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Ethics, Part 1 Chapter 1 pp. 1-38

Ethics, Part 1 Chapter 1 pp. 1-38. 2017 National Income Tax Workbook™. p. 1 Introduction . Confidentiality and Privilege Disclosure to Contractors Confidentiality and Misdeeds Sale, Transfer, or Discontinuance of a Tax Practice Case studies.

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Ethics, Part 1 Chapter 1 pp. 1-38

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  1. Ethics, Part 1Chapter 1 pp. 1-38 2017 National Income Tax Workbook™

  2. p. 1 Introduction • Confidentiality and Privilege • Disclosure to Contractors • Confidentiality and Misdeeds • Sale, Transfer, or Discontinuance of a Tax Practice • Case studies

  3. p. 2Confidentiality and Privilege Confidentiality is duty to protect client info from disclosure to third parties vs. Privilege is right to prevent other persons from disclosing confidential info

  4. pp. 2-3 Confidentiality I.R.C. § 7216 Tax return preparers cannot disclose tax return information Limited exceptions for: • Disclosure to IRS • Disclosure to prep return • Disclosure per court order, etc.

  5. p. 4 Confidentiality State Confidentiality Laws • Accountants cannot disclose confidential client communication • Limited exceptions for: • Professional obligations • Subpoena, etc.

  6. pp. 4-5Required Disclosures • Circular 230: Information requests from the IRS • IRS Summons • Produce books and records • Give testimony

  7. p. 5 Privilege IRS cannot compel privileged communication Even with a summons

  8. pp. 6-7 Sources of Privilege • I.R.C. § 7525 • State privilege law • Attorney-client communications

  9. p. 6Section 7525 • Applies only to authorized persons (CPAs, attorneys, enrolled agents, enrolled actuaries) • Applies only to tax advice (not business or financial advice) • Applies only in noncriminal proceeding

  10. pp. 6-7 State Privilege Laws • Apply only to licensed CPAs • Apply only in state proceedings (not IRS or federal)

  11. pp. 7-8 Attorney Client Privilege US v. Kovel Extends attorney client privilege to someone attorney retained to provide accounting-related services

  12. p. 7Kovel Privilege • Accountant is like translator of foreign language. Must interpret books and records so the attorney can understand the facts • Does not protect communication re tax return preparation

  13. p. 8 Invoking the Kovel Privilege • Attorney, not the client, hired the accountant • Separate written agreement between the attorney and the accountant • Accountant billed separately for the Kovelmatter and kept the files for the Kovelmatter segregated from other accounting work • Accountant was necessary, or at least highly useful, for the effective consultation between the client and the lawyer

  14. p. 9Work Product Doctrine Protects documents prepared by tax practitioner if • Attorney contacts, engages, and pays • Documents prepared for attorney in anticipation of litigation

  15. pp. 9-10 Disclosure to Contractors • Section 7216 tax practitioner nondisclosure • AICPA Confidential Client Information Rule Demonstrate that safeguards were applied that eliminated or reduced significant threats of unauthorized disclosure to an acceptable level

  16. pp. 10-11Confidentiality Agreement • Required for certain software and equipment service providers • Advisable for all other contract workers

  17. pp. 12-15 Confidentiality and Misdeeds • Errors • Omissions • Fraud • Criminal Conduct What should the tax practitioner do?

  18. pp. 12-13 Errors and Omissions • Circular 230: Must advise client if practitioner finds error, omission, noncompliance and must advise re consequences of noncompliance • AICPA SSTS 6: Inform of error, advise of consequences, recommend corrective measures

  19. pp. 13-14 Fraud or Criminal Activity • State law – allowed to report • AICPA SSTS 6 – advise to consult atty. • IESB • Gain an understanding • Discuss with management • Assess appropriateness of response • Document response

  20. pp. 14-15Fraud or Criminal Activity Cont. IFAC Code of Ethics Remain confidential unless a “professional right or duty to disclose” Consider: • Interests of parties, harm of disclosure • Whether info is known and substantiated • Type of expected communication • Communication to appropriate recipients

  21. pp. 15-22Sale, Transfer, Discontinuance of Tax Practice • Confidentiality • Client notification and consent to transfer records • Record retention • Closing out IRS authorities

  22. pp. 15-16 Confidentiality AICPA: Okay to disclose if written confidentiality agreement State Law: Many states allow disclosure Section 7216: Disclose list of limited information in conjunction with sale

  23. pp. 16-18 Nondisclosure Agreement Key Terms • No disclosure of discussions between the buyer and the seller • No disclosure and use of any client or tax practice info provided • Return or destroy info provided • No solicitation of clients • No solicitation of employees

  24. pp. 19-20Notification and Consent to Transfer Records • Entity sale: no duty to notify or get consent but still should • Asset sale: notify and get consent to transfer • Discontinuance: notify and return records

  25. pp. 20-22Record Retention Seek assurance that the buyer or other transferee will maintain client files in compliance with applicable record retention requirements

  26. p. 22Closing Out IRS Authorities Deceased practitioner • No need to notify re PTIN • Written request to close out CAF • Written request to close out EIN • Contact e-Help to close out EFIN

  27. pp. 23-26Case Studies Case Studies 1-10

  28. p. 23Case Study 1 Confidential Client Communication Tax practitioner Maria Worthy provides Tech Co. with information about corporate restructuring, purchase and sale transactions, and tax return positions Attorney involved to draft agreements Banker involved to finance transactions

  29. p. 23Case Study 1 Cont. IRS audits the return and calls Maria to ask questions about Tech Co. deductions • Are communications exchanged between Tech Co. and Maria confidential? • Must Maria disclose info to the IRS? • What should Maria do before she discloses info? • If she must obtain consent from Tech Co., what should Maria do if it refuses to consent?

  30. pp. 26-27Case Study 1 Response • Confidential under section 7216 (with exceptions) and confidential under state accountancy statutes • Ethical obligation to disclose to IRS unless privileged • Section 7525 if Maria is authorized practitioner • Likely no attorney client privilege

  31. pp. 26-27Case Study 1 Response Cont. • Notify client and try to get consent to disclose • Will disclosure violate duty of due care? Duty to be free from conflict of interest? Should Maria withdraw?

  32. p. 23Case Study 2 Outsourcing and Nondisclosure • GPG in RI preps returns for Timothy • GPG calculates amounts then forwards the return to tax processers in CT to input data • GPG files the return

  33. p. 23Case Study 2 Cont. • Is GPG required to obtain Timothy’s consent to send the tax information to the processer? • What if the processer gives her advice on whether Timothy may claim a deduction for his home office? • What if the tax processor is located overseas?

  34. p. 27Case Study 2 Response • If processer not making substantive determinations, no need for consent to disclose (but check state law and prof. standard) • Substantive determinations need consent • Need consent to disclose outside US and may have to redact SSN

  35. pp. 23-24 Case Study 3 Data Protection and Confidentiality Bank and Associates hires a temp worker to help program and maintain accounting firm’s computers and software B&A trains the worker on systems and software Worker quit. B&A clients getting solicitations

  36. pp. 23-24 Case Study 3 Cont. • Has B&A violated the ethical rule of confidentiality or any other rules? • What should B&A have done to prevent this outcome? • Must B&A report the breach?

  37. pp. 27-28 Case Study 3 Response • By sharing confidential info without a nondisclosure agreement or other safeguards, B&A likely violated section 7216 • B&A should have required Todd sign a confidentiality and nondisclosure agreement • If material risk of harm, loss, or injury, must report the breach to clients

  38. p. 24 Case Study 4 Sale of a Tax Practice Arthur Davis is thinking about selling Davis Tax Prep and retiring Arthur meets Kaitlyn at a CPE and begins negotiations for the sale Arthur gives Kaitlyn business financials, and a client list, which includes clients’ average yearly income Kaitlyn opens her own firm and solicits Arthur’s clients and employees

  39. p. 24 Case Study 4 Cont. • Did Arthur violate any ethical or legal duties by sharing information with Kaitlyn? • What should Arthur have done to prevent this outcome?

  40. p. 28 Case Study 4 Response • Arthur can transfer a list of the names, mailing addresses, e-mail addresses, phone numbers, taxpayer entity classifications, and income tax return form numbers, NOT income • Get Kaitlyn to sign an NDA (sample NDA on pp. 16-18)

  41. p. 24 Case Study 5 Errors and Omissions Corey’s Tax Service prepped 14, 15, and 16 returns for LLC and LLC owner Corey went to a tax class and learned about the DPAD. Corey realizes the LLC could have claimed the DPAD but did not. Also made a mistake on 16 that will affect 17

  42. p. 25 Case Study 5 Cont. • Call the mistakes to Shannon’s attention? • Must Shannon file an amended return? • What if she refuses to file an amended return? • Are the mistakes significant, and how does that affect Corey’s course of action? • Does acknowledgment concede malpractice? • What should Corey do on the 2017 return?

  43. pp. 28-29 Case Study 5 Response • Circular 230 § 10.21, promptly notify the client and advise the client to file an amended return • Shannon ultimately decides • Can’t file inaccurate return, consider withdrawing • Likely significant, regardless must notify and advise

  44. p. 29Case Study 5 Response Cont. • Amend return, stop interest and penalties, mitigate liability exposure • Cannot repeat error, if won’t amend consider withdrawing

  45. Case Study 6 p. 25 Fraud and Privilege Top executive Susan Storm under audit Asked JTS Tax Service to review returns JTS found Susan underreported 5M over 3 years Susan does not seem surprised

  46. Case Study 6 Cont. p. 25 • What obligation, if any, does JTS have to report the underreporting to the IRS? • How can JTS take steps to ensure that its communications with Susan are privileged?

  47. Case Study 6 Response pp. 29-30 • Susan’s conduct may be fraudulent, but no duty to disclose and may be privileged • Recommend that Susan hire an attorney and have the attorney engage JTS • Start a privilege log • Direct communication with attorneys • Mark documents “privileged”

  48. p. 25Case Study 7 Due Diligence Kelly’s Accounting does tax prep. for Fargo Brothers Partnership every year Fargo completes a POA - just in case Kelly gathers income and expense info over the phone Fargo always has mfr.income, but none reported this year

  49. p. 25 Case Study 7 Cont. • Duty to ask about additional income or request written copies of Forms 1099? • Can rely on assurance that no income? • Use POA to get a transcript? • Are there any other steps that Kelly should take?

  50. p. 30 Case Study 7 Response • May rely in good faith, without verification, on info furnished verbally but due diligence to determine the correctness • Must make reasonable inquiries if the info furnished appears to be incorrect, inconsistent • Penalties for understatement – recommend get transcript • Document inquiries and responses

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