ETHICS RULES FOR CALIFORNIA TAX PREPARERS CALIFORNIA TAX PREPARER LAW

` ETHICS RULES FOR CALIFORNIA TAX PREPARERS CALIFORNIA TAX PREPARER LAW READING For this session read: California tax publications: California Business and Professions Code, Sections 22250-22259 (Included in this session) CTEC News and Views, July 2011 edition OBJECTIVES By the end of this session, you should: Know the pertinent provisions of California Tax Preparers Act CALIFORNIA TAX PREPARER LAW Background In 1996 the California Legislature passed the Tax Preparers Act, Business and Professions Code 22250-22259, which regulates tax preparers. The sections of the statute pertaining to licensing, tax preparer ethics, professional conduct, conduct regarding bonding, and penalties for violating the law are described below. The Tax Preparers Act is administered by the California Tax Education Council (CTEC). It is the policy of CTEC to be sure registered tax preparers (CRTPs) are aware of the Tax Preparer Code of Conduct and Responsibilities. Following is a detailed summary of the provisions contained in Chapter 14 of the California Business and Professions Code. Pacific Northwest Tax School recommends you read the Code in its entirety. The contents of this manual are intended to summarize the meaning of the Code only and are not intended to be a full and accurate copy of the Code. 1

California Business and Professions Code CHAPTER 14 TAX PREPARERS Sections 22250-22259 Section 22250 Bonding Requirements A tax preparer shall maintain a bond issued by a surety company admitted to do business in this state for each individual preparing tax returns for another person. The principal sum of the bond shall be five thousand dollars ($5,000). By law, CRTPs cannot prepare tax returns for a fee without a current CTEC registration that includes proof of an active bond. Applications with bonds are accepted for the effective dates shown on the bonds. Thus a bond with an effective date of January 1, 2012 will prevent an applicant who submits an application in November of 2011 from becoming registered with CTEC until January 2012. A tax preparer subject to this section shall provide to the surety company proof that the individual is at least 18 years of age before a surety bond may be issued. The bond shall be in favor of, and payable to, the people of the State of California and shall be for the benefit of any person or persons damaged by any fraud, dishonesty, misstatement, misrepresentation, deceit, or any unlawful facts or omissions by the tax preparer, or the tax preparers employed or associated with it to provide tax preparation services. The tax preparer filing the bond shall identify all tax preparers employed or associated with the tax preparer. A tax preparer employed or associated with a tax preparer shall be covered by the bond of the tax preparer with which he or she is employed or associated. However, in no event shall the total bond required for any single tax preparer and the tax preparers employed or associated with it be required to exceed one hundred twenty-five thousand dollars ($125,000). The aggregate liability of the surety to any and all persons regardless of the number of claims against the bond or the number of years the bond remains in force shall not exceed five thousand dollars ($5,000) for any one tax preparer. The bond shall not cover payment of any civil penalties, fines, attorneys' fees, or any other cost provided by statute or regulation. The tax preparer shall file an amendment to the bond within 30 days of a change in information contained in the bond, including a change in the tax preparers employed or associated with the tax preparer. 2

A tax preparer may not conduct business without having a current surety bond in the amount prescribed by this section. Thirty days prior to the cancellation or termination of any surety bond the surety shall send a written notice of that cancellation or termination to the tax preparer and the California Tax Education Council, identifying the bond and the date of cancellation or termination. If a tax preparer fails to obtain a new bond by the effective date of the cancellation or termination of the former bond, the tax preparer shall cease to conduct business until that time a new surety bond is obtained. A tax preparer may not make a deposit in lieu of a bond. A tax preparer shall furnish evidence of the bond required by this section upon the request of any state, federal agency or any law enforcement agency or the California Tax Education Council. Section 22251 Definitions The following definitions apply under Section 22251 California Licensing Law: A "tax preparer" includes: 1. A person who, for a fee or for other consideration: o Assists with or prepares tax returns for another person, or o Who assumes final responsibility for completed work on a return on which preliminary work has been done by another person, or o Who holds himself or herself out as offering those services. 2. A corporation, partnership, association, or other entity that: o Has associated with it persons who are not exempt from California Licensing Law when such persons have, as part of their responsibilities, the preparation of data and ultimate signatory authority on tax returns, or o Holds itself out as offering or having that authority to offer tax preparation services or ultimate signatory authority on tax returns. "Tax preparer" does not include an employee who, as part of the regular clerical duties of his or her employment, prepares his or her employer's income, sales, or payroll tax returns. "Tax return" means a return, declaration, statement, refund claim, or other document required to be made or filed in connection with state or federal income taxes or state bank and corporation franchise taxes. 3

An "approved curriculum provider," is a provider who has been approved by the council. "Council" means the California Tax Education Council (CTEC). CTEC is a single organization made up of not more than one representative from each professional society, association, or other entity operating as a nonprofit corporation that chooses to participate in the council and that represents tax preparers, enrolled agents, attorneys, or certified public accountants with a membership in California of at least 200 for the last three years, and not more than one representative from each for-profit tax preparation corporation that chooses to participate in the council and that has at least 200 employees and has been operating in California for the last three years. The council shall establish a process by which two individuals who are tax preparers pursuant to Section 22255 are appointed to the council with full voting privileges to serve terms as determined by the council, with their initial terms being served on a staggered basis. A person exempt from the requirements of this chapter pursuant to Section 22258 is not eligible for appointment to the council, other than an employee of an individual in an exempt category. "Client" means an individual for whom a tax preparer performs or agrees to perform tax preparation services. "Refund anticipation loan" means a loan whose payment is secured by, a client's federal or state income tax refund or by both. "Refund anticipation loan fee schedule" means a list or table of refund anticipation loan fees that includes three or more representative refund anticipation loan amounts. The schedule shall separately list each fee or charge imposed, as well as a total of all fees imposed, related to the making of a refund anticipation loan. The schedule shall also include, for each representative loan amount, the estimated annual percentage rate calculated under the guidelines established by the federal Truth in Lending Act (15 U.S.C. Sec. 1601 and following). Section 22252 Prior to rendering tax preparation services Prior to rendering any tax preparation services, a tax preparer shall provide the following information in writing to the customer: The tax preparer' s name, address, telephone number, and Evidence of compliance with the bonding requirement of Section 22250, including the bond number, if any. 4

Section 22252.1 Confidentiality No confidential information obtained by a tax preparer, in his or her professional capacity, concerning a client or a prospective client shall be disclosed by the tax preparer without the written permission of the client or prospective client, except for the following: (1) Disclosures made by a tax preparer in compliance with a subpoena or a summons enforceable by order of a court. (2) Disclosures made by a tax preparer regarding a client or prospective client to the extent the tax preparer reasonably believes it is necessary to maintain or defend himself or herself in a legal proceeding initiated by the client or prospective client. (3) Disclosures made by a tax preparer in response to an official inquiry from a federal or state government regulatory agency. (4) Disclosures made by a tax preparer or to a tax preparer's duly authorized representative to another tax preparer in connection with a proposed sale or merger of the tax preparer's professional practice. (5) Disclosures made by a tax preparer to either of the following: Another tax preparer to the extent necessary for purposes of professional consultation. Organizations that provide professional standards review and ethics or quality control peer review. (6) Disclosures made when specifically required by law. Disclosures to persons outside of the United States In the event that confidential client information may be disclosed to persons or entities outside the United States of America in connection with the services provided, the tax preparer shall inform the client in writing and obtain the client's written permission for the disclosure. Section 22252.5 Encouragement to inform client about voluntary contributions The California Legislature has determined that many taxpayers are unaware of the fact they can make voluntary contributions to certain funds or programs on their State tax returns. The Legislature wants taxpayers to be aware of the fact that they can make voluntary contributions to certain funds or programs, as provided on the state income tax return. The Legislature encourages all persons who prepare state income tax returns, including tax preparers, to inform their clients in writing, prior to the completion of any state income tax return, that they may make a contribution to any voluntary contribution check-off on the state income tax return if they so choose. 5

Section 22253 Prohibited Acts A tax preparer may NOT do any of the following: 1. Fail to register as a tax preparer with the council. 2. Make, or authorize the making of, any statement or representation, oral or written or recorded by any means, which is intended to induce persons to use the tax preparation service of the tax preparer, which statement or representation is fraudulent, untrue, or misleading. 3. Obtain the signature of a customer to a tax return or authorizing document which contains blank spaces to be filled in after it has been signed. 4. Fail or refuse to give a customer, for his or her own records, a copy of any document requiring the customer's signature, within a reasonable time after the customer signs the document. 5. Fail to maintain a copy of any tax return prepared for a customer for four years from the date of completion or the due date of the return, whichever is later. 6. Engage in advertising practices which are fraudulent, untrue, or misleading, including, but not limited to, assertions that the bond required by Section 22250 in any way implies licensure or endorsement of a tax preparer by the State of California. 7. Violate Section 17530.5 or 17530.6. 8. Violate Section 7216 of Title 26 of the United States Code. 9. Fail to sign a customer's tax return when payment for services rendered has been made. 10. Fail to return, upon the demand by or on behalf of a customer, records or other data provided to the tax preparer by the customer. 11. Knowingly give false or misleading information to the consumer pursuant to Section 22252, or give false or misleading information to the surety company pursuant to subdivision (a) of Section 22250, or give false or misleading information to the California Tax Education Council pursuant to Section 22255. 12. Each violation of this section constitutes a separate offense. Section 22253.1 Refund Anticipation Loan Requirements Any tax preparer who advertises the availability of a refund anticipation loan shall not directly or indirectly represent the loan as a client's actual refund. 6

Any advertisement that mentions a refund anticipation loan shall state conspicuously that it is a loan and that a fee or interest will be charged by the lending institution. The advertisement shall also disclose the name of the lending institution. Every tax preparer who offers to facilitate, or who facilitates, a refund anticipation loan to a client shall display a refund anticipation loan schedule showing the current fees for: o Refund anticipation loans facilitated at the office, o Electronic filing of the client's tax return, o Setting up a refund account, and o Any other related activities necessary to receive a refund anticipation loan. The fee schedule shall also include a statement indicating that the client may have the tax return filed electronically without also obtaining a refund anticipation loan. The postings required by this section shall be made in not less than 28- point type on a document measuring not less than 16 by 20 inches. The postings required in this section shall be displayed in a prominent location at each office where any tax preparer is offering to facilitate or facilitating a refund anticipation loan. Prior to the client's completion of the refund anticipation loan application, a tax preparer that offers to facilitate a refund anticipation loan shall provide to the client a clear, written disclosure containing all of the following information: o The refund anticipation loan fee schedule. o That a refund anticipation loan is a loan and is not the client's actual income tax refund. o That the taxpayer can file an income tax return electronically without applying for a refund anticipation loan. o The average amount of time, according to the Internal Revenue Service, within which a taxpayer who does not obtain a refund anticipation loan can expect to receive a refund if the taxpayer's return is filed or mailed as follows: a. Filed electronically and the refund is deposited directly into the taxpayer's bank account or mailed to the taxpayer. b. Mailed to the Internal Revenue Service and the refund is deposited directly into the taxpayer's bank account or mailed to the taxpayer. c. That the Internal Revenue Service does not guarantee that it will pay the full amount of the anticipated refund and it does 7

not guarantee a specific date that a refund will be deposited into the taxpayer's bank account or mailed to the taxpayer. d. That the client is responsible for the repayment of the refund anticipation loan and the related fees in the event that the tax refund is not paid or paid in full. e. The estimated time within which the loan proceeds will be paid to the client if the loan is approved. f. The fee that will be charged, if any, if the client's loan is not approved. Prior to the client's consummation of the refund anticipation loan transaction, a tax preparer that facilitates a refund anticipation loan shall provide to the client, in either written or electronic form, the following information: a. The estimated total fees for obtaining the refund anticipation loan. b. The estimated annual percentage rate for the client's refund anticipation loan. c. A comparison which shows the client the various costs, fees, and finance charges associated with obtaining a refund anticipation loan versus the costs associated with filing a paper return, an electronically filed return or any other refund settlement options facilitated by the tax preparation service. d. Any tax preparer who offers to facilitate, or who facilitates, a refund anticipation loan may not engage in any of the following activities: o Requiring a client to enter into a loan arrangement in order to complete a tax return. o Misrepresenting a material factor or condition of a refund anticipation loan. o Failing to process the application for a refund anticipation loan promptly after the client applies for the loan. o Engaging in any transaction, practice, or course of business that operates a fraud upon any person in connection with a refund anticipation loan. Section 22253.2 Fines and Penalties The Franchise Tax Board (FTB) shall notify the California Tax Education Council (CTEC) when it identifies an individual who has violated paragraph (1) of subdivision (a) of Section 22253 governing acts prohibited by California Tax Preparer laws. 8

Upon receiving the notice from FTB, CTEC shall notify the Attorney General, a district attorney, or a city attorney of the violation. Upon receiving this notice, the Attorney General, a district attorney, or a city attorney may do any of the following: 1. Cite individuals preparing tax returns in violation of subdivision (a) of Section 22253. 2. Levy a fine up to five thousand dollars ($5,000) per violation. 3. Issue a cease and desist order, which shall remain in effect until the individual has complied with paragraph (1) of subdivision (a) of Section 22253. Section 22254 Education Providers A provider of tax preparer education for tax preparers shall meet standards and procedures as approved by the council. The council shall either approve or decline to approve providers of tax preparer education within 120 days of receiving a request for approval. If approval is not declined within 120 days, the provider shall be deemed approved. A listing of those providers approved by the council shall be made available to tax preparers upon request. Section 22255 Certificate of Completion Initial Registration Requirements The council shall issue a "certificate of completion" to the tax preparer when the tax preparer demonstrates that he or she has: 1. Completed not less than 60 hours of instruction in basic personal income tax law, theory, and practice by an approved curriculum provider within the previous 18 months; and 2. Provides evidence of compliance with the bonding requirement of Section 22250, including the name of the surety company, the bond number, and the bond expiration date. Of the required 60 hours in basic personal income tax law, 45 hours shall be concerned with federal tax curriculum and 15 hours shall be concerned with state tax curriculum. QE Test Requirement Beginning January, 2010, all new registrants must now pass a competency exam before they can register with CTEC. Qualifying education providers will be 9

responsible for administering their own test based on the lessons completed for that specific course. Before the policy revision, a test was required for distance learning courses, but not for contact courses. The new policy affects students that need to complete the 60-hour qualifying education requirement. Students must pass with a score of at least 70 percent before they can receive credit for the course and register as a new tax preparer with CTEC. Renewal Requirements A tax preparer shall complete on an annual basis not less than 20 hours of continuing education, including: 12 hours in federal taxation*, 4 hours in California taxation* and, 2 hours in either federal or California taxation* from an approved curriculum provider. Beginning with the 2010 renewal cycle, 2 hours of ethics* education is also required. Ethics can be allocated as either federal or California. All education providers are required to submit hours electronically to CTEC, which means all CRTPs can renew online. (Beginning with the 2012/2013 CTEC cycle, online registration will be required. Mail in registrations will no longer be accepted after August 1, 2012.) * The IRS is requiring nonexempt tax preparers (includes CRTPs) to complete 15 hours of federal continuing education (CE) each year starting January 1, 2012. CTEC is working to conform its federal CE requirements to the IRS. If state legislation passes, the new CE hours for CTEC renewals will be 15 hours federal and 5 hours state starting January 1, 2012. Because the new federal CE hours are scheduled to take effect after the start of the next CTEC registration cycle, CTEC will accept courses completed on or after November 1, 2011 to count toward the next renewal cycle. These changes are set to take effect starting beginning with the 2012/2013 CTEC registration cycle. Please read CTEC newsletters, tweets and blogs for updates. For more information about the new IRS requirements, visit www.irs.gov/taxpros. Top 10 Renewal Facts 1. You must have a social security number. 2. You must have a valid PTIN. 3. If you need your bond information, call your insurance agent, not CTEC. 4. If your education is not showing up online, call your education provider, not CTEC. 5. Unless specified, education providers do not register students with CTEC. 6. Do not send applications registered mail, overnight or by any other express service. 10

7. CTEC does not accept renewals by phone or fax. 8. CTEC will not accept credit card payments over the phone or by mail. 9. Personal information changes must be submitted in writing to CTEC or edited by you through your online account. 10. Still have a question? Please have your CTEC number available before you call. Statement of Compliance The council shall issue annually a "statement of compliance" when the tax preparer demonstrates that he or she has: 1. Completed the required 20 hours of continuing education, and 2. Provides evidence of compliance with the bonding requirement of Section 22250, including the name of the surety company, the bond number, and the bond expiration date. Exception from Qualifying Education Requirement An individual who possesses a minimum of two recent years experience in the preparation of personal income tax returns may petition the council to review the experience and determine if it is the equivalent of the required qualifying education. The council may provide that individual with a "certificate of completion" if it is determined that the experience is the equivalent of the required hours. Tax preparation experience obtained in violation of California Tax Preparer laws may not be used toward qualifying experience needed for registration as a tax preparer. Section 22256 Court Injunctions and Penalties The superior court in and for the county in which any person acts as a tax preparer in violation of the provisions of California Tax Preparer laws may, upon a petition by any person, issue an injunction or other appropriate order restraining the preparer s conduct. A person who violates a provision of California licensing law is guilty of a misdemeanor, which offense is punishable by a fine not exceeding one thousand dollars ($1,000), or by imprisonment in a county jail for not more than one year, or by both Section 22257 Civil Penalties If a tax preparer fails to perform a duty specifically imposed upon him or her pursuant to California licensing law, any person may maintain an action for 11

enforcement of those duties or to recover a civil penalty in the amount of one thousand dollars ($1,000), or for both enforcement and recovery. In an action to enforce these duties or to recover civil penalties, or for both enforcement and recovery, the prevailing plaintiff shall be entitled to reasonable attorney's fees and costs, in addition to the civil penalties provided under the law. Section 22258 Persons who are exempt from California Tax Preparer s Act The following persons are exempt from the requirements of this title: 1. A person with a current and valid license issued by the California Board of Accountancy and his or her employees while functioning within the scope of their employment. 2. A person who is an active member of the State Bar of California and his or her employees while functioning within the scope of their employment. 3. An employee of any trust company or trust business as defined in Chapter 1 (commencing with Section 99) of Division 1 of the Financial Code while functioning within the scope of his or her employment. 4. A financial institution regulated by the state or federal government, and employees thereof, insofar as the activities of the employees are related to their employment and the activities of the financial institution with respect to tax preparation are subject to federal or state examination or oversight. 5. A person who is enrolled to practice before the Internal Revenue Service pursuant to Subpart A (commencing with Section 10.1) of Part 10 of Title 31 of the Code of Federal Regulations, and his or her employees while functioning within the scope of his or her employment. In general, the exemption applying to employees of California CPAs, California attorneys and Enrolled Agents applies only if the exempt person signs the tax return. In cases where an employee of a CPA, attorney or Enrolled Agent signs a tax return, the employee is not exempt from the provisions of the California Tax Preparer s Act and must adhere to all CTEC registration requirements including: Successful completion of a CTEC approved 60 hour course 20 hours of continuing education is required for each renewal year Maintenance of a $5,000 tax preparer bond 12

Fees CTEC RENEWAL REQUIREMENTS Application Type Application Fee Due Date Delinquent Fee Application for Initial Registration $25 Application for Renewal of Registration $25 10/31 $15* *CTEC plans to increase its late fee from $15 to $55 starting November 1, 2012. The grace period for late renewals will also be cut short from 12 months to 10 weeks starting November 1, 2012. CRTPs who do not renew their registration by January 15, 2013, and each year thereafter, will have to re-take the 60-hour qualifying education course, pass an exam from an approved education provider and register as new CRTPs. Continuing Education (CE) Reporting Requirements Tax preparers must obtain CE from a CTEC approved education provider. CE hours are awarded based upon whether the course completed is deemed to be: 1. Contact, 2. Interactive distance learning, or 3. Non-interactive distance learning. Credit hours for instructor-led and/or interactive instruction will be assigned based on a 50-minute contact hour. Credit hours for distance learning instruction will be allowed based on a 100- minute hour. Tax preparers who complete non-interactive distance learning courses are awarded half the hours for CPE completion that are awarded to the equivalent course which is contact or interactive distance learning. Example: Tax Preparer 1 completes Pacific Northwest Tax Schools course Basis of Assets (Interactive Self-Paced Online) and is awarded 4 Hours of CE. Tax Preparer 2 completes Pacific Northwest Tax School s course Basis of Assets (Correspondence) and is awarded 2 hours of CE. 13

Homework Homework Instructions for Classroom Students Complete all Homework including any necessary tax forms and bring them to the next class session for review and submission. Homework Instructions for Correspondence Course Students Enter answers for this assignment using the included Student Homework Answer Form and submit your answers by: Fax: 503-350-0265, or Email: pnwtaxschool@aol.com, or Mail to: Pacific Northwest Tax School 13405 NW Cornell Rd. Portland, OR 97229 Homework Answer Form 1 is included with this session. If you wish to submit your answer form by email, use our fillable Adobe answer form available on our website at: www.pnwtaxschool.com, under the Student Resources tab. Homework Instructions for Online Students Complete Homework assignment online using the LMS. Forms needed to complete Homework: None Answer the following questions. For questions 1 3, in preparing a client's return for the current year, you discover a major error on his return for the prior year, which you did not prepare. Answer Yes or No. 1. Should you prepare the current year return? Y or N 2. Should you offer to amend the prior year return? Y or N 3. Is there anything in Section 22253 prohibited acts which covers this situation? Y or N 14

4. California registered tax preparers must complete how many hours of CTEC-approved continuing education each year? a. 10 hours, all federal law b. 20 hours (12 federal, 4 California, 2 hours ethics, 2 hours either) c. 20 hours (12 federal, 4 California, 4 hours either) d. 30 hours (20 federal, 5 California, 5 either) 5. California registered tax preparers must maintain a Tax Preparer Bond in the amount of: a. $5,000 b. $10,000 c. $50,000 d. No bond is required. 6. California tax preparers must maintain copies of the returns they prepare for: a. 2 years b. 3 years c. 4 years d. 5 years 7. If you prepare a tax return for a fee in California without legal registration, you may be subject to a fine of up to $5,000 per return. a. True b. False 8. An income tax preparer who is required to sign a tax return but fails to do so is not subject to a penalty. a. True b. False 9. Mike is a registered preparer. For the past five years, the information Anne provided Mike to prepare her return included a Schedule K-1 from a partnership showing significant income. However, Mike did not see a Schedule K-1 from the partnership among the information Anne provided him this year. What does due diligence require Mike to do? a. Without talking to Anne, Mike should estimate the amount that would be reported as income on the Schedule K-1 based on last year s K-1 and include that amount on Anne s return. b. Call Anne s financial advisor and ask him about Anne s investments. c. Nothing, because Mike is required to rely only on the information provided by his client, even if he has reason to know the information is not accurate. 15

d. Ask Anne about the fact that she did not provide him with a Schedule K-1. 10. If a person is paid to prepare, assist in preparing, or review a tax return, then he/she must sign that return. He/she may, however, choose whether or not to provide the other information in the paid preparer s area of the tax return. a. True b. False 11. The due date for CRTP renewal and delinquency fee for late renewal are which of the following? a. September 30, $15 b. October 31, $15 c. September 30, $25 d. October 31, $25 12. Under Section 22251, tax preparer does not include a person who: a. Assists with or prepares tax returns for another person. b. Who assumes final responsibility for completed work on a return on which preliminary work has been done by another person. c. Holds himself or herself out as offering tax preparation services. d. Prepares his or her employer s income, sales, or payroll tax returns as a part of the regular clerical duties of his or her employment. 13. Tax preparers must obtain continuing education (CE) from a CTECapproved provider. Which of the following statements is not true? a. Contact CE courses are awarded credit based upon a 50-minute hour. b. Interactive distance learning courses are awarded credit based upon a 50-minute hour. c. Non-interactive distance learning courses are awarded credit based upon a 50-minute hour. d. Non-interactive distance learning courses are awarded credit based upon a 100-minute hour. 16

Pacific Northwest Tax School Answer Form 1 Correspondence Course Student Homework Student Name: Course Name: CTEC Ethics (Ver. 11.8.11) Date Submitted: Question # Student Answer Question # Student Answer 1 2 3 4 5 6 7 8 9 10 11 12 13 Instructions: Enter your name at the top of this answer sheet. In the space provided, enter the amount from the finished tax return you prepared that corresponds to the questions on your Homework assignment. Email this completed answer form to: pnwtaxschool@aol.com, or Fax this completed answer form to: 503-350-0265 17