TAX ACADEMY: ETHICS 2016

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1 TAX ACADEMY: ETHICS 2016

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3 Ethics and the Tax Professional Doing the Right Things at the Right Time References: Circular 230 Revised Best CPE Courses IRS.Gov Tax Academy 2015 IRS EITC Webinar Ethics: (Noun) Set of moral principles, especially ones relating to or affirming a specified group, field or form of conduct. (Adjective) Of or relating to moral principles or the branch of knowledge dealing with them Laymen s term: Doing the Right Things at the Right time. Ethics and Ethical behavior have come under fire the last several years in the Tax Preparation Industry. From the Internal Revenue Service (IRS) targeting conservative leaning non-profits to tax professionals committing fraud. These acts all make the front page of the newspaper and in some cases, the lead story on the local 6 O clock news. No matter the situation, it is up to each individual tax professional to treat their clients, their employees and their product (the tax return) with the utmost integrity and professionalism and to be ethical throughout the process, which is doing the right things at the right time. The objectives of this course and the discussion during the presentation are to provide the preparer with the following: Understanding the tax preparer responsibilities. Identify best practices for tax professionals in assisting or preparing a submission to the Internal Revenue Service (IRS). List the professionals duties and restrictions as it relates to Circular 230. Discuss and understand sanctions that may be imposed on the professional for not complying with the applicable rules of Circular 230 and Internal Revenue Code. Tax Academy: Ethics 1

4 Upon completion the Preparer will have a better understanding in handling various situations that might put their respective ethical behavior in jeopardy and thus their ability to practice before the IRS and also prepare returns for their clients. Tax Return Preparer Responsibilities The IRS authorizes certain professionals to practice before it. Practice is more than just preparing a tax return; it includes representing the taxpayer in all matters before the IRS, its agents or employees. Attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents and other qualified tax preparers are some of those professionals authorized to practice before the IRS. Furthermore, within each category, the IRS delineates a more detailed scope of responsibilities for each. The CPA, attorney, Enrolled Agent (EA) or tax return preparer can practice before the IRS as long as he or she is not currently under suspension or disbarment from practice. The CPA, attorney or EA has unlimited representation rights of their clients, but the tax return preparer who is not a CPA, attorney or EA, otherwise known as an unenrolled preparer, is limited. The allowable activities of the unenrolled tax return preparers are not limited to just tax preparation documents. An unenrolled tax return preparer can participate in the IRS Annual Filing Season Program (AFPS) and thus will be allowed to represent a taxpayer before the IRS during an examination if they signed the tax return or claim of refund for the particular taxable year under examination. Beginning Jan. 1, 2016, there will be changes to the representation rights of return preparers. Attorneys, CPAs, and enrolled agents will continue to be the only tax professionals with unlimited representation rights, meaning they can represent their clients on any matters including audits, payment/collection issues, and appeals. Annual Filing Season Program participants will have limited representation rights, meaning they can represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service. 2 Tax Academy: Ethics

5 PTIN holders without an Annual Filing Season Program Record of Completion or other professional credential will only be permitted to prepare tax returns. For returns prepared and signed after December 31, 2015, they will not be allowed to represent clients before the IRS. Preparation of Documents The unenrolled preparer must limit their activities to preparing and signing the tax returns, claims for refunds and other documents for submission to the IRS. The tax preparer may prepare all or substantially all of a taxpayers return or claim for refund. Representation The unenrolled tax return preparer that has completed the AFSP annually and has signed the taxpayer s return, he or she may represent the taxpayer before revenue agents, customer service representatives or a similar officers and employees of the IRS. This representation does not extend to appeals officers, revenue officers, counsel or similar officers or employees of the IRS or Treasury Department. For instance, a taxpayer receives a letter from the IRS stating information was not reported. An unenrolled preparer who completed the AFSP and signed the return, can discuss with the customer service representative or agent at the IRS regarding this particular issue. An unenrolled preparer would not be able to represent the same taxpayer if their return was pulled for audit and the taxpayer was required to meet with a Revenue officer. In that situation, the taxpayer would need to seek representation from a professional authorized to practice before the IRS. Tax Return preparer Best Practices Tax professionals should be expected to provide clients with the highest quality of representation concerning federal tax issues. Treasury Department Circular 230 is considered the handbook for tax professionals and preparers to adhere to in providing assistance and advice in preparing any submission to the IRS. Tax professionals should identify the best practices regarding client communication, determining relevant facts, providing advice and practicing before the IRS. (Section 10.33) Tax Academy: Ethics 3

6 Communicate, Communicate, Communicate When communicating with a client, the tax professional, should clearly state and explain to the client what they should expect from the professional and the expected activities. It is not just a data entry function; it involves explaining the cause and effect of the actions of the professional has taken. It is important that the client fully understand the implications of what will occur or has occurred. Best practice, communicate, communicate and communicate. Relevant Facts As a tax return preparer provides professional services to a client, the tax professional should bring their best evaluation skills when considering their clients situation. Clients will provide varying degrees of information and the tax professional should develop a process to review the information provided and determine the following: Establishment of the facts Determine which facts are relevant Determine the reasonableness of the representation Determine how applicable law relates to the facts Determine an appropriate conclusion that is supported by facts and the law For instance, a taxpayer provides the tax return preparer with 1099 Misc for their business along with a summary of expenses. As the tax return preparer evaluates this information, they should begin a process as to determine the reasonableness of this information. On the surface it appears to be fine. However as the tax return preparer begins the preparation process, it appears that based on the information provided, the taxpayer has understated income as it relates to the total expenses, or total expenses seem to be unusual for the business. In determining these facts, the tax return preparer should look at the penalties for under reporting income or overstating expenses and then communicate to the client the problems with the information provided. In this situation, the tax return preparer went through a process to determine that information provided was not reasonable based on its representation. The tax return preparer communicated to the taxpayer of this and gave the taxpayer an opportunity to provide additional information. Should the 4 Tax Academy: Ethics

7 additional information not be provided, the tax return preparer should return all records to client and not continue the tax preparation process. In the previous example, the tax professional also provided a an IRS best practice by looking at the accuracy related penalties for under reporting income on the Schedule C. The IRS considers the providing of advice to a taxpayer very important and that all potential consequences are express to the client by the tax professional and whether the client acted on this advice. The tax professional can protect themselves by communicating the information to the client and documenting what was said or sent to the client. Firms should take reasonable steps to ensure all members/employees follow the best practices. Practice before the Internal Revenue Service (Circular ) All tax professionals, whether enrolled or unenrolled, are expected to act fairly and have integrity in practice before the IRS. Acting fairly requires honesty, impartiality and a disclosure of material conflicts of interest. The tax professional should subordinate their own feelings, prejudices and a desire to achieve a proper balance of conflicting interests. Fairness is treating others the same way that you would want to be treated. Integrity is the quality of being honest and having strong moral principles. A person of integrity would not perform a job or task that would enhance personal gain or advantage. A fundamental source of a tax professional s trust with their clients in practice before the IRS is their integrity. At times a tax professional may make an innocent error or have a difference of opinion; however, their integrity is antithetical to deceit and subordinate to the professional s principles. For instance, a tax professional should not inflate deductions or expenses to increase a client s claim of refund, nor should the tax professional ignore information that is paramount to preparing an accurate return submittal. Additionally in representing a client before the IRS, the tax professional should also treat the IRS representatives with the utmost respect and consideration. Tax Academy: Ethics 5

8 10.34 Standards with respect to tax returns and documents, affidavits and other papers. A tax return preparer is expected to exercise reasonable and appropriate judgement with respect to their professional activities. The tax return preparer should also comply with several various standards in their practice before the IRS. These include: Tax Returns Documents, affidavits and other papers Advising clients on Potential penalties Tax returns-a practitioner may not sign a return that they know or should have known, is not reasonable. Return must not take an unreasonable position and cannot be a willful attempt by the tax preparer to understate the liability. A pattern of behavior is a factor in determining willful, reckless, or gross incompetence. Documents-A Practitioner may not submit a document, affidavit or other paper with a purpose to delay or impede the IRS that is frivolous or contains or omits information in manner that demonstrated an intentional disregard of rules or regulations, unless the submittal is a good faith challenge to the rule or regulation. Advising clients of potential penalties- Practitioner must inform clients of any penalties likely to apply to a tax return and also any way to avoid a penalty. Relying on information furnished by clients-tax return preparer may rely on information provided by client in good faith without verifying the information. However, they may not ignore inconsistencies or incorrect information. Preparer must make additional inquiries of the client. Circular 230 Sub Part B- Practitioner Duties and Restrictions Information to be furnished. A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the IRS, promptly submit records or information 6 Tax Academy: Ethics

9 in any matter before the IRS unless the practitioner believes in good faith and on reasonable grounds that the records are privileged. Good faith refers to an absence of malice or any intention to deceive. It is characterized by good intentions and sincerity. What happens if the tax practitioner does not have the information requested? The practitioner must promptly notify the IRS of same and inform the IRS who they believe may have the information in their possession. The practitioner must make inquiry of their client but not other persons. When the inquiry involves an alleged violation they must provide information concerning the alleged violation including testifying unless the practitioner believes in good faith that the information is privileged. What happens if the material requested relates to an alleged practitioner violation? Alleged practitioner violations of Internal Revenue Service rules are investigated. When a duly authorized officer or employee of the Internal Revenue Service makes a request of a practitioner concerning an inquiry into an alleged violation of the regulations, the practitioner must: Provide any information he or she has concerning the alleged violation Testify regarding the provided information in any subsequent proceeding with respect to the alleged violation, unless the practitioner believes in good faith and on reasonable grounds that the information is privileged The practitioner may not interfere with a proper and lawful request for records or information. If the tax preparer receives a letter from the IRS requesting information, even if it is damaging to the client, it must be provided. When a client tells something to a tax preparer it is not privileged information. There are legal issues as to what is privileged and what is not. The same information given to an attorney may be privileged. It is not privileged in discussion with a tax preparer. Tax Academy: Ethics 7

10 Section example to consider: Scott Andrews is a tax return preparer who prepares 500 returns a year and also reviews many more throughout the year. He received a letter from the IRS to substantiate his clients, Donnie Page, deductions taken on a prior year return that Scott did not prepare. Scott does not have the records requested and figures the IRS has made a mistake and should have directed this request to Mr. Page or the prior preparer. Scott went ahead and ignored the IRS request. What should he have done? Did he do the right thing per Circular 230? How about his duty to his client, did he act with fairness and integrity in this situation? Knowledge of client s omission. A practitioner who, having been retained by a client with respect to a matter administered by the IRS, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any document, affidavit or other paper submitted or executed under the U.S. revenue laws must advise the client promptly of the fact of such omission, error or noncompliance. The practitioner must advise the client of the consequences as provided under the Code and regulations for noncompliance, error or omission. Consider the following: A new client hires the tax professional to do taxes. The preparer discovers an error in a prior year return or filing. The preparer must inform the client of the error and the consequences of the error. A best practice would be to consider withdrawing from the engagement if the client does not want to fix the prior year. If your office did the mistake, give the client the amended return. Then it is up to the client to submit the return. At least you have given them the correction. While you must tell the client, you do not report it to the IRS. There is no obligation to tell on the client. If you decide to do the current year anyway, the current year must be done correctly. Basically tax preparers must do the right thing. Unfortunately sometimes that means turning away clients who will go to another preparer. Integrity is important. Your employees need to see where you stand on issues. 8 Tax Academy: Ethics

11 Information given to a tax preparer is not privileged information. If the info involves criminal actions, stop and refer to an attorney immediately. Attorney client relationship is privileged. Actual Office issue in Acworth, Georgia Existing client from another office came by to have taxes prepared because they were not able to get an appointment from the office and felt like they were being avoided. Preparer initially was excited about the prospect of a new business client using the office as this office had a significant number of small and medium business clients, both sole proprietors and corporations. Client immediately told preparer over the phone (he was a truck driver) to just use the prior year s returns as guide for the current year. A 1099 Misc was submitted so the preparer had current year income. Using the prior year information as a framework and guide, it became apparent that the prior year returns where lacking in proper documentation and economic reality. Preparer notified client of the results and expressed concern that the net income was not correct. Client provided current year information, again which was lacking in economic reality. Client came in to discuss, when preparer expressed their concerns on the prior year returns expenses and current year expenses, client insisted that the information was correct. When pressed for more details, client balked and said he would come back. He came back again later with wife and pressed the preparer to just file as in the past. What do you think occurred? Diligence as to accuracy. Practitioner must exercise due diligence in preparing tax returns: Preparing or assisting in 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 the practitioner to the Department of Treasury Determining the correctness or oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS Tax Academy: Ethics 9

12 Due diligence is the care a reasonable person could be expected to exercise in order to avoid harm to other persons or their property. Put another way, it is the degree of attention or care that would be reasonably expected of an individual in a given specific situation. The IRS requires tax practitioners to exercise Due Diligence with respect to determining a client s earned income tax credit (EITC). Practitioners are required to complete an eligibility checklist, retain the worksheet used to compute the credit and the key to the EITC due diligence: Neither know nor have reason to know that the information used in determining the taxpayer s eligibility for or the amount of the EIC is incorrect, incomplete or inconsistent Not ignore the implications of any information furnished by the client or known by the practitioner Make reasonable inquires if a well-informed tax return prepare could reasonably conclude the information furnished appears to be incorrect, inconsistent or incomplete Document in their records any additional inquiries made into the client s responses Retain various records with respect to EIC eligibility and computation They also must determine the correctness of oral and written representations to the IRS as well as to the client. Preparers may rely on the work of others and will be presumed to have exercised due diligence as long as the preparer used care in engaging, supervising, training and evaluating the person. Consider this situation Scott Blair is an experienced tax preparer. He is interviewing a long time client and begins to question some of his answers with regard to a potential earned income tax credit. The client is being evasive about his income and expenses. 10 Tax Academy: Ethics

13 Scott sees that the income being provided is lower than in the past and his client is now eligible for an earned income tax credit. Scott thinks the business expenses are higher than expected in proportion to income and as compared to prior years, not in line with them. Additionally, over the prior several years, his client has averaged about $8,000 or more in investment income which would disallow EIC, however this year, the amount is only $ His client seems to be pressing him a lot about the EIC in this year and knowing his lifestyle and prior return status, Scott is pretty confident that some of the records are incorrect. Even though Scott has these concerns he just asked the client if the records supplied were complete and accurate. His client assured him that they were and Scott proceeded to complete and sign the return. This client received a large earned income tax credit. What to do? What if this was one of your longtime excellent clients? What about if you saw your employee working this client? As the owners of a tax office, we can rely on our preparers if we have provided training, supervision, care in hiring and evaluations of the preparer. A best practice is to require each tax preparer to take the IRS s earned income tax credit (EITC) self-study class. The last screen is a certificate. In our office, we review every return. The return has to make sense. Example: Jeff is a first year tax preparer. He passed level 1 tax preparer certification. The lead preparer reviews each of his returns for accuracy. Corrections are made and a review sheet is given to Jeff showing issues of concern. Example: Jeff is a first year tax preparer. He passed level 1 tax preparer certification. Jeff reviews his own returns and electronically files them. Is this showing diligence as to accuracy? Identity theft is a huge problem. A lot of it is from foreign countries. Due diligence as to accuracy includes who is this new client? Do you know the client or did they make up the Form W2 themselves or steal the identity of someone? Did they use someone s identity to work? Tax preparers must be comfortable that they are preparing a tax return for the real John Smith. Tax Academy: Ethics 11

14 Prompt disposition of pending matters. A practitioner may not unreasonably delay the prompt disposition of any matter before the IRS. Example: John Smith is an Enrolled Agent. He is scheduled to meet with Henry, a revenue agent at the local IRS. He calls the morning of the meeting to say he is busy and cannot attend. This is the fourth time he has canceled appointments with Henry by calling in the early hours the day of a scheduled appointment. Example: Roger hired Anne, a CPA, to do his taxes for the last 20 years. Roger is being audited at the local office of the IRS. Roger asked Anne to go to the IRS with him and bring the papers the IRS has requested. Anne will not return calls. She has not provided any paper work Assistance from or to disbarred or suspended persons, and former IRS employees. Practitioner may not, knowingly and directly or indirectly help or receive help from suspended persons. Former government employees must follow and any other federal law. Example: Jeremy owns a tax practice. His friend James was suspended by the IRS. James prepares taxes for Jeremy. Jeremy signs the tax returns prepared by James so that the IRS will not know James is still doing taxes Practice by former government employees, partners and their associates. Basically this section applies to someone who was a government employee involved with a specific party. When they are no longer a government employee, they cannot represent that specific party to the IRS. The time frame is within one year of leaving the IRS and then within two years after working for the IRS. There are various rules for former government employees to follow. 12 Tax Academy: Ethics

15 10.26 Notaries A practitioner may not perform any official act as a notary public with respect to any matter administrated by the IRS in which they are in any way interested. An example of this is the preparer who notarizes document true copies attached to Form W-7 application for an individual tax identification number (ITIN). Or notarizing a statement made by a client that is submitted to the IRS as part of a request for information. This is a violation of Circular 230. Example: George is a tax preparer. He does a lot of Form W-7 applications for ITINs. He became a notary to help his clients. He provides notarized true copies of identifications that are required to be attached to Form W-7 and sent to the IRS. Does George have a problem? Fees A practitioner is allowed to state in an advertisement or solicitation that the clients or prospective clients may obtain a written schedule of their tax preparation fees. The practitioners can publish information regarding fixed fees for routine services, hourly rates, range of fees or a fee charged for an initial consultation. The practitioner cannot charge more than the published rate for at least 30 calendar days after the last day of the fee being published. The practitioner is not allowed to charge an unconscionable fee for any matter before the IRS. An unconscionable fee is not defined. A practitioner is not allowed to charge a contingent fee for an original submittal to the Internal Revenue Service. What is a contingent fee? It is a fee that is based on a percentage of the refund or a percentage of taxes saved. Example: Holly Jones, tax preparer, offers to complete a tax return for Jill which shows a refund of $5,200. Her fee is 10% of the refund. This is a contingent fee and is not allowed. When can a preparer charge a contingent fee? Preparer may charge a contingent fee as a fee for services in defending an original tax return, an amended return, or within 120 days of a letter from the IRS. Preparer may charge a contingent fee for services for a claim for refund of interest or penalties. Tax Academy: Ethics 13

16 Example: Melissa Jones, tax preparer, reviews a prior year return and sees an error. She offers to amend the client s prior year return for 10% of the refund. The fee is contingent on the amount of the refund received from the amended return. The Form 1040X shows a refund due to client of $1,100. Melissa s fee is $110. Is this allowed? The IRS is looking at people or groups offering services to get people refundable credits for which they do not qualify. Apparently there are people looking at getting research and development credits. Previously first time home buyers and telephone credits were used to claim fraudulent refunds Return of client s records Preparer must return all records of client that are necessary for the client to comply with federal tax obligations. Preparer may retain a copy. A dispute over fees is not an excuse to keep the client s information. Those records that must be attached to the client s tax return must be returned. If state law allows the preparer to keep the information due to nonpayment, the client must have access to the documents to review and copy the information. What do Client Records consist of or not consist of? Records of the client includes: Materials that were prepared by the client or a third party ( this does not include an employee of the practitioner) at any time and provided to the practitioner All documents, written or electronic provided to the practitioner or obtained by the practitioner in the course of the practitioner s representation of the client, that pre-existed the retention of the practitioner by the client Any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if the document is necessary for the taxpayer to comply with his or her current federal tax obligation. 14 Tax Academy: Ethics

17 Records of the client, when a fee for service is being withheld by client, does not include the following: Tax returns; Claims for refund; Schedules; Affidavits; Appraisal; or Any other document. Example: Juanita prepared a tax return for a client using a bank product. Juanita will not be paid for her services unless the IRS releases a refund. Where is My Refund, IRS.gov shows that the IRS will not release the refund. The entire refund is applied to child support. The client needs her tax return. Can Juanita refuse to give the client her paperwork? Conflicting interests A practitioner may not represent a client if it involves a conflict of interest. What is a conflict of interest? Represent one client when it is adverse to another client. Or represent one client when it will materially limit the representation of another client, third person or a personal interest of the practitioner. This includes a former client. The exception is if all involved clients sign a disclosure. The written consents must be kept on file for at least 36 months. Conflicts of interests are not done well by non-lawyers. The tax preparer needs waivers for every person or tax preparer must resign from the case. The conflict of interest could be between corporations and shareholders or husband and wife. Example: George and Geraldine Holmes have been clients for years. When George comes in to do his tax return, he mentions they are getting divorced and will file separately. If the tax preparer wants to continue to represent one of the parties, he must have both spouses sign even if the preparer is not completing Geraldine s tax return. Geraldine is a past client therefore there is a potential conflict of interest. Tax preparer must tell the clients what the conflict is and what the results are. Both must be advised. If both parties will not sign an informed consent, the tax preparer must withdraw. Conflicts of interests are malpractice time bombs. Tax Academy: Ethics 15

18 10.30 Solicitation Advertising and solicitation restrictions are listed. No false, fraudulent or coercive statements of any form to the public or private parties. EA and enrolled tax preparers may not utilize the term certified or imply they are employees of the IRS. Acceptable for Enrolled Agents: enrolled to practice before the Internal Revenue Service or admitted to practice before the Internal Revenue Service. An unenrolled preparer my not use the term certified, but if they have chosen to participate in the AFSP program, an acceptable statement would be holds a valid Annual Filing Season Program Record of Completion for the calendar year and has complied with the IRS requirements for receiving the Record of Completion. Copies of radio and TV broadcasts must be kept as well as copies of direct mail and e-commerce communications. Copies must be kept for 36 months after the date of last use. The practitioner may not receive assistance from any person or entity that does not follow these rules Negotiation of taxpayer checks A practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability. Never negotiate a refund check. Refund checks may be through a third party. A tax practitioner may not use Form 8888, Direct Deposit of Refund to More Than One Account to split the refund. Currently language says check however it applies to all refunds. Expect a correction of that language. Negotiate means taking any part of the refund. The tax preparer has too much control over the taxpayer. The third party receiving the refund is a protective device to put them between the tax client and the tax preparer. 16 Tax Academy: Ethics

19 Example: Craig is a tax preparer. The client is not able to pay for the tax return. Craig shows his client the third party bank program whereby the client can file without paying up front. The bank then pays Craig and releases a check to the client for the balance of the refund after fees. The client does not want to pay the bank fees. Instead Craig files the return with a Form Craig uses the form to put the amount of his tax prep fee into Craig s business bank account. The remainder goes into the client s account. Is Craig allowed to do this? NO- NEVER Practice of law Nothing in these rules can be construed to allow people who are not members of the bar, to practice law. There is a fine line of giving advice versus practicing law. Example: Tax client is going to start a business. He wants to know about LLC, partnerships and S Corps. The EA can tell the client about the 3 however, the EA should not say the LLC is better for the client. Stating which business form is best for the client is practicing law Best practices for tax advisors Tax advisors should provide the highest quality representation concerning federal tax issues by following best practices in providing advice and in preparing submission to the IRS. Best practices include: Communicate clearly with the client. The client should have a clear understanding of the scope of the advice or assistance provided. Establish the facts-determine what is relevant, evaluate the reasonableness of any assumptions and arrive at a conclusion supported by law and the facts. Advise the client regarding the import of the conclusions reached. Act fairly and with integrity in practice before the IRS. Tax Academy: Ethics 17

20 Follow procedures to ensure best practices for tax advisors. Firms should take reasonable steps to ensure all members/employees follow the best practices. Avoid Ethical Violations Sanctions for false statements or misleading the IRS include an arsenal of censure, suspension, disbarment, resignation of enrolled agents, and private or public reprimand. What are situations to avoid? The easiest is file your federal tax returns on time. It is surprising how many tax preparers are behind on filing their own tax returns. And how many falsify their own tax returns. There must be clear and convincing evidence that is willful. Improper preparation of form Power of Attorney, or improper signing of the form. Don t sign for the client. This is easy. Only file a form 2848 if you know that the client signed the form. Failure to provide information to the IRS or delay in doing so. When the IRS requests information you must provide it. Respond to letters on time and if you don t have the requested information suggest who has the info if you know where it is. IRS Hot Buttons Schemes, Scams and Cons There s an old saying, if it sounds too good to be true, it probably is! Don t become a victim to any scheme that offers instant wealth or exemption from your obligation as a United States citizen to file tax returns and/or pay taxes. Some schemes can cost the taxpayer their life savings and others can result in prosecution and imprisonment if you knowingly participate in them. Abusive Return Preparer Taxpayers should be very careful when choosing a tax preparer. Must preparers provide excellent service and knowledge to their clients, there a few unscrupulous return preparers who file false and fraudulent tax returns and ultimately defraud their clients. As owners of a tax office, we need to 18 Tax Academy: Ethics

21 know who we are hiring to insure that our staff does not fall into this habit, thus hurting our business and our brand. We need to notice the small things that are occurring in the office to prevent the big things (IRS invasion) from occurring. For example, another owner told a story of how he purchased a tax office that had an experience staff and did a significant number of returns. While the return count was nice, this owner became suspicious when he noticed only one preparer seeing clients all day. He noticed that the clients only want to see Sue. This concerned him, so he personally reviewed all the returns prepared by that preparer for two days, not sending any to IRS. Upon his review, he determined, based on the information not provided and results that every return during this period was fraudulent. He terminated the preparer and refused to transmit any return to the IRS due to this fraud. This owner could have just sent the returns, but something just didn t feel right. As an owner, you have to sometimes just go with your gut feeling and do the right thing. Summary points The IRS is not a don t ask, don t tell organization. When doing a tax return, the preparer must take into account any inconsistencies. Willful blindness is not ok. The preparer cannot just rely on the tax organizer or documents prepared by the client. If the client could fill out the organizer or documents correctly, why pay a preparer. It is the preparer s responsibility to get it right and do the right thing. When relying on estimates, they have to be the client s estimates. The estimates must have a reasonable basis. Give your clients ideas on how to improve their return each year. For instance, recommend they fill out a mileage log for medical or business miles. Start out with a business bank account and use it. There are many ways for clients to do a better job so next year they will not have to make estimates. Make improvements with your staff. A safe harbor exists if you have adequately trained your staff. You are allowed to rely on your staff when you know adequate training and supervision in your office. Be sure that your staff has read Circular 230. Encourage your staff to discuss Circular 230 issues. Tax Academy: Ethics 19

22 There are offices with a culture of not following Circular 230. OPR can give fines to the preparers and the office. Use best practices to avoid fines. Do not take on a tax return that is over your head. You must have the knowledge and training to do a tax return. Be careful about complaining about another tax preparation office in your area. You must have documentation and it takes a lot of evidence. You can not disclose your client s information to the IRS when turning in the other tax office. According to Circular 230 a tax preparer can NOT: Take positions that are unrealistic. Notarize documents going to the IRS. Unreasonably delay matters before the IRS. Charge contingent fees for original returns. Charge an unconscionable fee. Represent clients with conflicting interests. Cash IRS refund checks of clients. Tax preparers MUST follow Circular 230 which requires the following: Return client s information. Sign all tax returns. Provide copy of tax return to client. Advise client of errors and omissions. Exercise due diligence and use best practices. As tax professionals, ethics and integrity is doing the right thing when no one is watching. We should consider all the results of our actions prior to completing those actions. If something doesn t feel right, then it must not be right, so don t do it. Always treat your staff, your clients, the IRS, agents and employees, State revenue officers with the utmost respect and consideration. A little sugar can go a long way. Be honest with an IRS Auditor and admit a mistake if it is a mistake or omission, there is a good chance that the auditor might absolve you and the taxpayer of some penalties. Updated and prepared by Keith Altobelli, EA Marietta, Ga. Parts of this section were previously prepared by Nancy Hall, CPA for a prior Tax Academy season. 20 Tax Academy: Ethics