ETHICS
What Every Tax Preparer Needs
to Engrave in Their Thoughts
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 Presented
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By:
Marcia L. Miller, MBA, EA
Financial Horizons, Inc.
Weston, Florida
[email protected]
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 Ethics
has always been a requirement, but
will our clients agree not to control us by
swaying our ethical requirements?
 Frivolous
tax arguments and tax scams
will always be a dilemma to be reckoned
with, but now – more than ever – it is
imperative that we not trust the client too
much.
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Imagine a Pyramid

At the bottom appears the Code of Professional Conduct’s
six principles are the cornerstone of ethical behavior.
They include:
1 - Responsibilities
2 - The Public Interest
3 - Integrity
4 - Objectivity and Independence
5 - Due Care
6 - Scope and Nature of Services
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Principles
 These
are positive statements of
responsibility in the Code of
Professional Conduct that provide the
framework for the rules, which govern
performance.
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
Next are the rules by which we are governed whether we are in the
practice of accounting or merely providing professional services.
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Independence
Integrity and objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Commissions and Referral Fees
Advertising and Other Forms of Solicitation
Form of Organization and Name
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RULES
 Broad
but specific descriptions of
conduct that would violate the
responsibilities stated in the
principles in the Code of
Professional Conduct.
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 Now
as the Pyramid narrows, you as
the professional, must make your
own interpretations of these
specific rules, some of which may
require rulings for certain
circumstances.
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INTERPRETATIONS
 This
refers to those pronouncements
issued by organizations such as the
AICPA’s Division of Professional Ethics
to provide guidelines concerning the
scope and application of the rules of
conduct.
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ETHICS RULINGS
 Rulings
summarize the application of
rules and interpretations to a
particular set of factual
circumstances.
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“YOUR BEHAVIOR”
 Lastly,
at the top of your pyramid is
the Behavior for which your peers
are judging your actions.
 Your
Behavior needs to be impacted
by the Code, Interpretations and
Rulings.
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CIRCULAR 230

In order to protect citizens from incompetent and
unethical practitioners, governments have passed laws
and regulations regarding the professional conduct of
certain professionals who provide accounting and tax
services. In particular, Certified Public Accountants
(CPAs) and Public Accountants (PAs) are regulated by
State Boards of Accountancy; and professionals who are
authorized to practice before the Internal Revenue
Service (IRS) are regulated by Treasury Department
Circular 230 and the IRS Office of Professional
Responsibility. The body of law which is intended to
protect citizens from unethical behavior is sometimes
referred to as regulatory ethics. Those who are
regulated and fail to uphold the required standards of
ethical and professional conduct are guilty of committing
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acts which are not only unethical, but also illegal.
CIRCULAR 230

Many accounting and tax practitioners are not directly
regulated by State Boards of Accountancy or the Internal
Revenue Service. However, the standards of ethical and
professional conduct established by those authorities
represent the high expectations of the citizens who are
served by the accounting profession. Because these
standards are widely published and well known, they
may also be used in a court of law when a citizen sues to
obtain damages from a practitioner. Therefore, it is
important for all accounting and tax professionals,
whether regulated or not, to understand the high level of
ethical and professional conduct that is expected
because of the trust that is conveyed to them by the
individuals and businesses they serve.
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CIRCULAR 230

Liability for Fraud
Actual fraud and constructive fraud present two different circumstances under
which an accountant may be found liable. An accountant may be held liable for actual
fraud when he or she intentionally misstates a “material fact” to mislead his or her
client, and the client detrimentally relies on the misstated fact. A material fact is one
that a reasonable person would consider important in deciding whether to act.
Constructive fraud, on the other hand, will be found when an accountant is grossly
negligent in the performance of his or her duties. The intentional failure to perform a
duty in reckless disregard of the consequences of such a failure would constitute
gross negligence on the part of an accountant. Both actual and constructive frauds
are potential sources of legal liability under which a client may bring an action against
an accountant.
When a client is dissatisfied with the performance of an accounting firm, he or she will
often sue on all three common law theories in the alternative. The Federal Rules of
Civil Procedure permit a pleader, in a claim or defense, to make two or more
statements which are not necessarily consistent with each other. A plaintiff may sue
on several theories.
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CIRCULAR 230

Treasury Department Circular 230
Circular 230 provides regulations governing the practice of Attorneys,
Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled
Retirement Plan Agents, and Appraisers before the Internal Revenue
Service. As part of an ongoing effort to improve ethical standards for tax
professionals and to curb abusive tax avoidance transactions, the Treasury
Department and the Internal Revenue Service have issued final regulations
amending Circular 230 to achieve the strategic goal of ensuring that
attorneys, accountants, enrolled agents, and other tax practitioners adhere
to professional standards and follow the law. Subpart B of Circular 230
describes the duties and restrictions relating to practice before the Internal
Revenue Service, the best practices for tax advisors, and standards with
respect to tax returns, financial documents, and workpapers. Subpart C
describes the sanctions for violation of the regulations, and defines
incompetence and disreputable conduct for which a practitioner may be
sanctioned. The most recent revision of Circular 230 is available on the
Internal Revenue Service website.
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CIRCULAR 230

Tax professionals who are authorized to practice before the Internal Revenue Service
(that is, to represent clients) are regulated by the Office of Professional Responsibility
(OPR) and are legally obligated to follow Circular 230 requirements. Tax
professionals who are not authorized to practice before the Internal Revenue Service
are not directly regulated by OPR. However, all tax professionals should be familiar
with Circular 230 as many of the standards and best practices discussed are
universally applicable. Some of the most important requirements regarding
professional conduct are summarized below.

Furnishing Information: A practitioner must furnish records or other information to
the IRS or OPR upon a proper and lawful request unless the practitioner believes in
good faith and on reasonable grounds that the records or information are privileged. If
the practitioner does not possess the requested records, he/she must promptly notify
the requesting IRS officer or employee. The practitioner must ask the client where the
requested records are located, and provide any information regarding the identity of
any person who the practitioner believes may have possession of the requested
records to the IRS officer or employee.
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Knowledge of Client’s Omission: If a practitioner knows that a client has not
complied with the revenue laws or has made an error in or omission from any return
or other document submitted to the U.S. government, the practitioner is obligated to
advise the client promptly of the facts of such noncompliance, error, or omission. The
practitioner must also advise the client of the consequences of such noncompliance,
error, or omission as provided under the Internal Revenue Code and regulations.
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CIRCULAR 230
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Diligence as to Accuracy: A practitioner must exercise due diligence as to
the accuracy of all returns, documents, other papers, and oral or written
representations which relate to IRS matters. If the practitioner relies on the
work product of another person, he/she will be presumed to exercise due
diligence if the practitioner has used reasonable care in engaging,
supervising, training, and evaluating the person, taking into account the
nature of the relationship between the practitioner and the person.
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Prompt Disposition of Pending Matters: A practitioner may not
unreasonably delay the prompt disposition of any matter before the Internal
Revenue Service.
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Assistance from Disbarred or Suspended Persons: A practitioner may
not knowingly accept assistance regarding IRS matters, either directly or
indirectly, from any person who is under suspension or disbarment from
practice before the Internal Revenue Service.
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CIRCULAR 230
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Notaries: A practitioner may not act as a notary public with respect to any matter
administered by the IRS if the practitioner is also employed by the client regarding
IRS matters or is in any way interested in the matter pending before IRS.
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Fees: A practitioner may not charge unconscionable fees. Generally, a practitioner is
not allowed to charge a contingent fee for tax return preparation or other matters
before the IRS. A contingent fee is a fee that is based on a percentage of the refund
reported on a return, or is otherwise dependent on the result obtained. However,
contingent fees are allowed in the following situations:
Services rendered in connection with an examination or other challenge to a
taxpayer’s original return.
Services rendered in the preparation of an amended return or claim for refund or
credit which is filed within 120 days of the taxpayer receiving a notice of examination
or a written challenge to the return.
Services rendered in connection with a claim for refund or credit regarding the
determination of interest and penalties assessed by the IRS.
Services rendered in connection with any judicial proceeding arising under the
Internal Revenue Code.
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CIRCULAR 230
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Return of Client’s Records: A practitioner is obligated
to promptly return, upon request, any and all records that
belong to the client, or that the client needs to comply
with his/her federal tax obligations. The practitioner may
retain copies of the records returned to the client. A
dispute over fees does not relieve the practitioner of this
responsibility. (There is an exception, where allowed by
state law, whereby the practitioner may retain the
records subject to the fee dispute, but must provide the
client with reasonable access to review and copy the
records.) The practitioner is not required to release
returns or other documents which have been prepared
by the practitioner or the practitioner’s firm if the return or
document is being withheld due to the client’s
nonpayment of fees with respect to that return or
document.
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CIRCULAR 230
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Conflicting Interests: A practitioner shall not represent a client before the
IRS if the representation involves a conflict of interest. A conflict of interest
exists if the representation of one client will be directly adverse to another
client. There is also a conflict of interest if there is a significant risk that the
representation of a client will be materially limited by the practitioner’s
responsibilities to another client, a former client or a third person, or by the
practitioner’s own personal interests.
A practitioner may reasonably believe that he/she will be able to provide
competent and diligent representation to clients where a potential conflict of
interest exists. The clients may consent to such representation if it is not
prohibited by law. Each affected client must waive the conflict of interest and
give informed consent in writing within 30 days after being informed of the
conflict. The practitioner must retain copies of the written consents for at
least 36 months after the conclusion of the representation of the affected
clients, and must provide those consents upon request to any officer or
employee of the IRS.
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CIRCULAR 230
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Solicitations: A practitioner may not advertise or solicit clients,
either publicly or privately, in any manner that could be considered
false, fraudulent, misleading, deceptive, or coercive. Any uninvited
solicitation must clearly identify the solicitation as such, and also
identify the source of information used in choosing the recipient.
If a practitioner publishes a fee schedule, he/she may not charge
more than the published fees for at least 30 days after the last date
of publication. The practitioner must retain a copy of any
communication containing fee information, along with a list or
description of persons to whom the communication was distributed.
The practitioner must retain these copies for at least 36 months after
they were last used. This applies to all methods of communication –
mailings, e-mails, radio, television, flyers, telephone directories, and
all others.
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CIRCULAR 230
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Clients’ Refund Checks: A practitioner who prepares tax returns may not
endorse or otherwise negotiate any check issued to a client by the
government with respect to a federal tax liability.
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Best Practices: Tax professionals should adhere to best practices when
preparing tax returns or other documents or providing advice
regarding federal tax matters. In addition to compliance with standards, best
practices include the following:
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Communicating clearly with clients and having a clear understanding with
clients as to the scope of advice and assistance being given.
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Establishing the facts, determining which facts are relevant, evaluating the
reasonableness of any assumptions, relating the facts to the applicable law,
and arriving at conclusions that are supported by the law and the facts.
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Advising clients regarding the importance and potential consequences of
the conclusions reached, including the avoidance of penalties if the
taxpayer relies on the advice.
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Acting fairly and with integrity in the conduct of your business.
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CIRCULAR 230
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Standards with Respect to Tax Returns: Circular 230
establishes certain standards with respect to tax returns
and other submissions to the Internal Revenue Service.
A tax professional may NOT:
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Advise a client to take a position on a return or document
submitted to the IRS unless the position is not frivolous.
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Advise a client to submit a document to the IRS for the
purpose of impeding or delaying
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CIRCULAR 230
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Advise a client to submit a document to the IRS for the purpose of impeding
or delaying administration of federal tax laws.
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Advise a client to submit a return or document that is frivolous.
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Advise a client to submit a return or document that contains or omits
information in a manner that demonstrates an intentional disregard of a rule
or regulation (unless the client is also advised to submit documents that
evidence a good faith challenge to the rule or regulation).
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In order to comply with standards, a tax professional must:
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Inform a client of any penalties that may reasonably apply to a position
taken on a tax return, if the practitioner gave advice regarding the position
or prepared or signed the tax return.
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Inform a client of any opportunity to avoid penalties by disclosure, and of the
requirements of adequate disclosure.
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CIRCULAR 230
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A tax professional may generally rely in good faith without verification upon
information furnished by the client. However, a practitioner may not ignore
the implications of information furnished by the client or otherwise known by
the practitioner. If the information provided by the client appears to be
incorrect, inconsistent, or incomplete, the professional must make
reasonable inquiries to obtain reliable information.
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Giving Written Advice: When giving written advice to a client, a tax
professional may NOT:
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Base the advice on unreasonable factual or legal assumptions;
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Unreasonably rely on the representations or statements of the taxpayer
or any other person;
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Ignore or fail to consider all relevant facts that the professional knows or
should know; or
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Take into account the risk of being audited or having the advice
challenged by the IRS.
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CIRCULAR 230
Incompetence and Disreputable Conduct: Incompetence and/or disreputable conduct may
subject a tax professional who is authorized to practice before the IRS to sanctions for violation of
the regulations. Incompetent and/or disreputable acts include the following:
Conviction of any criminal offense under the federal tax laws.
Conviction of any criminal offense involving dishonesty or breach of trust.
Conviction of any felony under federal or state law which would render a practitioner unfit to
practice.
Knowingly giving false or misleading information to the Department of the Treasury or its officers
or employees.
Soliciting employment or attempting to deceive a client or prospective client using false or
misleading representations, or intimating that the practitioner is able to obtain special
consideration or action from the IRS or its officer or employee.
Willfully failing to file a federal tax return, or participating in evading or attempting to evade any
assessment or payment of any federal tax.
Willfully assisting, counseling, or encouraging a client or prospective client to violate any federal
tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to
evade federal taxes.
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CIRCULAR 230
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Misappropriation or failure to remit funds received from a client for the purpose of paying taxes or
other government obligations.
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Directly or indirectly trying to influence the official action of any IRS officer or employee by the use
of threats, false accusations, duress or coercion, or by offering or promising gifts, favors, or
anything of value.
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Disbarment or suspension from practice as an attorney, certified public accountant, public
accountant, or actuary by any state or other U.S. jurisdiction.
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Knowingly aiding and abetting another person to practice before the IRS during a period of
suspension, disbarment, or other period of ineligibility.
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Contemptuous conduct in connection with practice before the IRS, including the use of abusive
language or malicious or libelous communications.
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Knowingly, recklessly, or through gross incompetence giving a false opinion on questions arising
under Federal tax laws.
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Willfully failing to sign a tax return prepared by the practitioner.
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Willfully disclosing or otherwise using a tax return or tax information in a manner not authorized by
the Internal Revenue Code.
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CIRCULAR 230
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Confidentiality, Privacy, and Disclosure
of Financial or Tax Information
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Citizens have a right to expect professionals who assist them with private financial matters to be
trustworthy. The accounting and tax professional has an obligation to maintain and respect the
confidentiality of information obtained in the performance of all professional activities. The
Gramm-Leach-Bliley Act of 1999 requires each financial institution and tax preparer to disclose its
privacy policy to those who trust them with nonpublic personal information.
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In general, the tax preparer’s privacy policy should state that nonpublic personal information is not
disclosed without the client’s consent. Any exceptions should be explained in the privacy policy.
The following are some common exceptions that a tax preparation firm should explain in its
privacy policy:
Disclosure to employees, technical advisors, software consultants, or electronic filing providers.
Disclosures required to comply with federal, state, or local laws, or with licensing requirements.
Disclosures required to comply with legal subpoenas or other legal actions.
The Internal Revenue Service also has requirements regarding the disclosure of tax information.
These requirements are found in Revenue Procedure 2008-35, published in the Internal Revenue
Bulletin on July 21, 2008. Section 7216(a) of the Internal Revenue Code imposes criminal
penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or
uses of information furnished in connection with the preparation of a tax return. Any disclosure or
use of tax information requires the informed consent of the taxpayer.
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Due Diligence
 It
probably doesn’t mean that practitioners
must use all measures possible to verify
all information that client provides but the
scope of our investigations has
broadened.
 It
would be likely that facts and
circumstances would be considered.
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Letter to Client
 Due
to the tighter standards imposed by
the new rules, the cost of providing written
tax opinions will likely be higher unless the
disclaimer approach is taken.
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Firm Responsibilities
 Effective
for all members, associates and
employees there must be a conformity
with Circular 230.
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Tax Return Preparation

Tax return should not be signed as preparer if it
contains a position that does not have a realistic
possibility of being sustained on its merits.
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Audit roulette does not count.
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Does it have a one in three chance (or greater) of being
sustained on its merits.
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If position is improper it is frivolous.
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Preparers must make taxpayers aware of the
penalties involved.
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Penalties
 Reckless
violation or incompetence is
grounds for censure, suspension or
disbarment from practice.
 All
information, hearings, pleadings,
evidence, reports decisions will be
made available to the public.
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Changing Face of Return Prep
SBWOTA changes
Substantial or Gross valuation
misstatement >$5,000 penalties to
20% or 40%, respectively unless:
Substantial authority or
Adequately disclosed and
reasonable basis.
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Understatement of Tax Liability by
Return Preparers
Prior
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1st Tier penalty $250 for Income Tax preparer if:
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Not disclosed; Not ‘realistic possibility’ (1/3)
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2nd Tier penalty if willful neglect; $1,000 preparer
penalty
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Tax return preparer penalties
 Old
Law: An income tax return preparer is
liable for penalties for failing to have a
reasonable factual or legal basis for a
position taken on a return.
 Evolved
into a "realistic possibility of
success" standard, as a one-in-three
chance of prevailing on the merits of an
issue.
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Tax return preparer penalties

If the position did not meet the realistic
possibility of success an income tax preparer
could avoid the penalty for non-frivolous
positions through adequate disclosure.
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Only subject to the penalty if an
understatement arose as the result of :
(1) a nondisclosed position that failed to meet the
"realistic possibility of success" standard, or
(2) a disclosed position that was frivolous.
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Understatement of Tax Liability by
Return Preparers
Now:
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ANY return prepared > 5/27/07
More Likely Than Not sustained (51%+)
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1st Tier is greater of $1,000 or 50% of fees
2nd Tier is greater of $5,000 or 50% of fees
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Change effectively applies penalties, due to
understatement of taxpayer liability, to preparers of ALL
returns (Gift, Estate, 941, Excise, 990-T, W-2’s, 1099’s)
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New Preparer Penalty
Legislation

Undisclosed Positions:
Preparer may be subject to penalties even
though the taxpayer would not as a result of
an understatement.

Standard for Taxpayers:
Substantial Authority

Standard for Practitioners:
Higher level, was a realistic possibility of success,
MORE LIKELY THAN NOT,
(more than 50% likely to succeed)
now is
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New Preparer Penalty
Legislation
 New Law: Return preparer is subject to a
penalty of up to 50% of the fees for the
assignment if:
- the position was not disclosed and the
return preparer did not have a reasonable
belief that the position was more likely
than not correct, or
- the position was disclosed but did not
have a reasonable basis.
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New Preparer Penalty
Legislation

Accounting firms may be forced to change the
Engagement letters, Organizer Letters
and even the Circular 230 disclaimer on
e-mails and memoranda advising clients to
disclose any position that does not meet the
"more likely than not" standard.

Notice 2007-54 delayed application for all
returns filed before 2008.
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New Preparer Penalty
Legislation

Tax professionals should react with caution to this change
in the law.

It has been suggested that some practitioners in order to
protect themselves may disclose every position taken
on a return on Form 8275 rather than risk the penalty.
Line-by-line basis, that there is no certainty that each number
reflected on the return is more likely than not correct………..

AICPA Urged Congress to Reconsider….see article in Sept
Journal Of Accountancy, page 25.
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Are YOU willing to GAMBLE
$1,000 or 50% of professional fees
for……….
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1099 issued to individual in lieu of Form W-2?
Asset is held for investment versus sale?
Expense capitalized versus deducted?
Form W-2 issued to self-employed member (partner) of
LLC (partnership)?
Value of non-cash charitable contributions?
Basis of asset sold?
Worthlessness of a Stock or Debt?
Claiming Real Estate Pro when not?
Unreasonably LOW compensation of S shareholder?
Business Miles driven by taxpayer?
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Getting the records and proof from
clients: don’t trust your client too much
 Suggested
solutions for consideration
Document, document, document!!!

Form 8275 - Disclosure Statement –
Disclose a position contrary to a rule
such as a statutory position or
IRS revenue ruling.
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IRS advice: avoid the ‘Dirty
Dozen’ tax scams of 2009
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Phishing
Economic Stimulus Payments
Frivolous Tax Arguments- taxes are illegal
Fuel Tax Credit Scams
Hiding Income Offshore
Abusive Roth IRAs
Zero Wages
False claims for refunds and abatements
Return Preparer Fraud
Disguised Corporate Ownership
Trust Misuse
Use of Charitable Organizations to shield income
45
Update on Circular 230
1. In general, Treasury Department proposed changes to Circular 230
on March 6, 2006
2. What is a contingent fee?
Fee based in whole or part on a position taken on a tax return;
includes refund or reimbursement of fees
Cannot charge contingent fee on Original
Can charge contingent free on:
Amended return,
exam of original return,
or judicial proceeding
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Tax Return Preparation





230 regs forbid practitioners from signing a
return that contains a position that does not
have ‘realistic possibility’ of being sustained.
Generally 1-in-3 or better chance of being
sustained.
‘Risk of audit’ cannot be considered.
Disclosure to client of potential penalties
Disclosure of position on return?
IRS sanctions include censure, suspension, or
disbarment from practice before IRS.
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New Preparer Penalties Update

Standard is now “MLTN” or >50%

Applies to all tax returns

IRS Notice 2008-13



May rely on good faith upon information furnished by
T/P or 3rd party
You don’t have to audit your clients
Make reasonable inquiries

Do not ignore other information you may have
48
Pension Protection Act
Penalties
1. Thresholds for accuracy related
penalties reduced
- From 200% to 150% for Substantial
valuation misstatement (20% penalty)
- From 400% to 200% for Gross valuation
misstatement (40% penalty)
2. Appraisal penalties increased
- $1,000 or 10% of tax understatement
- Max = 125% x appraisal fee unless ‘more
likely than not’ correct appraisal
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Accuracy Related Penalty
NOTE: Per the IRS general instructions:
The portion of the accuracy-related penalty
attributable to the following types of misconduct
cannot be avoided by disclosure on Form 8275:

Negligence

Disregard of rules or regulations

Any substantial understatement of income tax

Any substantial valuation misstatement

Any substantial overstatement of pension liabilities

Any substantial estate or gift tax valuation understatements
50
FIVE MINUTE
MANAGEMENT COURSE
51
Lesson 1:

A man is getting into the shower just as his wife
is finishing up her shower, when the doorbell
rings.

The wife quickly wraps herself in a towel and
runs downstairs. When she opens the door,
there stands Bob, the next-door
neighbor. Before she says a word, Bob says, "I'll
give you $800 to drop that towel" After thinking
for a moment, the woman drops her towel and
stands naked in front of Bob, after a few
seconds, Bob hands her $800 and leaves.
52
 The
woman wraps back up in the towel
and goes back upstairs. When she gets to
the bathroom, her husband asks, "Who
was that?"
 "It
was Bob, the next door neighbor," she
replies.
 "Great,"
the husband says, "did he say
anything about the $800 he owes me?"
53
Moral of the story
 If
you share critical information pertaining
to credit and risk with your shareholders in
time, you may be in a position to prevent
avoidable exposure.
54
Lesson 2




A priest offered a nun a lift. She got in and crossed her
legs, forcing her gown to reveal a leg.
The priest nearly had an accident. After controlling the
car, he stealthily slid his hand up her leg. The nun said,
"Father, remember Psalm 129?" The priest removed his
hand. But, changing gears, he let his hand slide up her
leg again.
The nun once again said, "Father, remember Psalm
129?" The priest apologized "Sorry sister but the flesh is
weak." Arriving at the convent, the nun sighed heavily
and went on her way.
On his arrival at the church, the priest rushed to look up
Psalm 129. It said, "Go forth and seek, further up, you
will find glory."
55
Moral of the story:
 If
you are not well informed in your job,
you might miss a great opportunity.
56
Lesson 3:

A sales rep, an administration clerk, and the manager are walking to
lunch when they find an antique oil lamp. They rub it and a genie
comes out. The genie says, "I'll give each of you just one
wish." "Me first! Me first!" says the admin clerk. "I want to be in the
Bahamas, driving a speedboat, without a care in the world.“

Puff! She's gone. "Me next! Me next!" says the sales rep. "I want to
be in Hawaii , relaxing on the beach with my personal masseuse, an
endless supply of Pina Coladas and the love of my life."

Puff! He's gone. "OK, you're up," the Genie says to the
manager. The manager says, "I want those two back in the office
after lunch."
57
Moral of the story:
 Always
let your boss. have the first say.
58
Lesson 4
 An
eagle was sitting on a tree resting,
doing nothing. A small rabbit saw the
eagle and asked him, "Can I also sit like
you and do nothing?"
 The
eagle answered: "Sure, why
not." So, the rabbit sat on the ground
below the eagle and rested. All of a
sudden, a fox appeared, jumped on the
rabbit and ate it.
59
Moral of the story:
 To
be sitting and doing nothing, you must
be sitting very, very high up.
60
Lesson 5

A turkey was chatting with a bull. "I would love
to be able to get to the top of that tree" sighed
the turkey, "but I haven't got the energy." "Well,
why don't you nibble on some of my droppings?"
replied the bull. They're packed with nutrients.“

The turkey pecked at a lump of dung, and found
it actually gave him enough strength to reach the
lowest branch of the tree. The next day, after
eating some more dung, he reached the second
branch. Finally after a fourth night, the turkey
was proudly perched at the top of the tree. He
was promptly spotted by a farmer, who shot him
out of the tree.
61
Moral of the story:
 Bull
s**t might get you to the top, but it
won't keep you there..
62
Lesson 6

A little bird was flying south for the winter. It was
so cold the bird froze and fell to the ground into
a large field. While he was lying there, a cow
came by and dropped some dung on him. As
the frozen bird lay there in the pile of cow dung,
he began to realize how warm he was. The
dung was actually thawing him out! He lay there
all warm and happy, and soon began to sing for
joy. A passing cat heard the bird singing and
came to investigate.

Following the sound, the cat discovered the bird
under the pile of cow dung, and promptly dug
him out and ate him.
63
Morals of the story:
 (1)
Not everyone who sh*ts on you is your
enemy.
 (2)
Not everyone who gets you out of sh*t
is your friend.
 (3) And
when you're in deep sh*t, it's best
to keep your mouth shut!
64
THUS ENDS THE FIVE MINUTE
MANAGEMENT COURSE
 Send
this to at least five bright, funny
people you know and make their day!
65
Sec 7216
Discussion Points
■ General Overview of Sec. 7216
■ Criminal Penalties Apply
■ Tax Return Preparation & Auxiliary Services
■ Definition of Tax Return Information
■ Use and Disclosure
■ Permitted Disclosures without Consent
■ How do we protect ourselves?
66
IRS REGULATION 7216
Use and Disclosure of Tax
Information

As of this filing Season 2009, IRS Regulation 7216 provides guidance to tax
preparers regarding the use and disclosure of their clients' tax information. This
regulation strengthens taxpayers' ability to control their tax information and to make
informed decisions regarding the preparer's use of that information.

Tax preparers who fail to comply with this regulation face a $1,000 fine and one
year in jail for each violation.

The Consent to Use of Tax Return Information requires the client’s permission to
use his or her tax information for purposes other than preparing and filing the tax
return (such as determining whether bank or other financial products may be
available to the client). The Consent to Use of Tax Return Information explains this
requirement and must be signed before the return is prepared.

The Consent to Disclosure of Tax Return Information requires all tax preparers, to
obtain the client’s permission to disclose his or her tax return information to third
parties (such as to banks for bank products, or to service bureaus or franchisors).
The Consent to Disclosure of Tax Return Information must be signed before sending
the return to the designated third party.
67
Section 7216 Overview

New regulations under Internal Revenue Code Section 7216, became effective
January 1, 2009.

The new regulations update regulations that have been substantially unchanged
since the 1970s, and give taxpayers greater control over their personal tax return
information.

The statute limits tax return preparers’ use and disclosure of information obtained
during the return preparation process to activities directly related to the
preparation of the return.

Rev. Proc. 2008-35 provides guidance to tax return preparers regarding the
format and content of consents to disclose and consents to use tax return
information with respect to taxpayers filing a return in the Form 1040 series.

This revenue procedure also provides specific requirements for electronic
signatures when a taxpayer executes an electronic consent to the disclosure or
use of the taxpayer’s tax return information.
68
Sec 7216 overview continued

Unless section 7216 or §301.7216-2 specifically permits the
disclosure or use of tax return information, a tax return
preparer may not disclose or use a taxpayer’s tax return
information prior to obtaining a consent from the taxpayer.

Consent must be knowing and voluntary.

There is form and content requirements that all consents to
disclose or use must include, as well as timing requirements
and other limitations upon consents to disclose or use tax
return information.

There is a limitation upon consents to disclose a taxpayer’s
social security number to a tax return preparer located
outside of the United States.
69
Sec 7216 overview continued

The Secretary may, by publication in the Internal Revenue
Bulletin, prescribe additional requirements for tax return
preparers regarding the format and content of consents to
disclose and consents to use tax return information with
respect to taxpayers filing a return in the Form 1040 series,
as well as the requirements for a valid signature on an
electronic consent under section 7216.

The Secretary may, by publication in the Internal Revenue
Bulletin, describe the requirements of an “adequate data
protection safeguard” for purposes of removing the limitation
upon consents to disclose a taxpayer’s social security
number to a tax return preparer located outside of the United
States. This revenue procedure provides additional consent
format and content requirements and defines an “adequate
data protection safeguard.”
70
Form and Content of a Consent to Disclose or a
Consent to Use Form 1040 Tax Return Information

Separate Written Document. A taxpayer’s consent to each separate disclosure or use of tax
return information must be contained on a separate written document, which can be
furnished on paper or electronically. For example, the separate written document may be
provided as an attachment to an engagement letter furnished to the taxpayer.

Special rule for multiple disclosures or uses within a single consent form. Multiple
disclosures and uses can be authorized within a single forms, only if the document provides
the taxpayer with the opportunity to affirmatively select each disclosure or use, and must be
provided any information required for each specific disclosure or use.

A consent furnished to the taxpayer on paper must be provided on one or more sheets of
81/2 inch by 11 inch or larger paper. All of the text on each sheet of paper must pertain
solely to the disclosure or use the consent authorizes, and the sheet or sheets, together,
must contain all the elements described in section 4.04 and, if applicable, comply with
section 4.06. All of the text on each sheet of paper must also be in at least 12-point type (no
more than 12 characters per inch).
71
Form and Content continued

An electronic consent must be provided on one or more computer
screens. All of the text placed by the preparer on each screen must
pertain solely to the disclosure or use of tax return information authorized
by the consent, except for computer navigation tools. The text of the
consent must meet the following specifications: the size of the text must
be at least the same size as, or larger than, the normal or standard body
text used by the website or software package for direction,
communications or instructions and there must be sufficient contrast
between the text and background colors. In addition, each screen or,
together, the screens must:
- contain all the elements described in section 4.04 and, if
applicable, comply with section 4.06,
- be able to be signed as required by section 5 and dated by the
taxpayer, and
- be able to be formatted in a readable and printer-friendly manner.
72
Form and Content continued
Consents Must:

Identify the intended purpose of the disclosure or use;

Identify the recipient(s) and describe the particular authorized information
to be disclosed or used;

Include the name of the tax return preparer and the name of the taxpayer;

Include the applicable mandatory language set forth in section 4.04(a)-(c)
of Revenue Procedure 2008-35 that informs the taxpayer that he is not
required to sign the consent and if he signs the consent, he can set a time
period for the duration of that consent;

Include the mandatory language set forth in section 4.04(d) of Revenue
Procedure 2008-35 that refers the taxpayer to the Treasury Inspector
General for Tax Administration if he believes that his tax return information
has been disclosed or used improperly.
73
Form and Content continued
Consents Must:

Where applicable, include the appropriate mandatory
statement set forth in section 4.04(e) of Revenue Procedure
2008-35 that informs the taxpayer that his tax return
information may be disclosed to a tax return preparer located
outside the U.S;

Be in 12-point type on 8 1/2 by 11 inch paper. Electronic
consents must be in the same type as the web site’s
standard text; and

Contain the taxpayer’s affirmative consent (as opposed to an
“opt-out” clause); and

Be signed and dated by the taxpayer.
74
Form and Content continued
4 Types of Consents:

Consent to disclose tax return information in context other than tax
preparation or auxiliary services.

Consent to disclose tax return information in tax preparation or auxiliary
services context.

Consents for disclosure of tax return information to a tax return preparer
outside of the United States if the tax return information to be disclosed
does not include the taxpayer’s social security number, or if the social
security number is fully masked or otherwise redacted.

Consents for disclosure of the taxpayer’s tax return information including
a social security number to a tax return preparer outside of the United
States.
75
Form and Content continued
Adequate data protection safeguard

A tax return preparer located within the United States, including any
territory or possession of the United States, may disclose a taxpayer’s
SSN to a tax return preparer located outside of the United States or any
territory or possession of the United States with the taxpayer’s consent
only when both the tax return preparer located within the United States
and the tax return preparer located outside of the United States maintain
an adequate data protection safeguard at the time the taxpayer’s consent
is obtained and when making the disclosure.

An “adequate data protection safeguard” is a security program, policy and
practice that has been approved by management and implemented that
includes administrative, technical and physical safeguards to protect tax
return information from misuse or unauthorized access or disclosure and
that meets or conforms to one of the privacy or data security frameworks
listed in Rev. Proc. 2008-35.
76
Form and Content continued
ELECTRONIC SIGNATURES

If a taxpayer furnishes consent to disclose or use tax
return information electronically, the taxpayer must
furnish the tax return preparer with an electronic
signature that will verify that the taxpayer consented
to the disclosure or use. The regulations under
§301.7216-3(a) require that the consent be knowing
and voluntary. Therefore, for an electronic consent
to be valid, it must be furnished in a manner that
ensures affirmative, knowing consent to each
disclosure or use.
77
Electronic signatures continued

A tax return preparer seeking to obtain a taxpayer’s consent to the disclosure or
use of tax return information electronically must obtain the taxpayer’s signature on
the consent in one of the following manners:
(a) Assign a personal identification number (PIN) that is at least 5 characters long
to the taxpayer. To consent to the disclosure or use of the taxpayer’s tax return
information, the taxpayer may type in the pre-assigned PIN as the taxpayer’s
signature authorizing the disclosure or use. A PIN may not be automatically
furnished by the software so that the taxpayer only has to click a button for
consent to be furnished. The taxpayer must affirmatively enter the PIN for the
electronic signature to be valid;
(b) Have the taxpayer type in the taxpayer’s name and then hit “enter” to authorize
the consent. The software must not automatically furnish the taxpayer’s name so
that the taxpayer only has to click a button to consent. The taxpayer must
affirmatively type the taxpayer’s name for the electronic consent to be valid; or
(c) Any other manner in which the taxpayer affirmatively enters 5 or more
characters that are unique to that taxpayer that are used by the tax return
preparer to verify the taxpayer’s identity. For example, entry of a response to a
question regarding a shared secret could be the type of information by which the
taxpayer authorizes disclosure or use of tax return information.
78
Criminal Penalties

A violation of section 7216 is a misdemeanor, with a maximum penalty
of up to one year imprisonment or a fine of not more than $1,000, or
both, together with the costs of prosecution.

Section 7216(b) establishes exceptions to the general rule in section
7216(a) and also authorizes the Secretary to promulgate regulations
prescribing additional permitted disclosures and uses.

Section 6713(a) prescribes a related civil penalty for unauthorized
disclosures or uses of information furnished in connection with the
preparation of an income tax return. The penalty for violating section
6713 is $250 for each disclosure or use, not to exceed a total of
$10,000 for a calendar year. Section 6713(b) provides that the
exceptions in section 7216(b) also apply to section 6713.
79
Tax Return Preparation & Auxiliary Services

A “tax return preparer” is anyone who is engaged in the
business of preparing tax returns or providing auxiliary
services in connection with the preparation of income tax
returns.

That is true even if the preparation of tax returns or
provision of auxiliary services is not the principal
business of the organization, as well as if no fee is
charged specifically for the preparation of income tax
returns.

It also includes those that do such returns “on the side”
outside the course of business, if done for
compensation.
80
Tax Return Information

Tax return information includes any and all information
provided to a tax return preparer in connection with the
preparation of a taxpayer’s tax return.

It also includes information received from third parties in
connection with the preparation of the taxpayer’s tax return,
including items received from the IRS.

Statistical compilations of tax return information also
constitutes tax return information, even if the information is
maintained in a form that cannot be associated with the
taxpayer, unless it is for internal management and support of
the taxpayer’s business.
81
Use & Disclosure

Use of tax return information is defined as any circumstance
where the preparer refers to or relies upon tax return
information as to the basis to take or permit an action.

IRS Example:
Tax preparer inquires of taxpayers about whether they wish to
make an IRA contribution after determining if the taxpayer is
eligible to make an IRA contribution. Only those taxpayers
that are eligible to make an IRA contribution receive the
inquiry. This is a use of tax return information potentially
subject to the consent rules.

Disclosure of tax return information includes the act of
making tax return information known to any person in any
manner whatever. An extremely broad definition.
82
Permitted Disclosures without Consent

Regulation 301.7216-2 provides a list of cases where tax return
information may be used for disclosed without taxpayer consent.

CPAs need to review their state’s regulations.

The following are permitted:
1) Disclosures pursuant to other provisions of the Internal Revenue Code
or Regulations.
2) Disclosures to Officers or Employees of the IRS.
3) Disclosures or Uses for the Preparation of a Taxpayer’s Tax Return.
4) Disclosure to Other Preparers.
5) Related Taxpayers
83
Permitted Disclosures without Consent
6) Courts & Regulatory bodies.
7) Attorney for purposes of securing legal advice.
8) Officer of the Court.
9) Certain disclosures by Attorneys & Accountants.
10) Corporate Fiduciaries.
11) Taxpayer’s Fiduciary.
12) Employee of the Treasury Dept. for use in investigation of
the tax return preparer.
84
Permitted Disclosures without Consent
13) Other Tax Returns/Tax Obligations.
14) Payment for Tax Preparation Services.
15) Retention of Taxpayer records.
16) Lists for solicitation of Tax Return Business.
17) Production of Statistical information for return
preparation business.
18) Quality or Peer Reviews.
19) Disclosure to Report the Commission of a Crime.
20) Due to Tax Return Preparer’s Incapacity or Death.
85
How Do We Protect Ourselves?







Know the Rules.
Use disclosure letters.
When in doubt, use disclosure letters.
Inform your staff and all return preparers.
Have a company written policy and procedures
document that all employees must sign.
Inform your clients as you meet with them during tax
season.
Use NSA’s Tax Talk forum. It’s a free member
benefit.
86
Thank you for attending today.
 Today’s




Course has been presented by:
Marcia L. Miller, MBA, EA
Financial Horizons, Inc.
Weston, Florida
[email protected]
87
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