2016 taxease, llc 2-hour continuing education · 2016 taxease, llc 2-hour continuing education 2...
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I
2016 TaxEase, LLC
2-HOUR CONTINUING EDUCATION
2 HOUR CTEC APPROVED COURSE NUMBER - 3064-CE-0041
2 HOUR ETHICS – IRS COURSE NUMBER: B8FQK-E-00017-16-S
PHONE NUMBER: 877-829-2667 WEBSITE: www.taxeaseed.com
II
Objectives
TaxEase objective is to:
Provide continuing education for seasoned tax preparers
Provide the student with comprehensive learning material, including examples and
interactive questions and answers to assist in the learning process.
Give an update and review of current tax matters.
Supply material that will give a wealth of information for use as a reference.
Meet all the requirements for a CTEC registered tax preparer
Meet all IRS voluntary continuing education requirements to receive an IRS Record of
Completion.
Specific objectives are stated at the beginning of each chapter.
The authors of this publication are offering a continuing education program only. TaxEase LLC
and the authors are not rendering any legal, accounting or other professional advice whatsoever.
There is always the possibility of error in every publication, though we try to avoid it. If a
significant error comes to our attention, you will find a correction on our website
www.taxeaseed.com. Your own research is always recommended. All tax situations and facts
differ. We strongly recommend that you do additional research and refer to IRS code and
publications in all situations. We do not take responsibility for any professional advice given to
you or given by you to others.
Laws change frequently; please make certain to update any information given herein with the
IRS and our website.
Tax preparers can use this course to meet their 15-hour federal continuing education
requirement. TaxEase is required to report continuing education hours that a student successfully
completes to the IRS if a valid PTIN is provided on TaxEase Personal Information Form (paper
exam) or the User Information screen (online exams).
This Continuing Education class is a CTEC-approved course, which fulfills the 20-hour
“continuing education” requirements for tax preparers in California. A listing of additional
requirements to register as a CTEC tax preparer can be obtained by contacting CTEC at P.O.
Box 2890, Sacramento, CA, 95812-2890, by phone at (877) 850-2832, or on the Internet at
www.ctec.org. TaxEase, LLC is an approved education provider.
III
2015 Tax Year
This text will be continually updated to put in the 2016 tax law changes as they become
effective. The references made to 2015 are for examples where information for 2016 is not
available.
An update page will be available on our website (www.taxeaseed.com) for students to stay
abreast of the latest tax law changes. All required changes announced by CTEC will be sent to
students who previously purchased this course.
Assignments
This is an intermediate course, designed for seasoned tax preparers, who have the basic
knowledge of tax law. This course references the Internal Revenue Code, tax publications and
tax case law. TaxEase recommends that you use IRS publications available on the IRS website
for additional information, though they are not needed to complete this course.
The student is required to thoroughly read this syllabus. All courses include review questions
which we call “What Do You Think” to help guide the student. This course contains all answers
to the final exam questions.
To receive Internal Revenue publications, forms or instructions call or visit their website:
IRS: (800) 829-3676 www.irs.gov
CTEC: (877) 850-2832 www.ctec.org
CTEC rules require all students to renew their CTEC registration by October 31, 2016 (CTEC
allows late registration between Nov. 1, 2016 and Jan 15, 2017).
All continuing education must be paid for in advance. We offer a full money back guarantee, if
requested within thirty (30) days of date ordered and prior to submission of any answer sheet for
grading. TaxEase will not exchange any courses for the following year.
IV
Certification and Instructions
1. The Final Exam Questions, Final Exam Answer Sheet, Personal Information Form and
Evaluation Sheet are found at the back of this text. The exam is open book; all the answers
are included in the text.
2. There is only one correct answer per question. Mark an “X” in the correct answer box on the
Final Exam Answer Sheet provided. All questions in all sections of the Final Exam must be
completed before submitting the answer sheet to TaxEase. Only TaxEase answer sheet will
be accepted.
3. Email or fax the following items: Answer Sheet, Personal Information Form, Course
Evaluation.
Fax: 510-779-5251
Scan and email: [email protected]
4. TaxEase will grade the final exam. A score of 70% or better in each part is passing. Submit
ONLY the Answer Sheet, Personal Information Form and Evaluation Page.
5. If you do not pass the test the first time, you may retake the test within 30 days at no
additional charge.
6. Paper certificates are available instead of email certificates for $12 each. Paper certificates
are ordered on the Personal Information Form at the time the exam is submitted.
7. Students must provide TaxEase with their current CTEC number. No tests will be graded
unless the CTEC number is on the TaxEase Personal Information Form. If your registration
is not current with CTEC, do not complete this course for CTEC continuing education.
TaxEase will report your continuing education hours to CTEC within 10 days of successful
passage of this course.
8. TaxEase will report 15 hours of continuing education to your PTIN account upon successful
passage of this course if a valid PTIN is entered on TaxEase Personal Information Form.
TaxEase reports continuing education to the IRS within the required timeframes.
V
Contents
Objectives .......................................................................................................................................... II 2015 Tax Year .................................................................................................................................... III
Assignments ..................................................................................................................................... III Certification and Instructions ....................................................................................................... IV
Contents ................................................................................................................................................. V
2 HOUR ETHICS ............................................................................................................................ 1 Chapter One – Circular 230 ............................................................................................................... 1
Internal Revenue Code ................................................................................................................... 1
Circular 230 ............................................................................................................................................ 1
Annual Filing Season Program .................................................................................................... 2 Practical Examples .......................................................................................................................... 5
§ 10.21 Knowledge of Client’s Omission ................................................................................... 5
Due Diligence .................................................................................................................................... 6 Fees ..................................................................................................................................................... 8
Conflict of Interest ........................................................................................................................... 9 What Do You Think? ....................................................................................................................... 12
What Do You Think? - Answers ................................................................................................... 13 Chapter Two - Statute of Limitations .............................................................................................. 14
Date Considered Filed .................................................................................................................... 14
Mailbox Rule ...................................................................................................................................... 14
Six-Year Statute for Certain Omissions from Gross Income ............................................... 16
What Do You Think? ....................................................................................................................... 18
What Do You Think? - Answers ................................................................................................... 19
Chapter Three - Disclosure, Document Protection and Rules ................................................ 20 Internal Revenue Code §7216 ....................................................................................................... 20 IRC § 7216 - Related to the Affordable Care Act ...................................................................... 21
Revenue Procedure 2013-14 ......................................................................................................... 22 Federally Authorized Tax Practitioner-Client Privilege ......................................................... 26
What Do You Think? ....................................................................................................................... 28 What Do You Think? – Answers .................................................................................................. 29
Chapter Four - Sanctions for the Violation of Regulations ...................................................... 30 Circular 230 §10.50 Sanctions ...................................................................................................... 30 Circular 230, Subchapter C §10.51- Incompetence and disreputable conduct. .............. 30
National Taxpayer Advocate – Report to Congress ............................................................... 31 Trade or Business Expenses Under IRC §162 and Related Sections ................................ 33
Damage Awards ............................................................................................................................... 36
What Do You Think? ....................................................................................................................... 38
What Do You Think? - Answers ................................................................................................... 39 Chapter Five - Identity Theft .............................................................................................................. 28
Efforts by the IRS ............................................................................................................................. 28
SCAMS ................................................................................................................................................ 30 Information for Tax Preparers ...................................................................................................... 33
Federal Trade Commission Publications .................................................................................. 33 Return Preparer Fraud .................................................................................................................... 34
VI
False Form 1099 Refund Claims .................................................................................................. 34
Hiding Income Offshore ................................................................................................................. 36
“Free Money” from the IRS & Tax Scams Involving Social Security ................................. 37 False/Inflated Income and Expenses .......................................................................................... 37
Frivolous Arguments ...................................................................................................................... 38 Falsely Claiming Zero Wages ....................................................................................................... 38
What Do You Think? ....................................................................................................................... 40 What Do You Think? - Answers ................................................................................................... 41 Final Exam - Ethics .......................................................................................................................... 1
Answer Sheet ........................................................................................................................................ 4 2016 Continuing Education Student Course Evaluation ....................................................... 6
2016
TaxEase, LLC
2 HOUR CONTINUING EDUCATION
20 HOUR CTEC APPROVED COURSE NUMBER 3064-CE-0041
2 HOUR ETHICS – IRS COURSE NUMBER: B8FQK-E-00017-16-S
MAILING ADDRESS: c/o POSTAL ANNEX, 39270 PASEO PADRE PKWY., #624, FREMONT, CA 94538
PHONE NUMBER: 877-829-2667 WEBSITE: www.taxeaseed.com
FAX NUMBER: 510 779-5251 EMAIL: [email protected]
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Ethics
Chapter One – Circular 230
Internal Revenue Code
Congress writes the tax laws, which become part
of the Internal Revenue Code (IRC). The tax code
is amended every year.
Congress has given the IRS the power to interpret the tax code through a series of IRS
Regulations. These regulations are expanded versions of some tax code provisions with
illustrations of how the law is applied in different situations. The regulations are about four times
the length of the tax code itself. The IRS also publishes revenue rulings, revenue procedures, and
letter rulings, as well as publications and instructions, which provide guidance in much the same
manner as the regulations.
The IRS does not have the final say on interpreting the tax code. The federal court system
composed of the U.S. Tax Court, federal district courts, the U.S. Court of Federal Claims, and
U.S. Bankruptcy courts, all have the power to decide, on a case-by-case basis, how Congress
intends the tax laws to be applied. In addition, if more than $50,000 is at stake, a taxpayer can
appeal a tax court decision to a Circuit Court of Appeal and in rare cases to the U.S. Supreme
Court.
Our objective in this course is to provide practical examples and court case decisions, which will
show the practitioner a clear view of the ethics, discussed in these examples.
NOTE: Provisions of the CA Business and Profession Code referring to CA Registered Tax
Preparer are explained in the CA Section.
Circular 230
The Treasury Department Circular 230 (Revised 8-2011) is the Regulations Governing Practice
before the Internal Revenue Service. A copy of these new regulations can be found on the IRS
website.
Circular 230 is sometimes an incredibly complex document that addresses a broad range of
topics. Treasury and the IRS have consistently maintained that tax practitioners must meet
minimum standards of conduct and those who do not should be subject to disciplinary action,
including suspension or disbarment.
Objective
Understand the PTIN and AFSP
requirements for tax preparers
Understand the responsibility and
limitations of non-exempt tax preparers
Recognize the importance for the tax
preparer to use due diligence when
preparing a tax return.
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Ethics
PTIN
Beginning January 1, 2011, all paid preparers, regardless of their designation, must have a
Preparer Tax Identification Number (PTIN) before preparing returns. Tax Preparers can sign up
for their PTIN online or by paper application. Effective November 1, 2015 the fee is $50.1
The annual renewal cost is also $50 ($33 user fee and $17 third-party fee). Preparers will be able
to renew either online or on paper. All paid preparers must have a PTIN to prepare tax returns for
compensation. The PTIN does not give the preparer the right to represent taxpayers before the
IRS unless qualified by one of the designations below.
District Court Injunction
On Friday, Jan. 18, 2013, the United States District Court for the District of Columbia enjoined
the Internal Revenue Service from enforcing the regulatory requirements for registered tax return
preparers. In accordance with this order, tax return preparers covered by this program are not
required to complete competency testing or secure continuing education. The ruling does not
affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled
retirement plan agents or enrolled actuaries.
The case which was brought in U.S. District Court for the District of Columbia (Loving et al,
2013-1 USTC §50156). This case can be found online at the Government Printing Office2.
Annual Filing Season Program
The voluntary Annual Filing Season Program is intended to recognize and encourage unenrolled
tax return preparers who voluntarily increase their knowledge and improve their filing season
competency through continuing education (CE). An unenrolled or unlicensed tax preparer may
represent a tax client only if they successfully complete the AFSP course, have an active PTIN
and consent to adhere to Circular 230 practice obligations.
How to Obtain an AFSP – Record of Completion
Successfully complete 18 hours of continuing education from IRS-Approved CE Providers,
including:
A six (6) hour Annual Federal Tax Refresher (AFTR) course that covers filing season
issues and tax law updates, as well as a knowledge-based comprehension test
administered at the end of the course by the CE Provider;
Ten (10) hours of other federal tax law topics; and
Two (2) hours of ethics.
Have an active preparer tax identification number (PTIN).
Consent to adhere to specific practice obligations outlined in Subpart B and section 10.51 of
Treasury Department Circular No. 230.
1 www.irs.gov/taxpros 2www.gpo.gov/fdsys/granule/USCOURTS-dcd-1_12-cv-00385/USCOURTS-dcd-1_12-cv-00385-1/content-
detail.html
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Ethics
Record of Completion
After PTIN renewal season begins in October, a Record of Completion will be generated once all
requirements have been met, including renewal of the PTIN for 2017 and consent to the Circular
230 obligations. A PTIN that is not renewed and fees are not paid for three consecutive years
will be dropped from the IRS PTIN database. Providers will no longer be able to enter CE credits
for that preparer.
The following are exempt return preparers who can obtain the AFTR – Record of Completion
without taking the AFTR course are:
Anyone who passed the Registered Tax Return Preparer test administered by the IRS
between November 2011 and January 2013
Established state-based return preparer program participants currently with testing
requirements: Return preparers who are active registrants of the Oregon Board of Tax
Practitioners, California Tax Education Council (CTEC), and/or Maryland State Board of
Individual Tax Preparers.
SEE Part I Test-Passers: Tax practitioners who have passed the Special Enrollment Exam
Part I within the past two years
VITA volunteers: Quality reviewers and instructors with active PTINs
Other accredited tax-focused credential-holders: The Accreditation Council for
Accountancy and Taxation’s Accredited Business Accountant/Advisor (ABA) and
Accredited Tax Preparer (ATP) programs
Exempt return preparers must also renew his or her preparer tax identification number (PTIN) for
the upcoming year and consent to adhere to the obligations in Circular 230, Subpart B and
section 10.517.
AFSP participants are included in a public database of return preparers on the IRS website. The
directory includes the credentials and qualifications of all qualified federal tax return providers.
UNLIMITED REPRESENTATION RIGHTS: Enrolled agents, certified public accountants,
and attorneys have unlimited representation rights before the IRS, this means they may represent
their clients on any matters including audits, payment/collection issues, and appeals.
Enrolled Agents – People with this credential are licensed by the IRS and specifically
trained in federal tax planning, preparation and representation. Enrolled agents hold the
most expansive license the IRS grants and must pass a suitability check, as well as a three-
part Special Enrollment Examination, a comprehensive exam that covers individual tax,
business tax and representation issues. An EA is required to complete 72 hours of
continuing education every 3 years. This must be done by obtaining a minimum of 16 hours
of continuing education (including 2 hours of ethics or professional conduct) each year. For
more information on enrolled agents, see Publication 4693-A, A Guide to the Enrolled
Agent Program.
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Ethics
Certified Public Accountants are credentialed individuals (unlike Enrolled Agents)
licensed by state boards of accountancy, the District of Columbia, and U.S. territories, and
have passed the Uniform CPA Examination. They also must meet education, experience,
and good character requirements established by their boards of accountancy. In addition,
CPAs must comply with ethical requirements as well as complete specified levels of
continuing education in order to maintain an active CPA license. CPAs can offer a range of
services; some CPAs specialize in tax preparation and planning.
Attorneys are individuals with credentials licensed by state courts or their designees, such
as the state bar. Generally, requirements include completion of a degree in law, passage of
an ethics and bar exam and on-going continuing education. Attorneys can offer a range of
services; some attorneys specialize in tax preparation and planning.
LIMITED REPRESENTATION RIGHTS: Preparers without any of the above credentials
have limited practice rights and may only represent clients whose returns they prepared and
signed only at the initial audit level. Under USC section 7701(a)(36), a tax return preparer is any
person who prepares for compensation, or employs others to prepare for compensation, all or a
substantial portion of any tax return or claim for refund under the IRC.
NOTE: Registered Tax Return Preparers – Certain preparers became RTRPs under an
IRS program that IRS is no longer able to enforce due to a District Court injunction. RTRPs
passed an IRS competency test based on Form 1040 tax preparation.
In April 2015, the Office of Professional Responsibility (OPR) issued Alert 2014-05 reminding
tax preparers that the Commissioner signed a delegation order that gives OPR the authority to
process referrals for misconduct by tax return preparers who engage in limited practice before
the IRS. OPR also has the authority to issue disciplinary actions in connection with the new
Annual Filing Season Program (AFSP).
Return Preparer Office Federal Tax Preparer Statistics as of April, 2016
The IRS mentioned that many PTIN holders, who completed their Annual Filing Season
Program Courses, did not complete their Record of Completion showing they met the
requirement to comply with Circular 230. Without the Record of Completion, the tax preparer
will not be able to represent clients even though they completed the course and the tax preparer’s
CE credits are in their PTIN account.
Number of Individuals with PTIN’s for 2016 707,229
Professional Credentials
Attorneys 29,666
Certified Public Accountants 210,641
Enrolled Actuaries 320
Enrolled Agents 51,341
Enrolled Retirement Plan Agents 703
Other Qualifications
AFSP Records of Completion 60,130
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Ethics
Practical Examples
Practical Example 1: A first-time client comes into a tax preparer’s office for tax preparation.
He supplies the preparer with his W-2’S, 1099’s, Mortgage Interest Statement and a Brokers
Statement. The preparer verifies his prior year information on his 2014 tax return he supplied
and then begins to review his documents. While reviewing his documents the preparer notices
that the Brokers statement is from 2014 not 2015, furthermore there is a sale of stock and some
interest on this statement that was not reported in 2014.
The preparer discusses the omission with the client. He says that he opened the account in 2014
and noted he bought and sold some stock and had a gain on the sales of $2,500. The preparer
advises the client to amend the 2014 return as soon as possible. After further discussion, the
client decides he would rather wait for the IRS to contact him and he does not want to amend the
prior year return.
§ 10.21 Knowledge of Client’s Omission
The action taken in the above example is in accordance with §10.21 Knowledge of Client’s
Omission from Circular 230, it states that the preparer must advise the taxpayer immediately of
any error or omission discovered in a tax return. A discussion of the remedy, which in this case
would be amending the return and the interest and penalties that may occur should be completed
immediately. Amended returns are sometimes confusing to a taxpayer, it is important that the
taxpayer understands all income from all sources must be reported on a return and as a preparer
the best course of action is to amend the return.
It is the decision of the taxpayer how to proceed and not to amend this return and the preparer
must abide by that decision, even if he or she do not agree. Circular 230 does not require the
preparer to inform the IRS of the omission
NOTE: Although it is not required, if a taxpayer does not amend or correct an error or omission,
it is recommended that the preparer advises the client in writing and notations be made in the
file. In this example, it is the advice of the tax preparer that the 2014 tax return be amended
before completing the 2015 tax return. In this case, against the preparer’s advice the taxpayer did
not amend the return.
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Ethics
Due Diligence3
There is no exact set of standards a tax preparer must apply in preparing a tax return. When a tax
return is completed and ready for submission to the IRS, the taxpayer and the preparer sign a
declaration. The declaration for the preparer includes the following “Declaration of preparer
(other than taxpayer) is based on all information of which preparer has any knowledge4” under
penalties of perjury that the return is, to the best of the knowledge and belief, true, correct, and
complete.
A fundamental portion of preparer regulations has to do with the concept of reliance by the
preparer. The general rule is that the preparer may rely in good faith and without verification
upon information furnished by the taxpayer. The preparer is not required to audit, examine, or
review books and records, business operations, documents, or other evidence to verify
information provided by the taxpayer; however, the preparer may not ignore the implications of
information furnished by the taxpayer. The preparer must make reasonable inquiries if the
information as furnished appears to be incorrect or incomplete.5
Practical Example 2
It is the customary practice of the tax office to mail out tax organizers at the beginning of tax
season to all of the firm’s clients. The clients are requested to complete the organizer and return
it, when they come in for their interview. Mr. Johnson came for his appointment and as in
previous years, he brought his completed organizer. The preparer reviews a series of questions
that the tax software includes and asks a few questions from notes kept from the prior year. The
preparer then reviewed his documents. Everything was complete and a copy was kept of his W-2.
In reviewing his organizer, he had all the same interest and dividend payers as in previous years.
He did supply the 1099-INT and 1099-DIV. The taxpayer had answered the question that he had
not sold any stock during the year. The return was completed and he came in the office the next
week reviewed the return and signed Form 8879.
A few months after filing the return, Mr. Johnson received a CP2000 from the IRS regarding
missing dividends. The preparer checked his organizer and everything seemed to be in order.
Mr. Johnson called the tax preparer and said that in March 2013 he purchased several
additional shares of stock through E-trade. He had arranged for the dividends to be reinvested
and the 1099-DIV is in his E-trade account and not with his other stock holdings. The preparer
advised him to pay the amount as soon as possible.
As the preparer of the return due diligence was exercised by relying on his completed organizer
and the interview.
3 § 10.22 Diligence as to Accuracy
4 IRS 2013 Form 1040 5 §6694 1(e)1
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Ethics
A definition of “due diligence” for the purpose of tax preparation means the diligence or care
that a reasonable tax return preparer would use under the same circumstances. While court cases
relating to disciplinary or malpractice actions against preparers often refer to a preparer’s due
diligence, they do not appear to define the term in any manner that is unique to tax preparers.
10.22 (b) of Circular 230 discusses that a practitioner would have exercised due diligence if the
practitioner used reasonable care in evaluating the other practitioner and the work product he or
she supplied.
Practical Example 3
Jack, a tax preparer for many years, has rented an office in a small building that also has offices
including another tax preparer, a chiropractor, and an attorney. Many times, over the years, the
other preparer has asked Jack for assistance on some tax return issues and Jack has asked his
advice to determine if the issue on a particular return was being handled properly. He called
Jack’s office on March 30 and indicated that he had 10 returns where he had done the interview
and had completed the work papers. Since, all the information regarding the returns had been
gathered and Jack used the same software company, he asked if he would finish the returns. He
requested Jack sign them and answer any questions the taxpayer’s may have when they came to
pick up the returns. He contacted the clients, got proper permission to give Jack the information
and delivered the returns. Jack completed the returns from the work papers and only one of the
taxpayers had any additional questions, which was noted in the file.
Jack, using his colleagues work papers met the standards for due diligence.
Note: Jack could not have assisted his colleague with these returns if the colleague had been
under disbarment or suspension from practice before the Internal Revenue Service. A tax
practitioner cannot accept assistance from or assist any person who is under disbarment or
suspension if the assistance relates to a matter or matters constituting practice before the Internal
Revenue Service. Jack could not have relied on the other preparer’s work papers because that
would not have met the due diligence standard as described in §10.24 of Circular 230.
Practical Example 4
A taxpayer comes to the tax office when the preparer is unavailable; he has a packet of
documents, which he asks the receptionist to deliver. The receptionist asks the taxpayer if she
can make an appointment for him to come in for his tax interview. He declines and says the
packet of documents should be sufficient and to have the return prepared with those documents.
When the preparer reviews the documents, he notices the organizer is incomplete and he did not
have any interest or dividend statements in the package. The taxpayer had reported those items
in the previous year. The preparer contacts the taxpayer who instructs him to prepare the return
without that income. He fears he may owe tax and he will amend the return later. After a
discussion regarding reporting all income, the taxpayer says he will make an appointment soon,
but he would like to pick up his documents.
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Ethics
According to Circular 230 §10.28, at the request of a client, a tax preparer must promptly return
any and all records of the client that are necessary for the client to comply with his or her Federal
tax obligations. The practitioner may retain copies of the records returned to a client.
Records of the client include:
All documents or written or electronic materials provided to the practitioner, or obtained
by the practitioner in the course of the practitioner’s representation of the client, that pre-
existed the retention of the practitioner by the client.
The documents include materials that were prepared by the client at any time and
provided to the practitioner for tax preparation.
Also included is any return, claim for refund, schedule, affidavit, appraisal or any other
document prepared by the practitioner, or his or her employee or agent, that was
presented to the client with respect to a prior representation if such document is necessary
for the taxpayer to comply with current Federal tax obligations.
Fees
A practitioner’s fee must be reasonable in matters before the IRS. Contingent fees are only
allowed when the IRS is examining or challenging an original tax return; an amended return,
claim for a refund or credit where the amended return or claim was filed within 120 days of
taxpayer receipt of IRS examination notice. Contingent fees are also allowed for services to a
client in connection with the determination of interest or penalties assessed by the service and for
services provided with any judicial proceeding arising under the Internal Revenue Code.
Practical Example 5: A client in prior years has mailed his or her tax organizer and all
pertinent and required documents to the tax office for preparation of their tax returns, the client
picked up and reviewed the tax return and signed Form 8879 for electronic filing. No payment
was received at that time. Being a returning client the office policy is to proceed with the
electronically filing of his return. Even though the taxpayer was contacted many times, he never
paid his fee.
In late March 2014, he sent in his documents and a letter of instruction asking the preparer to
complete the return as soon as possible, but there was no payment for the prior year return. The
preparer spoke with the taxpayer who feels the fee charged in the prior year was too high. He
does not intend to pay all of it, wants the current year’s return completed, and then discuss the
matter. Since this is not the firm’s policy and the policy was clearly explained to the client, with
no resolution, his documents and notes should be returned to the taxpayer so he can meet the
filing deadline. The fee dispute for the prior year should be handled separately.
According to Circular 230 §10.28 the existence of a dispute over fees generally does not relieve
the practitioner of his or her responsibility to return documents to the taxpayer. Nevertheless, if
applicable state law allows or permits the retention of a client’s records by a practitioner in the
case of a dispute over fees for services rendered, the practitioner need only return those records
that must be attached to the taxpayer’s current return. The practitioner, however, must provide
the client with reasonable access to review and copy any additional records of the client retained
by the practitioner under state law that are necessary for the client to comply with his or her
Federal tax obligations.
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Ethics
NOTE: A tax organizer prepared by the preparer and completed by the client is considered material
prepared by the client; and must be returned to the client in a tax fee dispute.
Practical Example 6: For many years Anita, an enrolled agent, has completed the joint tax
return for Mr. Jones and Mrs. Jones. Much to her surprise, the Jones came to the office together,
and told Anita they have not lived together since May. They are not legally separated or divorce.
They want to file as Married Filing Separate. After a discussion with the Jones, Anita realized
they have some disagreements over their holdings. They are willing to waive any conflict of
interest, but Anita does not feel she can represent both of them to the best of her ability. Mrs.
Jones decides to retain another preparer; Anita provides her with a copy of the prior year return
and completes the return with Mr. Jones.
Conflict of Interest
According to Circular 230 §10.29 a conflict of interest exists if the representation of one client
will be directly adverse to another client (which in the circumstance above this would be the
case); or
The tax preparer could represent the taxpayer, if —
(1) The tax preparer reasonably believes that he or she will be able to provide competent
and diligent representation to each affected client,
(2) The representation is not prohibited by law; and
(3) Each affected client waives the conflict of interest and gives informed consent,
confirmed in writing by each affected client, at the time the existence of the conflict of
interest is known by the practitioner. The confirmation may be made within a reasonable
period after the informed consent, but not later than 30 days.
Copies of the written consents must be retained by the practitioner for at least 36 months from
the date of the conclusion of the representation of the affected clients, and the written consents
must be provided to any officer or employee of the Internal Revenue Service on request.
Practical Example 7: A new client comes to Smitty’s office to have his tax return prepared. After
the preparation of the return, the taxpayer tells Smitty he has some stock he wants to sell in the
current year and wants to know about the tax he may have to pay. He anticipates a gain of about
$10,000. Smitty had prepared his prior year return and correctly noted a $9,500 capital loss
carryover. $3,000 of that loss was used on the return that was just prepared. Smitty explains to
him that he can use this carryover loss to offset $6,500 of his gain and the remainder would be
taxed at 15% with his income. The taxpayer then tells Smitty that he would be willing to pay him
for some advice on which stock he should buy and asks him to do some research on three
different stocks. Smitty does not accept his offer and explains that this kind of research is not
directly related to the preparation of the tax return.
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In the latest clarification from the IRS, Circular 230 §10.3(f)(3) states that tax return preparers
are allowed to provide advice to a client that is reasonably necessary to prepare a document
intended to be submitted to the IRS. Preparation of a tax return, claim for refund, or other
document intended to be submitted to the Internal Revenue Service for a current or future tax
period would meet that qualification. The taxpayer does not have to engage the preparer for the
period in question, but the information must be about a document intended to be submitted to the
IRS. In the example above the advice would not be related to a document intended to be
submitted to the IRS.
NOTE: The IRS has released final regulations6that eliminate the overly complex covered opinion
rules in Circular 230 by replacing them with a new competence standard. Section 10.35 now
requires practitioners to "possess the necessary competence to engage in practice before the
Internal Revenue Service" and states "competent practice requires the appropriate level of
knowledge, skill, thoroughness, and preparation necessary for the matter for which the
practitioner is engaged." The final rules also allow practitioners to remove the Circular 230
notices at the end of emails, which will make communications with clients less complex
Practical Example 8: According to the Office of Professional Responsibility the majority of
sanctions on preparers have been for failure to file their own tax returns
Circular 230 §10.50 and §10.51 state that incompetence and disreputable conduct for which a
practitioner may be sanctioned includes willfully not filing a Federal tax return and filing a
Federal income tax return in an untimely manner. This section pertains to tax preparers as well as
taxpayers. It is important that tax preparers understand the tax rules as interpreted by the IRS and
follow them. Below is a chart from OPR V. Timothy L Baldwin Complaint No. 2010-08:
6 TD 9668 June 12, 2014
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Timothy Baldwin, in the case above, was an attorney engaged in practice before the IRS and he
willfully failed to file his tax returns violating §10.51. Mr. Baldwin was suspended from practice
before the IRS, indefinitely. Reinstatement was left to the sole discretion of the Office of
Professional Responsibility.
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What Do You Think?
Q1. The following are correct regarding the PTIN, except?
A. Enrolled Agents are required by regulation to enter a PTIN on all
tax returns submitted to the IRS.
B. The PTIN program cannot be conditional upon testing and
continuing education.
C. The IRS requires all tax professionals who prepare taxes for
compensation to have a PTIN.
D. A fee is required for PTIN’s on an annual basis.
Q2. Which of the following is exempt and able to obtain the AFSP – Record of Completion
without taking the AFTR course?
A. A CTEC Registered tax preparer.
B. A VITA volunteer
C. Anyone who passed the Registered Tax Return Preparer test administered by the IRS
between November 2011 and January 2013.
D. All of the above are correct.
Q2. A client called and needed advice regarding Social Security Income and wanted to know
whether they should take early Social Security Benefits or wait until they reached full retirement
age. The client is single and has a small business, which for the last few years has earned a profit
of about $40,000 a year and investments of about $10,000. Which of the following would qualify
as best practices as described in Circular 230 §10.33?
A. Advise the client to go to Social Security website and use the calculator to see how the
benefits will be reduced due by taking early Social Security.
B. Review the tax return and call the client to determine when he is planning on retiring,
Discuss the reduction of social security benefits due to his net income from his business
and the reduction of benefits due to his age. With that information, refer him to the SSA
website for additional information.
C. Tell him the decision is his and if he needs the money he should apply.
D. None of the above.
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What Do You Think? - Answers
Q1: A is the correct answer,
EA’s who prepare tax returns for compensation are required to have a PTIN by
statute not by regulation.
The PTIN program now requires all tax professionals who prepare tax returns for compensation
to have a PTIN. Tax professionals must renew their PTIN’s annually. Currently the fee to renew
is $50.
Answer Q2 - D – Is the correct answer
Who is exempt and able to obtain the AFSP – Record of Completion without taking the
AFTR course?
• Anyone who passed the Registered Tax Return Preparer test administered by the IRS
between November 2011 and January 2013.
• Established state-based return preparer program participants currently with testing
requirements: Return preparers who are active members of the Oregon Board of Tax
Practitioners and/or the California Tax Education Council.
• SEE Part I Test-Passers: Tax practitioners who have passed the Special Enrollment Exam
Part I within the past two years as of the first day of the upcoming filing season.
• VITA volunteers: Quality reviewers and instructors with active PTINs.
• Other accredited tax-focused credential-holders: The Accreditation Council for
Accountancy and Taxation’s Accredited Business Accountant/Advisor (ABA) and
Accredited Tax Preparer (ATP) programs
Q3: B is the correct answer.
According to Circular 230 §10.33 Best Practices - tax preparers should provide clients with the
highest quality representation concerning Federal tax issues by adhering to best practices in
providing advice, as well as communicating clearly, establishing the relevant facts and advising the
taxpayer of the importance of the conclusions reached.
It is important that any questions asked of a tax preparer directly related to the tax return are
answered using current law and the best interest of the taxpayer. It is equally as important that
the preparer advise the client where additional information may be found, if applicable.
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Chapter Two - Statute of Limitations
Date Considered Filed
The IRS is subject to a statute of limitations for assessing taxes. Generally, taxes must be
assessed within three years of the due date of the return, or the date the return is filed, whichever
is later.7 The filing of a substitute return by the IRS does not start the running of the period of
limitations on assessment and collection. 8
Early filing of a return before the due date is considered filed by the due date. Late filing of a
return is considered filed on the date received by the IRS.
Mailbox Rule
If any document, which must be filed by a certain date, is delivered by U.S. mail after that date,
the date of the U.S. postmark stamped on the envelope is deemed to be the date of delivery.9 This
“mailbox rule” applies only in cases where the document is actually received by the IRS after the
statutory period. If a document is sent by registered or certified mail, this is evidence that the
document was delivered to the office to which it was addressed, and in that case the postmark is
deemed the date of delivery10.
The regulation provides that a private delivery service designated under criteria established by
the IRS will also constitute prima facie evidence of delivery. A list that the IRS accepts from
Notice 2015-38 is in the Update Section.
Common Law “Mailbox Rule”
It is the IRS's position that if a return was never received by the IRS and the taxpayer cannot
prove that it was mailed by registered mail, certified mail, or by a private delivery service
designated by the IRS, then the return was not timely filed. According to the IRS, Code Sec.
7502 preempts the "common law mailbox rule."
The common law mailbox rule was first acknowledged by the Supreme Court in Rosenthal v.
Walker, 111 U.S. 185 (1884). In that case, the Court held that if a letter properly addressed is
proved to have been either put into the post office or delivered to a postal worker, it is presumed,
that it reached its destination at the regular time, and was received by the person to whom it was
addressed. Therefore, the common law mailbox rule provides proof of mailing of a properly
addressed communication bearing proper postage create a presumption that the communication
was received.
7 IRC §6501(a) 8 Gleason v. Comm'r, T.C. Memo. 2011-154 9 IRC §7502(a) 10 IRC §7502 (c)
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The IRS's position that the common-law mailbox rule has been preempted by Code Sec. 7502
has been upheld by some circuit courts but rejected by others, thus creating a split in the courts.
In and, the Second and Sixth Circuits held
In the Deutsch case11, the taxpayer offered the affidavit of his accountant who stated he mailed a
copy of the relevant tax document within the prescribed time period. The Second Circuit held for
the IRS and stated that Code Sec. 7502 provided an easily applied, objective standard. A similar
conclusion was reached in the Miller case12, where the IRS records failed to establish a refund
claim was ever received. The Sixth Circuit rejected the taxpayer's offer of proof of timely
mailing to the IRS.
Relying on the Second Circuit's Deutsch decision, the Sixth Circuit concluded the only
exceptions to Code Sec. 7502's physical delivery rule were those found in the statute. However,
other circuit courts have concluded that where a taxpayer does not rely on Code Sec. 7502's
protection and produces evidence beyond their own testimony that it mailed the tax document
early enough to allow timely receipt by the IRS in the regular course of U.S. post office business,
the common law mailbox rule may be used.
E-file
A return that is filed using IRS e-file is considered filed on time if the authorized electronic
return transmitter postmarks the transmission by the return's due date. The electronic postmark is
a record of when the authorized electronic return transmitter received the transmission of the
electronically filed return on its host system. The date and time in the filer's time zone controls
whether the electronically filed return is timely.13
Deposits made by the Electronic Federal Tax Payment System
Deposits must be initiated by 8 pm ET at least one calendar day before the deposit due date to be
considered timely.
Extension of time to File
Individuals can request an automatic six-month extension of time to file their income tax returns.
For a calendar-year taxpayer, this would extend the due date for filing from April 15 to October
15.14 The automatic extension only extends the due date for filing the return - it does not extend
the due date for paying any tax due by the regular due date.
11 Deutsch v. Comm'r, 599 F.2d 44 (2d Cir. 1979) 12 Miller v. U.S., 784 F.2d 728 (6th Cir. 1986) 13 Reg. Sec. 301.7502-1(d)(1) 14 Reg. Sec. 1.6081-4(a)
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The extension request must show the full amount properly estimated as tax for the tax. The
Second Circuit has held that a taxpayer should be treated as having properly estimated his tax
liability when he or she makes a bona fide and reasonable estimate of his or her tax liability
based on the information available to the taxpayer at the time he or she requests the extension.15
This requires the taxpayer to judge or determine his or her tax liability generally, but carefully.
Thus, if a taxpayer, in a Form 4868 request for automatic extension, estimated his or her tax
liability to be zero, even though at the time the taxpayer submitted the request, he or she had
ample evidence discrediting the estimate, the Form 4868 would be invalid. Further, to be treated
as having properly estimated his or her tax liability, the taxpayer must make a bona fide and
reasonable attempt to locate, gather, and consult information that will enable the taxpayer to
make a proper estimate of his or her tax liability.
The IRS can terminate an automatic extension at any time by mailing the individual a notice of
termination at least 10 days before the termination date designated in the notice. The IRS must
mail the notice of termination to the address shown on the Form 4868 or to the individual's last
known address.
Six-Year Statute for Certain Omissions from Gross Income
If a taxpayer omits an amount from gross income that is properly includible in gross income and
that amount is in excess of 25 percent of the gross income stated in its return, the statute of
limitations on the assessment of taxes is extended from three years to six years16
For returns filed after July 31, 2015, an understatement of gross income by reason of an
overstatement of unrecovered cost or other basis is an omission from gross income for purposes
of the extended six year limitations period.17
Prior to the enactment of Pub. L. 114-41 (7/31/15) , which modified Code Sec. 6501(e)(1)(B) as
noted above, Previously, there was considerable controversy over whether or not an
overstatement of basis on the sale of property, which reduces gain reported on a tax return,
constitutes an omission from gross income that triggers the six-year statute.
There are several cases where the courts seem to be at odds in this area. The two cases most
often referred to are the following:
In Colony, Inc. v. Comm'r, 357 U.S. 28 (1958), the Supreme Court held that an overstatement of
basis was not an omission from gross income that triggered the longer statute of limitations. The
IRS argued that the Supreme Court's decision in Colony no longer applied as a result of changes
to Code Sec. 6501(e)(1)(A). Some courts agreed, other courts concluded that the Colony decision
did still apply and an overstatement of basis was not an omission of gross income.
15 Berlin v. Comm'r, 59 F.2d 996 (2d Cir. 1932) 16 (Code Sec. 6501(e)(1); 6229(c)(2)). 17 Code Sec. 6501(e)(1)(B)
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The IRS then issued regulations defining "omission from gross income" and "gross income" for
purposes of determining whether the six-year statute of limitations should be applied. As a result
of the conflicting court opinions on whether an overstatement of basis triggered the extended
statute of limitations and whether the IRS could essentially issue regulations overruling court
decisions it did not agree with, the Supreme Court agreed to hear one of the cases.
In U.S. v. Home Concrete & Supply, LLC, 2012 PTC 94 (S. Ct. 2012), the Supreme Court
affirmed a Fourth Circuit decision which, rejected IRS assertions that an overstatement of basis
on the sale of property triggers the six year statute of limitations. The Supreme Court relied on its
decision in Colony, Inc. v. Comm'r, 357 U.S. 28 (1958).
According to the Supreme Court, its prior decision in Colony had already interpreted the statute.
Thus, the Supreme Court's decision invalidated the portion of the regulations that said an
overstatement of basis was considered in calculating an omission of gross income. The Court
determined that an "understatement" of basis was not an "omission" for purposes of the statute.
In reaching this decision, the Court looked at the legislative history of the provision and
concluded that Congress intended an exception to the usual three-year statute of limitations only
in a restricted type of situation - a situation that did not include overstatements of basis. As a
result, of the decision, the taxpayers were allowed to avoid certain taxes because the IRS did not
discover their overstated basis until after the normal three-year period.
In July, 2015 Congress effectively reversed the Supreme Court's holding. In the Surface
Transportation and Veterans Health Care Choice Improvement Act of 2015, Congress amended
Code Sec. 6501 to clarify that an understatement of gross income because of an overstatement of
unrecovered cost or other basis is an omission from gross income for purposes of the six-year
statute of limitations.
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What Do You Think?
Q1. The “mailbox rule” applies only in cases where the document
__________________after the statutory period
A. Is mailed
B. Is sent be private courier
C. Is actually received by the IRS
D. None of the above
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What Do You Think? - Answers
Answer Q1 – C Is the correct answer
If any document, which must be filed by a certain date, is delivered by U.S. mail
after that date, the date of the U.S. postmark stamped on the envelope is deemed
to be the date of delivery.18 This “mailbox rule” applies only in cases where the
document is actually received by the IRS after the statutory period. If a
document is sent by registered or certified mail, this is evidence that the document was delivered
to the office to which it was addressed, and in that case the postmark is deemed the date of
delivery19.
18 IRC §7502(a) 19 IRC §7502 (c)
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Chapter Three - Disclosure, Document Protection and Rules
Internal Revenue Code §7216
On January 1, 2009, tax return preparers became
subject to many additional rules regarding the use
and disclosure of their clients’ tax return
information. These new rules and restrictions
create everyday problems by complicating a tax
preparer’s ability to use or disclose return
information.
These changes made it very difficult for any tax preparer to share tax return information with
anyone other than the IRS or state taxing authorities without obtaining a taxpayer’s consent.
Disclosure regulations under Internal Revenue Code §7216 became effective January 1, 2009.
The regulations give taxpayers greater control over their personal tax return information. The
statute limits tax return preparers’ use and disclosure of information obtained while preparing a
taxpayer’s return to activities directly related to the preparation. The regulations describe how
preparers, with the informed written consent of taxpayers, may use or disclose return information
for other purposes. The regulations also describe specific and limited exceptions that allow a
preparer to use or disclose return information without the consent of taxpayers.
Consents to disclosure of a taxpayer’s tax return information – paper or electronic – must contain
certain specific information. Every consent form must include:
Tax preparer name and the taxpayer’s name
The nature of the disclosure and intended purpose
To whom the disclosures will be made
Details on the information being disclosed
The particular use authorized
The product or service for which the tax return information will be used.
Expansion of the definition of “return preparer”
The new rules apply only to “return preparers.” Tax return preparers for this purpose are defined
as persons who participate in the preparation of tax returns for taxpayers. These include, but are
not limited to:
Return preparers who are in business or hold themselves out as preparers.
Casual preparers who are compensated for their services
E-file providers
Electronic return originators and electronic return transmitters
Intermediate service providers
Software developers
Reporting Agents
Objective
Identify when a consent for disclosure is
required.
Awareness that specific wording must be
included in a consent to use or disclose
form.
Recognize the importance of protecting
taxpayer data.
Adherence to the appropriate tax preparer
conduct
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The definition of a “return preparer” also now extends to those who assist the tax preparer in
preparing returns, such as tax preparers’ employees who perform services in connection with the
preparation of a tax return, and those individuals outside the office who perform services in
connection with the preparation of return.
IRC § 7216 - Related to the Affordable Care Act
Internal Revenue Code § 7216 is a criminal provision enacted by the U.S. Congress in 1971 that,
except as provided in regulations, prohibits tax return preparers from knowingly or recklessly
disclosing tax return information or using tax return information for a purpose other than
preparing, or assisting in preparing, an income tax return. This provision applies to tax return
preparers who also offer services and education related to the Affordable Care Act. Violators are
subject to a $1,000 fine or a year in prison, or both.
The regulations under § 721620, were issued as final regulations effective on Dec. 28, 2012.
In addition to criminal penalties, a civil penalty of $250 for each unauthorized disclosure or use
of tax return information by a tax return preparer may be imposed21. The total amount imposed
on any person shall not exceed $10,000 in any calendar year.
The IRS takes the privacy rights of America's taxpayers very seriously and is committed to
protecting those rights. Section 7216 prohibits tax return preparers, including those who also
offer services and education related to the Affordable Care Act, from knowingly or recklessly
disclosing or using tax return information for unauthorized purposes.
The tax return information a tax return preparer can disclose or use depends on whether the
preparer obtains consent from the taxpayer, or whether Treas. Reg. § 301.7216-2 provides an
exception to the general prohibition on disclosure or use of tax return information without
taxpayer consent.
The §7216 regulations permit tax return preparers to use a list of client names, addresses, email
addresses, phone numbers and each client’s income tax form number to provide clients general
educational information, including general educational information related to the Affordable
Care Act.
Example: A tax return preparer may mail general educational information to all clients
regarding health care enrollment options available through the new health insurance
marketplaces without obtaining consent.
Tax return preparers who use tax return information to solicit and facilitate health care
enrollment services must first obtain taxpayer consent to do so.
20 Treas. Reg. §§ 301.7216-1 to 301.7216-3 21 IRC §6713
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Example: Return Preparer Joe is also a health care "navigator" who would like to use tax
return information22, to solicit and facilitate enrollment of eligible clients into qualified health
plans available through the new health insurance marketplaces. Joe must obtain taxpayer
consent prior to using the tax return information in assisting taxpayers in connection with the
solicitation and facilitation of the enrollment of Joe’s eligible clients into qualified health care
plans. See Rev. Proc. 2013-14 (I.R.B. 2013-3, Jan.4, 2013 for information regarding the
qualification requirements for health care navigators, agents, or brokers visit healthcare.gov.
Starting Jan.1, 2014, tax return preparers must use the mandatory language in Rev. Proc. 2013-
14. See Rev. Proc. 2013-19.
Revenue Procedure 2013-1423
This Rev. Proc supersedes and modifies the rules issued in 2008-35 (effective Jan 14, 2013) The
IRS has provided guidance to tax return preparers about the format and content of taxpayer
consents to disclose and consents to use tax return information and modified the mandatory
language required on each taxpayer consent. The guidelines applies to individuals filing a return
in the Form 1040 series. The revenue procedure also lists specific requirements for electronic
signatures when a taxpayer executes an electronic consent to the disclosure or consent to the use
of the taxpayer’s tax return information.
In the revenue procedure, the IRS says that some taxpayers have expressed confusion over
whether they must complete consent forms to engage a tax return preparer to perform tax return
preparation services. The modified mandatory language required in consent forms clarifies that a
taxpayer does not need to complete a consent form to engage a tax return preparer to perform
only tax return preparation services. One example in the revenue procedure provides that if a tax
return preparer makes provision of tax preparation services contingent on the taxpayer’s signing
a consent, the consent is not valid because it is not voluntary. However, a taxpayer must
complete a consent form as described in the revenue procedure to allow a tax return preparer to
disclose or use tax return information in providing services other than tax return preparation.
IRC §7216 prohibits a tax return preparer from “knowingly or recklessly” disclosing or using tax
return information. A violation could result in a preparer’s being charged with a criminal
misdemeanor, involving a maximum penalty of $1,000 or one year in prison, or both, plus costs
of prosecution.
Under the revenue procedure, each separate consent to disclosure or use of tax return information
must be contained on a separate written document (either paper or electronic). The separate
written document may be provided as an attachment to an engagement letter furnished to the
taxpayer.
22 Treas. Reg. §301.7216-1(b)(3), 23 Appendix Rev Proc 2013-14
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The revenue procedure prescribes the required paper size and font size for consents on paper. For
electronic consents, the revenue procedures requires the consent to appear on its own screen,
prescribes the text size, and says there must be sufficient contrast between the text and
background colors.
The revenue procedure provides mandatory statements that must be included in a consent in
various circumstances, including:
1. Consent to disclose tax return information in a context other than tax return preparation
or auxiliary services;
2. Consent to disclose tax return information in the context of tax return preparation or
auxiliary services; and
3. Consent to use tax return information.
All consents must also contain the following statement:
If you believe your tax return information has been disclosed or used improperly in a
manner unauthorized by law or without your permission, you may contact the Treasury
Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or
by email at [email protected].
The revenue procedure also provides mandatory language to be included in any consent
to disclose tax return information to a tax return preparer located outside the United
States.
All consents must require the taxpayer’s affirmative consent to a tax return preparers’
disclosure or use of tax return information. An “opt-out” consent, which requires the
taxpayer to remove or deselect disclosures or uses that the taxpayer does not wish to be
made, is not permitted. For an electronic consent to be valid, it must be furnished in a
manner that ensures the taxpayers’ affirmative, knowing consent to each disclosure or
use.
All consents to disclose or use of tax return information must be signed by the taxpayer.
For consents on paper, the taxpayer’s consent to a disclosure or use must contain the
taxpayer’s handwritten signature. For electronic consents, a taxpayer must sign the
consent by any method prescribed in Rev. Proc. 2013-14. (See Appendix)
A tax return preparer may not alter a consent form after the taxpayer has signed the document;
therefore, a tax return preparer cannot present a taxpayer with a consent form containing blank
spaces for completing the spaces after the taxpayer has signed the document.
Practical Example 9: The tax preparer does not acquire a consent form from a taxpayer when
a draft of the taxpayer's Schedule C is requested by the retirement administrator to determine
the amount of retirement contribution that can be contributed by the taxpayer.
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In this case, the tax preparer did not meet any of the exceptions. Disclosure of tax return
information to a taxpayer’s retirement administrator does not fit within any of the exceptions
under the second revised Regulation (301.7216-2) to the requirement of prior written consent.
Accordingly, the taxpayer should have a signed consent form before the preparer made the
disclosure.
The following are the items listed in Reg. §301.7216-2 allowing a tax preparer to disclose tax
information without written consent:
A. Disclosure pursuant to other provisions of the Internal Revenue Code.
B. Disclosures to the IRS. NOTE: If doing a state return for the taxpayer, information may
be disclosed to a state taxing authority.
C. Disclosures or uses for preparation of a taxpayer's return—
a) Updating Taxpayers' Tax Return Preparation Software.
b) Tax return preparers located within the same firm in the United States.
Practical Example 10: A taxpayer sent an email to his tax preparer, which read: “I'm in the
process of refinancing my home loan, and if the mortgage company calls, please provide them
with whatever they request”. The tax preparer prints the email and puts it in the client’s file.
When the mortgage lender calls a week, later the preparer gives the information the lender
requests.
Again, the preparer did not meet the requirements of §7216 or Rev Proc. 2013-14. The preparer
should have sent the appropriate consent form to the taxpayer for signature. The preparer should
not provide any tax return information to the third party until the preparer received the signed
consent form from the taxpayer. A letter, email, or note is not sufficient.
Adequate data protection safeguards A tax return preparer located within the United States, including any U.S. territory or possession,
may disclose a taxpayer’s Social Security number to a tax return preparer located outside the
United States or any U.S. territory or possession with the taxpayer’s consent. Both the tax return
preparer located within the United States and the tax return preparer located outside the United
States must maintain an “adequate data protection safeguard”, at the time the taxpayer’s consent
is obtained and when making the disclosure.
The revenue procedure describes an “adequate data protection safeguard” as the following:
a) An implemented security program, which is explained to all employees and monitored by
management, and
b) A written policy put into practice and reviewed, and
c) It must include technical and physical safeguards to protect tax return information from
misuse, unauthorized access, or disclosure, and
d) It must follow and conform to one of the data security frameworks described in the
revenue procedure24.
24 IRS Publication 1075, Tax Information Security Guidelines for Federal, State and Local Agencies and Entities
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Electronic signatures 1. For electronic consents, the tax return preparer must obtain the taxpayer’s signature on
the consent in one of the following ways:
2. Assign a personal identification number (PIN) that is at least five characters long to the
taxpayer.
3. Have the taxpayer type in the taxpayer’s name and then select “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.)
4. Any other manner in which the taxpayer affirmatively enters five or more characters
unique to the taxpayer that the tax return preparer uses to verify the taxpayer’s identity.
Document Rules25
The revenue procedure includes three examples showing the application of its rules.
A tax preparer cannot willfully sign a tax return or advise a taxpayer knowing that the
return, documentation, or other submitted papers lack a reasonable basis or if the tax
preparer should have known the information lacks a reasonable basis.
The tax preparer cannot take an unreasonable position, or a willful attempt to understate
the tax liability or a reckless disregard of rules by the preparer.
A tax preparer may not advise a client to take a frivolous tax position on any document
affidavit or other submitted papers.
Practical Example 11: A taxpayer comes to a tax preparer, he is divorced and his child lives all
year with his ex-wife. He instructs the preparer to claim the child as his dependent because he
pays child support.
This would be an unreasonable position and should be explained to the taxpayer. The tax
preparer should not take this position on the tax return because the child did not live with the
taxpayer during the year and there is no reasonable basis to take the child as a dependent.
Any penalties that are likely to be applied must be communicated to the taxpayer by the tax
preparer if the tax preparer advised the taxpayer with respect to the position, prepared or signed
the tax return or any other document submitted to the IRS. The tax preparer can rely on
information provided by the taxpayer without verification, but the tax preparer may not ignore
implications of information furnished that appear to be incorrect or inconsistent with other
factual assumptions.
25 IRC §6694
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Practical Example 12: Use the same facts as in practical example 11. Also, assume the taxpayer
is not satisfied with the answer and says he will do his own return, because the preparer will not
sign the return with an unreasonable position. The preparer tells the taxpayer that if he
knowingly claims a child that is not considered his dependent, the taxpayer will be subject to
penalty and his position will not be sustained.
A tax preparer advising a taxpayer to take a position on a tax return, document, affidavit or other
paper submitted to the Internal Revenue Service, or preparing or signing a tax return as a
preparer, generally may rely in good faith without verification upon information furnished by the
taxpayer. The tax preparer may not, however, ignore the implications of information furnished
to, or actually known by, the tax preparer, and must make reasonable inquiries if the information
as furnished appears to be incorrect, inconsistent with an important fact or another factual
assumption, or incomplete.
Penalties The new rules have criminal as well as civil penalties that can apply. Further, violations can be
sanctioned by restriction on a practitioner’s right to practice before the IRS.
A civil penalty is imposed under IRC §6713(a) for unauthorized disclosures or uses of
information furnished in connection with the preparation of an income tax return. The penalty for
violating IRC §6713 is $250 for each disclosure or use, not to exceed a total of $10,000 for a
calendar year. IRC §7216 imposes a criminal penalty on tax return preparers who knowingly or
recklessly make an unauthorized use or disclosure of tax return information provided to them in
connection with the preparation of an income tax return. A maximum $1,000 fine or
imprisonment of no more than one year, or both, may be imposed for each violation.
Federally Authorized Tax Practitioner-Client Privilege26
Generally, with respect to tax advice, the same common law protections of confidentiality
applies. The privilege which applies to a communication between a taxpayer and an attorney
shall also apply to a communication between a taxpayer and any federally authorized tax
practitioner to the extent the communication would be considered a privileged communication if
it were between a taxpayer and an attorney. The privilege may only be asserted in any
noncriminal tax matter before the Internal Revenue Service and any noncriminal tax proceeding
in Federal court brought by or against the United States
The term federally authorized tax practitioner means any individual who is authorized under
Federal law to practice before the Internal Revenue Service.27 The term tax advice means advice
given by an individual with respect to a matter, which is within the scope of the individual's
authority to practice.
26 IRC §7525 27 USC §330
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NOTE: Be cautious, this is an area where the IRS usually prevails; there is a difference between
tax preparation and tax advice. Items which are entered on a tax return and submitted to the IRS
cannot be considered privileged.
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What Do You Think?
Q1. Which of the following are correct regarding a consent to disclose in Rev
Proc. 2013-14?
A. A tax return preparer makes provision of tax preparation services
contingent on the taxpayer’s signing a consent. The consent is not valid
because it is not voluntary.
B. A taxpayer must complete a consent form as described in the revenue
procedure to allow a tax return preparer to disclose or use tax return
information in providing services other than tax return preparation.
C. A taxpayer does not need to complete a consent form to engage a tax return preparer to
perform only tax return preparation services.
D. All of the above
Q2. Which of the following is a correct statement?
A. If the taxpayer insists, the tax preparer must sign the return even if the preparer has
reasonable knowledge that information supplied is incorrect.
B. If a taxpayer is self-employed, the tax preparer must audit the taxpayer’s books to
complete the tax return.
C. The tax preparer can rely on information provided by the taxpayer without verification.
D. The tax preparer does not have to advise a taxpayer of potential penalties on a position, if
the return is going to be filed with the IRS
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What Do You Think? – Answers
Answer Q1: D All of the items are correct. In Rev Proc. 2013-14, the IRS says that some taxpayers have expressed confusion
over whether they must complete consent forms to engage a tax return preparer to
perform tax return preparation services.
The modified mandatory language required in consent forms clarifies that a taxpayer does
not need to complete a consent form to engage a tax return preparer to perform only tax
return preparation services.
The revenue procedure provides that if a tax return preparer makes provision of tax
preparation services contingent on the taxpayer’s signing a consent, the consent is not
valid because it is not voluntary.
A taxpayer must complete a consent form as described in the revenue procedure to allow a tax
return preparer to disclose or use tax return information in providing services other than tax
return preparation.
Answer Q2: C is the correct answer.
According to §6694, any penalties that are likely to be applied must be communicated to the
taxpayer by the tax preparer if the tax preparer advised the taxpayer with respect to the position,
prepared or signed the tax return or any other document submitted to the IRS. The tax preparer
can rely on information provided by the taxpayer without verification, but the tax preparer may
not ignore implications of information furnished that appears to be incorrect or inconsistent with
other factual assumptions.
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Chapter Four - Sanctions for the Violation of Regulations
Circular 230 §10.50 Sanctions
Circular 230 §10.50 gives the OPR the authority to
censure, suspend or disbar any practitioner from
practice before the IRS if he or she fail to comply
with the conduct of standards. Monetary penalties may also be assessed to individuals and/or
firms who violate these provisions.
Circular 230, Subchapter C §10.51- Incompetence and disreputable conduct.
The following is an overview of §10.51 Incompetence and disreputable conduct for which a
practitioner may be sanctioned includes but is not limited to —
Conviction of any criminal offense under the Federal tax laws.
Giving false or misleading information to the Department of the Treasury or any
officer or employee or facts or other matters contained in Federal tax returns,
financial statements and any other document or statement, written or oral, which
are included in the term “information.”
Failing to file a Federal tax return in violation of the Federal tax laws, or willfully
evading or attempting to evade any assessment or payment of any Federal tax.
Assisting, counseling, encouraging a client in violating, or suggesting to 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
or payment.
Tax Law Case 10-243 - USA v. Mobley
Tax preparer Alice Mobley, paid $10 to $20 per person to a friend to gather social security
numbers to use fraudulently on tax returns. Those selling their information were paid $500 for
adult numbers and $600 for children’s’ numbers. Mobley’s Preyear Tax and Check Cashing in
Atmore Mobley’s home and other business locations were raided by federal agents on March 4,
2010. Investigators found complete identification information on 536 people, including Social
Security cards, Medicaid cards and other documents.
Mobley also “split” dependents, using the identity of some children on one return to obtain
Earned Income Credit, and on other returns to obtain Child Credit and Dependent Care Credits.
Mobley’s firm also prepared returns, which claimed business tax deductions for business, which
did not exist and farm tax deductions for clients who did not have farms.
Objective
Recognize what constitutes
misconduct in a tax preparer
Understand the importance of Form
8275 – Disclosure Statement
Understand the importance of being
an informed tax preparer.
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The following can be basis for sanctions:
Although “trade or business” is one of the most widely used terms in the IRC, neither the Code
nor the Treasury Regulations provide a definition. The definition of a “trade or business” comes
from common law, where the concepts have been developed and refined by the courts. The
Supreme Court has interpreted “trade or business” for purposes of IRC §162 to mean an activity
conducted with “continuity and regularity” and with the primary purpose of earning income or
making profit.28
A court considers damage awards for emotional distress to be excludible from
income.
National Taxpayer Advocate – Report to Congress
The National Taxpayer Advocate’s Annual Report to Congress identifies the most serious
problems facing taxpayers and recommends solutions to those problems. §7803(c)(2)(B)(ii) of
the Internal Revenue Code requires the National Taxpayer Advocate to submit this report each
year and in it, among other things, to identify at least 20 of the most serious problems
encountered by taxpayers and to make administrative and legislative recommendations to
mitigate these problems. Nina Olsen is the National Taxpayer Advocate.
Nina Olson’s job, as the National Taxpayer Advocate, is to discover any way in which the IRS
bureaucracy or the tax laws passed by Congress are harming taxpayers. Tax-filing season is
when those problems are most easily detected.
An analysis of IRS data by the Office of the Taxpayer Advocate shows it takes U.S. taxpayers
more than 6.1 billion hours to complete filings required by a tax code that contain almost four
million words and that, on average, has more than one new provision added to it daily. Indeed,
few taxpayers complete their returns without assistance. Nearly 60 percent of taxpayers hire paid
preparers and another 30 percent of people rely on commercial software to prepare their returns.
To inspire confidence and trust, the tax laws should be comprehensible and the computations of
tax should be transparent and relatively simple, yet few taxpayers today can confidently say they
understand the tax code or even that they have correctly computed their tax liabilities.
The office is located within the IRS, but independent of its authority. The Taxpayer Advocate
Service helps taxpayers with liens or delayed refunds navigate the IRS.
Congress created the office of the National Taxpayer Advocate in 1996 as a resource for
taxpayers with “significant hardship[s]” like extraordinary delays, legal threats or substantial
costs. Olson says she is placing particular attention now on fraud.
Only the most serious cases get elevated to Olson’s desk. Last year 26 of the “taxpayer
assistance order” cases she saw focused on fraud, specifically tax preparer fraud. In the previous
few years, she had 10 cases elevated to her desk.
28 Taxpayer Advocate ARC 2012
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The Office of the Taxpayer Advocate also analyzes the most litigated issues each year. The
Report to Congress discusses this litigation and shows the court cases that were analyzed. This
gives unique insight to the tax preparer on how the IRS looks at different situations. The
following is an overview of some of the litigated issues from National Tax Advocate’s Annual
Report to Congress.
Accuracy Related Penalty
Many different circumstances can result in an accuracy related penalty for the taxpayer or for the
tax preparer. A common defense against the accuracy-related penalty is reliance on tax software
The IRS and court decisions have sustained accuracy related penalties where the taxpayer or
preparer relies on the software. 66% of the time when the taxpayer or tax preparer blamed
software for inaccuracy, the penalty was sustained by the court. The court and the IRS essentially
followed the garbage-in and garbage-out philosophy. To blame the computer software the
taxpayer or preparer needs to show it was a software error and not the tax preparer or the
taxpayer’s failure to enter the information in the proper manner29.
Another example of an accuracy related penalty is Andrew Dean Shelton v. Commissioner30
The Tax Court considered whether a $25,000 cash payment made pursuant to a marital
settlement agreement was alimony deductible by the petitioner. The divorce decree entered in
2007 by an Illinois Circuit Court stated that each party was barred from asserting any claim “for
maintenance, formerly known as alimony.” The petitioner paid the $25,000 in 2007 and deducted
the full amount as alimony. The IRS issued a statutory notice disallowing the deduction and
asserted the accuracy –related penalty under §6662(a).
The court ruled that the payment was not deductible alimony,31 and as such not deductible. The
court held that the Illinois divorce court did designate the payments as non-deductible/ non-
taxable by stating in its order that each party was barred from asserting any claim for
maintenance, formerly known as alimony.
The court in Shelton upheld the accuracy-related penalty for negligence or intentional disregard
of the rules or regulations. The court found, based on the evidence, that petitioner did not act
with reasonable cause and in good faith. The court based is finding on the fact that the Illinois
court explicitly stated that neither party was entitled to alimony, yet petitioner “proceeded to
claim an alimony deduction.”
29 Brenda F Bartlett v. Commissioner TC Memo 2012-254 30 T.C. memo 2011-266 31 Section 215(See section 71(b) (1) (B)).
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Trade or Business Expenses Under IRC §162 and Related Sections
Internal Revenue Code §162 allows deductions for ordinary and necessary trade or business
expenses paid or incurred during the course of a taxable year. Rules regarding the practical
application of IRC §162 have largely come from case law. The IRS, the Department of the
Treasury, Congress, and the courts continue to provide guidance about whether a taxpayer is
entitled to claim certain deductions.32 In the following paragraphs, we show many court cases,
which demonstrate “ordinary” and “necessary” and some of the evolution of the term.
The majority of gross income cases this year involved taxpayers failing to report items of
income, including some specifically mentioned in IRC §61 such as wages, interest, dividends,
and annuities. Although “trade or business” is one of the most widely used terms in the IRC,
neither the Code nor the Treasury Regulations provide a definition. The definition of a “trade or
business” comes from common law, where the concepts have been developed and refined by the
courts. The Supreme Court has interpreted “trade or business” for purposes of IRC §162 to mean
an activity conducted with “continuity and regularity” and with the primary purpose of earning
income or making profit.33
IRC §162(a) requires a trade or business expense to be both “ordinary” and “necessary” in
relation to the taxpayer’s trade or business in order to be deductible.
In Welch v. Helvering, the Supreme Court stated that the words “ordinary” and “necessary” have
different meanings, both of which must be satisfied for a taxpayer to benefit from the deduction.
The Supreme Court describes an “ordinary” expense as customary or usual and of common or
frequent occurrence in the taxpayer’s trade or business. The Court describes a “necessary”
expense as one that is appropriate and helpful for development of the business.
Common law also requires that in addition to being ordinary and necessary, the amount of the
expense must be reasonable for the expense to be deductible.
In Commissioner v. Lincoln Electric Co., the Court of Appeals for the Sixth Circuit held there
must be an element of reasonableness in the term ‘ordinary and necessary.’ There is no express
statutory provision limiting it to a reasonable amount. The element of reasonableness is inherent
in the phrase "ordinary and necessary." It was not the intention of Congress to allow as
deductions operating expenses incurred or paid by the taxpayer in an unlimited amount34. The
taxpayer is required to have receipts and to be able to demonstrate its business use or
relationship.
Example 15: Jack has a small realty office; his cat comes with him to the office every day. Jack
list as a deduction the cat’s food and veterinary bills. The preparer tells Jack these items cannot
be deducted because he cannot show a business purpose related to his realty business.
32 Taxpayer Advocate ARC 2012 33 Taxpayer Advocate ARC 2012 34 IRC §§104, 105,6601
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This is the most prevalent issue was the substantiation of claimed trade or business expense
deductions, which appeared in 13 cases.
For example: In Lyseng v. Commissioner35, the Tax Court denied several deductions for lack of
substantiation, including depreciation on a travel trailer, laundry services, vehicle permit costs,
and towing expenses. The taxpayer provided no evidence to substantiate the laundry, vehicle,
and towing expenses, and, therefore, the court disallowed the deductions. Concerning the
depreciation deduction, the taxpayer provided no evidence substantiating the trailer has cost
basis — no bill of sale, canceled check, or third party corroborating testimony. The Tax Court
did find that the taxpayer substantiated the deductions for unreimbursed automobile expenses
and some union dues. The taxpayer kept a mileage record with the dates of travel and provided
credible testimony regarding the business purpose of each trip he took for his employer. A pay
stub from an employer, combined with credible taxpayer testimony, also convinced the court to
allow some of the union dues.
Even when the individual taxpayer maintains records to substantiate a deduction, he or she still
has to prove the expense is ordinary and necessary to a trade or business.
In Farias v. Commissioner36, the taxpayer was a teacher who claimed deductions for
unreimbursed employee expenses for the purchase of a specialty chair, an adjustable headrest, a
pillow, and ice/heat pads. The taxpayer claimed she purchased the items because she suffered a
back injury when she moved her classroom. The taxpayer also taught fitness classes and claimed
deductions for fitness items, including clothing. The IRS denied the deductions because the
purchases were not ordinary and necessary to her teaching position. The Tax Court also
disallowed the taxpayer’s deductions for fitness expenses because she failed to describe the items
purchased and to prove the clothing was ordinary and necessary in her trade or business. The
court further determined the clothing deduction was not allowable because the clothing was
suitable for general use
Kennedy v. Commissioner37 Shows the general rule that where business clothes are suitable for
general wear, a deduction for the clothes is not allowable. Refer to Donnelly v. Commissioner,38
in which such costs are not deductible even when it has been shown that the particular clothes
would not have been purchased but for the employment.
Example 16: A police officers uniform, which he pays for without reimbursement, is deductible.
The detective’s suit (which he can wear to either work or elsewhere) is not deductible.
The tax preparer should assist the taxpayer in determining whether their business expenses are
ordinary and necessary under IRC § 162. The Internal Revenue Code defines business expenses
as the ordinary and necessary expenses of carrying on a trade or business. Generally, business
35 T.C. Memo. 2011-226. 36 T.C. Memo. 2011-248. 37 T.C. Memo. 1970-58, affd. 451F.2d 1023 (3d Cir. 1971) 38 262 F.2d 411 (2d Cir. 1959), affg. 28 T.C. 1278 (1957)
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expenses are tax deductible. However, the IRS does not provide a compendium of general
business expenses, leaving it to the taxpayer to define from the criteria what is ordinary and
necessary. In fact, the terms ordinary and necessary were not defined in the original statute
establishing the Internal Revenue Code, leaving it to the tax courts to establish their meanings
through case law.
This case's interpretation of the word necessary is referenced repeatedly in subsequent court
cases involving taxation. Welch v. Helvering39, references McCulloch v. Maryland in its
assumption "that the payments to creditors were necessary for the development of the petitioner's
business, at least in the sense that they were appropriate and helpful." In 1983, Rothner v.
Commissioner40, adds that an expense is not necessary "simply because the taxpayer could have
avoided it by pursuing a different course of conduct", further reinforcing a less rigorous
interpretation of its meaning.
In Welch v. Helvering, the court also stated that the term ordinary has some consistency but is
nonetheless a variable affected by time, place and circumstance" and does not mean it must be
habitual. There is not one standard that defines ordinary. Accuracy-related penalties have
Practical Example 17: A plumbing service ordered two cases of aftershave and new shirts for
the 35 plumbers that worked for the service. Although the aftershave and shirts were not
required, the owner (and some customers) found it necessary.
In Deputy v. DuPont41 the Supreme Court defined ordinary as “normal, usual, or customary”,
reaffirming Welch V. Helvering by explaining, that though an expense happened but once in the
taxpayer's lifetime, if the transaction giving rise to it is of "common or frequent occurrence in the
type of business involved", it is ordinary. It concludes that the kind of transaction from which the
obligation arose in the particular business is crucial in determining whether the expense is
ordinary and, deductible by the taxpayer. In Commissioner v. Heininger42defines the term
"normal" as used in the prior two court opinions quoted above in their definition of ordinary, as
an expense arising "from an action that is ordinarily to be expected of one in the taxpayer's
position".
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense
is one that is common and accepted in that trade or business. A necessary expense is one that is
helpful and appropriate for that trade or business. An expense does not have to be indispensable
to be considered necessary.
From this definition and the tax court rulings, we can draw the following conclusions.
Both criteria, ordinary and necessary, need to be met for the expense to be deductible.
39 Supreme Court 290 U.S. 111 (1933) 40 United States Tax Court, T.C. Memo. 1996-442, Docket No. 26134-93 41 Supreme Court 308 U.S. 488, 495 (1940), 42 Supreme Court, 320 U.S. 467 (1943)
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For an expenditure to be an ordinary expense, it must be a common or usual expense in
one's business and an acceptable or customary expense for one's business.
Practical Example 18: If a plumber claims the purchase of window curtains as a deduction on
his tax return it would not be considered an ordinary and necessary expense.
However, if an interior decorator purchases window curtains, they may easily be a legitimate
business deduction. Their purchase would be both a common and an acceptable expenditure in
the conduct of their services.
The term necessary for tax purposes has a wider definition than that found in common usage
today.
As the tax cases illustrated above, the expense does not have to be "absolutely necessary"
in the sense that it is "indispensable" to carrying on the business.
It only needs to be helpful to one's business as well as appropriate for one's business.
Practical Example 19: Renting office space is certainly helpful to a tax preparer, providing a
place for the preparer to meet with clients and for employees to work. However, renting an office
is not necessary for a tax preparer to conduct his trade, since many sole proprietors, preparers
work out of their home, or provide their services at their clients' homes or businesses. In
addition, an office is very appropriate for a tax preparer, providing a workplace for him and his
employees.
The best advice the tax preparer can give a taxpayer regarding “ordinary and necessary”
expenses is good record keeping. All taxpayers should have records and receipts. There are many
ways a business taxpayer can keep and substantiate his or her records. Any recordkeeping system
suited to his or her business that clearly shows the income and expense is acceptable. The books
must show the gross income, as well as deductions and credits. For most small businesses, the
business checkbook is the main source for entries in the business books.43
Damage Awards
The taxation of damage awards continues to generate litigation. Damage awards fall under IRC
§104(a) (2). This year, at least ten taxpayers challenged the inclusion of settlement proceeds or
arbitration awards in gross income, and the IRS won every case. The code specifies that damage
awards and settlement proceeds are taxable as gross income unless the award was received “on
account of personal physical injury or physical sickness.44” Congress added the “physical injury
or physical sickness” requirement in 1996; until then, the word “physical” did not appear in the
statute.
43 IRS Publication 583 44 Pub. L. No. 104-188, § 1605(a), 110 Stat. 1755, 1838 (1996).
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A court cannot consider damage awards for emotional distress to be excludible from income,
even if the emotional distress has resulted in “insomnia, headaches, or stomach disorders.” To
justify exclusion from income under IRC §104, the taxpayer must show that settlement proceeds
are in lieu of damages for physical injury or sickness.
Settlements and judgments are taxed according to the item for which the plaintiff was seeking
recovery (the "origin of the claim"). If the taxpayer is suing a competing business for lost profits,
a settlement will be lost profits, taxed as ordinary income. A taxpayer laid off from work and
sues for discrimination seeking wages and severance, the wages are taxed as any other wages.
If the taxpayer sues for damage to their condominium by a negligent building contractor, the
damages usually will not be income. Instead, the recovery will be treated as an expense to repair
the condominium and/or affect the basis of the condominium.
Legal Fees: If the taxpayer settles a suit for intentional infliction of emotional distress against a
neighbor for $100,000 and the lawyer fee is $40,000. The $100,000 would be taxable and the
$40,000 would be an itemized deduction, subject to 2% of AGI.45
45 Tc 1997-312 eFleur v Commissioner
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What Do You Think?
Q1. The majority of gross income cases this year involved taxpayers failing to
report items of income, including some specifically mentioned in IRC §61 such
as wages, interest, dividends, and annuities. Which of the following is correct
regarding “trade or business” income?
.
A. The code does not define “trade or business income.
B. An activity conducted with “continuity and regularity” and with the
primary purpose of earning income or making profit.
C. Wages, interest, dividends, and annuities are part of gross income
according to IRC §61
D. Legal fees are considered part of the gross settlement for emotional distress.
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What Do You Think? - Answers
Answer Q1: D is the correct answer
Although “trade or business” is one of the most widely used terms in the IRC,
neither the Code nor the Treasury Regulations provide a definition. The
definition of a “trade or business” comes from common law, where the concepts
have been developed and refined by the courts. The Supreme Court has
interpreted “trade or business” for purposes of IRC §162 to mean an activity conducted with
“continuity and regularity” and with the primary purpose of earning income or making profit.
A court considers damage awards for emotional distress to be excludible from income
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Chapter Five - Identity Theft
The Dirty Dozen46 listing, compiled by the IRS each year, lists a variety of common scams
taxpayers can encounter at any point during the year. Many of these schemes peak during filing
season as people prepare their tax returns. It is important that tax preparers are aware of these
scams and can advise the taxpayers.
Topping the “Dirty Dozen” list is identity theft.
If the SSN is compromised or the taxpayer suspects they are a victim of tax-related identity theft,
they should take these additional steps:
Respond immediately to any IRS notice; call the number provided
Complete IRS Form 14039, Identity Theft Affidavit. Use a fillable form at IRS.gov, print,
then mail or fax according to instructions.
Continue to pay taxes and file the tax return, even if it must be filed on paper.
The IRS continues to aggressively pursue the criminals that file fraudulent returns using
someone else’s Social Security number. Though the agency is making progress on this front,
taxpayers still need to be extremely careful and do everything they can to avoid being victimized.
Preparers should follow up with their clients, be sure they have all the necessary information to
respond to the IRS and resolve the situation as soon as possible.
Efforts by the IRS
Launched in March 2015, the IRS started an initiative47 to address tax-related identity theft. It is
a partnership between the IRS, state tax administrators and the tax industry, including tax return
preparation firms, tax software vendors and payroll and tax financial product processors. The
goal is to establish safeguards to protect taxpayer information and the integrity of federal and
state tax systems.
The Taxpayer Advocate Service is a legitimate IRS organization that helps taxpayers resolve
federal tax issues that have not been resolved through the normal IRS channels. The IRS,
including TAS, does not initiate contact with taxpayers by email, texting or any social media.
TIGTA’s mandate is to provide independent oversight of the IRS in its administration of our
Nation’s tax system. Based on the increased number and sophistication of threats to taxpayer
information and the need for the IRS protect the taxpayer TIGTA will continue auditing and
investigating security issues at the IRS.
46“ Dirty Dozen” - IR-2016-12, Feb. 1, 2016 47 IR 2015-87
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The following items are some of the key parts of the IRS efforts:
Form W-2: Each filing season, the IRS receives millions of returns from individuals
requesting refunds based on wages and tax withholding reported on Forms W-2. Due to
the previously allowed filing dates of Form W-2 the IRS did not receive the Form W-2
information from the Social Security Administration (SSA) until well after the tax season
had begun. Identity thieves routinely exploit this gap by filing fraudulent refund claims
early in the filing season using false income documents from authentic employers.
The Protecting Americans from Tax Hikes Act (PATH) accelerated the due date for filing
Forms W-2 to January 31, effective for Forms W-2 filed in 2017 regarding wages paid in
2016. The new January 31 due date for Forms W-2 will make information available to the
IRS sooner,
Identification Protection PIN Program
An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent the
misuse of their Social Security number on fraudulent federal income tax returns. The
taxpayer cannot use an IP PIN as their e-file signature PIN.
A new identity theft victim assistance organization is managing the IP PIN program, the
IRS’s main tool for protecting taxpayers against ongoing identity theft. The IRS has
issued 1.5 million IP PINs and is offering the opportunity to opt into the IP PIN program
to approximately 1.7 million taxpayers whom the agency has identified as having been
potentially affected by identity theft.
For additional information go to http://www.irs.gov/Individuals/Identity-Protection
Fraud identification: The tax industry is now sharing information. The IRS and state tax
authorities are comparing information to detect fraud schemes in an attempt to stop them
before they take hold.
Identity theft data models and filters have been set up to identify potential fraudulent
returns. The IRS reported that hey rejected or suspended the processing 4.8 million
suspicious returns totaling 8 billion dollars in 201548.
Security requirements for software companies have been increased. These
requirements include passwords, security questions and lockout features, which will in
turn increase security at the IRS.
48 FS-2016-1
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SCAMS
A common scam is sophisticated phone scam targeting taxpayers, including recent immigrants,
throughout the country. Victims are told they owe money to the IRS and it must be paid
promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they
are then threatened with arrest, deportation or suspension of a business or driver’s license.
Characteristics of this scam include:
Scammers use fake names and IRS badge numbers. They generally use common names
and surnames to identify themselves.
Scammers may be able to recite the last four digits of a victim’s Social Security Number.
Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS
calling.
Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
Victims hear background noise of other calls being conducted to mimic a call site.
After threatening victims with jail time or driver’s license revocation, scammers hang up
and others soon call back pretending to be from the local police or DMV, and the caller
ID supports their claim.
This scam should be reported to the Treasury Inspector General for Tax Administration at 1-800-
366-4484.
Letters from the IRS
Several clients have received Letter 4883c - This letter tells the taxpayer that the IRS needs more
information to verify their identity in order to process your tax return accurately. The contact
information below is only for taxpayers who received Letter 4883C. Be sure your clients follow
up on these letters.
The taxpayer who receives Letter 4883c should call the toll-free IRS Identity Verification
telephone number, 1-800-830-5084. Be sure they have a copy of their prior year tax return and
the most recently filed tax return. The toll-free IRS Identity Verification telephone number is
available for them to call even if you have not filed a tax return for this year.
Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to
taxpayers. The IRS has seen a surge of these phone scams in recent years as scam artists threaten
taxpayers with police arrest, deportation and license revocation, among other things.
Preparers should caution their clients not to give out any information over the phone, Be sure
you review with them that this is a scam. Police reports and reports to the IRS are being filed
daily. Older clients are very vulnerable to this and should be made aware.
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The following are five tips from the IRS on what they will not do, that can be passed to
taxpayers:
The IRS will never:
Call to demand immediate payment, nor will the agency call about taxes owed without
first having mailed a bill.
Demand that payment of taxes without giving the taxpayer the opportunity to question or
appeal the amount they owe.
Require the taxpayer to use a specific payment method for taxes, such as a prepaid debit
card.
Ask for credit or debit card numbers over the phone.
Threaten to bring in local police or other law-enforcement groups to have the taxpayer
arrested for not paying.
Phishing: A very common scam is the email phishing scam. Phishing is a scam typically carried
out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in
potential victims and prompt them to provide valuable personal and financial information.
Armed with this information, a criminal can commit identity theft or financial theft. The emails
appear to be from the IRS Taxpayer Advocate Service and include a bogus case number and the
following message:
“Your reported 2015 income is flagged for review due to a document processing error.
Your case has been forwarded to the Taxpayer Advocate Service for resolution
assistance. To avoid delays processing your 2015 filing contact the Taxpayer Advocate
Service for resolution assistance.”
This email will contain links directing the taxpayer to a website to collect personal information;
taxpayers should not respond and should forward the email to the IRS at [email protected].
Taxpayers need to be on guard against these fake emails or websites looking to steal personal
information. The IRS will never send taxpayers an email about a bill or refund unexpectedly. Do
not click on one claiming to be from the IRS. Be wary of strange emails and websites that may
be nothing more than scams to steal personal information.
Tax preparers should warn their clients that the IRS does not email personal data and this is a
scam.
An example of phishing was investigated by the Treasury Inspector General for Tax
Administration (TIGTA) in which several individuals were deceived into providing their
personal identification numbers and banking information to identity thieves who then defrauded
them of over $1 million. The phishing scheme was designed to defraud numerous individuals
through Internet solicitations and stealing the identities of those individuals. The subject of the
investigation was sentenced to a total of 30 months of imprisonment and five years of supervised
32
Ethics
release for aggravated identity theft and conspiracy to commit wire fraud. He was also ordered to
pay $1,741,822 in restitution to his victims49
If the taxpayer receives an unsolicited email that appears to be from either the IRS or an
organization closely linked to the IRS, such as the Electronic Federal Tax Payment System
(EFTPS), report it by forwarding the email to [email protected].
Another scam affects tax professionals, a website that mimics the IRS e-Services online
registration page. The phony web page looks almost identical to the real one. The IRS gets many
reports of fake websites like this. Criminals use these sites to lure people into providing personal
and financial information that may be used to steal the victim’s money or identity. Typically,
identity thieves empty the victim’s financial accounts, run up charges on the victim’s existing
credit cards or apply for new loans, credit cards, services or benefits in the victim’s name.
NOTE: The address of the official IRS website is www.irs.gov. Do not be misled by sites
claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. The
IRS website has information that can help tax professionals and taxpayers protect themselves
from tax scams of all kinds. Search the site using the term: phishing
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to
request personal or financial information. This includes any type of electronic communication,
such as text messages and social media channels.
Letters received from the IRS regarding phishing: Eric and Kathy James were
gathering their tax documents before they went for their tax appointment when they
received Letter 5071C from the IRS. The James immediately contacted their tax preparer
office. Not being familiar with this particular letter, the tax preparer immediately went to
the IRS website to confirm this letter as authentic and not a phishing document.
Once the document was authenticated, the clients followed the directions on the letter.
They attempted to call the number on the letter for the identity verification, unfortunately,
with the IRS budget cuts the recording told them to go to the website and verify their
identity. The James went to their tax preparer office who helped them verify their
identity. The instructions after their identity was established was to file a paper return and
send it to the address on the letter. All paper returns take longer to process. The James
sent their return with a “receipt of mailing”, since they owed money they have been
checking their bank for the cancelled check and are keeping all their documents for any
future correspondence with the IRS.
Rejected e-file. An electronic return is rejected because the SSN belonging to the
taxpayer, spouse or dependent has been used on another return for that year.
49 E.D.N.Y. Response to Defendant’s Sentencing Letter filed Dec. 19, 2011; E.D.N.Y. Judgment filed Aug. 9, 2012
33
Ethics
To complete the paper return filing, the James completed Form 14039, Identity Theft
Affidavit, and attached a clear and legible copy of their passports. This form was attached
to their paper return.
The IRS instructions for Form 14039 allows any of the following for identification
purposes:
• Passport;
• Driver’s license;
• Social security card; or
• Other valid U.S. Federal or State government issued identification.
If your client is a victim of tax-related identity theft these publications are available.
Taxpayer Guide to Identity Theft
Publication 5027, Identity Theft Information for Taxpayers (PDF)
Data Breach: Tax-Related Information
Requesting Copy of Fraudulent Return
Publication 4524, Security Awareness For Taxpayers (PDF)
Identity Theft Victim Assistance: How It Works
Information for Tax Preparers
Identity Theft Information for Tax Preparers
Publication 5199, Tax Preparer Guide to Identity Theft (PDF)
Information for businesses about data breaches and identity theft
Tax Practitioner Guide to Business Identity Theft
Federal Trade Commission Publications
Taking Charge – What to Do If Your Identity is Stolen?
Safeguarding – Your Child’s Future
https://bulkorder.ftc.gov/publications?f%5B0%5D=field_campaigns%3A1587
The IRS recommends the following Steps to take as a victim50:
File a report with law enforcement.
Report identity theft at ftc.gov/complaint and learn how to respond to it at
identitytheft.gov.
Contact one of the three major credit bureaus to place a ‘fraud alert’ on credit records:
o Equifax, www.Equifax.com, 1-800-525-6285
o Experian, www.Experian.com, 1-888-397-3742
o TransUnion, www.TransUnion.com, 1-800-680-7289
Contact the financial institutions, and close any accounts opened without permission or
tampered with.
50 IRS Pub. 4535, Identity Theft Protection and Victim Assistance
34
Ethics
Check with the Social Security Administration earnings statement annually. An account Victim
of identity theft not concerning the tax return. The taxpayer should follow the steps above that
the IRS recommends. In addition, contact should be made with the Identity Protection
Specialized Unit of the IRS. 1-800-908-4490
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax
returns. Most return preparers provide honest service to their clients. However, as in any other
business, also some prey on unsuspecting taxpayers.
The following are some of items the Tax Division of the Department of Justice routinely identify
a fraudulent:
Preparing phony tax-return forms with fabricated businesses and income;
False education and homebuyer credits;
False and inflated deductions;
False filing status;
False dependents;
Selling deceptive loan products;
Filing tax returns without customer consent or authorization;
Preparing bogus W-2 forms, based on information from employee paystubs;
Falsifying information on returns to claim inflated earned income tax credits; and
Filing fraudulent tax returns using stolen taxpayer identities to obtain improper tax
refunds.
Some preparers try to conceal their fraud by not signing the returns they prepare and by using
stolen or fake social security numbers or PTIN to misidentify the paid preparer.
Taxpayers should know every paid preparer needs to have a Preparer Tax Identification Number
(PTIN) and enter it on the returns he or she prepares.
False Form 1099 Refund Claims
In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099
Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In
some cases, individuals have made refund claims based on the bogus theory that the federal
government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the
accounts by issuing 1099-OID forms to the IRS.
Tax Fraud Case using 1099-OID51
Karen A. Olson admitted she participated in a conspiracy that promoted a tax refund scheme
across the United States from July 1, 2008, to Sept. 21, 2011. Conspirators received more than
$3.5 million of the total $96 million in attempted fraudulent refunds.
51justice.gov/usao/mow/divisions/OIDfraud.html
35
Ethics
Olson, who has an associate’s degree in accounting, was formerly employed as a tax preparer
and did taxes for people on the Air Force base where her husband was deployed while serving in
the military. On Oct. 13, 2008, the Olsons submitted a 2007 joint income tax return, including
fraudulent Forms 1099-OID. They received a refund of $171,806.
In actuality, Olson admitted that they had never accrued any OID income from the banks and
lenders listed on their Forms 1099-OID, nor had those entities issued the forms, nor had they
paid any taxes on the Olsons’ behalf.
People around the Olsons knew they had received a large refund from the process and began
asking them for their help. They decided to charge $200 per person or couple to transmit their
Forms 1099-OID and 1099-A through their tax preparation and submission company, FATR,
LLC. The Olsons assisted approximately 10 individuals/couples in preparing their Forms 1040
using the 1099-OID process. Four returns that were based on fraudulent Forms 1099-OID
claimed refunds totaling $825,907. Refunds totaling $408,693 were issued.
Under federal statutes, Olson is subject to a sentence of up to 10 years in federal prison without
parole, plus a fine up to $250,000 and an order of restitution.
Tax Fraud Case52
A Montclair CA man, who was charged for his role in a scheme to unlawfully use the names and
social security numbers of other people to file fraudulent federal income tax returns, has pleaded
guilty to tax and identity theft charges.
Specifically, Chibueze Chidozie Nwafor pleaded guilty to three criminal counts – presenting
false claims to the United States, theft of government benefits, and aggravated identity theft.
The charges are the result of an investigation by the IRS Criminal Investigation.
Nwafor used the identification of other individuals whom he knew to be real people, specifically
the names and social security numbers of purported tax filers, in order to submit false tax returns.
Nwafor knew the information contained in the false tax returns that he filed contained materially
false information, including taxes withheld and wages received from a bogus corporation,
California Mutual Life and Health (“CMLH”). Nwafor also misappropriated tax filer refunds to
which he was not entitled for his own use.
In 2009, Nwafor prepared tax returns for various individuals including a 2008 federal income tax
return in the name of an unidentified victim claiming a tax refund of $7,773, which included
Form W-2, which falsely claimed that the unidentified victim received $30,119 in wages from
CMLH. The IRS issued a tax refund, which Nwafor stole and converted to his own use.
For the 2010 tax year, Nwafor filed a fraudulent tax return on his own behalf claiming false
deductions, which resulted in Nwafor receiving a refund check in the amount of $32,789 from
52 USA v Chibueze Chidozie Nwafor
36
Ethics
the IRS. It is estimated that the attempted tax loss attributable to Nwafor from 2009 through
2011 is approximately $126,991.
Because of the guilty plea, Nwafor faces a sentence of 70 months in federal prison and was
ordered to pay $118,474 in restitution to the IRS.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding
income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards
or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing
schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared
accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.
The IRS works closely with the Department of Justice to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting
requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do
not comply with reporting and disclosure requirements are breaking the law and risk significant
penalties and fines, as well as the possibility of criminal prosecution.
The IRS is in the middle of a major offensive against wealthy taxpayers who are hiding income
overseas to avoid taxes. An estimated 19,000 American citizens were hiding taxable assets in the
Swiss Bank UBS with the encouragement and assistance of the bank itself, the government
alleges. UBS is now cooperating and has paid a $780 million fine to avoid prosecution.
Bradley Birkenfeld, an American citizen who worked at UBS, voluntarily disclosed UBS
documents that alerted the U.S. to a scheme "to defraud the United States by impeding the IRS,"
the Department of Justice alleges. Department of Justice went on to say that Swiss bankers made
about 3,800 trips to the U.S. "to market Swiss bank secrecy to United States clients interested in
attempting to evade United States income taxes."
That prompted the IRS to establish a new unit, Offshore Voluntary Disclosure Program, which
allows the IRS to take a unified look at the entire web of business and economic entities
controlled by high-wealth individuals. Finding the missing income was made easier when UBS
agreed to turn over the names of U.S. citizens who have assets at the bank.
The IRS offered amnesty for those who came forward voluntarily, and so far, about 15,000
Americans have done so to avoid prosecution.
IRS compliance efforts have increased significantly regarding the reporting of foreign bank and
financial accounts. (FBAR)
California attorney Christopher M. Rusch was sentenced to 10 months in prison for helping his
clients Stephen M. Kerr and Michael Quiel hide millions of dollars in secret offshore bank
accounts. Rusch pleaded guilty on Feb. 6, 2013, to conspiracy to defraud the government and
failing to file a Report of Foreign Bank and Financial Accounts (FBAR)
37
Ethics
“Free Money” from the IRS & Tax Scams Involving Social Security
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a
tax return with little or no documentation, have been appearing in community churches around
the country. These schemes are also often spread by word of mouth as unsuspecting and well-
intentioned people tell their friends and relatives.
Scammers prey on low-income individuals and the elderly. They build false hopes and charge
people good money for bad advice. In the end, the victims discover their claims are rejected.
Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.
There are a number of tax scams involving Social Security. For example, scammers have been
known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates.
In another situation, a taxpayer may really be due a credit or refund but uses inflated information
to complete the return.
A common tax fraud against the elderly is convincing a Social Security Recipient who has no
other income, that they can receive a refund by filing a tax return; the scammer then receives the
Social Security Number of the recipient and prepares a fraudulent return.
False/Inflated Income and Expenses
Including income that was never earned, either as wages or as self-employment income in order
to maximize refundable credits, is another popular scam. Claiming income, the taxpayer did not
earn or expenses the taxpayer did not pay in order to secure larger refundable credits such as the
Earned Income Tax Credit could have serious repercussions. This could result in repaying the
erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and
other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax
credit. However, other individuals have claimed the tax credit when their occupations or income
levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous
tax claim and can result in a penalty of $5,000.
Tax Fraud Case against Preparer Kenneth L. Barber
Kenneth L. Barber has been convicted by a federal jury of wire fraud, preparing false returns,
making a false statement to a bank and conspiracy to commit tax fraud. At trial, the government
presented evidence that Barber ran and operated a local tax preparation business where he
encouraged preparers to falsify clients’ returns.
Government agents testified that the scheme resulted in a loss of more than $700,000. Barber
was also convicted of making false statements to a financial institution based upon evidence that
he provided a bank with false information concerning his income in order to qualify for loans
totaling more than $300,000.
38
Ethics
Records introduced at trial showed that personal and corporate returns he submitted to Wachovia
Bank reflected substantially greater income than the returns the defendant filed with the IRS.
Barber faces a maximum of five years in prison for conspiracy, three years in prison on each
count of preparing fraudulent returns, 20 years in prison on each count of wire fraud and 30 years
in prison on each count of making a false statement to a bank.
Frivolous Arguments
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish
claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that
taxpayers should avoid. These arguments are false and have been thrown out of court. While
taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the
law.
One of the most common frivolous arguments is that the tax system is voluntary and it is up to
the taxpayer whether to file a return.
The word “voluntary,” as used by the IRS, refers to the system of allowing taxpayers initially to
determine the correct amount of tax and complete the appropriate returns, rather than have the
government determine tax for them from the outset. The requirement to file an income tax return
is not voluntary and is clearly set forth in IRC §§6011(a), 6012(a), and 6072(a)53
In United States v. Tedder54, the court stated that, “Although Treasury regulations establish
voluntary compliance as the general method of income tax collection; Congress gave the
Secretary of the Treasury the power to enforce the income tax laws through involuntary
collection. The IRS’ efforts to obtain compliance with the tax laws are entirely proper.”
Falsely Claiming Zero Wages
Filing a phony information return is an illegal way to lower the amount of taxes an individual
owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a
way to improperly reduce taxable income to zero. The taxpayer may also submit a statement
rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory
language on the definition of wages or may include some reference to a paying company that
refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any
temptation to participate in any variations of this scheme. Filing this type of return may result in
a $5,000 penalty.
NOTE: Tax preparers fraudulently use Line 21 of Form 1040 to subtract the income shown on a
W-2, as well as using Miscellaneous Deductions on Schedule A.
53 Reg. § 1.6011-1(a) 54 Case 787 F.2d 540, 542 (10th Cir. 1986),
39
Ethics
Abuse of Charitable Organizations and Deductions
IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including
arrangements that improperly shield income or assets from taxation and attempts by donors to
maintain control over donated assets or the income from donated property. The IRS is
investigating schemes that involve the donation of non-cash assets –– including situations in
which several organizations claim the full value of the same non-cash contribution. Often these
donations are highly overvalued or the organization receiving the donation promises that the
donor can repurchase the items later at a price set by the donor. The Pension Protection Act of
2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified
appraisals.
Subject to certain limitations, taxpayers can take a deduction from their adjusted gross income
for contributions of cash or other property to charitable organizations.55 Taxpayers must
contribute to certain qualifying organizations,56 and are required to substantiate contributions of
$250 or more. Litigation generally arises over one of four issues:
1. Whether the organization receiving the contribution is charitable in nature;
2. Whether the property contributed qualifies as a charitable contribution;
3. Whether the amount deducted equals the fair market value of the property contributed;
and
4. The extent to which the taxpayer has substantiated the contribution.
Taxpayers can generally take a deduction for charitable contributions made within the taxable
year.57 For individuals, these deductions are generally limited to 50 percent of the taxpayer’s
contribution base (adjusted gross income computed without regard to any net operating loss
carryback to the taxable year under IRC §172). However, subject to certain limitations,
individual taxpayers can carry forward unused charitable contributions in excess of the 50
percent base for up to five years. Corporate charitable deductions are generally limited to ten
percent of the taxpayer’s taxable income. Taxpayers cannot deduct services that they offer to
charitable organizations; however, incidental expenditures incurred while serving a charitable
organization and not reimbursed may constitute a deductible contribution58.
Deductions for charitable contributions of $250 or more are disallowed in the absence of a
contemporaneous written receipt from the recipient. For cash contributions, taxpayers must
maintain receipts from the charitable organization, copies of canceled checks, or other reliable
records showing the name of the organization, the date, and the amount contributed. For each
contribution of property other than money, taxpayers generally must maintain a receipt showing
the name of the recipient, the date and location of the contribution, and a description of the
property. When property other than money is contributed, the amount of the allowable deduction
is the fair market value of the property at the time of the contribution.59
55 IRC §170 56 IRC § 170(c)(2). 57 IRC § 170(a)(1). 58 Treas. Reg. § 1.170A-1(g). Meal expenditures in conjunction with offering services to qualifying organizations
are not deductible unless the expenditures are away from the taxpayer’s home. IRC § 170(j). 59 Treas. Reg. § 1.170A-13
40
Ethics
What Do You Think?
Q1. Which of the following is not an action the IRS has under taken to combat
identity theft?
A. A requirement for employers to file W-2s by January 31.
B. Phone call to taxpayers to verify their tax information submitted
C. Adjustments of data filters to prevent identity theft and fraudulent
returns.
D. Taxpayer awareness.
Q2. Which of the following is correct regarding deductions for charitable contributions of $250
or more?
A. The deductions are disallowed in the absence of a contemporaneous written receipt from
the recipient.
B. Cash contributions must have receipts from the charitable organization.
C. The amount of the allowable deduction is the fair market value of the property at the time
of the contribution.
D. All of the above are correct
41
Ethics
What Do You Think? - Answers
Answer Q2: D all the statements are correct
Deductions for charitable contributions of $250 or more are disallowed in the
absence of a contemporaneous written receipt from the recipient. For cash contributions,
taxpayers must maintain receipts from the charitable organization, copies of canceled checks, or
other reliable records showing the name of the organization, the date, and the amount
contributed. For each contribution of property other than money, taxpayers generally must
maintain a receipt showing the name of the recipient, the date and location of the contribution,
and a description of the property. When property other than money is contributed, the amount of
the allowable deduction is the fair market value of the property at the time of the contribution.60
Answer Q2:B is the correct answer.
The IRS will not call to verify information; they do this through employer filing and data
models. If the IRS needs additional information, they will generate a letter,
The IRS will never:
Call to demand immediate payment, nor will the agency call about taxes owed without
first having mailed a bill.
Demand that payment of taxes without giving the taxpayer the opportunity to question or
appeal the amount they owe.
Require the taxpayer to use a specific payment method for taxes, such as a prepaid debit
card.
Ask for credit or debit card numbers over the phone.
Threaten to bring in local police or other law-enforcement groups to have the taxpayer
arrested for not paying.
60 Treas. Reg. § 1.170A-13
2016
TaxEase, LLC
2 HOUR ETHICS
EXAM QUESTIONS
ETHICS
Final Exam - Ethics
1. The tax preparer realizes that income was not reported on a client’s current year tax
return which had already been electronically filed and accepted by the IRS. Which of the
following statements reflect the appropriate action the tax preparer should take?
A. The preparer should notify the taxpayer at once and explain that he or she should
amend their return immediately because he or she is required to report all income
in the year received, and so he or she can avoid additional penalties and interest.
B. The preparer should contact the IRS immediately and report the omission of
income.
C. The preparer should tell the taxpayer to wait until the IRS sends them a CP2000
requesting the additional tax be paid.
D. The preparer should ignore the situation in hopes it will go away.
2. A tax preparer takes on a new client who had his 2014 tax return prepared by a different
preparer. The taxpayer requested the preparer review his 2014 return in hopes of
amending the return and receiving a larger refund. While reviewing the return the
preparer finds that a 1099-Misc, Box 3 (Other income) in the amount of $900 had not
been reported on the return. Which answer is correct on how the preparer should handle
this situation?
A. Since the preparer did not prepare or sign the 2014 return he or she is not under
any obligation to address the issue.
B. The tax preparer should discuss with the taxpayer that he or she should amend
their 2014 return because they are required to report all income in the year it is
received. The preparer should offer to amend the 2014 and prepare the 2015
return for the taxpayer or suggest that the taxpayer go back to the original
preparer and ask him or her to amend the return.
C. The preparer should instruct the taxpayer to report this income on their 2015 tax
return.
D. The preparer should only tell the taxpayer that he or she does not have an
additional refund coming their way from 2014.
3. The voluntary Annual Filing Season Program is intended to recognize and encourage
unenrolled tax return preparers who voluntarily increase their knowledge and improve
their filing season competency through continuing education. Which of the following are
not correct?
A. An unenrolled or unlicensed tax preparer may represent a tax client only if they
successfully complete the AFSP course
B. All tax professionals who receive payment for preparation of a tax return must
have a PTIN.
C. Enrolled Agents must complete the AFSP program to preparer tax returns for
payment.
D. All of the statements above are correct.
4. In reference to the term “due diligence”. The following statements are correct; except
A. A tax professional has specific and well defined rules to follow compared to other
professionals in other fields in order to meet their due diligence requirement.
B. A tax preparer may be judged to have met their due diligence if he or she applied
the same level of intenseness and care in preparation of the return as other tax
professionals would deem appropriate.
C. Reasonable inquiries of the taxpayers presented documentation will assist the tax
preparer in meeting his or her due diligent requirement.
D. All the statements above are correct
5. Which of the following statements is correct?
A. It does not matter in what order the consent information is arranged on the
consent to disclose or use form as long as a preparer includes all the required
information.
B. The same exact wording can be used for both the consent to disclose and the
consent to use form.
C. The consent to disclose is not needed if a client asks their tax preparer to discuss
his or her tax return with his or her attorney.
D. None of the above statements are correct
6. In reference to the disclosure or use of taxpayer’s tax return information. Which of the
following statements is a correct statement?
A. The criminal penalty for knowingly and recklessly disclosing a taxpayer’s return
information is a maximum $1,000 fine or the maximum imprisonment of no more
than one year, or both.
B. The civil penalty for unauthorized disclosure or use of a taxpayer’s information is
$250 for each disclosure or use not to exceed $10,000 for a calendar year.
C. Both A and B are correct
D. Neither A or B are correct
7. The following are true statements; except?
A. If a taxpayer gives his or her tax preparer a check made payable to the
Department of Treasury for a tax payment that they owe, the tax preparer must
immediately remit the check to the designated agency.
B. A tax preparer who disagrees with an IRS agent can withhold the information the
agent is requesting without consequence.
C. A tax preparer who is required by the IRS to electronically file the tax returns that
they prepare, fails to do so, may face an incompetence and disreputable conduct
violation.
D. A preparer may not knowingly assist another tax preparer in tax preparation
during his or her colleague’s suspension from preparing tax returns.
8. Which of the following is not correct regarding “competent practice” of Circular 230,
Section 10.35?
A. An unenrolled preparer does not have to regard Section 10.35.
B. A preparer must possess necessary competence to engage in practice before the
Internal Revenue Service.
C. A preparer is required to have the appropriate level of knowledge for tax
preparation.
D. Competent practice, skill, thoroughness, and preparation necessary for the matter
for which the practitioner is engaged is required.
9. What does the “voluntary” tax system mean as used by the IRS?
A. An individual can choose to file a tax return.
B. Allows taxpayers to initially determine the correct amount of tax and complete the
appropriate returns.
C. The Secretary of the Treasury has the power to enforce the tax laws through
voluntary collection. above are relevant.
D. None of the above define voluntary tax system.
10. Which of the following is considered fraudulent by a tax preparer?
A. Preparing a return without entering a PTIN
B. Filing a return knowing the filing status is incorrect
C. Filing tax returns without customer consent or authorization
D. All of the above are considered fraudulent actions by the preparer.
Ethics
A B C D
1 A B C D
2 A B C D
3 A B C D
4 A B C D
5 A B C D
6 A B C D
7 A B C D
8 A B C D
9 A B C D
10 A B C D
Name: ___________________________
Date: ____________________________
TaxEase, LLC
Answer Sheet 2016– 2 Hour Ethics CE
Answer Sheet Instructions
Using ink mark an X in the column which
reflects the correct answer.
Example: Question 1 – How many inches are
in a foot?
A. 9 B. 6 C. 3 D. 12
Question A B C D
1 A B C X
2 A B C D
3 A B C D
PERSONAL INFORMATION FORM
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Complete the Personal Information Form above and the Evaluation Form
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TAXEASE REPORTS EDUCATION TO CTEC. IT IS
THE STUDENT’S RESPONSIBILITY TO COMPLETE
THEIR REGISTRATION RENEWAL WITH CTEC
ANNUALLY.
THE IRS REQUIRES THAT TAXEASE REPORT
THE STUDENTS CONTINUING EDUCATION
TO THE IRS IF THE STUDENT PROVIDES US
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2016 Continuing Education Student Course Evaluation
TaxEase LLC
IRS Issued Course Numbers: 2 Hour Ethics B8FQK-E- 00017-16-S
CTEC Issued Course Number: 3064-CE-0037
Student’s Name: ____________________________ Date: ___________________
Ethics
Date Program Completed
Hours Spent to Complete
Instructions: Please comment on all the following evaluation points on the programs and
assign a number grade, using 1-5 scale, with 5 being the highest.
Ethics
Were the stated learning objectives met?
Were the course materials accurate and relevant,
and did they contribute to the achievement of the
learning objectives?
Was the time allocated to learning adequate?
Was the course syllabus satisfactory?
Part of the course you found most beneficial:
Part of the course you found least beneficial:
Additional Comments:
Please return with your completed answer sheet