Module 3 TAX PRACTICE, PROCEDURES, & PROFESSIONAL RESPONSIBILITIES

1. Module 3TAX PRACTICE, PROCEDURES, & PROFESSIONAL RESPONSIBILITIES

2. Tax Practice Key Learning Objectives • Considered practicing law • Three separate areas • Compliance • Research • Planning

3. Tax Compliance • Complying with rules, laws, and regulations • Preparation of a tax return • Preparer--anyone compensated for preparing return/claim for refund

4. Tax Research/Planning • Tax research • Use of primary and secondary tax authorities to answer a tax-related question • Tax planning • Structuring a prospective transaction • Both require complying with rules, laws, and regulations

5. Professional Responsibilities Key Learning Objectives • IRS Code and regulations • Standards of practice • Statement on Responsibilities in Tax Practice

6. IRS Code & Regulations • §7701(a)(36) defines income tax preparer • §§6694-6696 imposes money penalties on preparer • Related regulations provide more information • §7206 provides penalties for fraud--includes jail time

7. Standards of Practice--Lawyers, CPAs, Enrolled Agents • Circular 230 • Issued by U. S. Treasury Department • Violations can cause being barred from practice (representing clients with IRS) • Does not apply to • Preparation of tax returns & • Responding to IRS notices

8. Circular 230--Realistic Possibility • Minimum standard of authority required • 1 in 3 chance would be sustained by IRS • Other, non-frivolous, positions must be fully disclosed on tax return • Penalties may be imposed on taxpayer • Form 8275

9. Penalties Key Learning Objectives • Tax preparer penalties • Taxpayer penalties

10. Tax Preparer Penalties • Based on understatement of tax liability • $250--failure to follow realistic possibility standard • $1,000--willful attempt to understate or reckless/intentional disregard of rules • Possible defense--good faith/reasonable cause • Other penalties--administrative issues

11. Taxpayer Penalties--Accuracy related understatement • Penalty = 20% of understatement, if • Substantial understatement of tax liability • Substantial overstatement of pension liability • Negligence/disregard of rules • Substantial valuation misstatement for • Income tax • Gift or estate tax • If fraud, penalty = 75% of related underpayment

12. Taxpayer Penalties--Accuracy related understatement • Negligence-- • Lack of reasonable attempt to comply • Disregard of rules-- • Careless, reckless, intentional • Substantial understatement of tax liability • > $5,000 or 10% of tax required to be shown • >$10,000 for most regular corporations

13. Avoiding Substantial Underpayment Penalty • The penalty does not apply if the taxpayer's position had • Substantial authority OR • A reasonable basis and was adequately disclosed.

14. Reasonable Basis forAvoiding Substantial Underpayment Penalty Minimum standard--arguable, but fairly unlikely to prevail in court • Significantly higher than • “Not patently improper" • “Not frivolous" • More than merely arguable • Disclosure also required

15. Substantial Authority forAvoiding Substantial Underpayment Penalty • Objective standard involving an analysis of the law and application of the law to relevant facts • The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority • Disclosure not required, but retain contemporaneous written documentation

16. Research Query: Substantial Authority • What types of authority constitute “substantial authority” under §6662(d)(2)(B)(i)? • See • Reg § 1.6662-4(d)(3)(iii) • Notice 90-20, Sec. V(A), 1990-1 CB 328 • H Rept No. 101-247 (PL 101-239) p.1389-90

17. Solution--Research Query: Substantial Authority • The Code and other statutes • Final and temporary regulations • Proposed regulations not yet superseded • Federal Court cases • Revenue rulings and procedures • Tax treaties, plus IRS and other official explanations of such treaties...

18. Solution--Research Query: Substantial Authority • Congressional intent as reflected in • Committee reports • Joint explanatory statements of managers included in conference committee reports • Floor statements made before enactment by one of a bill's managers

19. Solution--Research Query: Substantial Authority • After public release, the following become substantial authority • if dated after Dec. 31, 1984 • Private letter rulings • Technical advice memoranda • Actions on decisions • General counsel memoranda

20. Solution--Research Query: More Substantial Authority • Internal Revenue Service information or press releases • Notices, announcements and other administrative pronouncements published by IRS in the Internal Revenue Bulletin • "Blue books," i.e..., General explanations of tax legislation prepared by the Joint Committee on Taxation

21. Statement on Responsibilities in Tax Practice--Advisory Only Eight Separate Standards • SRTP 1: Follows Circular 230 disclosure rules • SRTP 2: Some general questions on return can be disregarded for cause • SRTP 3: Need not audit information • must use knowledge and investigate if information appears incorrect/incomplete

22. Statement on Responsibilities in Tax Practice--Advisory Only • SRTP 4: Materiality not defense • can use reasonable estimates if disclosed • SRTP 5: Each year stands alone • unless consistency agreed to in closing agreement • SRTP 6: Error on prior return • inform client only, not IRS

23. Statement on Responsibilities in Tax Practice--Advisory Only • SRTP 7: Error discovered during audit • advise client to disclose • SRTP 8: Communicate important advice in writing • advice is subject to professional judgment

24. Other Procedural Issues Key Learning Objectives • Engagement letters • Legal liability • IRS audit procedures

25. Other Procedural Issues--Engagement Letters • Defines scope of work to be performed • Helps to limit liability exposure

26. Other Procedural Issues--Legal Liability • Professional negligence • Improper statement of tax liability • Communication/documentation important • Make it clear that return position might be challenged • Make it clear that additional taxes & penalties could be assessed • if IRS wins

27. Other Procedural Issues--IRS Audit Procedures • Taxpayer Compliance Measurement Program Discriminant Income Function (DIF) score • Correspondence examination--by mail • Interview examination--tax auditor • Field examination--revenue agent

28. Compliance Query: SRTP 6 • What steps should a CPA take if a significant error is discovered on a client’s previously filed return? • See SRTP 6

29. Solution--Compliance Query • Inform the client immediately • Do not inform the IRS • Recommend corrective measures • Consider withdrawing from the engagement if corrective measures are not taken SRTP #6

30. Ethics Query... • A tax preparer can avoid the $250 understatement penalty by meeting the “realistic possibility” standard • A taxpayer can avoid the 20% substantial understatement accuracy penalty by meeting the “substantial authority” standard • “Substantial authority” is a higher standard than the “realistic possibility” standard...

31. Ethics Query--continued • Discuss the following: Is it ethical for a preparer to take a return position that meets the “realistic possibility” standard but does not meet the “substantial authority” standard?