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Elements of Taxation

Elements of Taxation. Elements of Tax Practice. Elements of Tax Practice. Tax compliance Gathering of pertinent information, evaluation Evaluating and classifying the information Filing of necessary tax returns Representing clients before the IRS during tax return audits Tax planning

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Elements of Taxation

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  1. Elements of Taxation

  2. Elements of Tax Practice

  3. Elements of Tax Practice • Tax compliance • Gathering of pertinent information, evaluation • Evaluating and classifying the information • Filing of necessary tax returns • Representing clients before the IRS during tax return audits • Tax planning • Arranging transactions to optimize (usually minimize) tax liability • tax avoidance – legitimate • tax evasion – illegal • Planning undertaken for • open transactions – plan for pending future transactions • closed transactions – plan for how to best present past transactions

  4. Elements of Tax Practice • Tax litigation • Settling disputes with the IRS in court • Attorneys usually handle litigation beyond initial appeal of an IRS audit • Tax research • Analyze and determine answers to tax problems • Steps: • Identify issues • Determine proper authorities • Evaluate appropriateness of authorities • Apply authority to specific fact situation

  5. Sources of Rules and Ethics for Tax Practitioners

  6. Who May Practice • “Practice” before IRS • Represent clients during audits • Who may practice • Attorneys • CPAs • Enrolled agents • Enrolled = passed IRS exam or formerly employed by IRS for 5 years • Enrolled actuaries • Limited practice without enrollment

  7. Proposed Requirements for Tax Return Preparers • Tax Return Preparers • Must register with IRS, pay a fee, and obtain a preparer tax identification number (PTIN) • Pass competency tests • Continue education 15 hours per year • Subject to tax compliance checks • Must follow Circular 230 ethics standards

  8. Practice Before the IRS (Circ. 230) • Circular 230 subpart B provides a set of rules of conduct, which includes: • Must furnish information to the IRS on request • If have knowledge of client’s omission, must advise client of both error and remedy • Exercise due diligence • Must not unreasonably delay matters before the IRS • May not act as a notary public for clients • May not charge contingent or unconscionable fees • Must promptly return all client records upon request (but may keep copies of client records)

  9. Solicitation and Advertising (Circ. 230) • Most media permissible • Cannot contain false, fraudulent, coercive, or unfair statements • Must comply with ethical standards of other authorities (e.g., ABA, AICPA, State CPA societies, state regulatory agencies, National Association of Enrolled Agents, etc.)

  10. Best Practices (Circ. 230) • Aspirational standards to help tax advisors provide clients with the highest quality representation concerning Federal tax issues. Standards address: • Communications with clients • Establishing relevant facts • Evaluating reasonableness of assumptions • Relating the law to the facts • Arriving at supported conclusions • Advising clients of the conclusions • Acting fairly and with integrity before the IRS

  11. Positions and Covered Opinions (Circ.230) • A practitioner should not recommend a position unless the position has a more-likely-than-not possibility of being sustained on its merits • Strict standards for written communication encompassing a covered opinion • A “covered opinion” is written advice that concerns • A tax avoidance transaction • A transaction where the principal purpose is tax avoidance or tax evasion • Reliance or marketed opinion • A transaction subject to confidentiality provisions • A transaction subject to contractual protection

  12. Other Written Advice (Circ. 230) • A practitioner should not give written advice that: • is based on unreasonable factual or legal assumptions (including assumptions as to future events • unreasonably relies upon representations, statements, findings or agreements of the taxpayer or any other person • does not consider all relevant facts that the practitioner knows or should know • takes into account the possibility that the return will not be audited, that the issue will not be raised in an audit, or that an issue will be resolved through settlement if raised

  13. AICPA Code of Professional Conduct • Governs AICPA members • All services provided by CPAs • Purpose is to provide: • Enforceable comprehensive code of ethical and professional conduct • Guide for members in answering complex questions • Assurance to the public • Other guidance comes in the form of: • Interpretation of the rules • Ethics rulings • Ethics features • Departures from this Code must be justified

  14. AICPA Code of Professional Conduct • Independence (Rule 101) • A CPA in public practice must be independent of enterprise for which services are being provided • Independence is impaired if certain financial relationships exist with a client, e.g.: • Direct or material financial interest in client’s business • Jointly held material investments • Loans to or from the client • Officer, director, employee or underwriter of the client • Integrity and objectivity (Rule 102) • Services must be provided with objectivity and integrity and avoid conflicts of interest

  15. AICPA Code of Professional Conduct • General standards (Rule 201) • Competence • Due professional care • Adequate planning and supervision • Obtain sufficient relevant data for conclusions or recommendations • Compliance with standards (Rule 202) and accounting principles (Rule 203) • No departures unless departure is described, its effect is described, and justification for departure is disclosed • Confidential client information (Rule 301) • No disclosure without client consent • Exceptions: • Conflict with rules 202 and 203 • CPA served with subpoena or summons

  16. AICPA - Code of Conduct • Contingent fees (Rule 302) • Fees must not be contingent on findings of services (e.g., type of audit opinion) • Acts discreditable (Rule 501) • Committing a felony • Failing to return client records after a client request • Signing a false concern • Issuing a misleading audit opinion • Advertising and solicitation (Rule 502) • Cannot use false, misleading, or deceptive advertising/solicitation

  17. AICPA - Code of Conduct • Commissions and referral fees (Rule 503) • Cannot receive a payment for referral of a product or service of a third party to a client • Accepting payment would create conflict of interest • Exception: A CPA performing only tax work or other nonaudit work may accept a commission • Form of organization and name (Rule 505) • Form • Only those forms allowed by state law or regulation, usually a proprietorship, partnership,or professional corporation • Name • Cannot use misleading name • Acceptable to use past owners’ names

  18. Statements on Standards for Tax Services • Statements on Standards for Tax Services (SSTS) issued by AICPA intended to: • Address problems inherent in the tax practitioner’s dual role in serving the client and the public • Supplement AICPA Code of Professional Conduct and Circular 230

  19. Statements on Standards for Tax Services • Tax return positions (SSTS 1) • Should have good-faith belief that position has a realistic possibility of being sustained • Answers to questions on returns (SSTS 2) • Reasonable effort to obtain information to answer all questions • Exceptions: • Data not readily available and not significant to the outcome of return • Meaning of question uncertain • Answer too voluminous • Not acceptable on Form 1120 • Certain procedural aspects of preparing returns (SSTS 3) • May rely on client information without verification unless information appears to be incorrect, incomplete, inconsistent • Not required to examine supporting documents

  20. Statements on Standards for Tax Services • Use of estimates (SSTS 4) • Use estimates if impractical to obtain exact data and if estimates appear reasonable • Disclosure of estimates may be necessary: • Records destroyed by disaster • K-1’s not received • Departure from a position previously concluded in an administrative proceeding or court decision (SSTS 5) • Prior year disposition may not prevent recommending a different treatment of a similar item in a later year • CPA and IRS not bound to act consistently with previous position, IRS usually is consistent, however

  21. Statements on Standards for Tax Services • Knowledge of error (SSTS 6) • Must inform client upon discovery of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return • Must recommend appropriate action • Not the CPA’s duty to inform tax authority • Form and content of advice to clients (SSTS 8) • Judgment reflects professional competence • Use written communication for complex matters • Oral communication okay for simple matters

  22. Sarbanes-Oxley and Taxation • Auditors may not provide certain nonaudit services to audit clients • Sarbanes-Oxley Act of 2002 lists nine such prohibited services • List does not include tax services • Services not listed may be provided • But only if approved in advance by the audit committee

  23. Nonregulatory Ethical Behavior Models • Nonregulatory ethics involve making choices that are not always clearly spelled out (resolving ethical dilemmas) • Ethical reasoning • End-based– An action is right if it produces at least as much net good as any alternative action could have produced • Rule-based – Rules are made to apply to everyone with no exceptions • “Zero Tolerance” • Care-based– Decisions based on the treatment you yourself would like to receive (Golden Rule)

  24. Sources of Ethical Behavior and Impacts

  25. Legal Research by CPAs • When does undertaking tax research become the unauthorized practice of law? • Different tests/standards across time • Shouldn’t be wholly within the field of law • Should be incidental to accounting practice • General rule: CPAs should avoid providing general legal services

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