REPRESENTATION - PREPARING RETURNS Flashcards
Record Retention Rules
For three years after the close of the return year either:
- A copy of the Tax Return or,
- A list that includes:
a. The taxpayer’s name
b. The taxpayer’s identification numbers
c. The tax year
Where does the Burden Of Proof rest?
In the United States, the burden of proof in a tax case often rests with the IRS.
5 Requirements for Burden of Proof to rest with the IRS?
For the Burden of Proof to rest with the IRS, the TP needs to:
- Introduce credible evidence.
- Substantiate (prove) the items that they are claiming.
- Maintain adequate records.
- Comply with reasonable requests for information and submission of documents.
- Have a net worth of less than $7 million.
Generally it requires HONESTY and OPENESS
What are the consequences of an INTENT TO EVADE in regards to the Burden Of Proof?
The Burden of Proof switches to the TP.
A civil fraud penalty can be imposed on a taxpayer if the IRS is able to show by a preponderance of evidence that the taxpayer had specific intent to evade a tax.
After the IRS first shows that fraudulent actions by the taxpayer have occurred, the burden of proof shifts to the taxpayer who must then prove that any tax underpayment was not attributable to fraudulent behavior.
Understatement of Liability
Circular 230 Section 10.34 outlines standards with respect to tax returns and documents, affidavits and other papers.
A practitioner must not sign a tax return or claim for refund that the practitioner knows or reasonably should know contains an unreasonable position. Preparer penalties under Section 6694 apply to the following circumstances: ??NEED MORE INFO??
Preparer penalties under Section 6694 apply to the following circumstances:
Unreasonable positions – A penalty of $1,000 or 50% of preparer’s fee, whichever is greater.
A position lacking substantial authority is unreasonable if the preparer knew (or should have known) of the position.
The position does not have substantial authority – for undisclosed positions
The position does not have a reasonable basis – for disclosed positions
There was not a reasonable belief that the position would more likely than not be sustained on its merits – for tax shelters
Willful or reckless conduct – A penalty of UPDATE: $5,000 or 75% of preparer’s fee, whichever is greater.
Willful or Reckless Conduct Defined:
Conduct by the Tax Return Preparer that is a WILLFUL attempt in any manner to understate the liability for a tax on the return or a claim, or a reckless or intentional disregard for rules and regulations.
The amount of any penalty payable for willful misconduct is reduced by any penalty for an Unreasonable Position. You don’t get penalties twice.
Penalties for failures under Section 6695 are:
In the case of any failure relating to a return or claim for refund filed in 2020 (generally 2019 tax returns filed in 2020), the penalty amounts under §6695 are:
Penalty of $50 for each occurrence up to a maximum of UPDATE: $26,500 a year unless it is shown that such failure is due to reasonable cause and not willful neglect:
Each of these have a $50 penalty:
- Failure to furnish copy of return to taxpayer
- Failure to sign return
- Failure to furnish identifying number
- Failure to retain copy or list
- Failure to file correct information returns
Section 6695 - Penalty for the Negotiation of Check?
Negotiation of check – Any tax return preparer who endorses or otherwise negotiates (directly or through an agent) a refund check (including an electronic version of a check) issued to the taxpayer, shall pay a penalty of $530 with respect to each check.
We are NOT allowed to take a check that are not ours!
Section 6695 - Penalty for Failure to be Diligent
Failure to be diligent in determining eligibility for earned income credit – Any return preparer who fails to comply with due diligence requirements imposed to determine eligibility for, or the amount of, the credit allowable shall pay a penalty of UPDATE: $530 for EACH failure.
Example: When we’re preparing EIC we must ask the required questions, and then additional questions when the info received seems incorrect, incomplete, or inconsistent.
Including: EIC AOTC CTC ACTC ODC HOH
Safe Guarding Tax Payer Info
Internal Revenue Code Section 6713 imposes a civil penalty of $250 on any person who is engaged in the business of preparing, or providing services in connection with the preparation of returns of tax, or any person who for compensation prepares a return for another person, and who:
Discloses any information furnished for, or in connection with, the preparation of any such return, or
Uses any such information for any purpose other than to prepare, or assist in preparing, any such return.
Keep it CONFIDENTIAL!
The max penalty shall not exceed $10,000 in a calendar year.
Taxpayer Supporting Documentation
A taxpayer must keep records as long as needed for the administration of any provision of the IRC.
Generally, this means keeping records that support items shown on the return until the period of limitations for that return expires.
Period of Limitations for a Tax Return
Generally this is the later of 3 years from the due date of the Tax Return or the date the TP filed the return. There are exceptions.
Keeping records of items shown on the return, to allow for an amendment to claim a Credit or a Refund, or for the IRS to assess additional tax.
What is the extended Period of Limitations for NOT reporting income that is MORE THAN 25% of the gross income shown on a return
6 years
What is the extended Period of Limitations for a Fraudulent Tax Return?
No Limit
What is the extended Period of Limitations for not filing a Tax Return?
No Limit
What is the extended Period of Limitations to file a claim for a loss from worthless securities?
7 years
What defines Reasonable Position?
There must be Substantial Authority for the position,
or in the case of a disclosed position, a Reasonable Basis for the treatment of such items on the return.
The return CANNOT contain frivolous positions.
Reasonable Basis is NOT satisfied by a return position that is merely arguable.
If based on §1.6662-4(d)(3)(iii), taking into account the relevance and persuasiveness of the authorities, and subsequent developments, the return should satisfy reasonable basis.
What defines Reasonable Position on a Tax Return in regards to the Substantiation and Disclosure of a Tax Position
There must be Substantial Authority for the position,
or in the case of a disclosed position, a Reasonable Basis for the treatment of such items on the return.
The return CANNOT contain frivolous positions.
Substantial Authority standard realted to a Tax Return Position Defined:
The substantial Authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts.
It is MORE stringent than Reasonable Basis,
but LESS strict than “More Likely Than Not.”
There is Substantial Authority for the tax treatment of an item ONLY if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.
Basically, there is more weight of support, than there is contrary to the treatment.
Reasonable Basis
Reasonable basis is a relatively high standard of tax reporting that 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.
If a Return Position is reasonably based on 1 or more of the of the authorities that sets for in section 1 of the code, the Return Position will generally satisfy the Reasonable Basis standard, even though it may not satisfy the Substantial Authority Standard.
Tax Shelter Requirements
A tax shelter, for purposes of the substantial understatement portion of the accuracy-related penalty, is a partnership or other entity, plan, or arrangement with the intent of avoiding or evading federal income tax.
Tax shelters have a HIGHER STANDARD and must have a confidence level of at least MORE LIKELY THAN NOT (greater than 50% likelihood) that one or more significant tax issues would be resolved in the taxpayer’s favor.
What Form is used to disclose items or positions that are not otherwise adequately disclosed on a tax return.
Form 8275, 8275-R, or Rev. Proc. 2008-14 are used by TPs and Tax Preparers to avoid certain penalties.
It is telling the IRS we aren’t certain about what we’ve done, and that they should have a look.
When are Penalties Unavoidable (6 items), even when filling out Form 8275.
- Negligence
- Disregard of regulations
- Any substantial understatement of income tax on a tax shelter item
- Any substantial valuation misstatement under chapter one of the Internal Revenue Code
- Any substantial overstatement of pension liabilities
- Any substantial estate or gift tax valuation understatements
