module 3 tax practice, procedures, & professional responsibilities
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Module 3 TAX PRACTICE, PROCEDURES, & PROFESSIONAL RESPONSIBILITIES. Tax Practice. Key Learning Objectives Considered practicing law Three separate areas Compliance Research Planning. Tax Compliance. Complying with rules, laws, and regulations Preparation of a tax return - PowerPoint PPT PresentationTRANSCRIPT
Module 3TAX PRACTICE, PROCEDURES, &
PROFESSIONAL RESPONSIBILITIES
Tax Practice
Key Learning Objectives
Considered practicing law Three separate areas
ComplianceCompliance ResearchResearch PlanningPlanning
Tax Compliance
Complying with rules, laws, and regulations Preparation of a tax return Preparer--anyone compensated for
preparing return/claim for refund
Tax Research/Planning
Tax research Use of primary and secondary tax Use of primary and secondary tax
authorities authorities to answer a tax-related questionto answer a tax-related question Tax planning
Structuring a prospective transactionStructuring a prospective transaction Both require complying with rules, laws,
and regulations
Professional Responsibilities
Key Learning Objectives
IRS Code and regulations Standards of practice Statement on Responsibilities in Tax
Practice
IRS Code & Regulations
§7701(a)(36) defines income tax preparer§7701(a)(36) defines income tax preparer §§6694-6696 imposes money penalties on §§6694-6696 imposes money penalties on
preparerpreparer Related regulations Related regulations
provide more informationprovide more information §7206 provides penalties§7206 provides penalties
for fraud--includesfor fraud--includesjail timejail time
Standards of Practice--Lawyers, CPAs, Enrolled Agents
Circular 230Circular 230 Issued by U. S. Treasury DepartmentIssued by U. S. Treasury Department Violations can cause being barred from Violations can cause being barred from
practice (representing clients with IRS)practice (representing clients with IRS) Does not apply toDoes not apply to
Preparation of tax returns &Preparation of tax returns & Responding to IRS noticesResponding to IRS notices
Circular 230--Realistic Possibility
Minimum standard of authority requiredMinimum standard of authority required 1 in 3 chance would be sustained by IRS1 in 3 chance would be sustained by IRS Other, non-frivolous, positions must be Other, non-frivolous, positions must be
fully disclosed on tax returnfully disclosed on tax return Penalties may be imposed on taxpayerPenalties may be imposed on taxpayer Form 8275Form 8275
Penalties
Key Learning Objectives
Tax preparer penalties Taxpayer penalties
Tax Preparer Penalties
Based on understatement of tax liabilityBased on understatement of tax liability $250--failure to follow realistic possibility $250--failure to follow realistic possibility
standardstandard $1,000--willful attempt to understate or $1,000--willful attempt to understate or
reckless/intentional disregard of rulesreckless/intentional disregard of rules Possible defense--good faith/reasonable causePossible defense--good faith/reasonable cause Other penalties--administrative issuesOther penalties--administrative issues
Taxpayer Penalties--Accuracy related understatementAccuracy related understatement
Penalty = 20% of understatement, ifPenalty = 20% of understatement, if Substantial understatement of tax liabilitySubstantial understatement of tax liability Substantial overstatement of pension liabilitySubstantial overstatement of pension liability Negligence/disregard of rulesNegligence/disregard of rules Substantial valuation misstatement forSubstantial valuation misstatement for
Income taxIncome tax Gift or estate taxGift or estate tax
If fraud, penalty = 75% of related If fraud, penalty = 75% of related underpaymentunderpayment
Taxpayer Penalties--Accuracy related understatementAccuracy related understatement
Negligence--Negligence-- Lack of reasonable attempt to complyLack of reasonable attempt to comply
Disregard of rules--Disregard of rules-- Careless, reckless, intentionalCareless, reckless, intentional
Substantial understatement of tax liabilitySubstantial understatement of tax liability > $5,000 or 10% of tax required to be shown> $5,000 or 10% of tax required to be shown >$10,000 for most regular corporations>$10,000 for most regular corporations
Avoiding Substantial Underpayment Penalty
The penalty does not apply if the taxpayer's position had Substantial authority ORSubstantial authority OR A reasonable basis and was adequately A reasonable basis and was adequately
disclosed.disclosed.
Reasonable Basis for Avoiding Substantial Underpayment Penalty
Minimum standard--arguable, but fairly unlikely to prevail in court
Significantly higher than ““Not patently improper" Not patently improper" ““Not frivolous"Not frivolous"
More than merely arguable Disclosure also required
Substantial Authority for Avoiding Substantial Underpayment Penalty Objective standard involving an analysis of
the law and application of the law to relevant facts
The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority
Disclosure not required, but retain contemporaneous written documentation
Research Query: Substantial Authority
What types of authority constitute What types of authority constitute “substantial authority” under §6662(d)(2)“substantial authority” under §6662(d)(2)(B)(i)? (B)(i)?
SeeSee Reg § 1.6662-4(d)(3)(iii)Reg § 1.6662-4(d)(3)(iii) Notice 90-20, Sec. V(A), 1990-1 CB 328Notice 90-20, Sec. V(A), 1990-1 CB 328 H Rept No. 101-247 (PL 101-239) p.1389-90H Rept No. 101-247 (PL 101-239) p.1389-90
Solution--Research Query: Substantial Authority
The Code and other statutesThe Code and other statutes Final and temporary regulationsFinal and temporary regulations Proposed regulations not yet supersededProposed regulations not yet superseded Federal Court casesFederal Court cases Revenue rulings and proceduresRevenue rulings and procedures Tax treaties, plus IRS and other official Tax treaties, plus IRS and other official
explanations of such treatiesexplanations of such treaties......
Solution--Research Query: Substantial Authority
Congressional intent as reflected inCongressional intent as reflected in Committee reportsCommittee reports Joint explanatory statements of Joint explanatory statements of
managers included in conference managers included in conference committee reportscommittee reports
Floor statements made before Floor statements made before enactment by one of a bill's managersenactment by one of a bill's managers
Solution--Research Query: Substantial Authority
After public release, the following become After public release, the following become substantial authority substantial authority if dated after Dec. 31, 1984if dated after Dec. 31, 1984
Private letter rulingsPrivate letter rulings Technical advice memorandaTechnical advice memoranda Actions on decisionsActions on decisions General counsel memorandaGeneral counsel memoranda
Solution--Research Query: More Substantial Authority
Internal Revenue Service information or Internal Revenue Service information or press releasespress releases
Notices, announcements and other Notices, announcements and other administrative pronouncements published administrative pronouncements published by IRS in the Internal Revenue Bulletinby IRS in the Internal Revenue Bulletin
"Blue books," i.e..., General explanations of "Blue books," i.e..., General explanations of tax legislation prepared by the Joint tax legislation prepared by the Joint Committee on TaxationCommittee on Taxation
Statement on Responsibilities in Tax Practice--Advisory Only
Eight Separate StandardsEight Separate Standards SRTP 1: Follows Circular 230 disclosure SRTP 1: Follows Circular 230 disclosure
rulesrules SRTP 2: Some general questions on return SRTP 2: Some general questions on return
can be disregarded for causecan be disregarded for cause SRTP 3: Need not audit informationSRTP 3: Need not audit information
must use knowledge and investigate if must use knowledge and investigate if information appears incorrect/incompleteinformation appears incorrect/incomplete
Statement on Responsibilities in Tax Practice--Advisory Only
SRTP 4: Materiality not defenseSRTP 4: Materiality not defense can use reasonable estimates if disclosedcan use reasonable estimates if disclosed
SRTP 5: Each year stands aloneSRTP 5: Each year stands alone unless consistency agreed to in closing unless consistency agreed to in closing
agreement agreement SRTP 6: Error on prior returnSRTP 6: Error on prior return
inform client only, not IRSinform client only, not IRS
Statement on Responsibilities in Tax Practice--Advisory Only
SRTP 7: Error discovered during auditSRTP 7: Error discovered during audit advise client to disclose advise client to disclose
SRTP 8: Communicate important advice in SRTP 8: Communicate important advice in writingwriting advice is subject to professional judgmentadvice is subject to professional judgment
Other Procedural Issues
Key Learning Objectives
Engagement letters Legal liability IRS audit procedures
Other Procedural Issues--Engagement Letters
Defines scope of work to be performed Helps to limit liability exposure
Other Procedural Issues--Legal Liability
Professional negligence Improper statement of tax liability Communication/documentation important Make it clear that return position might be
challenged Make it clear that additional taxes & penalties
could be assessed if IRS wins
Other Procedural Issues--IRS Audit Procedures
Taxpayer Compliance Measurement Program
Discriminant Income Function (DIF) score Correspondence examination--by mail Interview examination--tax auditor Field examination--revenue agent
Compliance Query: SRTP 6
What steps should a What steps should a CPA take if a CPA take if a significant error is significant error is discovered on a discovered on a client’s previously client’s previously filed return?filed return? See SRTP 6See SRTP 6
Solution--Compliance Query
Inform the client immediatelyInform the client immediately Do Do notnot inform the IRS inform the IRS
Recommend corrective measuresRecommend corrective measures Consider withdrawing from the engagement Consider withdrawing from the engagement
if corrective measures are not takenif corrective measures are not taken
SRTP #6SRTP #6
Ethics Query...
A tax preparer can avoid the $250 A tax preparer can avoid the $250 understatement penalty by meeting the understatement penalty by meeting the “realistic possibility” standard“realistic possibility” standard
A taxpayer can avoid the 20% substantial A taxpayer can avoid the 20% substantial understatement accuracy penalty by understatement accuracy penalty by meeting the “substantial authority” standardmeeting the “substantial authority” standard
““Substantial authority” is a higher standard Substantial authority” is a higher standard than the “realistic possibility” standard...than the “realistic possibility” standard...
Ethics Query--continued
Discuss the following:Discuss the following:
Is it ethical for a preparer to take a return Is it ethical for a preparer to take a return position that meets the “realistic possibility” position that meets the “realistic possibility” standard but does not meet the “substantial standard but does not meet the “substantial authority” standard?authority” standard?