361 documents and portions of 45 documents. After months of negotiations the number of documents in dispute were reduced to 92. The taxpayer declined to produce these materials based on its assertion of several privileges, including the following: (1) work-product protection under Federal Rule of Civil Procedure 26(b)(3); (2) attorney-client privilege; and, (3) tax practitioner privilege under IRC Section 7525(a)(1). Work-Product Doctrine Federal Rule of Civil Procedure 26(b)(1) provides that parties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense. The work-product exception to this disclosure requirement is in Rule 26(b)(3)(A). Generally, documents that are prepared in anticipation of litigation or for trial by or for another party or its representative do not have to be shared with the IRS. The purpose of this exception is to allow a party to prepare for litigation without fear that its work product will be used against it. The burden of demonstrating that a document is protected as work product rests with the party asserting the doctrine. The voluntary disclosure of a work product to an adversary or a conduit to an adversary waives work-product protection for that material. However, the disclosure of the product to a third party does not necessarily waive the protection of the work-product doctrine if it is made to non-adversaries. About 50% of the documents were asserted by the taxpayer to be protected under the work-product doctrine. The taxpayer argued that these documents were created in anticipation of litigation and protected under Rule 26(b)(3). The court reviewed each of these documents and classified them into two broad categories (1) draft reports of testifying experts, and (2) communications with testifying experts. Rule 26(b)(4)(B) extends work-product protection to drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded. Many of these documents were draft reports of the fair market value of the stock in question and were shared among employees of the testifying expert firms, outside counsel, and outside tax advisers. The court found that each person who had access to these documents was not an adversary or conduit to an adversary and therefore the company did not waive its privilege. To the contrary, the court noted that the outside tax advisors were regularly consulted as non-testifying experts. For the documents containing communications with testifying experts, the documents which contain attorney mental impressions and theories regarding the creation of the valuation report were protected. These included chains between the taxpayer, taxpayer s counsel, valuation experts, and outside tax professionals. The non- attorney communications with testifying experts received a different fate. While many of these documents were privileged, they were shared with nonattorneys which waived the workproduct privilege. Rule 26(b)(4)(C)'s protection, which extends only to communications between a party's attorney and a testifying expert, does not erase the general rule that work-product protection is waived when material is disclosed to a testifying expert. Most of the documents in this section related to communications with the valuation experts. The court noted that by enlisting the valuation experts as witnesses in its litigation with the IRS, the taxpayer placed them "in a position to serve as a conduit to transmit" either these documents or at least conclusions to 5

6 the IRS. That is, the taxpayer submitted the documents to the valuation experts with the hope that the experts would agree with their content, incorporate them into an expert report, and thereby provide the taxpayer an opportunity to persuade the IRS to agree with the taxpayer's position. Note: It is important to distinguish between draft reports of testifying experts and communications with testifying experts. For the latter, communications not involving attorneys in all likelihood will not be protected under the work-product doctrine. Attorney-Client Privilege The attorney-client privilege protects client and attorney communications related to securing legal advice. The privilege applies to communications from an attorney to a client as well as from a client to its attorney. The party asserting privilege must show each of the following: (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication is made is a member of the bar of a court, or his subordinate, and is acting as a lawyer; (3) the communication relates to an opinion on law, legal services, or assistance in some legal proceeding; and, (4) the privilege has not been waived by the client. Since the court considered whether documents were protected under either the attorney-client privilege or the tax-practitioner privilege together, its findings are discussed below. Tax-Practitioner Privilege As noted in Part 1, Section 7525 protects communications between a taxpayer and a "federally authorized tax practitioner" for the purpose of obtaining tax advice, to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. The scope of the tax practitioner-client privilege depends on the scope of the common law protections of confidential attorney-client communications. The court noted that for either the attorney-client privilege or the tax-practitioner privilege to attach to a document, it must be satisfied that it is (1) a communication, (2) made between privileged persons, (3) in confidence, and (4) for the purpose of obtaining or providing legal assistance for the client. The court found that all of these requirements were satisfied. The court noted further that the sharing of these documents within the corporate family did not waive these privileges since such sharing was essential to the communications with the attorneys and tax practitioners involved. OPR ISSUES ALERT ON POTENTIAL MISUSE BY PRACTITIONER OF FORM 1099-C The practitioner and his firm want to use Forms 1099-C, Cancellation of Debt, as a collection technique for delinquent/non-paying clients. The practitioner is subject to Circular 230, and owns and operates a small firm that provides various tax representation services for compensation. His firm usually enters into a written fee agreement with a client for agreed-upon services. The firm generally bills clients for services after the fact, requesting payment within 30 days. Invoices not paid after 30 days are considered delinquent, and treated as subject to collection regardless of whether the client disputes the liability. The practitioner periodically writes off balance-due accounts as uncollectible The firm would like to complete and file Forms 1099-C, and report the unpaid account balance as debt discharged. The firm s goal is to encourage the client to pay, or make him report additional income for the firm s free services. The practitioner asks the IRS s Office of Professional Responsibility (OPR) whether this business practice is consistent with his Circular 230 obligations. In a recent alert, the OPR states that if a tax professional repeatedly uses Forms 1099-C as a business strategy to collect unpaid fees, when the professional knows or should know that the facts and circumstances do not provide a basis for doing so, the conduct calls into question the tax professional s fitness to practice before the IRS. Per the OPR, a pattern of issuing Forms 1099-C with a reckless disregard as to the existence of debt is not consistent with the standards of competency and professionalism embodied in the rules of practice in Circular 230. The OPR cites specific Circular 230 provisions: Section 10.22(a) (due diligence), Section (competence), and Section 10.51(a)(4) (incompetence and disreputable conduct). The OPR states it is not opining that the facts here constitute a violation of the law or regulations governing practice before the IRS, or the Internal Revenue Code. It concludes that it is difficult to conceive of a situation in which a tax professional, principally engaged in providing tax services, justifies the use of Form 1099-C to attribute income to a client for the nonpayment. However, it states that every case depends on its own particular facts and circumstances. COURT DENIES INJUNCTIONS AGAINST RETURN PREPARERS In Hand-Bostick [10/8/14], the IRS sought to permanently enjoin the taxpayer (preparer) from preparing and filing tax returns other than for herself. The preparer had been preparing tax returns for over 20 years. She learned about Section 45K credits from the sale of fuel from nonconventional sources (FNS credits) through another enrolled agent (promoter) The promoter explained to the preparer that he had developed a program that her clients could use to claim FNS credits against their federal tax liability. The credits were based on a client s percentage of ownership in the fuel sold by fuel production facilities through partnership interests they would acquire. The promoter provided the preparer a pamphlet on the scheme. The pamphlet noted that the client s liability determined the benefit of the credits. It stated that the promoter s company had done all of the necessary research through numerous professionals, had been using the FSN credits for 10 years on individual returns, and had obtained 6 IRS private letter rulings. She was not familiar with the promoter s company, and she stated she did not fully understand the credits and relied almost exclusively on the promoter s representations without other support. She first claimed the credits on her own return in She then had the promoter do a presentation in her office to two other tax preparers and herself. She advised her clients 6

7 about the credits, and took credits on some client returns in Other promoters took the marketing of the credits from the original promoter, and paid the preparer commissions on the credits she processed through her office, with greater commissions on credits she personally sold. Between 2004 and 2005, the preparer earned $225,000 to $300,000 in commissions on the credits she sold. She used backdated documentation in claiming the credits. Ultimately, the IRS investigated the FNS credit scheme. When supporting documentation was needed from the promoter, none was provided. The IRS advised the preparer that the company that provided the credits did not own the property necessary to take the credits. By January 2008, the credits claimed by the preparer s clients were disallowed, based on the fact that the program s promoters did not own any interest that supported the credits. Beginning on clients 2008 returns, the preparer began claiming long-term capital losses relating to her clients purported interests in gas-producing properties. The IRS sought injunctions against the preparer under Sections 7402(a), 7407, and 7408, for alleged violations of Sections 6700(a)(2)(A) and (B), and 6694(a) and (b)(2)(b). A Texas district court concluded that the taxpayer s conduct subjected her to penalty under violations of all four code provisions, because it was unreasonable and reckless to recommend to her clients that they take FNS credits when she admittedly did not understand the basis for her clients entitlement to them. It noted that all credit transactions were based on backdated documents which purportedly were effective the year before they actually were made.the court stated that even though she had no duty of inquiry under Section 6700, as a tax return preparer she should have known her behavior was unreasonable and reckless. The court also concluded the preparer furnished gross valuation overstatements to clients when she assigned a value to nonexistent ownership interests that lacked any economic substance or value. Even though the court concluded that the preparer engaged in conduct subject to penalty, it did not believe any injunction necessary or appropriate. It based its decision on a number of items: (1) this was her first infraction in all of the years she had prepared tax returns; (2) the court had found there was no evidence she had actual knowledge regarding the illegality of the FNS credits claimed for her clients; (3) the court stated that she should not be held to the standard of a seasoned attorney with full knowledge of statutory and case authority, nor should she be required in every instance to seek a tax attorney s advice; (4) the court did not believe the preparer s conduct was sufficiently indicative that she would continue to participate in or promote fraudulent tax credits or tax shelter schemes; (5) the court was favorably impressed with the credibility of the preparer s testimony, and her sincerity; and, (6) the court felt she had been penalized enough, given the cost and length of the legal proceedings, the IRS s exhaustive investigation for more than seven years, and the public shame, humiliation, and client disfavor she suffered. The court agreed that the preparer engaged in behavior subject to penalty under the four parts of Sections 6700 and However, the court decided that the behavior did not warrant the injunctive relief that the IRS sought under Sections 7402, 7407, and The court held the preparer was not subject to an injunction with respect to the specific misconduct regarding the FSN credits, nor an injunction with respect to practicing as a preparer. **REVIEW QUESTIONS AND SOLUTIONS** Questions 6. Regarding a recent case involving the protection of documents from IRS review, which one of the following items may not be protected? a. s between the taxpayer and valuation experts involving the taxpayer s estimated value of certain company property. b. Legal advice from an outside attorney dealing with a matter the taxpayer anticipates will be challenged by the IRS. c. Professional advice from an outside tax practitioner dealing with a matter the taxpayer anticipates will be challenged by the IRS. 7. Which one of the following was not a fact in a recent case in which the taxpayer sought to protect documents from IRS inspection? a. The case involved a worthless stock deduction that the taxpayer claimed. b. The taxpayer sought document protection only under the tax-practitioner privilege. c. The taxpayer sought advice from lawyers, accountants, and valuation firms. 8. True or False. In a recent alert from the Office of Professional Responsibility, the OPR states that generally a practitioner s repeated use of Forms C as a business strategy to collect unpaid client fees is a questionable practice. 9. For a recent decision involving a preparer who advised her clients to claim Section 45K credits for the sale of fuel from nonconventional sources, which one of the following factors did not play a role in the court s decision? a. The preparer s infraction was her first in the over 20 years she had been preparing returns. b. The court was affected by the preparer s sincerity. c. The preparer claimed capital losses relating to her clients interests in gas-producing properties which the program s promoters did not own. 10. True or False. In a recent court decision in which a preparer advised her clients to claim Section 45K credits to lower their federal income tax liability, the court held the preparer subject to an injunction with respect to her misconduct related to the credits. 7

8 Solutions 6. A" is the correct response. Communications with testifying experts, as distinguished from draft reports of testifying experts, are not likely to be protected under the work-product doctrine if the expert is not an attorney. As noted by the district court in a recent case, communications between the taxpayer and valuation experts are not protected. B" is an incorrect response. Generally, legal advice from an outside attorney is protected under the attorney-client privilege. A work product prepared by the attorney or client in anticipation of litigation is also protected under the work-product doctrine. C" is an incorrect response. Generally, professional advice from an outside tax practitioner is protected under the tax practitioner privilege. A work product prepared by the tax practitioner or client in anticipation of litigation is also protected under the work-product doctrine. Veolia Environment North Amer. Operations. 7. "B" is the correct response. The taxpayer sought various protections, seeking protection under the workproduct doctrine, and the attorney-client and taxpractitioner privileges. A" is an incorrect response. The case involved a $4.5 billion worthless stock deduction related to the purchase of an affiliated corporation. C" is an incorrect response. The various protections sought were consistent with the varied, numerous sources of advice the taxpayer sought. Veolia Environment North Amer. Operations. 8. "True" is the correct response. The OPR states that if a tax professional repeatedly uses Forms 1099-C as a business strategy to collect unpaid fees, when the professional knows or should know that the facts and circumstances do not provide a basis for doing so, the conduct calls into question the tax professional s fitness to practice before the IRS. False" is the incorrect response. The OPR relaxes the position by noting that every case depends on its own facts and circumstances. OPR Alert. 9. "C" is the correct response. While the preparer did claim the capital losses, that was not mentioned as one of the factors affecting the court s decision. A" is an incorrect response. This was one of six factors stated as affecting the court s decision (factor one in the writeup of the case). B" is an incorrect response. This was another of the factors stated as affecting the court s decision (factor five in the writeup of the case). Hand-Bostick. 10. "False" is the correct response. The court did not subject the preparer to an injunction with respect to her specific misconduct regarding the Section 45K credits. True" is the incorrect response. The court decided that the preparer was not subject to any injunction. Hand-Bostick All rights reserved. The reproduction or translation of these materials is prohibited without the written permission of CPElite. T.M. The material contained in CPElite's T.M. courses and newsletters qualifies for CPE credit designed to enhance the professional knowledge of the individual. The material is sold with the understanding that CPElite T.M. is not engaged in rendering legal, accounting, tax, or other professional services in a consulting capacity "We have entered into an agreement with the Office of Director of Practice, Internal Revenue Service, to meet the requirements of 31 Code of Federal Regulations, Section 10(g), covering maintenance of attendance records, retention of program outlines, qualifications of instructors and length of class hours. This agreement does not constitute an endorsement by the Director of Practice as to the quality of the program or its contribution to the professional competence of the enrolled individual." CPElite, T.M. Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, Web site:

9 ***** QUIZ QUESTIONS ***** Place your answers to the following10 Multiple Choice Questions on the enclosed answer sheet (page 11). ON-LINE TESTERS GO TO CPELITE.COM. 1. Regarding information that the IRS may request from the practitioner under Circular 230, which one of the following statements is false? a. If a proper and lawful information request is made by an authorized IRS employee, in all cases the practitioner must promptly submit the requested information. b. Generally, if a proper and lawful request is made by the IRS for information concerning an alleged Circular 230 violation, the practitioner must provide any information he or she has about the violation. c. Generally, if a proper and lawful request is made by the IRS for information concerning an alleged Circular 230 violation, the practitioner must testify regarding the information in any proceeding under Circular Regarding Circular 230 rules affecting practitioner / client relationships, which one of the following statements is true? a. If the practitioner learns of a client s error or omission on the client s federal tax return, the practitioner is not required to apprise the client of consequences of the error or omission. b. If the practitioner has generated work product with respect to a client s return and the client agreed to pay for it, the practitioner is required to give the client the work product even though the client has not paid for it. c. The practitioner must advise the client promptly of knowledge the practitioner learns about his client s noncompliance with the federal tax laws. 3. Regarding a conflict of interest under Circular 230, which one of the following statements is false? a. A client s written confirmation that waives a potential conflict of interest on the part of the practitioner must be made within 36 months of the client s informed consent that the practitioner knows the conflict of interest exists. b. A client s written consent waiving a potential conflict of interest by the practitioner must be provided to the IRS if requested by an IRS officer. c. An example of a conflict of interest situation is where the practitioner prepares a single-owner S Corporation return and the return of the corporation s single owner. 4. Which one of the following is an acceptable description for an enrolled agent? a. Enrolled to Practice as Former Employee of the Internal Revenue Service. b. Admitted to Practice before the Internal Revenue Service. c. Enrolled to Practice before the IRS as a Corporate Tax Specialist. 5. Which of the following set of sanctions may be imposed at the same time on a practitioner for behaviors which violate Circular 230? a. Monetary penalty and imprisonment. b. Censure and suspension. c. Disbarment and monetary penalty. 6. Concerning the work-product doctrine, which one of the following statements is false? a. Work products prepared in the general course of business are not likely to be protected from the IRS under this doctrine. b. Disclosure of a work product to a third party automatically waives the work-product doctrine. c. In the Veolia case involving the protection of the company s documents from IRS scrutiny, the outside tax advisors were not considered to be conduits to an adversary. 7. Regarding a recent district court decision on document protection from the IRS, the court noted that for the tax-practitioner privilege to protect a document, four elements must be satisfied. Which one of the following is not one of those elements? a. The document must be available to all interested tax practitioners. b. The document must be made between privileged persons. c. The document must be for the purpose of obtaining or providing the client legal assistance. 9

10 8. In a recent alert from the Office of Professional Responsibility concerning practitioner use of Form 1099-C for a client who has not paid for services rendered, which one of the following Circular 230 sections did the OPR not cite as a relevant section? a. Section Due Diligence. b. Section Incompetence and Disreputable Conduct. c. Section Information to be Furnished. 9. For a recent case in which a preparer advised her clients about claiming Section 45K credits from the sale of fuel from nonconventional sources, under which one of the following Code sections did the IRS seek an injunction against the preparer? a. Section b. Section c. Section Which one of the following was a recent district court decision for a preparer who had advised her clients to claim Section 45K credits? a. She was subject to several Code penalties. b. She was subject to an injunction regarding her Section 45K credit advice. c. She was subject to an injunction with respect to practicing as a preparer. 10

11 CPElite T.M. Inc. ON-LINE TESTERS: GO TO CPELITE.COM QUIZ INSTRUCTIONS AND ANSWER SHEET 2015 SPECIAL EDITION ETHICS (LATEST RECOMMENDED COMPLETION DATE: WITHIN ONE YEAR OF PURCHASE) There are 10 quiz questions. The quiz questions are on pages 9 and 10 of the newsletter. Choose the best answer based on the limited facts of each question, and record your answer below. Indicate your responses in the newsletter for your personal records and complete the Newsletter Evaluation below. You must score 70% to receive continuing professional education credit for the newsletter. After you successfully complete the quiz, your quiz results, a complete set of solutions, and a certificate of completion will be mailed to you within 10 working days of our receipt of your answer sheet. The completion date that you specify on your answer sheet below will be the date placed on your certificate. We appreciate your business and hope that you are satisfied with the newsletter ANSWER SHEET 2 HOURS OF CPE DELIVERY METHOD - SELF STUDY Please record your answers below to the quiz questions. Customers should mail to the address below which coincides with the zip code indicated below. FOR NONSUBSCRIBERS, please be sure to include your check for $20 or supply the credit card information below. CUSTOMERS CUSTOMERS WITH ZIP CODES BELOW WITH ZIP CODES ABOVE CPElite T.M. CPElite T.M. P.O. Box 721 P.O. Box 1059 White Rock, SC Clemson, SC COMPLETE FOR NEWSLETTER CREDIT NAME (Circle Mr./Ms.) [PLEASE PRINT] ADDRESS ADDRESS PHONE NUMBER (Note: We do not share or sell addresses) PRE-PAID SUBSCRIPTION # (Not Applicable to First-Time Subscribers) SIGNATURE COMPLETION DATE PURPOSE OF CPE PTIN (if applicable) (Indicate whether credit is for Enrolled Agent, CPA, or other purpose. For CPAs and licensed accountants, please indicate the state where you are licensed. If you have a PTIN, please provide it for IRS reporting purposes). NEWSLETTER EVALUATION (Answer Yes, No, or N/A) 1. The stated learning objective was met. 2. Handout or advance preparation materials were satisfactory. 3. The materials were accurate. 4. The materials were relevant and contributed to the achievement of the learning objective. 5. If applicable, prerequisite requirements were appropriate. 6. The time allotted to the learning activity was appropriate. 7. Additional Comments 11