Chapter 26
Tax Practice and Ethics
Comprehensive Volume
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1
The Big Picture (slide 1 of 2)
• Campbell Corporation is preparing its Form 1120 for the tax
year.
• The entity develops and manufactures a number of electronic
products, including a line of GPS applications that are
downloaded onto cell phones.
• Campbell’s research department works with:
– The U.S. government on a line of security sensitive software, and
– Traditional software architecture and development.
• Some of the research department’s work clearly qualifies for
the Federal income tax credit for incremental research
expenditures.
– But for some other items, the availability of the credit is not so certain.
The Big Picture (slide 2 of 2)
• You are Campbell’s tax adviser.
• This situation presents you with several levels of
difficulty.
– How aggressive should you advise Campbell to be in
reporting items that qualify for the incremental research
credit?
– Will Campbell’s taking an overly aggressive position on
the credit trigger a tax preparer penalty for your consulting
firm?
– What level of diligence should you exercise in advising
Campbell as to whether specific expenditures qualify for
the credit, given that your expertise with GPS software is
limited to using the unit in your personal auto?
• Read the chapter and formulate your response.
Tax Administration
(slide 1 of 3)
• The IRS is responsible for administration and
enforcement of the tax laws
– Provides info to taxpayers through publications
and forms with instructions so taxpayers can
comply with the tax law
– Identifies delinquent tax payments
– Carries out assessment and collection procedures
Tax Administration
(slide 2 of 3)
• In meeting its responsibilities, the IRS
conducts audits of selected tax returns
– About 1% of all individual tax returns are audited
each year
– Certain tax returns, such as those for high income
individuals or cash-oriented businesses, have a
much higher audit rate
Tax Administration
(slide 3 of 3)
• To enhance its enforcement efforts, the IRS
has focused much effort on:
– Developing requirements for information reporting
and document matching
– Increasing pressure on tax advisers
• The IRS has recently undertaken a major
reorganization and adopted new operational
strategies aimed at improving its efficiency
while enhancing its interaction with taxpayers
Organizational Structure of the IRS
Letter Rulings
(slide 1 of 3)
• When a tax issue is controversial or involves
significant tax dollars, a taxpayer may request
a letter ruling from the IRS
– The ruling provides a written statement of the
position of the IRS concerning the tax
consequences of a course of action contemplated
by the taxpayer
Letter Rulings
(slide 2 of 3)
• The ruling can only be relied upon by the party
requesting the ruling
– Other taxpayers may use the ruling as an indication
of the IRS’ position on the matter
• Letter rulings are generally followed by the
IRS for the taxpayer who requested the ruling
as long as all material facts of the transaction
were accurately disclosed in the ruling request
Letter Rulings
(slide 3 of 3)
• Letter rulings may be declared obsolete by the
IRS for other taxpayers
• A fee is charged by the IRS for processing a
ruling request
Determination Letters
• Provide guidance regarding a completed
transaction when the issue involved is covered
by judicial or statutory authority, regulations,
or rulings
– Issued for various estate, gift, income, excise, and
employment tax matters
Technical Advice Memorandum
• Issued by the National Office to IRS personnel
in response to a request by an agent, Appellate
Conferee, or IRS executive
– May be requested by taxpayer when an issue in
dispute is not treated by the law or precedent
and/or published rulings or regulations
– Also appropriate when there is reason to believe
that the IRS is not administering the tax law
consistently
Technical Expedited
Advice Memorandum (TEAM)
• Can be used during an office or field audit
– Designed to reflect the position of the IRS in a shorter time
than a TAM otherwise would take
– This quicker response time is possible because prior to
submitting the TEAM request
• The taxpayer and IRS agree to the facts and conduct a
presubmission conference
• Technology, including e-mails and faxes, is used to gather facts as
part of the process
• The IRS holds an internal strategic planning meeting, discussing
potential responses to various holdings that could be issued as part
of the TEAM
IRS Administrative Powers
(slide 1 of 3)
• Examination of records
– The IRS can examine a taxpayer’s records to
determine the correct tax due
• Burden of proof
– If taxpayer meets the record keeping requirement
and substantiates income and deductions properly,
the IRS bears the burden of proof in establishing a
tax deficiency during litigation
IRS Administrative Powers
(slide 2 of 3)
• Assessment and demand
– The IRS can assess a tax deficiency and demand payment
of a tax
– The assessment cannot be made until 90 days after a
“statutory notice of deficiency” is issued to the taxpayer
• During the “90 day letter” period, taxpayer may file a petition with
the U.S. Tax court, which prevents the IRS from collecting the
amount until after the Tax Court case is resolved
• After assessment the IRS demands payment within 30 days
IRS Administrative Powers
(slide 3 of 3)
• IRS collection procedures
– If the taxpayer does not pay an assessed tax, the
IRS can place a lien on all property belonging to
the taxpayer
– The IRS can garnish (attach) wages and salary and
seize and sell all nonexempt property by any
means
• A taxpayer’s principal residence is exempt from the
levy process, unless
– The disputed tax, interest, and penalty exceed $5,000 and
– A U.S. District Court judge approves of the seizure
IRS Audit Selection
(slide 1 of 3)
• The IRS does not disclose its audit selection
process
• Utilizes mathematical formulas to select
returns:
– Likely to contain errors and
– Yield a substantial amount of additional tax
revenue
IRS Audit Selection
(slide 2 of 3)
• Examples of audit selection
– Certain taxpayers are more likely to be audited
such as:
• Individuals with gross income > $100,000
• Self-employed individuals with substantial business
income and deductions
• Cash businesses where potential for evasion is high
IRS Audit Selection
(slide 3 of 3)
• Most audits of individual tax returns are
started about two years following the date the
return is filed
Types of IRS Audits
(slide 1 of 3)
• Correspondence audits
– The return is checked for mathematical accuracy
or clearly erroneous deductions, etc. soon after the
return is filed
– In addition, several months after filing, all 1099s
and W-2s and other matching information is
verified
– If a discrepancy is found in either of these cases,
the IRS simply sends the taxpayer an explanatory
letter and a bill or a refund
Types of IRS Audits
(slide 2 of 3)
• Office audits
– These audits are frequently limited in scope, and
can be conducted in the IRS office
– The taxpayer is generally asked to substantiate the
items requested (i.e., present invoices, canceled
checks, etc.)
Types of IRS Audits
(slide 3 of 3)
• Field audits
– Commonly used for corporate returns and for
returns of individuals engaged in business or
professional activities
– These audits are generally conducted at a
taxpayer’s home or business
Audit Procedures
(slide 1 of 4)
• Prior to or at the initial interview, the IRS must
– Provide the taxpayer with an explanation of the
audit process and
– Describe the taxpayer’s rights under that process
• IRS representative must suspend the interview
if the taxpayer clearly states a desire to consult
an attorney, CPA, or enrolled agent
Audit Procedures
(slide 2 of 4)
• The IRS must grant permission to make an
audio recording of any interview, upon
advance request
• On completion of the examination, the IRS
agent will file a Revenue Agent’s Report
(RAR) outlining recommended changes to the
return (if any)
Audit Procedures
(slide 3 of 4)
• The RAR is reviewed internally before the IRS
assesses an additional tax
• The taxpayer may accept the RAR or appeal within
the IRS
• Appeal within the IRS must be accompanied by a
written protest unless:
– The amount of tax does not exceed $10,000 for any tax
year
– The adjustment resulted from a correspondence or office
audit
Audit Procedures
(slide 4 of 4)
• Settlement with an IRS agent is based solely
on the merits of the case, given IRS policy
• Settlement at the IRS appeals level can be
based on the “hazards of litigation” - e.g., the
likelihood that the courts would agree with the
IRS position
Offers in Compromise and Closing
Agreements (slide 1 of 2)
• Offers in compromise
– IRS can negotiate a compromise if taxpayer is
financially unable to pay the tax
• May result in IRS accepting less than full amount of tax
due
• Final payment of taxes may be allowed through
installment payments
Offers in Compromise and Closing
Agreements (slide 2 of 2)
• Closing agreements
– May be used:
• When disputed issues carry over to future years
• To dispose of a dispute involving a specific issue in a
prior year or a proposed transaction involving future
years
– Binding on taxpayer and IRS
Interest
(slide 1 of 3)
• Congress sets interest rates applicable to
underpayments and overpayments of tax
– Rate is determined quarterly
– Based on federal short-term rates
• For noncorporate taxpayers
– The interest rate for both over- and underpayments is 3%
for the first quarter of 2011
• For most corporate taxpayers
– The rate is 2 % for overpayments and 3% for
underpayments
Interest
(slide 2 of 3)
• IRS deficiency assessments
– Interest accrues from unextended due date of
return until 30 days after taxpayer agrees to the
deficiency by signing Form 870
– If amount due is not paid within 30 days interest
again accrues on the deficiency
Interest
(slide 3 of 3)
• Refund of taxpayer’s overpayments
– If refunded within 45 days after return is filed or is
due, no interest is allowed
– If taxpayer files an amended return or a claim for a
refund of a prior year’s tax, interest is accrued
from the original due date of the return
• Even then, no interest accrues until a return is filed or, if
the return has been filed, if the IRS pays the refund
within 45 days
Taxpayer Penalties
(slide 1 of 11)
• A comprehensive array of penalties are used to
promote compliance with the tax law
• Failure to file a tax return
– Penalty is 5% per month (up to 25%) on amount of
tax due
• Minimum penalty is $135
– If failure is due to fraud, rate is 15% per month (up
to 75%)
Taxpayer Penalties
(slide 2 of 11)
• Failure to pay tax due
– Penalty is 1/2% per month (up to 25%) on amount of tax
due
– If failure is after notice of deficiency is received, rate is 1%
per month
• Both above penalties can be eliminated if reasonable
cause exists for failure to file or pay
– Failure to file penalty is reduced by any failure to pay
penalty for the same month
Taxpayer Penalties
(slide 3 of 11)
• Accuracy-related penalties
– 20% of portion of tax underpayment due to:
•
•
•
•
Negligence or intentional disregard of law
Substantial understatement of tax liability
Substantial valuation overstatement
Substantial valuation understatement
– Penalty applies only if taxpayer fails to show a
reasonable basis for the position taken on the tax
return
Taxpayer Penalties
(slide 4 of 11)
• For purposes of this accuracy-related penalty
– Negligence includes any failure to make a
reasonable attempt to comply with the tax law
• Penalty also applies to any disregard of rules and
regulations whether careless, reckless, or intentional
• Penalty applies to all taxes except when fraud is
involved
• Penalty can be avoided upon showing
reasonable cause
Taxpayer Penalties
(slide 5 of 11)
• Substantial understatement of tax liability
– Occurs when tax understatement exceeds the larger of 10%
of amount due or $5,000
– For a C corporation, a substantial understatement occurs
when tax understatement is the lesser of
• 10% of the tax due, but at least $10,000
• $10 million
• This penalty applies unless:
• The taxpayer has substantial authority for the tax treatment
• Relevant facts are disclosed in the tax return
Taxpayer Penalties
(slide 6 of 11)
• Penalty for overvaluation of an asset
– Penalty is 20% of additional tax that would have
been due if correct valuation had been used
– Penalty applies if valuation is 150% or more of
correct valuation
• Penalty is doubled if the valuation is overstated by
200% or more
– Penalty applies only to extent that resulting tax
underpayment exceeds $5,000 ($10,000 for C
corporations)
Taxpayer Penalties
(slide 7 of 11)
• Penalty for undervaluation of an asset
– Penalty is 20% of additional tax that would have
been due if correct valuation had been used
– Penalty applies if the valuation is 65% or less than
the correct amount
• Penalty is doubled if the reported valuation was 40% or
less than the correct determination
– The penalty applies only to an additional transfer
tax liability in excess of $5,000
Taxpayer Penalties
(slide 8 of 11)
• Appraiser’s Penalty
– When a valuation penalty arises due to reliance on
an appraisal and the appraiser knew the appraisal
would be used as part of a tax or refund
computation, then the appraiser pays a penalty
equal to the lesser of:
• 10% of the tax understatement, but at least $1,000, or
• 125% of the gross income received by the appraiser
from the engagement (e.g., the appraisal fee collected)
Taxpayer Penalties
(slide 9 of 11)
• Penalty for Improper Refund Claim
– If a refund claim is filed and later found to exceed
the final amount allowed by the IRS or a court, a
penalty of 20% of the disallowed refund results
• The penalty is waived if the taxpayer can show a
reasonable basis for the refund claim (i.e., probably a
20% chance that a court would allow the refund)
• This penalty is meant to discourage the taxpayer from
overstating the amount of the refund requested from the
IRS
Taxpayer Penalties
(slide 10 of 11)
• Civil fraud penalty
– 75% penalty on any underpayment resulting from
fraud by the taxpayer
– For this penalty, burden of proving taxpayer civil
fraud by a preponderance of evidence is on the
IRS
Taxpayer Penalties
(slide 11 of 11)
• Criminal penalties
– Various monetary fines and/or imprisonment may
be assessed
– Burden of proof is on IRS to show guilt beyond the
shadow of any reasonable doubt
Estimated Taxes
(slide 1 of 3)
• A penalty is imposed for failure to pay estimated
taxes
– Applies to individuals, corporations, trusts, and certain
estates
– Penalty is not imposed if tax due < $500 for corporations,
$1,000 for all others
• Quarterly estimated tax payments should be paid on
15th day of the 4th, 6th, and 9th months of the current
year and the 1st month of the following year
– Corporations must make the last quarterly payment by the
12th month of the current year
Estimated Taxes
(slide 2 of 3)
• An individual’s underpayment of estimated tax
is the difference between the estimates that
were paid and the lesser of :
– 90% of the current-year tax,
– 100% of the prior-year tax
• If prior-year AGI > $150,000, the required payment for
the prior-year alternative is 110 %
– 90% of the tax on an annualized income basis
Estimated Taxes
(slide 3 of 3)
• A corp.’s underpayment of estimated tax is the difference
between the estimates paid and the lesser of:
– The current-year tax,
– The prior-year tax, and
– The tax on an annualized income computation
• For the prior-year alternative
– The prior tax year must have been a full 12 months, and
– A nonzero tax amount must have been generated for that year
– For large corporations (taxable income of $1 million or more in any of
the 3 immediately preceding tax years)
• Can use this alternative only for the 1st installment
Other Penalties
(slide 1 of 3)
• False Information with Respect to Withholding
– A civil penalty of $500 applies when a taxpayer
claims withholding allowances based on false
information
– A criminal penalty for willfully failing to supply
information or supplying false or fraudulent
information is an additional fine of up to $1,000
and/or up to one year of imprisonment
Other Penalties
(slide 2 of 3)
• Failure to Make Deposits of Taxes and
Overstatements of Deposits
– A penalty of up to 15% applies for failure to pay
the FICA and income tax amounts withheld from
wages of employees
– A 100% penalty applies if the employer’s actions
are willful
– In addition, the employer remains liable for the
employees’ income and payroll taxes that should
have been paid
Other Penalties
(slide 3 of 3)
• Failure to Provide Information Regarding Tax
Shelters
– A tax shelter organizer must register the shelter with the
IRS before any sales are made to investors
• A penalty of up to $10,000 is assessed if the required information is
not filed with the Service
– The shelter organizer must also maintain a list of
identifying information of all its investors
• Failure to fully and truthfully maintain the list can result in a
penalty of up to $100,000 per investment
Statutes of Limitations
(slide 1 of 2)
• In general, any tax imposed must be assessed
within 3 years of filing the return (or, if later,
the due date of the return)
– Exceptions to the 3 year rule include:
• If no return is filed or a fraudulent return is filed, there
is no statute of limitations
• If taxpayer omits gross income > 25% of gross income
stated on the return, statute of limitations is extended to
six years
Statutes of Limitations
(slide 2 of 2)
• Refund claims
– Must be filed within 3 years of filing the tax return
or within 2 years following payment of the tax, if
later
– A 7 year period applies to refund claims relating to
bad debts and worthless securities
Circular 230
(slide 1 of 4)
• Generally, practice before the IRS is limited to CPAs,
attorneys, and enrolled agents
– In limited situations, other parties may be allowed to
practice before the IRS
•
•
•
•
•
A taxpayer may always represent himself or herself
Employees may represent their employers
Corporations may be represented by their officers
Partnerships may be represented by any of the partners
Trusts, receiverships, guardianships, or estates may be represented
by their trustees, receivers, guardians, or administrators or
executors
• A taxpayer may be represented by whoever prepared the return for
the year in question (only through the agent level)
Circular 230
(slide 2 of 4)
• The IRS requires that all paid tax return preparers, including
CPAs and attorneys, obtain a Preparer Tax Identification
Number before they assist taxpayers with returns for a new
filing season.
– Preparers (other than CPAs, attorneys, and enrolled agents) must pass
an annual qualifying exam, designed to evaluate their familiarity with
new tax laws and filing requirements that will apply for the filing
season.
• Circular 230 prescribes rules governing practice before the
IRS
– Includes prohibitions against:
• Taking a position on a tax return unless there is a realistic possibility of it
being sustained
• Taking frivolous tax return positions
– A frivolous return is one with a less than 5% chance of being sustained by the
courts
Circular 230
(slide 3 of 4)
– Also contains requirements to:
• Disclose nonfrivolous tax return positions that fail the
realistic possibility standard
• Inform clients of penalties likely to apply and ways they
can be avoided
• Make known to clients any error or omission the client
may have made
• Submit records lawfully requested by the IRS
Circular 230
(slide 4 of 4)
– Also contains requirements to: (cont’d)
• Exercise due diligence and to use best practices in
preparing and filing tax returns accurately
• Not unreasonably delay disposition of matters before
the IRS
• Not charge an “unconscionable fee” for representing a
client before the IRS
• Not represent clients with conflicting interests
• Not charge contingent fees for preparing an original
return
– Such fees can be charged when dealing with an audited or
amended return
The Big Picture – Example 16
Realistic Possibility Standard (slide 1 of 2)
• Return to the facts of The Big Picture on p. 26-2.
• Campbell wants to claim the research credit
for a testing program that it has developed, to
be used by its in-house engineers before a new
GPS app is released to the public.
– Based on their tax research on this issue, the
members of your firm’s tax department have
severe doubts about taking the credit for this
program.
The Big Picture – Example 16
Realistic Possibility Standard (slide 2 of 2)
• Your firm’s position is that there is a one-infour chance that the courts would allow
Campbell’s credit.
– Claiming the credit fails the realistic possibility
standard of Circular 230.
• Therefore, if Campbell claims the credit, you
must insist that its Form 1120 include a
separate disclosure on the return, probably
using Form 8275.
Preparer Penalties
(slide 1 of 4)
• The Code provides penalties to discourage improper
actions by tax practitioners
• A penalty for understatements due to taking an
unreasonable position on a tax return
– The penalty is imposed if the tax position:
• Is not disclosed on the return and there was no substantial authority
(i.e., > 40% chance) that the tax position would be sustained by its
merits on a final court review, or
• Is disclosed on the return and there was not a reasonable basis (i.e.,
probably a 20% chance) for the position
– The penalty is computed as the greater of
• $1,000 or
• One-half of the income of the practitioner that is attributable to the
return
Preparer Penalties
(slide 2 of 4)
• 2. A penalty for willful and reckless conduct
– The penalty applies if any part of the understatement of a
taxpayer’s liability on a return or claim for refund is due to:
• The preparer’s willful attempt to understate the taxpayer’s tax
liability in any manner
• Any reckless or intentional disregard of IRS rules or regulations by
the preparer
– The penalty is computed as the greater of
• $5,000 or
• One-half of the income of the practitioner that is attributable to the
return or claim
Preparer Penalties
(slide 3 of 4)
• 3. A $1,000 penalty ($10,000 for corps.) is
imposed against persons who aid in
preparation of returns they know (or have
reason to believe) would result in an
understatement of tax liability of another
person
– If this penalty applies, neither the unreasonable
position penalty (item 1) nor the willful and
reckless conduct penalty (item 2) is assessed
Preparer Penalties
(slide 4 of 4)
• 4. A $50 penalty is assessed against the
preparer for failure to sign a return or furnish
the preparer’s identifying number
• 5. A $50 penalty is assessed if the preparer
fails to furnish a copy of the return or claim for
refund to the taxpayer
• 6. A $500 penalty may be assessed if a
preparer endorses or otherwise negotiates a
check for refund of tax issued to the taxpayer
Privileged Communications
• Communications between attorney and client
are protected from disclosure to other parties
(such as the IRS and the tax courts)
– Similar privilege of confidentiality extends to tax
advice between a taxpayer and tax practitioner
– Not available for matters involving:
• Criminal charges
• Questions brought by other agencies, such as the
Securities and Exchange Commission
• Promoting or participating in tax shelters
AICPA Standards For Tax Services
(slide 1 of 6)
• Statement No. 1: Tax Return Positions
– Under certain circumstances, a CPA may take a
position that is contrary to that taken by the IRS
• Must have a good faith belief that the position has a
realistic possibility (i.e., probably a one-in-three chance)
of being sustained
• Fully advise client of the risks involved and the
associated penalties
– The CPA should not take a questionable position
based on the probabilities that the client’s return
will not be chosen by the IRS for audit
The Big Picture – Example 19
Realistic Possibility Standard (slide 1 of 3)
• Return to the facts of The Big Picture on p. 26-2.
• Campbell’s new marketing program solicits the
opinions of a virtual focus group to test ideas for new
products.
– Based on your tax research, you believe that the program
might qualify for the Federal income tax research credit
even though it involves marketing research that is excluded
from the credit under § 41(d)(4).
– Still, you believe that there is only a 30% chance that the
courts would allow the credit.
• You meet with Shelly Watkins, Campbell’s tax
director, to convey the results of your research.
The Big Picture – Example 19
Realistic Possibility Standard (slide 2 of 3)
• Watkins agrees that the research credit would
be turned down by an IRS auditor.
– But, she says that Campbell never has been audited
and that it is not likely to be audited as long as its
legal structure and income levels do not
significantly change.
• Watkins believes that Campbell’s corporate
officers will sign off on the credit, given both
the firm’s weak cash position and the low
chances that the item will be discovered.
The Big Picture – Example 19
Realistic Possibility Standard (slide 3 of 3)
• As a CPA, you must inform Campbell that
– Claiming the credit for this activity does not have a realistic
possibility of being sustained on its merits, and
– Certain penalties will be assessed if the credit is claimed
and not further disclosed on the return.
• Whether the credit is claimed is the decision of your
client, the taxpayer.
– But if Campbell wants to claim the credit without the
required additional disclosures, you must terminate your
engagement with Campbell, under the SSTS and other
AICPA provisions
AICPA Standards For Tax Services
(slide 2 of 6)
• Statement No. 2: Questions on Returns
– A CPA should make a reasonable effort to obtain
from the client, and provide, appropriate answers
to all questions on a tax return before signing as
preparer
• Reasonable grounds may exist for omitting an answer
AICPA Standards For Tax Services
(slide 3 of 6)
• Statement No. 3:Procedural Aspects of
Preparing Returns
– In preparing a return, a CPA may in good faith rely
without verification on information furnished by
the client or by third parties
• The CPA should make reasonable inquiries if the
information appears to be incorrect, incomplete, or
inconsistent.
• The CPA should refer to the client’s returns for prior
years whenever appropriate
AICPA Standards For Tax Services
(slide 4 of 6)
• Statement No. 4:Estimates
– A CPA may prepare a tax return using estimates
received from a taxpayer if it is impracticable to
obtain exact data
• The estimates must be reasonable under the facts and
circumstances as known to the CPA
• When estimates are used, they should be presented in
such a manner as to avoid the implication of greater
accuracy than exists
AICPA Standards For Tax Services
(slide 5 of 6)
• Statement No. 5: Recognition of
Administrative Proceeding or Court Decision
– As facts may vary from year to year, so may the
position taken by a CPA
– In these types of situations, the CPA is not bound
by an administrative or judicial proceeding
involving a prior year
AICPA Standards For Tax Services
(slide 6 of 6)
• Statement No. 6: Knowledge of Error
– A CPA should promptly advise a client upon
learning of an error in a previously filed return or
upon learning of a client’s failure to file a required
return
• The error or other omission should not be disclosed to
the IRS without the client’s consent
• If the past error is material and is not corrected by the
client, the CPA may be unable to prepare the current
year’s tax return
Refocus On The Big Picture (slide 1 of 4)
• Your work with Campbell Corporation and its incremental
research credit may prove troublesome.
• To avoid the taxpayer and tax preparer penalties, substantial
authority must exist for claiming the credit.
– Unfortunately, the tax cases and Regulations do not appear to provide
much guidance with respect to research expenditures of this sort.
• How does one craft a tax return position when the tax law
largely is silent as to the particulars of the facts of the
taxpayer’s situation?
• How much risk of incurring a tax penalty are the taxpayer and
your firm willing to assume in deciding how and whether to
report these expenditures?
Refocus On The Big Picture (slide 2 of 4)
• Beyond the monetary effects, you and the client must consider
the publicity aspects of taking this issue to court.
– Does Campbell want to be the ‘‘test case’’ in the Tax Court on this
matter?
• What would be the effects on your consulting firm if a
preparer penalty or even loss of professional certification were
to result?
• If the credit is to be claimed, what degree of ‘‘disclosure’’ is
required?
• At a minimum, your firm and Campbell’s tax department must
conduct thorough research of analogous situations in the law.
– Due diligence in this regard would require that you examine how other
similar technological innovations were treated for tax credit purposes.
Refocus On The Big Picture (slide 3 of 4)
What If?
• The risk profiles of the tax adviser and a client seldom are
identical.
• What position should your firm take if Campbell’s tax
department decides to claim the full incremental research
credit for an item on which the tax law is silent or unclear, but
your firm recommends that a special disclosure be made on the
return concerning the item?
– A disclosure of this sort would protect the parties from later assessment
of tax penalties.
• Campbell believes that drawing attention to the credit item
would increase the likelihood of a targeted audit of the
expenditures by the IRS.
Refocus On The Big Picture (slide 4 of 4)
What If?
• Although you are certain that tax fraud is not a problem on the
Campbell return, you are concerned about the ramifications of
Campbell’s desire to omit the recommended disclosure.
– Your firm might decide to leave the Campbell engagement altogether
if it is especially sensitive to exposure to penalties, or if it is not certain
that adequate research has been done to support the tax return position.
• Charges of a lack of due diligence by your firm might be
brought by the IRS, the firm’s professional ethics or
certification bodies, or the issuer of its malpractice insurance.
• Clearly, none of these results is attractive to your firm.
If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact:
Dr. Donald R. Trippeer, CPA
trippedr@oneonta.edu
SUNY Oneonta
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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