Ethics. Session 24. Basic Income Tax Ethics 24-1

Transcription

1 Ethics Session 24 Basic Income Tax Ethics 24-1

2 24-2 Ethics Basic Income Tax

3 Contents Lesson I: Authority to Practice Regulatory Offi ces Practice Before the IRS Who Can Practice Limits and Requirements Attorneys and CPAs Enrolled Agents Registered Tax Return Preparers Lesson II: Practice Before the IRS Disposition of Matters Before the IRS Assistance from Disciplined Practitioners Fees Rules for Dealing With Clients Records Confl icts of Interest Public Statements Other Restrictions Lesson III: Due Diligence Standards for Due Diligence Responsibilities of a Principle Authority Lesson IV: Sanctions For Violating Circular 230 Regulations Incompetence and Disreputable Conduct Sanctions Session 24 Summary Session 24 Knowledge Check Answers Basic Income Tax Ethics 24-3

4 24-4 Ethics Basic Income Tax

5 Introduction The Treasury Department has a comprehensive list of rules governing tax return preparers practice. These rules cover authority to practice, duties and restrictions relating to practice, sanctions for violations of the rules and regulations, and rules governing disciplinary proceedings. The list of rules and regulations can be found in the IRS Treasury Department Circular No. 230, Regulations Governing Practice before the Internal Revenue Service, or Circular 230 as it is more commonly known. Circular 230 also contains rules governing the recognition of attorneys, certifi ed public accountants (CPAs), enrolled agents (EAs), enrolled retirement plan agents (ERPAs), and other persons representing taxpayers before the IRS. For more information on the topics discussed in this session, refer to IRS Treasury Department Circular No. 230, Regulations Governing Practice before the Internal Revenue Service. The most recent Circular 230 update occurred in August of 2011 and includes the regulations governing registered tax return preparers (RTRPs) and all necessary updates to the existing regulations. Objectives After completing this session, you will be able to Defi ne practice before the IRS Determine who can practice before the IRS Identify the practice limits of those individuals permitted to practice before the IRS Defi ne prompt disposition of matters before the IRS Determine who a practitioner may not receive assistance from while practicing as a tax return preparer Defi ne fees as allowed for tax preparation and other tax matters Identify the rules dealing with clients Identify what represents due diligence by a tax return preparer List the responsibilities of the principal authority over a fi rm s practice Identify incompetent and disreputable conduct that can result in disciplinary proceedings Recognize the sanctions that may be imposed under Circular 230 Basic Income Tax Ethics 24-5

6 Definitions of Terms The IRS has defined a set of terms to be used by the preparer community, as well as the IRS, when working with the rules and regulations governing tax return preparers. Service - The Internal Revenue Service (IRS) Tax Return - Any forms required to be submitted to show taxes due by an individual or entity, including an amended tax return and a claim for refund. Tax Return Preparer - Any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any tax return imposed by U.S. Code Title 26. The preparation of a substantial portion of a tax return shall be treated as if it were the preparation of a tax return. A person shall not be a tax return preparer merely because the person Furnishes typing, reproducing, or other mechanical assistance Prepares a tax return of the employer (or one of their offi cers or employees) by whom they are regularly and continuously employed Prepares as a fi duciary a tax return for any person Prepares a claim for refund for a taxpayer in response to any notice of defi ciency Practitioner - Defi ned by the code as any individual who is an Attorney or certifi ed public accountant (CPA) in good standing with the appropriate state licensing board Enrolled agent (EA), enrolled actuary, or enrolled retirement plan agent (ERPA) not currently under suspension or disbarment from practice before the IRS Registered tax return preparer (RTRP) not currently under suspension or disbarment from practice before the IRS 24-6 Ethics Basic Income Tax

7 Lesson I: Authority to Practice Circular 230 provides ethical standards and best practices, and is applicable to attorneys, accountants and other tax professionals who practice before the IRS. Circular 230, Subpart A, contains the rules that cover the authority to practice before the IRS. They include Establishment of offi ces Listing of who can practice Eligibility requirements for practitioners An explanation of what constitutes practice Application to practice requirements Requirements to maintain eligibility Eligibility requirements of continuing education providers and programs Regulatory Offices There are two offi ces established to oversee tax return preparers: Offi ce of Professional Responsibility (OPR) Return Preparer s Offi ce (RPO) The OPR is responsible for enforcing Circular 230 s standards of conduct. All tax practitioner complaints will be handled by the OPR. The purpose of the RPO is to improve taxpayer compliance by providing oversight and support to the tax preparer community. The RPO is responsible for Preparer Tax Identifi cation Number (PTIN) matters, including Practitioner s tax compliance Practitioner compliance with regulations governing registration Initial review of e-fi le violations Basic Income Tax Ethics 24-7

8 Practice Before the IRS Practice before the IRS means the ability to participate in all matters connected with a presentation to the IRS or any of its offi cers or employees, relating to a taxpayer s rights, privileges, or liabilities under laws or regulations administered by the IRS. Presentation includes the following activities: Preparing documents such as a tax return Filing documents such as a tax return 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 Representing a client at conferences, hearings, and meetings For more information, refer to Session 23. Practice before the IRS includes preparing any type of tax return and all working papers associated with the return. In order to represent a taxpayer before the IRS or IRS employees (beyond the scope of preparing a tax return), a practitioner generally needs a signed power of attorney document, or its equivalent. Form 2848, Power of Attorney and Declaration of Representative, can be used for this purpose. Who Can Practice For an explanation of the eligibility requirements and practice limits for enrolled actuaries, enrolled retirement plan agents, government offi cers and employees, state offi cers and employees, and others, refer to IRS Treasury Circular 230. Circular 230 defi nes who is eligible to practice before the IRS, and outlines the rules for those professionals that are directly controlled by the IRS. Guidelines are provided for all other professionals permitted to practice. For a complete list of eligible professionals, refer to Circular 230. In this session we discuss the following professionals eligible to practice: Attorney - A person who is a member in good standing of the bar of the highest court of any state, territory, or possession of the U.S. Certified Public Accountant (CPA) - A person who is qualifi ed to practice as a CPA in any state, territory, or possession of the U.S. Enrolled Agent (EA) - A person who has earned the privilege of representing taxpayers before the IRS by either passing a threepart comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. EAs must adhere to ethical standards and complete 72 hours of approved continuing education (CE) courses every three years, and maintain an active PTIN annually Ethics Basic Income Tax

9 Registered Tax Return Preparer (RTRP) - An individual who has earned the privilege of preparing tax returns and representing taxpayers in a limited capacity by passing a minimum competency test covering individual income tax returns and a tax compliance check. RTRPs must adhere to ethical standards and complete 15 hours of approved CE and maintain an active PTIN annually. All tax return preparers are required to apply for, and renew annually, a PTIN. The PTIN is a unique alpha-numeric identifi er with either a P or an S in the fi rst position and eight numbers following. It is used in place of the tax preparer s SSN, or individual taxpayer identifi cation number (ITIN), when the practitioner signs completed tax forms and for correspondence with the IRS. Preparers can apply for a PTIN online at or by mailing a completed Form W-12, IRS Paid Preparer Tax Identifi cation Number (PTIN) Application and Renewal. The cost of the initial PTIN application is $64.25 and each annual renewal is $63. Be prepared to provide the following information when applying for your PTIN: Personal information (name and date of birth) Filing status and mailing address from your last fi led return Business information (name, mailing address, telephone number) Explanations of felony convictions (if any) Explanations of problems with your U.S. individual or business tax obligations (if any) Credit or debit card information for the PTIN application fee (American Express is not accepted) Include any U.S.-based professional certifi cation information (CPA, attorney, EA, enrolled retirement plan agent, enrolled actuary, certified acceptance agent, or state license), if applicable, including certifi cation number, jurisdiction of issuance, and expiration date Basic Income Tax Ethics 24-9

10 Limits and Requirements Circular 230 outlines the requirements for professionals who are eligible to practice before the IRS, dependent upon their individual qualifi cation. Attorneys and CPAs In order to represent a client before the IRS, attorneys and CPAs must submit a written statement that they are qualifi ed by their licensing board and not currently disbarred or suspended by any licensing board. Circular 230 does not currently require any specifi c number, or type, of CE credits for either attorneys or CPAs. Each licensing board has its own CE requirements on which the IRS relies. Enrolled Agents An EA must be at least 18 years old, hold a current PTIN, and either pass the Special Enrollment Exam (SEE), or be a prior IRS employee. EAs must complete 72 hours of approved CE during each three-year enrollment cycle. The SEE is a three-part test governed by the IRS and administered by Prometric Inc. The test covers all forms of federal income tax, ethics, practices and procedures, and electronic fi ling requirements. The SEE is available at test centers throughout the U.S. and certain foreign countries between May 1 and February 28 annually. The exam covers the tax law and Circular 230 requirements currently in effect when the testing period begins. The testing period that begins May 1, 2012, and closes February 28, 2013, will cover 2011 tax law and the Circular 230 revised as of August An individual must pass all three parts of the exam within a two-year time frame, beginning with the date the fi rst section was passed. Example: Herman took Part I of the SEE on December 2, 2010, and failed. He took Part III of the SEE on January 15, 2011, and passed. Herman must pass the remaining two parts of the SEE (Parts I and II) before January 14, 2013, or he will be required to retake and pass Part III Ethics Basic Income Tax

11 After passing all three parts of the exam, the individual must submit Form 23, Application for Enrollment to Practice Before the Internal Revenue Service. The IRS may also conduct a tax compliance check and suitability check. The tax compliance check verifi es the applicant has completed all required individual and business returns, and has paid all taxes owed (or is in a timely payment plan). The suitability check is limited to an inquiry regarding any convictions of activity or crimes that would result in suspension or disbarment from practice. An EA s enrollment cycle is a three-year period determined by the last digit of their taxpayer identifi cation number (TIN). During each year within the enrollment cycle, an EA must complete at least two CE hours of Ethics and an additional 14 hours of courses designed to enhance knowledge in federal taxation or federal tax matters. Courses in federal tax matters include programs comprised of current federal tax law, accounting, tax return preparation software, and ethics. Enrollment cycles run for a three-year period, from January 1 of year one through December 31 of year three. Each year within an enrollment cycle also runs on a calendar basis, January 1 through December 31. The renewal period for each enrollment cycle starts on November 1 of the year the cycle ends and continues through January 31 of the following year. Example: The current enrollment cycle for EAs with a TIN ending in 7, 8, or 9 is January 1, 2012, through December 31, The renewal period will start November 1, 2015 and end January 31, To renew their certifi cation, an EA must submit Form 8554, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service, and keep their PTIN current at all times. Registered Tax Return Preparers To be an RTRP, you must be at least 18 years old, hold a current PTIN, and must pass a minimum competency test on federal taxation (RTRP Test). You must also complete a minimum of 15 hours of CE annually. The RTRP Test is governed by the IRS and administered by Prometric Inc. The test covers basic federal tax principles including federal taxation, electronic fi ling requirements for electronic return originators, ethics, and practices and procedures for tax return preparers. Basic Income Tax Ethics 24-11

12 Prometric has more than 200 test centers administering the test across the U.S. Individuals may take the test as often as necessary during each testing cycle. The RTRP Test is available annually from mid-april through February 28, and contains information on the current version of Circular 230 and federal tax law applicable for the year the test opens (in April). Example: The RTRP Test available from April 2012 through February 28, 2013, will cover tax law for 2011 and the Circular 230 revised as of August Once an individual has passed the RTRP Test, they receive a certificate from the IRS and may use the title RTRP. An RTRP must renew their registration annually by renewing their PTIN, and completing 15 hours of CE courses. The registration year for an RTRP is the same as their PTIN and runs from January 1 through December 31. The CE requirement includes two hours of ethics in federal taxation, three hours of annual tax update, and 10 hours of federal taxation. Courses in federal taxation include programs comprised of current federal tax law, accounting, tax return preparation software, and ethics. The initial phase of the RTRP initiative required tax return preparers to receive and maintain their PTIN annually beginning no later than January 1, 2011, and pass the RTRP Test prior to December 31, Tax return preparers could receive a provisional PTIN before passing the RTRP Test during this time frame. Individuals who hold a current PTIN prior to passing the RTRP Test are considered PTIN Holders. PTIN Holders must maintain the same minimum 15 hours of annual CE courses as an RTRP, and must also renew their PTIN annually before January 1 of the calendar year. PTIN Holders and RTRPs may be subject to a compliance check for their personal and business federal income taxes and federal income tax liability, and may also be subject to a suitability check. Beginning January 1, 2014, all tax return preparers must be registered as either an RTRP, EA, CPA, attorney, or other as prescribed in Circular Ethics Basic Income Tax

13 Knowledge Check One 1. An RTRP must renew their certifi cation how often? Every year Every three years Never When the IRS requests 2. An EA must renew their certification how often? Every year Every three years Never When the IRS requests 3. How many CE hours must an RTRP obtain annually? Lesson II: Practice Before the IRS There are various types of practice before the IRS, including Disposition of matters before the IRS Receiving assistance from disciplined practitioners Fees Rules dealing with clients Attorneys and CPAs have unlimited practice rights before the IRS, and attorneys have the right to represent their clients before a judge. RTRPs may represent only those taxpayers whose returns they have signed, and only for the year they prepared the return. They are further limited to only representing before revenue agents, customer service representatives, or similar offi cers and employees of the IRS, and are not permitted to give tax advice unless it pertains to a specifi c tax return prepared for that client. Basic Income Tax Ethics 24-13

14 Disposition of Matters Before the IRS Practitioners may not unreasonably delay the prompt disposition of any matter before the IRS. Practitioners must promptly provide a copy of any records or information requested by an IRS offi cer or employee. If the tax practitioner does not hold the records but knows the individual who does, the practitioner must provide the individual s name to the IRS. If the client knows, the practitioner must ask, or attempt to ask,the client for the name of the person holding the records. The practitioner is not required to question or independently verify who the individual is that is holding the records. Practitioners must provide any information, or testify when necessary, if an IRS offi cer or employee inquires into an alleged violation of the regulations. At no time should a practitioner interfere with a request for records or information from an IRS offi cer or employee. If the practitioner believes in good faith and on reasonable grounds that the request from the IRS offi cer or employee is privileged, they may deny the request. Practitioners should obtain legal counsel to determine if a request of an IRS offi cer or employee is considered privileged. If a practitioner is aware that a client is omitting income information required to be reported to the IRS, the practitioner should advise the client of the tax laws surrounding the omission. If the information presents while in the process of completing the tax return, the practitioner should stop immediately, explain why the information must be included, and should not continue or complete the return without including the information. If the omission is not presented until after the return is completed, the practitioner is required to explain both the tax laws and the consequences of omitting the information. The practitioner is not required to notify the IRS, nor are they required to complete an amended tax return without the permission of the client Ethics Basic Income Tax

15 Assistance from Disciplined Practitioners A practitioner may not, knowingly and directly or indirectly Accept assistance from or assist any person who is under disbarment or suspension from practice before the IRS if the assistance is any form of practice before the IRS. Accept assistance from any former government employee where any federal law may be violated. A practitioner may not act as a notary public for any tax matter for their clients or themselves. For more information concerning practice by former government employees see IRS Treasury Circular 230, Fees Practitioners may not charge an unconscionable fee for services related to federal tax matters. Contingent fees can t be charged by a practitioner unless The tax return is being examined or challenged by the IRS An amended tax return or claim for refund is fi led within 120 days of being challenged or examined by the IRS A claim for refund or credit is fi led solely in connection with a determination of statutory interest and penalties assessed by the IRS A contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return (or other fi ling) avoids challenge by the IRS, is sustained by the IRS, or is in litigation. A contingent fee is generally based on a percentage of the refund reported on a return, or otherwise depends on a specifi c result attained. A contingent fee could also include any fee arrangement in which the practitioner will reimburse the client for all, or a portion of, the client s fee in the event that a position taken on a tax return or other fi ling is challenged by the IRS or is not sustained. Example: Frieda charges her clients 10% of their refund as a fee for doing their tax returns. She is in violation of the fees regulation in Circular 230, and can be penalized and suspended from practice by the IRS. Basic Income Tax Ethics 24-15

16 Rules for Dealing With Clients Circular 230 includes standards and practices governing the relationship and interaction between practitioners and their clients. Records Refer to your state s Department of Taxation for more information. Practitioners must return a client s records in a reasonable amount of time after the client requests them. The practitioner does not have to provide a copy of any records created by the practitioner if the client has not paid, but any records provided by the client must be returned, even if they have not yet paid for services. In states where the practitioner may keep records until any fees have been paid, the practitioner must return those records necessary for the client to complete their tax obligation. Only those records the client has provided to the practitioner must be returned, or provided, to the client. If the client has paid for previous work done by the practitioner, and a copy of that work is necessary for the client to complete their current federal tax obligation, the practitioner must provide any required copies to the client. If the tax return has been completed and submitted successfully to the IRS, the practitioner must provide a copy, or acceptable facsimile, of the return to the client, even if the fees have not been paid. Conflicts of Interest A practitioner may not represent a client before the IRS if the representation involves a confl ict of interest. This includes cases such as representing both taxpayers from a previous joint return if either return would provide information for the other return. Practitioners also may not represent a client if there would be a confl ict of interest with the practitioner s personal interest. Practitioners may continue to represent clients in potential confl icts of interest as long as each party has been notifi ed in writing within 30 days of the practitioner recognizing the conflict. The written statement must explain both the potential confl ict and the identities of the involved parties. The applicable client(s) must sign the statement, agreeing to proceed. Such signed statements must be kept with the client s records for a minimum of 36 months. Public Statements Practitioners may not in any way participate in fraudulent, false, or misleading statements or claims privately, or to the public Ethics Basic Income Tax

17 EAs may not use the term certifi ed, or imply an employer/employee relationship with the IRS when describing their professional designation. EAs may use the following examples of acceptable descriptions: Enrolled to represent taxpayers before the Internal Revenue Service (or IRS) Enrolled to practice before the Internal Revenue Service (or IRS) Admitted to practice before the Internal Revenue Service (or IRS) An RTRP may use designated as a registered tax return preparer by the Internal Revenue Service (or IRS) as an acceptable description. Practitioners may publicly publish their fee information for the following: Fixed fees or specifi c routine services Hourly rates Range of fees for particular services Fee charged for an initial consultation Any statement of fees must include a disclosure stating if the client will be responsible for such costs. A practitioner may charge no more than the published rates for at least 30 calendar days after the last date the schedule of fees was published. Fee information may be communicated via most forms of media, however, the method used cannot be misleading or cause the information to become untruthful. Practitioners must keep a copy of any broadcast, print, or e-commerce media for at least 36 months after the date of publishing. In the case of e-commerce, the records must include a copy of the actual communication, and a list of the persons mailed to or otherwise distributed to. Other Restrictions A practitioner must cease attempts to contact or otherwise market to a potential client once it is made known they don t wish to be contacted. A practitioner may not endorse or otherwise negotiate any check issued to a client in respect to federal tax liability. This includes, but is not limited to, direct deposit of a refund check into the practitioner s personal or business account. The rules and regulations governing tax return preparers do not authorize individuals to practice law if they are not otherwise an attorney and permitted by a state bar to practice law. Basic Income Tax Ethics 24-17

18 Knowledge Check Two 1. A practitioner may delay responding to an IRS request for client records to help the client prepare for an audit. True or False? True False 2. A taxpayer may split their refund and have the practitioner s fees deposited directly into the practitioner s business checking account. True or False? True False 3. When must a practitioner return records a taxpayer provides? Within 24 hours of the request Within two weeks of the request Within a reasonable amount of time Never 4. How may a practitioner charge a client for work performed? Based on the hours, or increments of hours, worked Based on the amount of refund the taxpayer receives Based on the percentage of income tax due from the completed return Based on the likelihood of a successful audit 5. Which of the following is not acceptable wording for advertising services as an EA? Enrolled to represent taxpayers before the IRS Enrolled to practice before the IRS Admitted to practice before the IRS Certifi ed by the IRS 6. Which of the following individuals must be registered with the IRS and have a PTIN? Jon, who works as a paid tax preparer during tax season. Lucy, who fi les only her own tax return. Seng, who helps his parents prepare their return for free. Harriet, who works as a receptionist in a tax preparation offi ce but does not prepare any returns for clients Ethics Basic Income Tax

19 Lesson III: Due Diligence There is more to a practitioner s due diligence requirements than the specifi c Earned Income Tax Credit (EITC) due diligence rules and regulations discussed previously. IRS regulations require all practitioners to practice due diligence in all areas of tax return preparation, refund claims, IRS communications, and client advice. Due diligence occurs when the practitioner ensures a tax return is accurate to the best of their ability. It includes having the necessary knowledge of federal taxation to complete the tax return. Standards for Due Diligence For more information on EITC due diligence rules and regulations, refer to Session 23. Due Diligence - The practice by a tax preparer of acting as a reasonable, prudent individual with respect to the information supplied to them. Practitioner tax knowledge is the best resource for ensuring due diligence. Practitioners should be vigilant about staying up-to-date on tax law; using IRS rules, regulations and publications to research areas in which they are less than sure of the rules; and documenting any areas of concern they fi nd in the tax returns they prepare. To document an area of concern, the practitioner should make notes in the return fi le that include any questions they asked, the answers they received, and information from documentation provided by the client. Including copies of the documents the client provided in the return fi le is the best practice for a practitioner when documentation other than tax forms are provided. In addition, if a practitioner has reason to suspect the information provided by a client is incomplete or inaccurate, the practitioner must ask additional questions and document the questions and answers. If the practitioner is still unsure, they should explain to the client the consequences if the information is incorrect or incomplete. When determining if a practitioner is violating due diligence procedures, the IRS will look for a fact pattern that denies or supports the possibility of violating due diligence. The due diligence standards for practitioners defi ned in Circular 230 include the following: Practitioners may not purposely or through gross incompetence sign a return that contains a tax deduction or income position, (claim) that has no reasonable basis in tax law, that cannot be more than likely sustained by the rules and regulations or common accepted practices for tax preparation, or is a intentional understatement of income by a tax preparer. Basic Income Tax Ethics 24-19

20 Practitioners may not advise a client to take a position on a tax return that has no reasonable basis in tax rules and regulations, that cannot be more than likely sustained by the rules and regulations or common accepted practices, for tax preparation, or is a intentional understatement of income by the practitioner. Practitioners may not advise a client to submit a tax return or other documentation to the IRS that includes a frivolous position. Practitioners may rely on information provided by their clients; however, if the practitioner knows of or suspects information that is different from what is supplied by the taxpayer, the practitioner should make sure the client can explain the situation satisfactorily, and document the explanation, before completing the tax return. Practitioners should advise a client of the potential penalties of any inaccuracies identifi ed on previously prepared tax returns, or of making an inaccurate, false, or frivolous claim on a current tax return. If the inaccuracy is part of a previously fi led tax return, the practitioner is responsible for notifying the client of the error and any potential penalties from the IRS. The practitioner is not required to amend the previous return, but must do the current return accurately. Example: Germaine and Eileen are working with Helen to complete their 2011 tax return. While reviewing the 2010 tax return, Helen notices an error in how rental property losses were claimed on the return. Helen is responsible for notifying Germaine and Eileen of the error and explaining any consequences they could receive from the IRS, such as penalty and interest assessments. Helen is not responsible to force Germaine and Eileen to amend their 2010 tax return. Helen is only responsible for preparing their 2011 tax return correctly. Responsibilities of a Principle Authority The principle authority over a tax practice is the individual who is responsible for the daily operations of the tax practice. This individual must ensure the practice has procedures in place that require their tax preparers to follow IRS rules and regulations, practice due diligence, and meet all IRS recordkeeping requirements. The principle authority over the practice can be subject to penalties for the practices of the fi rm s preparers if procedures are not in place to ensure the regulations of Circular 230 are followed Ethics Basic Income Tax

21 Knowledge Check Three 1. What is a good way to demonstrate that you have exercised necessary due diligence during the tax preparation process? Take notes to document your conversations with clients. Refer all clients that you suspect of fraud to the IRS. Require the client to provide two separate types of proof for all income items. Refuse to prepare the return for any client whose circumstances appear unusual. 2. Which of the following statements is not correct? You may generally rely in good faith on information provided by your client. You must reality check information provided by your client if it appears incorrect, incomplete, or inconsistent. You should never send your clients away without fi rst exploring all available options to help them prepare their return. You must review all records your client says they can provide to the IRS in the event of an IRS inquiry. 3. Which of the following is not a responsibility of the principle authority over a tax practice? The principle authority is the individual who is responsible for the daily operations of the tax practice. The principle authority must ensure there are procedures in place requiring tax preparers to follow IRS rules and regulations. The principle authority must ensure the business tax returns are fi led. The principle authority is subject to penalties if their tax preparers are not following the IRS rules and regulations, and the principle authority had reason to know or should have known. Basic Income Tax Ethics 24-21

22 Lesson IV: Sanctions For Violating Circular 230 Regulations Censure is a harshly written notice of an individual s practices. It can include listing the practitioner s name, business name, and location in a public document. The Secretary of the Treasury, or a delegate, may censure, suspend, or disbar any practitioner from practice before the IRS if the practitioner is shown to be incompetent or disreputable. Practitioners that have been suspended or disbarred may not practice, nor may they provide help or training to, or oversee, another practitioner or tax business. Incompetence and Disreputable Conduct Incompetence and disreputable conduct is conduct for which a practitioner may be sanctioned. The various types of disreputable conduct include the following: Conviction of any criminal offense under the federal tax laws. Conviction of any criminal offense involving dishonesty or breach of trust. Conviction of any felony under federal or state law for which the conduct involved renders the practitioner unfi t to practice before the IRS, such as embezzlement, grand theft, or writing bad checks. The felony does not necessarily have to be fi nancial in nature. The crime can be a moral or violent crime as well. Giving false or misleading information, or participating in such, to the Department of the Treasury or any offi cer or employee, or to any court authorized to judge federal tax matters. Facts or other information contained in testimony, federal income tax returns, fi nancial statements, application for enrollment, affi davits, declarations, and any other document or statement written or oral are included in the term information. Solicitation of employment using false or misleading statements, intentionally using false or misleading statements to a client or potential client with the intent to gain employment, and implying or intimating the ability to obtain special consideration from the IRS or any IRS offi cers or employees. Willfully failing to fi le a required personal federal tax return, willfully evading or attempting to evade tax law, or participating in any way in evading or attempting to evade any assessment or payment of any federal tax Ethics Basic Income Tax

23 Willfully assisting, encouraging, or counseling a taxpayer to evade or attempt to evade, or suggesting to any taxpayer to violate any federal tax law, or suggesting or counseling in an illegal plan to evade federal taxes or payment of these taxes. Misappropriating or failing to properly remit any funds received from a client to pay a tax bill or other obligation due the United States. Infl uencing or attempting to infl uence any offi cer or employee of the IRS by threats, false accusations, duress or coercion, or by offering any special inducement or promise of an advantage or by bestowing of a gift, favor, or thing of any value. Disbarment or suspension from practice as an attorney, CPA, public accountant, or actuary by any state, territory, commonwealth, or the District of Columbia government in the United States. Knowingly aiding and abetting another person to practice before the IRS while that person is suspended, disbarred or ineligible. Contemptuous conduct in connection with practice before the IRS including abusive language, making false accusations or statements, circulating or publishing malicious or libelous matters. Intentionally creating and fi ling tax returns, requests for refunds, or any other documents with false statements and submitting them to the IRS. Willfully failing to sign a tax return that requires signature as the paid preparer. Intentionally disclosing information, without taxpayer authorization, from a tax return outside of the taxpayer (and spouse if married fi ling jointly) and the IRS as required. Failing to e-fi le, or fi le using magnetic media, as required by the IRS. Knowingly preparing tax returns without a valid PTIN. Representing taxpayers before the IRS when not authorized to do so. Basic Income Tax Ethics 24-23

24 Sanctions The Secretary of the Treasury, or a delegate, has the authority to impose a monetary penalty on any practitioner who engages in conduct subject to sanction. The Secretary, or delegate, must review the case and can not impose the penalty until after the practitioner is notifi ed of a proceeding. If the practitioner was acting on behalf of an employer or other entity when the actions occurred that allowed a penalty, the Secretary, or delegate, may impose the penalty on the employer or other entity if they knew or reasonably should have know of such action. The penalty may not exceed the gross income derived, or to be derived, from the conduct subject to the penalty. Example: Stanley was told by his employer, Alternative Tax Preparation, to include 10% of income as an employee business expense on all tax returns with itemized deductions. The Secretary of Treasury delegate sanctioned Stanley for gross overstatement of income and penalized him $5,000 in addition to the 6694(a) penalty of $20,000. Stanley s employer was also fi ned $50,000. Knowledge Check Four 1. Which of the following is an example of incompetence and disreputable conduct? Applying for a job as a tax preparer and stating your expired PTIN is valid. Transposing the rent expenses on a Schedule C. Requiring the client to provide two separate types of proof for all income items. Refusing to prepare the return for any client whose circumstances appear unusual Ethics Basic Income Tax

25 2. What is the maximum penalty the Secretary of the Treasury can impose on an individual that has been sanctioned? $50,000 Half of the gross income received from the conduct subject to the penalty Equal to the net income received from the conduct subject to the penalty Equal to the gross income received from the conduct subject to the penalty 3. Which of the following is not considered an example of incompetence and disreputable conduct? Refusing to sign a tax return as the paid preparer when charging to prepare tax returns. Refusing to prepare a tax return for a prospective client. Practicing as a tax preparer without an active PTIN. Being convicted of embezzlement by a former employer. Basic Income Tax Ethics 24-25

26 Session 24 Summary Practice before the IRS is defi ned as, all matters connected with a presentation to the IRS relating to a taxpayer s rights, privileges, or liabilities under the laws and regulations administered by the IRS. Presentation includes tax return preparation and fi ling, communication and correspondence with the IRS, rendering written advice, and client representation. Attorneys, certifi ed public accountants (CPAs), enrolled agents (EAs), registered tax return preparer (RTRPs), and certain others are authorized to practice before the IRS and are governed by IRS Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service. Attorneys must be current and in good standing with the state authority that governs their professional certifi cation, and both the Return Preparer Office (RPO) and the Offi ce of Professional Responsibility (OPR). Attorneys have no limits on their rights to practice. CPAs must be current and in good standing with the state authority that governs their professional certifi cation, and both the RPO and the OPR. CPAs have no limits on their rights to practice. EAs have no limits on their rights to practice, and must Be at least 18 years of age Be current in all personal and business taxes Pass the Special Enrollment Exam (SEE) Receive 72 hours of qualifying continuing education (CE) in a three-year enrollment cycle Be in good standing with the RPO and the OPR RTRPs are limited to representing only those taxpayers whose tax returns they completed. They are further limited to only representing before revenue agents and customer service representatives, and may not give tax advice unless it pertains to the tax return prepared for the taxpayer. RTRPs must Be at least 18 years of age Be current in all personal and business taxes Pass the RTRP minimum competency test Receive 15 hours of qualifying CE in an enrollment year Be in good standing with the RPO and the OPR Ethics Basic Income Tax

27 All tax return preparers (practitioners) must maintain an active PTIN, and renew annually, to practice. Practitioners must promptly provide the IRS or its employees with any taxpayer records that have been requested by such. Practitioners must promptly provide information or testify as requested by the IRS or its employees, and should at no time interfere with a request for records or information from the IRS or its employees. Practitioners must notify a taxpayer of the consequences of omitting information from a tax return, and must not knowingly participate in such omission. Practitioners are not required to voluntarily notify the IRS of a taxpayer s omission. Practitioners may not knowingly accept assistance in tax matters from any practitioner under suspension or disbarment from the IRS, or any former government employee that has violated a federal law. Practitioners may not charge unconscionable fees for services pertaining to tax matters. Generally, practitioners may not charge contingency fees for tax return preparation or preparation for claims for refund. Practitioners must return to their clients any records or documents provided by the clients when requested, even if the client s fees have not been paid. Practitioners must also provide a copy of a tax return, or reasonable facsimile of one, if the tax return has been successfully fi led with the IRS. Practitioners must disclose in writing any potential confl ict of interest to all involved clients within 30 days of recognizing the confl ict. The statement must be signed by the client and a copy kept in the client s records for at least 36 months. Practitioners may not submit false, fraudulent, or misleading statements to the public, clients, or potential clients. This includes advertisements that state a practitioner is certifi ed by the IRS, or to imply an employer/employee relationship with the IRS. Fee advertising must be honored for at least 30 days after the last published date and records of the advertising must be maintained for at least 36 months. Practitioners may not endorse or negotiate a taxpayer s federal refund of taxes or penalties and interest. Circular 230 does not authorize any individual to practice law if they are not otherwise an attorney. Basic Income Tax Ethics 24-27

28 Practitioners are required to practice due diligence in all areas of tax matters. Practitioners may not intentionally create and claim unreasonable deductions or tax credits. Practitioners may not intentionally understate a taxpayer s income. Practitioners may not make frivolous tax return claims. Practitioners should explain the consequences of an error found in a previously fi led tax return, but are not required to correct the error unless requested to by the taxpayer. Practitioners must complete any current tax return or claim for refund correctly regardless of previous year errors. Practitioners may rely on information provided by their clients. However, if the practitioner knows, or suspects, that information supplied by the taxpayer is misleading or false, the practitioner should request a further explanation from the taxpayer and act accordingly. The principle authority is the individual with responsibility over the daily operations of the practice. The principle authority is required to have procedures in place to ensure the practice and its individual preparers follow IRS rules and regulations, practice due diligence, and meet all IRS recordkeeping rules. The principle authority is subject to penalties for not ensuring the procedures are in place and followed. Incompetence and disreputable conduct by a practitioner can result in sanctions by the Secretary of the Treasury, or a delegate. The Secretary of the Treasury, or a delegate, can penalize both a practitioner who has been sanctioned, and the practitioner s employer, if the employer knew or had reason to know of the conduct leading to the sanction. The Secretary of the Treasury, or a delegate, may impose a monetary penalty up to the amount of income derived, or to be derived, from the conduct leading to the sanction Ethics Basic Income Tax

29 Session 24 Knowledge Check Answers Use the following to help verify your Knowledge Check responses. Knowledge Check One 1. Every year. An RTRP must renew their certifi cation every year by renewing their PTIN. 2. Every three years. An EA must renew their certifi cation every three years. They must complete a minimum of 72 hours of qualifying CE over the three-year period, including an annual minimum CE requirement of 16 hours An RTRP must obtain a minimum of 15 CE hours annually. They must complete two hours of federal ethics, three hours of federal tax update, and 10 hours of federal tax matters. Knowledge Check Two 1. False. A practitioner may not delay responding to an IRS request for client records to help the client prepare for an audit. They must respond within a reasonable amount of time. 2. False. A taxpayer may split their refund if they choose, but the practitioner cannot have their fees deposited directly into their business checking account. A practitioner may not negotiate any check issued to a client by the government in respect of a federal tax liability. 3. Within a reasonable amount of time. A practitioner must return the records a taxpayer provides them within a reasonable amount of time. 4. Based on the hours, or increments of hours, worked. A practitioner may charge a client for work performed based on the hours, or increments of hours, worked. They may not charge a contingent fee for their services. 5. Certified by the IRS. An EA may not advertise that they are certifi ed by the IRS. 6. Jon, who works as a paid tax preparer during tax season. A paid tax preparer must be registered with the IRS and have a PTIN. Basic Income Tax Ethics 24-29

30 Knowledge Check Three 1. Take notes to document your conversations with clients. Taking notes of your conversations with clients, and keeping them in the client s fi le, is a good way to show the IRS your due diligence efforts. 2. You must review all records your client says they can provide to the IRS in the event of an IRS inquiry. The IRS does not require a practitioner to review all records clients say they can provide to the IRS in the event of an IRS inquiry. Instead, they should explain that the IRS may request the records. 3. The principle authority must ensure the business tax returns are filed. The principle authority is not required to ensure business tax returns are fi led. They are responsible for the daily activities of a tax business and are required to provide procedures to ensure tax return preparers are following IRS rules and guidelines. They are subject to penalties if their tax return preparers do not follow IRS rules and guidelines and are sanctioned and penalized. Knowledge Check Four 1. Applying for a job as a tax preparer and stating your expired PTIN is valid. Applying for a job as a tax preparer and presenting false information or credentials, such as a PTIN, is incompetence and disreputable conduct. 2. Equal to the gross income received from the conduct subject to the penalty. When a preparer is sanctioned, the maximum penalty allowed is the equivalent of the gross income received at any time from the conduct subject to the penalty. 3. Refusing to prepare a tax return for a prospective client. Refusing to prepare a tax return for a prospective client is not considered incompetence or disreputable conduct Ethics Basic Income Tax