List the various "authorities" for purposes of determining whether there is substantial authority for the income tax treatment of an item.
A, B, C, and D are primary!
A) The Internal Revenue Code and other federal statutes
B) US Treasury regulations
C) IRS revenue rulings and procedures; tax treaties, and US Treasury Department explanations of such treaties.
D) Federal court cases
E) Congressional intent set forth in committee reports, statements of managers included in conference committee reports, and bill manager's floor statements.
F) Explanations prepared by the Joint Committee on Taxation (the "Blue Book").
G) Private letter rulings and technical advice memoranda.
H) Actions on decisions and general counsel memoranda.
I) IRS info or press releases and notices, announcements, and other administrative pronouncements. ** --> not primary
What is a "listed transaction?"
The term "listed transaction" means a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the US Department of the Treasury as a tax avoidance transaction. It is legal.
What is a reportable transaction?
The term "reportable transaction" means any transaction which the Secretary of the US Treasury Department has determined as having a potential for either tax avoidance (the legal use and application of the tax laws and cases in order to reduce the amount of tax due) or tax evasion (efforts by illegal means and methods to not pay taxes).
What is the "reasonable basis" standard?
1) Reasonable basis is a relatively high standard of tax reporting and is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.
2) If a return position is reasonably based on one or more acceptable authorities, the return position will generally satisfy the reasonable basis standard even though the position may not satisfy the substantial authority standard.
What is the "substantial authority" standard?
1) An ojective standard involving application of the law to relevant facts; less stringent than the "more likely than not" standard.
2) Substantial authority exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment.
3) There is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a US Court of Appeals to which the taxpayer has a right of appeal with respect to the item.
4) The taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant.
What is a tax shelter?
1) partnership or other entity
2) Investment plan or arrangement
3) Other plan or arrangement if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax.
List the various penalties the IRS can impose on a tax return preparer (not the payer) who understates the taxpayer's income tax liability.
1) Penalty for Understatement of Taxpayer's Liability Due to an Unreasonable Position by the Tax Return Preparer.
2) Penalty for Understatement of Taxpayer's Liability Due to Willful or Reckless Conduct of the Tax Return Preparer.
- preparer is not required to obtain supporting documentation unless the preparer has reason to suspect the accuracy of the info provided by the taxpayer.
- however, the preparer must make reasonable inquiries if the info provided by the taxpayer appears incorrect or incomplete
3) Penalty for Aiding and Abetting Understatement of Tax.
- this penalty applies to any person, not just preparers
- the IRS has the burden of proof
List the paid income tax preparer's responsibilities to the client and to the IRS.
1) Provide client a completed copy of tax return.
2) Sign tax return or refund claim.
3) Indicate on return or refund claim the tax ID number of the tax preparer.
4) Retain tax return records (copies or lists) properly and for at least 3 years.
5) Filing with the IRS the yearly info returns regarding other tax return preparers employed by the return preparer.
6) Not negotiating the client's IRS refund check.
7) Diligently determining the client's eligibility for the earned income credit.
8) Not disclosing, except as permitted by law, client tax return info.
9) Not using, except as permitted by law, client tax return info for any purpose other than to prepare a tax return.
10) Wrongful disclosure and/or Use of tax return information
List the exceptions to the penalty and/or fine for wrongful disclosure and/or wrongful use of tax return info.
1) Disclosures allowed by any provision of the IRC and disclosures pursuant to a court order (subpoena).
2) Use in preparing state and local tax returns and declaration of estimated tax.
3) Disclosures and uses permitted by US Treasury regulations (disclosure and use for quality and peer reviews, computer processing, and administrative orders).
- SEC audit, GAAP, GAAS
4) Consent of the client.
What is Circular 230?
Circular 230 is an IRS publication containing the US Treasury regulations governing:
- the authority of a tax practitioner to practice before the IRS,
- the duties and restrictions relating to practice before the IRS,
- the sanctions for violation of the regulations,
- and the rules applicable to IRS disciplinary proceedings.
Practitioners include: attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers.
Under the situations before the IRS may a tax practitioner charge a contingent fee?
A) IRS examination (audit)
B) Claim solely for a refund of interest and/or penalties
C) A judicial proceeding arising under the Internal Revenue Code.
(These are the only situations before the IRS when a tax practitioner may charge a contingent fee.)
If a conflict of interest exists, under what circumstances may a tax practitioner represent the clients for which there is a conflict of interest?
The practitioner may represent both (all) clients if:
1) The practitioner reasonably believes that she/he can competently represent the clients
2) No state or federal law prohibits such representation
3) Each affected client waives the conflict of interest and with respect to the waiver so confirms in writing within 30 days after so waiving.
What are the requirements for advertising?
1) No false or misleading advertising
2) Each solicitation must identify the solicitation as such
3) If applicable, identify the source of the info used to choose the recipient.
4) If advertising by radio and/or TV, keep for at least 36 months (3 years) a recording of the actual broadcast transmission.
5) If advertising by direct mail and/or e-commerce, keep for 36 months a copy of the communication and a listing of those to whom the communication was sent.
What are the requirements for written fee schedules?
1) If a practitioner publishes a written fee schedule, charge no more than the published fees for the 36 day period following the last date that the fees were published.
2) Any statement of fee info concerning matters in which fees may be incurred (such as fees for the practitioner's use of a tax return processor) must include a statement disclosing whether clients will be responsible for such costs.
What are the "best practices" for tax advisors?
1) Communicating with the client regarding the terms of the engagement.
2) Establishing the facts and arriving at a conclusion supported by the law and facts.
3) Advising the client about the import of the conclusion reached (for example, whether the client will be able to avoid penalties).
4) Making sure that all members, associates, and employees of the firm follow procedures that are consistent with the above.
Under what circumstances must the tax practitioner advise the client of penalties reasonably likely to apply?
1) Advised the client with respect to the position
2) Prepared or signed the tax return.
Further, the practitioner must inform the client of any penalties "reasonably likely" to apply with respect to any document submitted to the IRS.
Once the tax practitioner has informed the client of penalties reasonably likely to apply, what additional info must the practitioner provide to the client?
1) The opportunity to avoid such penalties if the client so discloses the position taken
2) The requirements for adequate disclosure.
To what extent may the tax practitioner rely upon client provided info?
1) General rule: The practitioner may rely "in good faith without verification" upon client-furnished info.
2) However, the practitioner cannot ignore contradictory info know to the practitioner
3) The practitioner must make reasonable inquires if client-furnished info appears questionable or incomplete.
Does the tax practitioner have any obligation to inform the client about the cleint's tax return errors or omissions?
1) Yes. The practitioner must advise the client promptly of any noncompliance, errors, or omissions in tax returns and other documents.
2) The practitioner must advise the client of the consequences under the law with respect to such noncompliance, errors, or omissions.
**Practitioner, however, does NOT have to notify IRS.
What is a "covered opinion?"
A covered opinion is any written or electronic advice, other than excluded advice, concerning one or more federal tax issues and arising from:
1) A tax avoidance transaction that the IRS identified in IRS publications as a listed transaction (legal), or
2) Any partnership or any other entity, plan, or arrangement whose principal purpose is federal tax avoidance or evasion (i.e. tax shelter), or
3) Any partnership or any other entity, plan, or arrangment having as a significant purpose federal tax avoidance or evasion if the advice is:
A) Reliance opinion
B) Market opinion
C) Subject to conditions of confidentiality
D) Subject to contractual protection.
What is a federal tax issue?
A question concerning
1) federal tax treatment of any item or transaction
2) value of property for federal tax purposes
What is a significant federal tax issue?
A federal tax issue:
1) the IRS has a reasonable basis for successful challenge
2) Resolution of the issue has a significant tax impact under any reasonably foreseeable circumstance.
What is a reliance opinion?
A reliance opinion is a type of covered opinion.
It is a written advice concluding at a confidence level of at least more likely than not (not greater than 50%) likelihood that the significant federal tax issue would be resolved in the taxpayer's favor. Thus avoiding penalties.
A reliance opinion does NOT include written advice, which is NOT about:
- listed transactions, or
- any partnership or any other entity, plan, or arrangement whose principal purpose is federal tax avoidance or evasion
- but only if the advice prominently discloses that it was not intended to be used, and cannot be used, to avoid any penalties.
What is a marketed opinion?
A marketed opinion is a type of covered opinion.
A marketed opinion is advice that will be used to "promote, market, or sell" a partnership, investment plan, or arrangement.
With respect to the practitioner's having procedures in place to assure compliance with Circular 230, when will the IRS institute disciplinary actions?
Failure to have these procedures in place will result in IRS disciplinary actions under either of the following:
- These procedures are not in place, and the result is a failure to comply, or
- The practitioner
- knows, or should have known, that others in the firm are not complying and
- fails to correct the noncompliance.
Who published these standards, and what are they?
The AICPA's Tax Executive Committee published the seven Statements on Standards for Tax Services. The SSTSs set forth the ethical tax practice standards for members of the AICPA.
List the sections of each standard.
Statement(often consisting of several paragraphs)
List the topics covered in the Standards.
- Tax return positions
- Answers to questions on returns
- Certain procedural aspects of preparing returns
- Use of estimates
- Departure from a position previously concluded in an administrative or court hearing
- Knowledge of error; return preparation and administrative proceedings
- Form and content of advice to taxpayers
If a tax return position does not have at least a realistic possibility of being sustained, the tax preparer may nevertheless recommend that position under what circumstances?
The tax preparer:
- concludes that there is a reasonable basis for the position, and
- advises the taxpayer to disclose appropriately that position
If a tax return relects a tax return position which the tax preparer has concluded has only a reasonable basis, under what circumstances may the preparer sign that return?
Sign the return only if that return position is appropriately disclosed.
List the levels of support from the least stringent to the most stringent
- Reasonable basis standard (least stringent)
- Realistic possibility standard
- Substantial authority standard
- More likely than not standard (most stringent)
What is the tax preparer's responsibilities with respect to answering questions on the return?
Make a reasonable effort to answer all questions on tax returns; there must be a reasonable grounds for omission of an answer.
Summarize the procedural aspects of preparing a return.
Generally, no responsibility to verify info provided by taxpayer.
However, make reasonable inquiries if the info appears to be incomplete, incorrect, or inconsistent.
Also determine whether the taxpayer
- maintains appropriate books and records when required by statute or rule, and
- possesses substantiating documentation when required by statute or rule.
Whenever possible, review one or more returns from previous years in order to obtain information concerning the taxpayer.
What is the standard regarding the tax practitioner's use of estimates?
The tax preparer may use estimates provided by the taxpayer, and disclosure of estimates is not generally required.
When can a tax practitioner depart from a position previously concluded in an administrative proceeding or in a court decision?
A tax preparer may recommend a tax position that is different from the treatment as concluded in an administrative proceeding or in a court decision with respect to a previous year's return if
- the taxpayer is not bound to a specified treatment in the later year and
- the tax return preparer follows Statement on Standards for Tax Services No. 1, "Tax Return Positions."
What is required of the tax return preparer who becomes aware of an error in a previously filed return?
Notify the taxpayer but do not notify any taxing authority regarding an error without first obtaining permission from the taxpayer, except when required by law.
What is required of the tax return preparer who becomes aware that the taxpayer has failed to file a tax return?
Notify the taxpayer but do not notify any taxing authority regarding the non-filing without first obtaining permission from the taxpayer, except when required by law.
What is required of the tax preparer who, while representing the taxpayer in the administrative proceeding, becomes aware of an error or non-filing?
Request the taxpayer's agreement to disclose to the taxing authority the error or non-filing. If the taxpayer does not agree, the tax preparer should consider whether it is appropriate to continue the professional relationship.
Do not notify any taxing authority regarding the error or non-filing without first obtaining permission from the taxpayer, except when required by law.
When must the tax preparer notify the taxpayer about new or changing tax developments occurring after the preparer has given advice to the client?
When assisting a taxpayer in implementing a plan associated with advice previously given, revise the plan if there are new developments.
If not assisting in implementing the plan, there is no requirement to notify the taxpayer of subsequent developments that may affect the advice previously given.