Ethical Issues with Respect to Tax Opinions. T. Joshua Wu, J.D., LL.M. Partner Strasburger & Price LLP

Transcription

1 Ethical Issues with Respect to Tax Opinions T. Joshua Wu, J.D., LL.M. Partner Strasburger & Price LLP 1

2 2 Topics Practice before the IRS and applicable rules Professional standards Tax opinion due diligence Reportable transactions Representations to the IRS Privilege issues Conflicts of interest Penalties for violations

3 Poll Question #1 3 Do you believe that most workplaces in the United States have a positive ethics culture?

4 Ethics in General 4 National Ethics Survey 41% of U.S. workers have observed misconduct 63% of those who witnessed wrongdoing reported such Of those who reported, 21% said they experienced some kind of retaliation 66% of companies have positive ethics culture Ethics Resource Center, 2013 National Business Ethics Survey of the U.S. Workforce

5 5 Ethics With Respect to Taxes Over and over again, courts have said that there is nothing sinister in so arranging one s affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant. Comm r v. Newman, 159 F2d 848, (2 nd Cir. 1947) (dissent)

6 6 Tax Practitioner Concerns Duty to client Duty to employer Duty to tax system Duty to family Duty to profession Desire to earn a living Business pressures

7 7 What Rules Apply to Tax Practitioners? Circular 230, 31 C.F.R. Part 10 Internal Revenue Code E.g., 6694, 6695, 7216 ABA Model Rules of Professional Conduct State Rules of Professional Conduct AICPA Rules and Statements on Standards for Tax Services (SSTS)

8 Circular 230 Practice Before the IRS Who is covered per Circular 230? Attorneys, CPAs, enrolled agents, registered return preparers (now filing season preparers) and other persons representing taxpayers before the IRS Anyone who preparers (or assists with) all or a substantial portion of a document pertaining to a taxpayer s liability (Section10.8(c)) What is practice before the IRS? 5 U.S.C. 500 Broadly authorizes attorneys to practice before all Federal agencies and CPAs to practice before the IRS 31 U.S.C. 330 Regulates practice before the Department of the Treasury 8

9 Circular 230 Practice Before the IRS 31 U.S.C. 330 Subject to section 500 of title 5, the Secretary of the Treasury may regulate the practice of representatives of persons before the Department of the Treasury; and before admitting a representative to practice, require that the representative demonstrate good character good reputation necessary qualifications to enable the representative to provide to persons valuable service; and competency to advise and assist persons in presenting their cases After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative 9

10 Circular 230 Practice Before the IRS What is practice of representatives? Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) Tax return preparers are not representatives Preparing tax returns does not constitute practice before the Treasury History of statute indicates that Congress intended the statute to cover representation in contested proceedings Thus, assisting someone prepare a tax return is not practice before the Treasury 10

11 Circular 230 Practice Before the IRS Ridgely v. Lew, 2014 WL (D.D.C. July 16, 2014) Preparation of ordinary refund claims is not practice before the IRS, and thus the IRS cannot regulate the kind of fees Ridgely charged (contingent fee restriction per Cir ) Sexton v. Hawkins, No. 2:13-cv RFB-VCF (D. Nev. Oct. 30, 2014) Sexton was suspended from practice by IRS OPR and argued that OPR had no authority to investigate him, postsuspension, because his work did not involve practice before the IRS. IRS OPR enjoined from requiring production of documents to investigate whether Sexton was engaged in practice. 11

12 Circular 230 Practice Before the IRS Steele v. U.S., 14-cv-1523-RCL (DC Dist. Col June 2017) IRS stated that PTINs were critical to effective oversight of tax preparers and would help maintain the confidentiality of social security numbers. IRS also imposed a user fee. Steele challenged the IRS s authority to require PTINs and charge a user fee. Court held that IRS has authority to require PTINs but not to charge fee. 12

13 Circular 230 Practice Before the IRS Questions after Loving and Ridgely How do the cases impact other areas of Circular 230? Can the IRS find other sources for regulation of persons not practicing before the IRS? Will Congress provide new authority to Treasury? Senate Finance Committee recently dropped return preparer regulations from two draft tax bills Do the standards in Circular 230 impact malpractice suits? Circular 230 continues to be a viable standard along with ABA Model Rules and AICPA standards 13

14 Poll Question #2 14 After recent case law, is Circular 230 a useful standard for ethics?

15 15 Why Get Tax Advice? Penalty protection Reliance on tax professional may constitute reasonable cause Reasonable basis standard (IRC 6662) Comfort for investors Ability to review analysis by tax professional Impacts reporting requirements

16 16 Reliance on Tax Opinions Time limits Changes in law Changes in facts Recipient limits Investors Promoters Partnerships and Corporations Subsidiary entities

17 17 Poll Question #3 If Josh and Travis start a partnership and Travis obtains tax advice regarding his outside basis in the partnership, who can rely on such advice? Assume that Josh is the managing partner.

18 Tax Opinion Levels of Authority Tax notes, March 21, 2005 (Anonymous) 100% Will 92% I would tell my motherin-law to do this 91% I would tell my mother to do this 87% They don t get much better 80% Strong should 79% Essentially, strong should 65% Should probably 57% Well grounded hope 52% More likely than more likely than not 51% More likely than not 50% Your guess is as good as mine 35% Stranger things have happened 21% I ve seen worse 12% It should work, but it won t 11% It could work, but it won t 8% Perhaps if nobody finds it 18

19 19 Tax Opinion Levels of Authority Will: % Should: 60-80% More Likely Than Not (MLTN): over 50% Substantial Authority: 40% Realistic possibility of success: 33% Reasonable Basis: 20% Not frivolous: 10%-20%

20 20 Substantial Authority Defense to substantial understatement What is it? Objective standard Lower than more likely than not but higher than reasonable basis There is substantial authority only if the weight of authority supporting the tax treatment is substantial in relation to the weight of authority supporting a contrary treatment The weight accorded to an authority depends on its relevance and persuasiveness and the type of document providing the authority Authorities listed in Treas. Reg (d)(3)(iii)

21 Tax Opinion Levels of Authority Minimum Standards 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. Circular Lawyer may advise reporting a position on a return if there is some realistic possibility of success if the matter is litigated. ABA Ethics Op. No (1985). A member should not recommend a tax return position or prepare or sign a tax return taking a position unless the member has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged. AICPA SSTS No. 1(5)(a). 21

22 Tax Shelters, Reportable Transactions, and Disclosure History of disclosure of tax shelters in the US Early cases and IRS initiatives focused on identifying and attacking specific abusive transactions The current IRS reporting regime focuses on broad categories of potentially abusive transactions or arrangements and places the burden on taxpayers and advisors to identify questionable tax positions 22 The variety of required disclosures Taxpayers are required to disclose uncertain tax positions and reportable transactions Material advisors are required to file information returns with the IRS with respect to reportable transactions

23 23 Reportable Transactions Any taxpayer participating in reportable transaction that is required to file a US tax return or information return must file Form 8886 disclosing the transaction and retain documents related to the transaction. Types of reportable transactions Listed transactions Confidential transactions Loss transactions Contractual protection transactions Transactions of interest

24 Poll Question #4 24 True or False. If a transaction is not specifically listed by the IRS as a Listed Transaction then it cannot be subject to the rules we just discussed.

25 Material Advisors 25 Every material advisor with respect to a reportable transaction is subject to list maintenance requirements and information reporting requirements A person or entity becomes a material advisor when: the person provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction; the person directly or indirectly derives gross income in excess of the threshold amount for such advice; and the transaction is entered into by the taxpayer to whom or for whose benefit that material advisor provided a tax statement. Threshold amount is $50,000 for natural persons and $250,000 in any other case

26 Material Advisors 26 Section 6112 requires material advisors to maintain lists of participants in a reportable transaction. A material advisor generally must include all persons to whom the advisor made a tax statement and who are required or are expected to be required to disclose a reportable transaction. (Treas. Reg (b)(2)) Section 6111 requires material advisors to make a return reporting any reportable transaction for which the material advisor provided material aid, assistance or advice The return must include information describing the transaction, information describing the potential tax benefits expected to result from the transaction, and various other information

27 Circular 230 The End of Covered Opinions Former section was eliminated in 2014 and ended the covered opinion rules. Former rules were regarded as ineffective disclosures were not viewed as effective warnings Current Circular 230 covers written tax advice in section and general competence in new section New section A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting with experts in the relevant area or studying the relevant law. 27

28 Poll Question #5 28 Circular 230 legends/disclaimers on the bottom of s are (1) required, (2) highly recommended by OPR, or (3) discretionary?

29 29 Duty of Competence Circular Effective beginning June 12, 2014 ABA Model Rule 1.1 A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. AICPA SSTS No. 7 A member should use professional judgment to ensure that tax advice provided to a taxpayer reflects competence and appropriately serves the taxpayer s needs.

30 30 Tax Opinion Due Diligence Circular Due diligence required: Return preparation Written representations to IRS Written representations to client 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 the practitioner and the person (b).

31 31 Tax Opinion Due Diligence ABA Model Rule 4.1 Truthfulness in Statements to Others Circular Written advice Based on reasonable factual and legal assumptions Consideration of all relevant facts that practitioner knows or reasonably should know Reasonable efforts to identify and ascertain the facts Not rely on representations of the taxpayer or others if reliance on them would be unreasonable Relate law to facts Cannot consider possibility of audit

32 Tax Advice Due Diligence Reliance Treas. Reg (c) Reasonable cause and good faith reliance on tax opinion only applies if (1) the advice is based on all pertinent facts and the law as it relates to those facts, and (2) the advice is not based on unreasonable factual or legal assumptions and does not unreasonably rely on representations of others. Courts examine tax opinions for reasonableness Conflicts of interest (Long-Term Capital Holdings, 330 F. Supp.2d 122) Unreasonable withholding of facts by client (Palm Canyon X Investments, LLC v. Comm r, T.C. Memo ) Inadequate qualification of tax advisor Bad faith and no reliance by taxpayer (Rovakat, LLC v. Comm r, T.C. Memo ) 32

33 33 Poll Question #6 You have a long-time client, Sarah, who has been coming to you for return preparation for ten years. Each year you send her an organizer which includes a question about foreign assets. This year Sarah is very busy because she moved to China to start her own manufacturing company based in Beijing. As such, she sends you her organizer a week before the filing deadline. She has answered No to the question about foreign assets. Should you file her return based on her answers in the organizer or ask for additional information?

34 34 Representations to the IRS Circular 230 Section Due diligence Section 10.33(4) Acting fairly and with integrity Section 10.34(a) Reasonable positions DC Rule 3.3 Candor to the tribunal ABA Formal Op. 314 In all cases the lawyer is under a duty not to mislead the IRS deliberately, either by misstatements or by silence or by permitting the client to mislead

35 35 Privilege Issues for Tax Opinions Attorney-Client, Work Product and IRC 7525 Privilege Kovel arrangements Exceptions Tax Shelters Doe v. Wachovia, 268 F. Supp. 2d 627 (W.D.N.C. 2003). The court held that in marketing the same tax opinion to more than one client, a firm acting as promoter could not expect that the communications were confidential. Crime-Fraud In re Grand Jury Investigation (The Corporation), 87 F.3d 377, 380 (9th Cir. 1996). To invoke the crime-fraud exception successfully, the government has the burden of making a prima facie showing that the client was engaged in or planning a criminal or fraudulent scheme when it sought the advice of counsel to further the scheme.

36 36 Privilege Issues for Tax Opinions Waiver of Attorney-Client Privilege Example: AD Investment Fund 2000 LLC v. Comm r, T.C Taxpayer received six tax opinions on a transaction but refused to disclose them to the IRS on privilege grounds Taxpayer raised reasonable cause defense to penalties Tax Court held that reasonable cause defense puts the taxpayer s understanding of the law at issue and, under the doctrine of implied waiver, waives privilege as to communications related to the transaction

37 37 Conflicts of Interest ABA Model Rule 1.7 No concurrent conflicts Direct adversity Material limitation Circular Practitioner shall not represent a client 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 third person, or by a personal interest of the practitioner. Notwithstanding the existence of a conflict, the practitioner may represent a client if (1) the practitioner reasonably believes she will be able to provide competent and diligent representation to each affected client, (2) the representation is not prohibited by law, and (3) each client waives the conflict and gives informed consent.

38 38 Penalties Related to Tax Opinions Section 6700 Penalty on any person who organizes (or assists in the organization of) or participates in the sale of any interest in an entity, plan or arrangement; and in connection, makes or furnishes: a statement which the promoter knows or has reason to know is false or fraudulent as to any material matter, or a gross valuation overstatement. Section 6662 Accuracy-related penalty on the understatement of tax resulting from an incorrect tax position due to (i) negligence, disregard or substantial misstatements, or (ii) a substantial understatement of tax. Penalties can be reduced based on adequate disclosure and reasonable cause Circular Censure, suspension or disbarment

39 39 Penalties Related to Tax Opinions Section 6694 Return Preparer Penalty Understatements due to unreasonable position or willful or reckless conduct Exception if supported by substantial authority or reasonable basis and disclosed If tax shelter then unreasonable unless belief that it was more likely than not correct, or substantial authority and disclosed Who is a tax return preparer under 6694? Person who prepares for compensation, or employs one or more people to prepare for compensation, any return of tax. See Section 7701(a)(36) May be preparer if you give written or oral advise on tax matter

40 Penalties Related to Tax Opinions 40 Section 6701 Penalties for adding and abetting understatement of tax Section 7201 Criminal penalties for willful attempt to evade or defeat tax Section 7203 Criminal penalties for willful failure to file return, supply information or pay tax Section 7206 Criminal penalties for false returns

41 Criminal Risk? 41 Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He/she shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are. IRM ( )

42 42 Criminal Risk? Must involve willfulness (an intentional violation of a known legal duty) Willfulness is shown by the person s knowledge of the reporting requirements and the person s conscious choice not to comply with the requirements Under the concept of "willful blindness," willfulness is attributed to a person who made a conscious effort to avoid learning about the rules Willfulness is generally subjective based on the person s state of mind. Cheek v. U.S., 498 U.S. 192 (1991). But Circular 230 uses a reasonable practitioner standard

43 43 Criminal Risk Title (a) Corrupt Endeavors Title Conspiracy False Claims 287 False Claims 371 Conspiracy to Defraud ( Klein Conspiracy ) Two or more persons conspire either to commit offense against U.S. (e.g., tax evasion) or to defraud the U.S. (e.g., impair or impede) in any manner or for any purpose and does any act to effect (overt act) the object of the conspiracy

44 44 Tax Firm Supervision Any individual who has (or individuals who have or share) principal authority and responsibility for overseeing a firm s tax practice, including the provision of advice concerning Federal tax matters and preparation of tax returns, claims for refund, 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. Willful, reckless or gross incompetence

45 45 Tax Firm Supervision Ensure procedures are in place Reevaluate policies periodically Require ethics training Take reasonable steps to ensure procedures are followed Take immediate remedial action where supervisor knows or should know that a violation of Circular 230 has occurred Consider whether taking remedial action creates conflict and/or should be handled by someone else Consider disreputable conduct provisions of Cir. 230, Section 10.51

46 46 Tax Firm Supervision Client advice When is something considered advice? Two partner/member/principal system for advice review Opinion committee Disclosures Timely service (Circular 230, Section 10.23) Case management system for IRS matters Workflow system Status meetings

47 Poll Question #7 47 True or False: It is a best practice, but not a requirement, to have firm policies and procedures to address potential ethical violations?

48 48 Hypothetical Facts: Long-time client of your firm seeks your advise regarding a complex transaction that will result in significant tax benefits. Based on the facts, you do not recommend the transaction to the client and advise him that the IRS would likely disallow the tax benefits on audit. Client insists on going forward and that you help him. Twist What if he fires you and comes back later with a slightly different transaction?

49 49 Hypothetical Facts: You are assisting a client with an offer-in-compromise. You ask the client to provide information to complete the Form 433 and tell her that she must give you information regarding all of her assets. You file the Form 433 and it turns out the client did not disclose to you a $500,000 bank account owned by a nominee for her benefit. Twist What if the client also transferred funds to friends to reduce the amount of assets for the OIC?

50 Poll Question #8 50 What is the most valuable thing you received from today s webinar?

51 Questions? 51

52 T. Joshua Wu (571) LinkedIn 52