Ethical Guidelines for Tax Practitioners in 2016

1. EthicsChapter 1 pp. 1-32 2016 National Income Tax Workbook™

2. p. 1 Introduction • Due diligence • Unauthorized practice of law • Engagement letters • Conflicts of interest • Protecting sensitive electronic data • Case studies

3. p. 2 Due Diligence • Potential $500 ($510 in 2016) penalty for failure • Preparer and/or preparer’s firm • Earned income tax credit (EITC) • Beginning 2016 (PATH Act of 2015) • Child tax credit (CTC) • American opportunity tax credit (AOTC)

4. pp. 3-4 Due Diligence – Form 8867 • Use is mandatory • Reduces errors • Required to be filed with return • Electronically by signing preparer • Provide to taxpayer to file • Nonsigning provide to signing preparer to file • 2016 revision includes CTC & AOTC

5. p. 5 Due Diligence • Worksheet • Must document basis for credit computation • Knowledge of preparer – position based on: • Current and reasonable information • From taxpayer or known by preparer • Inquire if incorrect, inconsistent, or incomplete • Document all inquiries and responses

6. p. 5 Due Diligence • Example 1.1: Incorrect Information • 22-year old • Wants to claim sons age 10 and 12 for CTC • Example 1.2: Inconsistent Information • 18-year old, infant daughter, $3,000 earned • Lives with parents part of the year • Wants to claim daughter and EITC

7. p. 5 Due Diligence • Example 1.3: Incomplete Information • Two qualifying children • Wants to claim EITC • $10,000 Schedule C income but no expenses

8. p. 6 Due Diligence • Retention of Records: • Completed Form 8867 • Completed EITC worksheet/other record • Records of how/when info used obtained • Identity of provider • Copy of any documents provided

9. p. 6Employing Firm Liability for Penalty • Principal management/officers participated in failure to comply, • Principal management/officers knew of failure to comply prior to return filing, • Failed to establish reasonable & appropriate procedures to ensure compliance, or • Firm disregarded compliance procedures by willfulness, recklessness, or gross indifference

10. pp. 6-7 Penalties and Waivers • Penalty letter issued to preparer • 30-days to request Appeals Office hearing • Waiver of penalty by IRS if: • Preparer establishes that reasonable procedures to comply routinely followed and • Instance of failure to meet due diligence was isolated and inadvertent • Waiver does not apply to a firm

11. p. 7 Unauthorized Practice of Law • Tax advice or legal advice? • Nonattorneys cannot give legal advice • Circular 230 • State law • Determination needed: • Does the activity = practice of law? • Is activity authorized even if = practice of law?

12. p. 7Practice of Law - Examples • Drafting corporation/legal documents • Interpreting laws/giving advice on those laws • Advising: immigration/bankruptcy matters • Representation in certain venues • Correspondence to dispute client’s debt • Representing in resolution of debts • Arbitration, mediation, etc. for profit

13. pp. 7-8 What is “Practice of Law”? • Difficult question of law test • Difficult or doubtful legal questions • Reasonably demands trained legal mind • Commonly understood test • Acts customarily carried on by lawyers Some practice of law activities o.k. for nonattorney

14. p. 8Representation - IRS – Circular 230 • CPA and enrolled agents • Prepare documents • File documents • Correspond/communicate with IRS • Render written advice: entity, transaction, plan, or arrangement w/potential tax issue • Represent in conferences, hearings, meetings

15. p. 8Representation - IRS – Circular 230 • Annual Filing Season Program (AFSP) • Limited practice rights • Prepare tax returns or claims for refund • Represent before revenue agents, customer service reps, TAS, or similar if prepared and signed return or claim in question • Cannot represent before revenue officers, appeals officers, counsel or similar

16. p. 8Representation – Tax Court • Tax Court Rule 200 • Some nonattorneys may practice before court • Must pass written examination

17. p. 8Tax Advice – Circular 230 • Establish the facts • Determine which facts are relevant • Evaluate reasonableness of assumptions • Relate applicable law to facts • Arrive at conclusion supported by law/facts • Advise client on effect of conclusion

18. pp. 8-9Written Advice – Circular 230 • Authorized for federal tax matters • Matter involving application/interpretation of • Revenue provision • Any provision impacting person’s obligations under Code and regs • Any law or regulation administered by IRS

19. p. 9 Engagement Letters • Minimize risk of professional liability • Improve collections • Ensure clients understand practitioner’s legal and ethical responsibilities • Help to fulfill Circular 230 requirement for procedures in place for ethical compliance • 8 key items to include

20. p. 9 Engagement Letters • Identity of client • Scope of work • Duty to furnish information • Deadline for submitting information • Reliance on information • Tax position clauses • Stop-work provisions • Payment terms

21. p. 9 Engagement Letters • Identity of client • Helps assess/avoid conflicts of interest • Scope of Work • Which returns (w/year) being prepared • Identify services not to be performed • Audit representation is separate letter • Identify when engagement concluded

22. p. 10 Engagement Letters • Duty to Furnish Information • Description of all info client to supply • Fulfills obligation to gather relevant facts • May detail specific data sources • May specify format of the data

23. p. 10 Engagement Letters • Deadline for Submitting Information • Specify date for all items from client • Detail consequences of missing date

24. p. 10 Engagement Letters • Reliance on Information • Affirmatively state client responsibility for complete and accurate information • State preparer will rely on client’s information • State preparer not obligated to verify records/detect fraud or malfeasance

25. p. 10 Engagement Letters • Tax Position Clauses • State that tax positions must satisfy professional standards

26. pp. 10-11 Engagement Letters • Stop-Work Provisions • Failure to pay fees • If conflict of interest arises • Client fails to provide information • Client refuses to take advice • Client insists on frivolous position • Client asks for unethical action

27. pp. 10-13 Engagement Letters • Payments Terms • Show formula for computing fees • Timing of billing & payment dates • Late payment interest provisions • Dispute resolution methods • Terms of any retainer • Other charges/expense reimbursements Sample Engagement Letter – pp. 11-13

28. p. 13 Conflicts of Interest • May not represent if conflict of interest • Conflict exists if representation of client • Is directly adverse to another client • Is materially limited by responsibilities to another client, former client, third person, or by personal interest of practitioner

29. p. 13 Conflicts of Interest • May represent client if: • Reasonably believes competent and diligent representation of both possible • Representation not prohibited by law • Each affected client waives the conflict, gives informed consent, confirms in writing within 30 days of consent

30. p. 14 Conflicts of Interest When considering new client: • Identify possible conflicts of interest • Evaluate to determine if waiver possible • Disclose the conflict and obtain informed consent

31. p. 14 Identify Conflicts of Interest • Identify parties involved • Review their relevant interests and relationships • Review scope of services and implication for parties involved • Common scenarios - p. 14

32. p. 14 Evaluate Conflict of Interest • Can competent and diligent representation be provided to each? • If duties to one impedes duty to other, must discontinue services that cause conflict If duties to one do not impede duty to other, disclose to parties involved and obtain informed written consent

33. pp. 14-15 Conflict of Interest Waiver • Identify client • Describe proposed engagement • Clearly identify potential/actual conflict • Detail why representation can proceed • Each aware of conflict/wants representation • Representation terminated if limits arise Sample Conflict of Interest Waiver – p. 15

34. p. 16 Protecting Sensitive Data Penalties for tax return preparer • § 7216 – misdemeanor criminal penalty • Knowingly or recklessly discloses information provided for return prep • Use of any such information for purpose other than return prep • § 6713 – civil penalty for same

35. p. 16 Who is a Return Preparer ? • In business or hold themselves out as preparers • Compensated casual preparers Example 1.4 – Return Preparers Employees of a return preparer who solicit information for return, prepare the return, type information into computer, file return

36. p. 16 Who is a Return Preparer ? Example 1.5 – Not Return Preparers • Return preparer rents space in store • Store advertises preparer business • Clients use store card to pay prep fees • Store is not a return preparer

37. pp. 16-17 Consent to Disclosure • If disclosure not specifically authorized, secure advance signed consent • Disclosures allowed w/o consent • To IRS and other taxing jurisdictions • To the courts • To others assisting in the return prep • For purposes of obtaining legal advice

38. p. 17 Suspicious/Fraudulent Return • May analyze return info for statistical compilation to identify potentially fraudulent behavior or patterns of conduct • If identifies potentially fraudulent return or pattern of conduct – may notify IRS/State • May disclose return info in relation to violation of any criminal law NOTE: Consider duties to client first

39. p. 17Disclosure – Related Taxpayers • In prep of return, may use and disclose in form in which it appears on the return any tax return information of other T/P if: • Taxpayers are related, • No adverse interests, and • Other taxpayer has not expressly prohibited disclosure

40. p. 17Disclosure – Related Taxpayers • Husband and wife • Child and parent • Grandchild and grandparent • Partner and partnership • Trust or estate and beneficiary/fiduciary • Corporation and shareholder • Members of controlled group - § 1563

41. p. 17 E-File Security & Privacy • Rev. Proc 2007-40 • Violations of other disclosure laws = violation of Rev. Proc. 2007-40 • Gramm-Leach-Biley Act, §§ 6713, 7216 • Reprimand, suspension, expulsion • Requires • Systems to prevent unauthorized access • Compliance with IRS pubs/notices

42. pp. 17-18 Publication 1345 Standards For online providers of 1040’s • Valid and current Extended Validation SSL certificate • Contract with independent 3rd party for weekly external vulnerability scans • Report security incidents to IRS ASAP

43. p. 18 Publication 1345 Standards Provider who owns/operates a website also: • Written info privacy & safeguard policies, & must display license/accreditation seal from IRS acceptable vendor • Effective technologies to protect from bulk filing of fraudulent returns • Domain name registered w/in US & accredited by ICANN

44. p. 18 Duty to Give Privacy Notices FTC Financial Rule applies to preparers Privacy Notice • CPA - not required to send • EA or other tax practitioner - must adopt a privacy policy and make available to clients

45. p. 18Duty to Safeguard Customer Info • FTC standards apply to anyone in business of completing income tax returns • Security program • Must be written in readily accessible parts • Appropriate administrative, technical, and physical safeguards

46. p. 18Security Program Objectives • Ensure security and confidentiality of customer information • Protect against anticipated threats to security or integrity of information • Protect against unauthorized access to or use of information

47. p. 19Security Program Requirements • Employee(s) designated to coordinate • Conduct risk assessment of program • Information safeguards to control risks identified • Oversee service providers • Evaluate and adjust program as needed

48. pp. 19-21 Information Security Program • Program must be written • Safeguards required to be included: • Facilities security (p. 19) • Personnel security (p. 20) • Information systems security (p. 20) • Computer systems security (p. 20) • Media security (p. 21) • Certifying info systems for use (p. 21)

49. pp. 21-22 Reporting Incidents - State • Security breach notification laws in most states • May apply to business within a state or business dealing with data of a state resident • Security breach: Unauthorized access that compromises personal information security, confidentiality, or integrity with loss, harm, injury • Personal Information: Name along with one or more data elements • Disclosure required w/o unreasonable delay

50. p. 22 Reporting Incidents - IRS • Immediate notice to designated individual who will gather information of incident • If person’s identity or financial information compromised, notify appropriate law enforcement and/or agency • FTC publication: “Information Compromise and the Risk of Identify Theft: Guidance for your Business”