Ethical Challenges for
the In-House Tax
Professional
TEI CAROLINAS CHAPTER
Duke Energy Paul Anderson Auditorium
Charlotte, North Carolina
October 10, 2014
TIMOTHY J. MCCORMALLY
KPMG LLP
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Notice

The information in this document is not intended to be “written advice
concerning one or more Federal tax matters” subject to the requirements
of section 10.37(a)(2) of Treasury Department Circular 230.

You (and your employees, representatives, or agents) may disclose to any
and all persons, without limitation, the tax treatment or tax structure, or
both, of any transaction described in the associated materials provided to
you, including, but not limited to, any tax opinions, memoranda, or other
tax analyses contained in the materials.

The information in this document is of a general nature and based on
authorities that are subject to change. Applicability of the information to
specific situations should be determined through consultation with your
tax adviser.
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2
Objectives

Review social science research relating to matters of personal
ethics, focusing on effect of demographic differences and
environmental influences.
 Recognize current ethics issues in tax practice.
 Identify ethical guidance for tax professionals, including the
Treasury Department’s recently revised Circular 230,
applicable AICPA and ABA Rules, and TEI’s Standards of
Conduct.
 Discuss cases involving ethics issues in tax practice, as well as
review scenarios and a case study raising ethics issues.
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Agenda
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Importance of Ethics in the Tax Practice, including 10 Myths of Ethics
The Ethical Landscape
Definitions & General Comments; Personal & Societal Considerations
Changes Affecting Tax Ethics
An Ethical Analytical Framework
Professional Standards (AICPA and ABA)
U.S. Treasury Department’s Circular 230 and IRS Office of Professional
Responsibility, including 2014 Changes
TEI Standards of Conduct
Civil Penalties, including I.R.C. § 6694
Document Management: Dos and Don’ts
Scenarios & Case Study
Appendix: Enforcement of Standards, Whistleblower Rules,
State False Claims Acts
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Before We Start — Part I
Lawyers Need to Be Fast on their Feet,
But Their Feet Must Be Covered
●
On August 23, 2014, a Blackford County, Indiana, judge ordered an lawyer to
wear socks. Should the lawyer appear without socks, “he will be subject to
sanctions from the court which may include a delay ordered by the court in
presenting his case, fines, continuances of pending proceeding[s] for which
costs, fees and expenses may be awarded opposing parties and/or their
counsel, or such other sanctions for contempt that the court may impose in
order to maintain appropriate decorum during court proceedings,” according
to the order.
●
The lawyer’s comment “I hate socks” was not a sufficient defense to violating
the court’s “appropriate business attire” rule.
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Before We Start — Part II
Maybe the IRS Isn’t So Bad, After All:
Use of Drones in Tax Enforcement
● While government authorities in the United States debate when and where drones
can be used safely, the Argentine province of Buenos Aires is sending them off in
search of tax scofflaws.
● On September 25, the provincial tax authority (ARBA) issued a press release
confirming that a combination of satellite images and aerial drones had been used
to determine that 87 percent of new construction in an area south of the city of
Buenos Aires has never been placed on the property tax rolls.
● ARBA’s director, Ivan Budassi, said in a release that the drone-assisted technology
will be an important weapon in his agency's arsenal. “We have achieved a level of
control that is very efficient and that allows us to be more rigorous and fair in
fighting evasion,” he said.
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Importance of Ethics in Tax Practice
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Heightened attention to ethics and “tax morality.”
People we know and work with — people like us — are
finding themselves on the wrong side of the ethical (or legal)
line:
o Tax executives.
o Practitioners.
o Companies.
Changes to Whistleblower Rules.
CPE Requirement.
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What Are the 10 Myths of Ethics?
From Virginia Board of Accountancy
1.
It’s ethical if it’s legal and permissible. Loopholes, tax enforcement, and
personal moral judgment do not outweigh what’s right or lawful.
2.
It’s ethical if it’s part of the job. Separating personal ethics from work
ethics can cause decent people to justify actions at work that they would
never do at home. Everyone’s first job is to be a good person.
3.
It’s ethical if it’s for a good cause. People can be vulnerable to
rationalizations when advancing a noble aim. This can lead to
deception, concealment, conflicts of interest, favoritism, or other
departmental violations.
4.
It’s ethical if no one’s hurt. Ethical values are not factors to be
considered in decision-making; they are ground rules.
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What Are the 10 Myths of Ethics?
From Virginia Board of Accountancy
5.
It’s ethical if everyone does it. Treating questionable behaviors as
ethical norms under the guise of “safety in numbers” is a false rationale.
6.
It’s ethical if I don’t gain personally. Improper conduct done for others
or for institutional purposes is wrong. Personal gain is not the only test
of impropriety.
7.
It’s ethical if I’ve got it coming. Being overworked or underpaid doesn’t
justify accepting favors, discounts, or gratuities. Nor is abusing sick
time, insurance claims, or personal use of office equipment fair
compensation for one’s services or underappreciated efforts.
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What Are the 10 Myths of Ethics?
From Virginia Board of Accountancy
8.
It’s ethical if I’m objective. By definition, if you’ve lost your objectivity,
you don’t know you’ve lost it. Gratitude, friendship, or anticipation of
future favors can subtly affect one’s judgment.
9.
It’s ethical if I fight fire with fire. Promise-breaking, lying, or other
misconduct is unacceptable even if others routinely engage in them.
10. It’s ethical if I do it for you. Committing white lies or withholding
information in professional relationships (such as performance reviews)
disregards the fact that most people would rather know unpleasant
information than soothing falsehoods.
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The Ethical Landscape
11
The Ethical Landscape
National Ethics Survey*
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Good news: Workplace misconduct at historic low.
41% of U.S. workers observed misconduct** (compared with 45% in
2011).
63% of those who witnessed wrongdoing reported misconduct (compared
with 65% in 2011).
Of those who reported, 21% said they experienced some kind of
retaliation (compared with 22% in 2011).
9% perceived pressure to compromise standards in order to do jobs
(compared with 13% in 2011).
* Ethics Resource Center, 2013 National Business Ethics Survey of the U.S. Workforce (released February 4, 2014), available at
www.ethics.org/downloads/2013NBESFinalWeb.pdf.
** Top three types of reported misconduct were abusive behavior, lying to employees, and discrimination.
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The Ethical Landscape
National Ethics Survey
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Still, the results are sobering: “a relatively high percentage of
misconduct is committed by managers — the very people who are
supposed to set a good example.”
60% of misconduct involved someone with managerial authority.
24% of observed misdeeds involved senior managers.
26% of misconduct is ongoing within the organization.
About 12% of wrongdoing is reported to take place company-wide.
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The Ethical Landscape
National Ethics Survey

Percentage of companies providing ethics training increased from
74% in 2011 to 81% in 2013.
 67% of companies included ethical conduct as a performance
measure in employee evaluations, up from 60% in 2011.
 74% of companies communicated internally about disciplinary
actions when wrongdoing occurs.
 66% of companies now have positive ethics culture.*
* “[E]thics culture drives employee conduct. When companies value ethical performance and build strong culture, misconduct is
substantially lower. In 2013, one in five workers (20 percent) reported seeing misconduct in companies where culture are ‘strong’
compared to 88 percent who witnessed wrongdoing in companies with the weakest cultures.”
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The Ethical Landscape
National Ethics Survey

When companies undergo change (mergers, acquisitions, or
restructurings), the prevalence of misconduct increases.
 On average, about 50% of employees in companies not undergoing
change observed misconduct, whereas in companies where there
were changes, an average of 60% saw something amiss — an
increase of more than 20 percent.
 Effects of change can be noticeably felt up to 6 months after the
conduction of the change as employees settle into new
organizational structure and working relationships.
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The Ethical Landscape
Does Gordon Gekko’s View Still Prevail?

Survey of 250 financial industry insiders:*
o 23% had observed or had first-hand knowledge of wrongdoing
at work.
o 26% believed compensation structure created an incentive on
compromising ethical standards.
o 24% would engage in insider trading to make $10 million
(increased to 38% for those with under 10 years of
experience).
 Groucho Marx: “There’s one way to find out if a man is
honest — ask him. If he says ‘yes,’ he is a crook.”
* Andrew Ross Sorkin, On Wall St., A Culture of Greed Won’t Let Go, New York Times, at B1 (July 16, 2013).
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The Ethical Landscape
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Overarching Themes
o Personal Ethics.
o Ethical Rules Promulgated by Governments
and Other Organizations.
o Other Outside Influences.
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The Ethical Landscape
A man wrote a letter to the IRS saying, “I have been unable
to sleep knowing that I have cheated on my income tax. I
have understated my taxable income and enclose a check for
$1,500. . . .”
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The Ethical Landscape
“. . . If I still can’t sleep, I will send in the rest.”
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Definitions & General Comments
Ethics in Everyday Life
(Line Drawing 101)
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•
Shampoo from Hotel Room … versus Towels. What about the
Gideon bible?*
“All You Can Eat … Here.”
Unlicensed Music, Movies, or Software.
Speed Limit Signs … versus Red Light Cameras.
* According to hotel.com, 35 percent of global travellers flinch hotel amenities (towels, linens, magazine, books, even furnishings);
toiletries excepted from survey because “everyone takes those.” But see Chuck Klosterman, Rinse & Repeat (The Ethicist), New
York Times, at MM20 (Magazine) (Oct. 14, 2012).
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Personal & Societal Considerations
Sources of Guidance
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Individual religious, philosophical, or moral standards.
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Wall Street Journal Test.
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WWMD: What Would Mom Do?
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“Well, Billy gets to do it….”
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“If you tell the truth, you don’t have to remember anything.” —
Mark Twain
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“A liar should have a good memory.” — Quintilian (Roman
Rhetorician, b. 35 AD)

“Relativity applies to physics, not ethics.” — Albert Einstein
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Personal & Societal Considerations
Tax Morality

Not a new issue.
o J.P. Morgan in 1937: “Taxation is a legal question, pure and
simple, and not a moral one.”
 Is this real?
 What is a “fair” amount of tax?
 Does it matter who the client is or what the tax planning
relates to?
 Does it matter if the government is corrupt?
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Personal & Societal Considerations
Social Science Research
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Early research based on “deterrence theory.”*
o Increase penalties = increased compliance.
More recent research shows importance of ethical values.
o Ethics “frame” decisions.
* Philip Reckers, Debra Sanders & Stephen Roark, The Influence of Ethical Attitudes on Taxpayer Compliance, 47 National Tax Journal
825-36 (Dec. 1994).
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Personal & Societal Considerations
Social Science Research
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Like it or not, most people cheat a little bit.
o Rationalization.
o Use tax.
Perspective is everything (business vs. ethical frame).
We lie because we care about others.
o Evidence from emissions tests.
o Unable to fully assess the harm.
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Personal & Societal Considerations
Social Science Research
Slippage — People who wear counterfeit sunglasses are more
likely to cheat.
 We are more likely to cheat if other people like us cheat.
 Prof. Dan Ariely, Predictably Irrational.

Duke Professor of Behavioral Economics.
o Why We Lie, Wall Street Journal (5/26/2012).
o

Consider how your actions affect others.
o
o
o
Contagion: Tax shelter marketing in the 1990s.
Milgram Experiment (Yale 1963): Obedience to Authority.
“Boiling a frog.”
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Personal & Societal Considerations
Social Science Research

If we all cheat a little, and do it without thinking, how do we
minimize it?
o Small “honesty” reminders.
o Adequate systems to avoid conflict of interest.
o Best practices.
o Would moving the jurat to the beginning of a tax return spur
higher compliance?
o Good news: We want to be honest!
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Personal & Societal Considerations

Survey of American and German MBA Students’ Views
on Tax Evasion*
Most thought tax evasion was unethical.
o 11% of Americans expressed some tolerance for cheating on their taxes.**
o Reasons some gave in support of tax evasion:
 Tax money used for unacceptable purposes.
 Can’t afford to pay.
 System is unfair.
 Government discriminates against me.
o
* Robert W. McGee, The Ethics of Tax Evasion: A Survey of Germany and the United States (October 2006).
** IRS Oversight Board, 2012 Taxpayer Attitude Survey.
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Personal & Societal Considerations

Survey of American and German MBA Students’ Views on
Tax Evasion*
Female students less accepting of tax evasion than males.
o Opposition to tax evasion increases with age.
o Opposition to tax evasion increases with education level in the U.S.
o
•
* Robert W. McGee, The Ethics of Tax Evasion: A Survey of Germany and the United States (October 2006).
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Personal & Societal Considerations

Survey of MBA Students’ Views on Tax Evasion in Mali*
o
o
o
o
Widespread support for tax evasion.
Caused by perception of government officials as corrupt.
Expectation that company officials give gifts to tax inspectors.
Taxpayers report only 74% of total sales on returns.
* Robert W. McGee, An Empirical Study of Attitudes Towards the Ethics of Tax Evasion in Mali (October 2007).
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Personal & Societal Considerations
What’s the Matter with Kids Today?
Ethics and the Next Generation*
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35% of teens use their cell phones to cheat.
25% believe texting answers to a friend is not cheating.
1/3 of students have copied from the Internet and turned in the work as their
own.
Response:
Cheat resistant computers for taking tests.
o Cell phone jammers in the classroom.
o
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*
Do ethics now need to be legislated?
Survey, Hi-Tech Cheating: Cell Phones and Cheating in Schools, A National Poll, Common Sense Media, Inc. , available at
www.commonsensemedia.org/hi-tech-cheating (survey conducted in 2009).
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Personal & Societal Considerations
Ethics and the Next Generation*
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*
Youngest workers are more likely than their older colleagues to feel pressured
by others to break the rules.
More of the youngest workers historically observe misconduct compared with
their older colleagues.
Reports of misconduct from the youngest workers have risen to be on par with
reports by their older cohorts.
Youngest workers are more likely to use hotline to report misconduct (rather
than reporting to their supervisor).
Misconduct ranges from sexual harassment and accepting bribes and kickbacks
to misuse of confidential information, Internet abuse, and insider trading.
Ethics Resource Center, General Differences in Workplace Ethics (A Supplemental Report of the 2011 National Business Ethics
Survey) (released June 24, 2013), available at www.ethics.org/resource/generational-differences-workplace-ethics-supplementalreport-2011-nbes.
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Changes Affecting Tax Ethics
Evolution of a Duty to “the System”
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Duty of loyalty.
o Are taxes different? Should tax professionals be “unfettered
advocates” for clients.
Evolution of a duty to the system.
o Self-assessment method of tax administration. Does it impose a
“gatekeeper” duty on tax professional?
o Adversarial relationship on audit (and post-audit).
o Financial scandals of the early 2000s.
o Increased disclosure requirements.
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Ethical Analytical
Framework
33
An Ethical Analytical Framework
Organizational Considerations
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Relationship with Tax Authorities, Reputational Risk.
Effect on Future Years.
Potential Future Benefit.
Good Corporate Citizenship.
Culture or Climate of Employees.*
* According to the 2013 National Business Ethics Survey, “culture” is another way of saying “the way things are done around here.”
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34
An Ethical Analytical Framework
Proposed Act
Violates
Statutes & Rules
(federal & state)
Violates
Complies
Complies
Professional Practice
Standards
Inconsistent
Legal
Considerations
•
•
•
•
•
ABA Model Rules
AICPA SSTS
State Standards of Conduct
TEI Standards of Conduct
Treasury Circular 230
Consistent
Company Policy
Organizational
Considerations
• Relationship with IRS or
State Revenue Officials
• Affect on future years
• Potential future benefit
• Good corporate citizen
• Culture or climate of
employer
Negative
Long Term & Broader Corporate
Interests
Positive
Personal
Considerations
Detriment
Benefit
Short Term
A special thanks to Donald M. Griswold
of Crowell & Moring LLP who developed
this analytical framework
Inconsistent
Do Not Proceed with Act
Personal Integrity
• Individual religious, philosophical
or moral standards
• WSJ Test=practical way to apply
your own individual moral standard
Consistent
Proceed with Act
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Professional Standards
36
Professional Standards
Taxpayer’s Paradox

The filing of the return is wholly an act of self assessment, but
the taking of an issue to court is adversarial; in between
(including the examination), it is not clear where one leaves off
and the other begins.

Does this give rise to a “duty to the system”?

See, e.g., Richard Lavoie, Am I My Brother’s Keeper? A Tax
Law Perspective on the Challenge of Balancing Gatekeeping
Obligations and Zealous Advocacy in the Legal Profession, 6
Loyola University Chicago Law Journal 813 (2013).
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37
Professional Standards
Tax Administrator’s Paradox

Government officials “are expected to be dispassionate
interpreter[s] of the law and dispensers of aid and succor to
the bewildered taxpayer” and . . . they are [also] “the
collector[s] of revenue and enforcer[s] of the law and the
adversar[ies] in court proceedings.” (Quotations from Leonard
Kust, former TEI President and drafter of TEI’s Standards of
Conduct, 1962.)

Does this impose a different (higher) standard on government
authorities than on taxpayers?
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Professional Standards
Legal Considerations

Professional Standards (ABA Model Rules; AICPA
Statements on Tax Services; TEI Standards of
Conduct)
 Treasury Circular 230.
 Civil Penalties (e.g., I.R.C. 6694).
 Criminal Sanctions.
 Company Code of Conduct.
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Why Have a Code of Conduct for the Profession?
●
A professional code of conduct is a
distinguishing mark of a profession that accepts
a high degree of responsibility toward the
public. It is a voluntary acceptance for the
purpose of benefiting society.
●
Effective self-regulation may stave off more
rigorous, burdensome governmental regulation.
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Professional Standards
AICPA Code of Professional Conduct
Framework
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Maintain the good reputation of the profession.
Serve the public interest.
Perform services with:
o Integrity.
o Due care.
o Professional competence.
o Independence & Objectivity.
o Confidentiality.
o Dissociate from others who behave unethically.
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Professional Standards
AICPA Code of Professional Conduct
Structure










Introduction
Section 50 – Principles of Professional Conduct
Section 90 – Rules: Applicability and Definitions
Section 100 – Independence, Integrity, and Objectivity
Section 200 – General Standards Accounting Principles
Section 300 – Responsibilities to Clients
Section 400 – Responsibilities to Colleagues
Section 500 – Other Responsibilities and Practices
ET Appendixes
ET Topical Index
http://www.aicpa.org/about/code/index.htm
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Professional Standards
AICPA Code of Professional Conduct
Principles

The Principles guide members in the performance of their
professional responsibilities:
o Article I – Responsibilities
o Article II – The Public Interest
o Article III – Integrity
o Article IV – Objectivity and Independence
o Article V – Due Care
o Article VI – Scope and Nature of Services
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Professional Standards
AICPA Code of Professional Conduct
Article III: Integrity

Integrity is an element of character fundamental to professional
recognition.
 Integrity is the quality from which the public trust derives and the
benchmark against which a member must ultimately test all decisions.
 Integrity requires a member to be, among other things, honest and
candid within the constraints of client confidentiality. Service and the
public trust should not be subordinated to personal gain and
advantage.
 Integrity also requires a member to observe the principles of
objectivity and independence and of due care.
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Professional Standards
AICPA Code of Professional Conduct:
Article III: What Is Meant by Integrity?




Courage to stand by principles even in face of pressure.
Act out of moral principle, not expediency.
Never let loyalty cloud good judgment and ethical decision-making.
Attributes of an person with Integrity:
o Truthfulness.
o Courage.
o Sincerity.
o Honesty.
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45
Professional Standards
ABA Rules for Professional Conduct
Most states have enacted a version of the American Bar
Association’s Model Rules (www.abanet.org/cpr).
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Professional Standards
ABA Opinion 314 (1965)
(Relating to Tax Opinions)



“[A] lawyer who is asked to advise his client in the course of
the preparation of the client’s tax returns may freely urge the
statement of positions most favorable to the client just as long
as there is a reasonable basis for this position.”
Lawyer owes client warm zeal, candor, and fairness.
Lawyer does not owe as high a duty to IRS as to a court.
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Professional Standards
ABA Opinion 314 (1965)
(Relating to Tax Opinions)



Lawyer has absolute duty not to make false assertions of fact,
but is not required disclosure of weaknesses in the client’s
case.
Lawyer is under a duty not to mislead the IRS deliberatively
or affirmatively, either by misstatements or silence or by
permitting client to mislead.
“Reasonable basis” standard superseded by ABA Opinion 85352 (1985).
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Professional Standards
ABA Opinion 85-352 (1985)
“A lawyer may advise reporting a position on a tax return so long
as the lawyer believes in good faith that a position is warranted in
existing law or can be supported by a good faith argument for an
extension, modification or reversal of existing law and there is some
realistic possibility of success if the matter is litigated.”
 “The ethical standards governing the conduct of a lawyer in
advising a client on positions that can be taken in a tax return are
no different from those governing a lawyer’s conduct in advising or
taking positions for a client in other civil matters.”

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Professional Standards
ABA Opinion 85-352 (1985)

“In summary, a lawyer may advise reporting a position on a return even
where the lawyer believes the position probably will not prevail, there is no
‘substantial authority’ in support of the position, and there will be no
disclosure of the position in the return. However, the position to be asserted
must be one which the lawyer in good faith believes is warranted in existing
law or can be supported by a good faith argument for an extension,
modification or reversal of existing law. This requires that there is some
realistic possibility of success if the matter is litigated. In addition, in his role
as advisor, the lawyer should refer to potential penalties and other legal
consequences should the client take the position advised.”
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Professional Standards
ABA Opinion 85-352 — Summary

If a position has a realistic possibility of success, a lawyer can
assist in reporting the position, even if :
o The lawyer believes the position probably will not prevail;
o There is no substantial authority to support the position; and
o There is no disclosure on the return.
 But I.R.C. § 6694 may subject the return preparer to a penalty.
 ASC 740 may preclude the taxpayer from recognizing any tax
benefit with respect to the position for financial statement
purposes.
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Professional Standards
ABA Standards of Tax Practice
Issues Statement 1999-1

“A lawyer must disclose a clear arithmetic or clerical error
in the client’s favor in a case docketed in court. In a nondocketed case, a lawyer must disclose a clear unilateral
arithmetic or clerical error if there exists express or implied
consent. If the client refuses express consent where there is
no implied authorization, counsel must withdraw.”
o How does an in-house tax professional withdraw?
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52
Professional Standards
AICPA’s Statements on
Standards of Tax Services
These AICPA rules delineate the members’ responsibilities to
taxpayers, the public, the government, and the accounting
profession (www.aicpa.org — Professional Ethics area).
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Professional Standards
AICPA’s Statements on
Standards of Tax Services

Aid members in fulfilling their ethical responsibilities.
 Apply to all members providing tax services regardless of
jurisdiction.
 Complement other standards of tax practice, including Circular
230, the penalty provisions of Internal Revenue Code, and state
boards of accountancy rules.
 Provide for appropriate range of behavior.
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Professional Standards
AICPA’s Statements on
Standards of Tax Services







SSTS No.1, Tax Return Positions
SSTS No. 2, Answers to Questions on Returns
SSTS No. 3, Certain Procedural Aspects of Preparing Tax Returns
SSTS No. 4, Use of Estimates
SSTS No. 5, Departure From a Position Previously Concluded in an
Administrative Proceeding or Court Decision
SSTS No. 6, Knowledge of Error: Return Preparation and Administrative
Proceedings
SSTS No. 7, Form and Content of Advice to Taxpayers
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Professional Standards
AICPA SSTS No. 1: Tax Return Positions


Member should determine and comply with the standards, if
any, imposed by the applicable taxing authority with respect
to recommending a tax return position, or preparing or
signing a tax return.
If the applicable taxing authority has no written standards (or
lower standards):
o
o
Member must have good-faith belief that position has at least a realistic
possibility of being sustained on its merits if challenged; or
Member concludes there is a reasonable basis for the position with
appropriate disclosure.
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Professional Standards
AICPA SSTS No. 1: Tax Return Positions



Member should, when relevant, advise taxpayer regarding
potential penalties.
Member should not recommend or prepare or sign tax return
reflecting position (a) exploiting audit selection process; or (b)
serving as a mere arguing position.
Member has both the right and obligation to be an advocate
for any position satisfying these standards.
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Professional Standards
AICPA SSTS No. 2:
Answers to Questions on Return


Member should make a reasonable effort to obtain from
taxpayer the information necessary to provide appropriate
answers to all questions on a tax return before signing as
preparer.
Reasons for required diligence:
Omission may detract from quality of the return.
o Disclosure may be necessary for a complete return or to avoid
penalty.
o Penalty of perjury statement — i.e., affirmation that return is “true,
correct, and complete.”
o
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Professional Standards
AICPA SSTS No. 2:
Answers to Questions on Return

Reasonable grounds may exist for omitting an answer, for
example:
 Information not readily available and not significant to
taxable income or tax liability shown on return.
 Answer is voluminous and will be supplied upon
examination.
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Professional Standards
AICPA SSTS No. 3: Certain Procedural
Aspects of Preparing Returns




In preparing or signing a return, member may in good faith
rely, without verification, on information furnished by taxpayer
or by third parties.
Should not ignore implications or information furnished.
Should make reasonable inquiries if appears to be incorrect,
incomplete, or inconsistent (on its face or with other known
facts).
Should refer to one or more prior returns whenever feasible.
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Professional Standards
AICPA SSTS No. 3: Certain Procedural
Aspects of Preparing Returns


Member should make appropriate inquiries to satisfactorily
determine taxpayer’s compliance with statutory or regulatory
requirements (such as maintenance of documentation).
Member should consider information actually known from
tax return of another taxpayer if relevant. Member should
consider confidentiality requirements.
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Professional Standards
AICPA SSTS No. 4: Use of Estimates


Unless prohibited by statute or by rule, member may use
taxpayer’s estimates in the preparation of a tax return if it is
not practical to obtain exact data and if member determines
that the estimates are reasonable based on the facts and
circumstances known to member.
Taxpayer’s estimates should be presented in a manner that
does not imply greater accuracy than exists.
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Professional Standards
AICPA SSTS No. 5: Departure from a Position
Previously Concluded in an Administrative
Proceeding or Court Decision

Tax return position with respect to an item as determined in
an administrative proceeding or court proceeding does not
restrict member from recommending a different tax position
in a later year’s return, unless taxpayer is bound to a
specified treatment in the later year, such as a formal closing
agreement.
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Professional Standards
AICPA SSTS No. 5: Departure from a Position
Previously Concluded in an Administrative
Proceeding or Court Decision


Member may recommend a tax return position or prepare or sign a tax
return that departs from treatment of an item as concluded in an
administrative proceeding or court decision with respect to a prior
return of taxpayer as long as the requirements of SSTS No.1, Tax Return
Positions, are satisfied.
Determination in earlier administrative proceeding or existence of
unfavorable court decision are factors that member should consider in
evaluating whether standards in SSTS No.1 are met.
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64
Professional Standards
AICPA SSTS No. 6: Knowledge of Error: Return
Preparation and Administrative Proceedings

Member should inform taxpayer promptly upon becoming aware
of error in previously filed return, error in return that is the
subject of administrative proceeding, or taxpayer’s failure to file
required return.
o Should also advise of potential consequences of error and
recommend corrective measures.
o Member is not allowed to inform taxing authority without taxpayer’s
permission, except when required by law.
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Professional Standards
AICPA SSTS No. 6: Knowledge of Error: Return
Preparation and Administrative Proceedings

If taxpayer has not taken appropriate action to correct error,
member should consider whether to continue professional or
employment relationship.
o If member does prepare current year’s return, member should take
reasonable steps to ensure that error is not repeated.
o If member is representing taxpayer in administrative proceeding,
member should consider withdrawing unless taxpayer agrees to
disclosure of the error to taxing authority.
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Professional Standards
AICPA SSTS No. 6: Explanation


Term “error” includes any position, omission, or method of
accounting that fails to meet standards set out in SSTS No. 1.
o “Error” does not include an item that has insignificant effect on
taxpayer’s liability.
Term “administrative proceeding” does not include a
criminal proceeding.
o Special considerations may apply where member has been
engaged by legal counsel.
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Professional Standards
AICPA SSTS No. 6: Explanation

It is taxpayer’s responsibility to decide whether to correct
error.
o Although taxpayer may not be required by statute to correct
an error by filing an amended return or taking other
corrective action, member should consider whether
taxpayer’s decision may predict future behavior that might
require termination of relationship.
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Professional Standards
AICPA SSTS No. 6: Explanation

Once taxpayer agrees to disclosure of error, member should
not delay to such a degree that it might be considered to have
failed to act in good faith or to have, in effect, provided
misleading information.
o Disclosure should be made before conclusion of administrative
proceeding.
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Professional Standards
AICPA SSTS No. 6: Explanation

Member should consider:
o AICPA Code of Conduct Rule 301, Confidential Client Information.
o Applicable tax law and regulations.
o Laws on privileged communications.
o Potential adverse effect on taxpayer of member’s withdrawal.
 If member believes that taxpayer may face possible exposure to
allegations of fraud or other criminal misconduct, member should
advise taxpayer to consult with an attorney before taxpayer takes any
action.
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Professional Standards
AICPA SSTS No. 7: Form and Content
of Advice to Taxpayers


Member should consider: return reporting and disclosure
standards; potential penalties; and SSTS No. 1, Tax Return
Positions.
Member has no obligation to communicate subsequent
developments to taxpayer, except while assisting taxpayer in
implementing procedures or plans associated with advice
provided (or when member undertakes this obligation by
specific agreement).
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Professional Standards
AICPA SSTS No. 7: Form and Content
of Advice to Taxpayers

Member should use professional judgment to ensure that tax advice
provided to taxpayer reflects competence and appropriately serves
taxpayer’s needs.
o When communicating tax advice to taxpayer in writing, member
should comply with relevant taxing authority standards, if any.
o Member should use professional judgment about need to document
oral advice.
o Member is not required to follow standard format.
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Professional Standards
AICPA SSTS No. 7: Form and Content
of Advice to Taxpayers

If member believes that taxpayer may face possible exposure
to allegations of fraud or other criminal misconduct, member
should advise taxpayer to consult with attorney before
taxpayer takes any action.
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U.S. Treasury Department’s Circular 230
Circular 230: Framework
Contains “standards of practice” to promote ethical practice
before the IRS.
 Imposes affirmative duties.
 Prohibits certain types of conduct.
 Establishes a legal process for disciplining tax professionals
for violation.
 Disciplinary action includes censure, suspension, disbarment,
fines, and injunctive relief.
 Final regulations promulgated June 12, 2014.

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U.S. Treasury Department’s Circular 230
Principal Changes to Circular 230

Single standard for all written advice; “covered opinion”
rules rescinded.
o


No more disclaimers or legends.
General competency standard in new § 10.35.
Reasonableness standard in new § 10.37.
o
o
For written tax advice (e.g., factual and legal assumptions).
For reliance on other professionals.
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U.S. Treasury Department’s Circular 230
Principal Changes to Circular 230



Migration from “rules-based” guidance to “principles-based”
guidance.
Expanded definition of “federal tax matters.”
Guidance on how firms should ensure compliance.
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U.S. Treasury Department’s Circular 230
Caveat: Ridgely v. IRS
In Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), the IRS’s
authority to regulate return preparers was restricted on the ground
that return preparers do not “practice before the IRS.”
 In Ridgely v. Lew, No. 1:12-cv-00565, 2014 U.S. Dist. LEXIS 96447
(D.D.C. July 17, 2014), a federal district court invoked Loving in
invalidating the portion of Circular 230 relating to the payment of
contingency fees in connection with “ordinary refund claims.”
 If preparing a claim for refund does not constitute “practice before
the IRS,” could it be argued that neither does preparing an opinion
about a possible return position? (Note: The IRS has not yet
announced whether it will appeal Ridgely.)

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U.S. Treasury Department’s Circular 230
“Fitness to Practice”




Good character.
Good reputation.
Necessary qualifications to enable the representative to
provide valuable service to the client.
Competency to advise and assist persons in presenting their
cases.
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U.S. Treasury Department’s Circular 230
Section 10.20: Information to Be Furnished

A practitioner must promptly submit records or information
requested by the IRS.

If documents are not in the control of the practitioner (or
client), the practitioner must promptly notify the IRS.

The practitioner must make reasonable inquiry of the client
about the identity of any person who may have possession or
control of the requested records.
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U.S. Treasury Department’s Circular 230
Section 10.21: Knowledge of Client’s Omission

A practitioner who, having been retained by a client with
respect to a matter administered by the IRS, knows that the
client has not complied with the revenue laws of the United
States or has made an error or omission with respect to any
document submitted or executed under such laws, must
advise the client promptly of the fact of such noncompliance,
error, or omission.
o
The practitioner must also advise the client of the consequences of such
noncompliance, error, or omission.
o
The tax practitioner is not required to inform the IRS.
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U.S. Treasury Department’s Circular 230
Section 10.21: Knowledge of Client’s Omission

The tax practitioner cannot perpetuate the error by repeating
it or supporting it by submitting arguments and computations
that rely on it.

It is both unethical and illegal for a practitioner to lie or make
a false statement to a government official, including an IRS
agent. See 18 U.S.C. § 1001; Circular 230, § 10.51(d)
(describing disreputable conduct to include giving false or
misleading information).
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U.S. Treasury Department’s Circular 230
Section 10.21: Knowledge of Client’s Omission

That includes not allowing the client to use the lawyer to
further the fraud.

Practitioner may have a duty to withdraw if the IRS is relying
on the attorney to corroborate statements of the client. See
ABA Opinion 314.
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U.S. Treasury Department’s Circular 230
Section 10.22: Diligence as to Accuracy

In general, a practitioner must exercise due diligence —
o
o

In preparing or assisting in preparation of, approving, and filing tax returns
and any other documents relating to IRS matter.
In determining the correctness of oral or written representations made by the
practitioner (to the IRS or to the client).
A practitioner generally may rely on the work product of
another person if the practitioner used reasonable care in
engaging, supervising, training, and evaluating the person,
taking proper account of the nature of the relationship.
[Specific exceptions apply].
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83
U.S. Treasury Department’s Circular 230
Section 10.23: Prompt Disposition
of Pending Matters

A practitioner may not unreasonable delay the prompt
disposition of any matter before the IRS.
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84
U.S. Treasury Department’s Circular 230
Section 10.33: Best Practices of Tax Advisers

Tax advisers can provide the highest-quality representation
by adhering to “best practices,” including —
o
o
o
o
Communicating clearly with client regarding terms of engagement.
Establishing the facts, determining which facts are relevant, evaluating the
reasonableness of any assumptions or representations, relating the law to the
facts, and arriving at a conclusion supported by the law and the facts.
Advising the client on the conclusions reached, including whether a
taxpayer may avoid accuracy-related penalties if a taxpayer acts in reliance
on the advice.
Acting fairly and with integrity in practice before the IRS.
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85
U.S. Treasury Department’s Circular 230
Section 10.34: Standards with Respect to
Tax Returns and Documents

A practitioner may not willfully, recklessly, or through gross
incompetence sign a tax return or claim for refund that the
practitioner knows or reasonably should know, prepare any
return or part of a return, or advise a client to take a position on
a tax return that —
o
Lacks a reasonable basis;
o
Is an “unreasonable position” under I.R.C. § 6694 (requires “substantial
authority” or reasonable basis with disclosure; more likely than not for “tax
shelters and reportable transactions”); or
o
Is a willful attempt by the practitioner to understate the tax liability or a reckless
or intentional disregard of the rules and regulations.
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86
U.S. Treasury Department’s Circular 230
Section 10.34: Standards with Respect to
Tax Returns and Documents


Any documents submitted to the IRS (other than a tax
return) must not (i) delay or impede the IRS; (ii) be frivolous;
or (iii) contain or omit information in a manner that
demonstrates intentional disregard of the rules and
regulations.
A practitioner must inform a client of any potential penalties
that are reasonably likely to apply, as well as any opportunity
to avoid such penalties by making adequate disclosure.
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87
U.S. Treasury Department’s Circular 230
Section 10.34: Standards with Respect to
Tax Returns and Documents

Relying on information furnished by clients.
A practitioner generally may rely in good faith, without verification
upon information furnished by the client.
o A practitioner may not ignore the implications of information
furnished to, or actually known by, the practitioner.
o A practitioner must make reasonable inquiries if the information
appears to be incorrect, inconsistent with an important fact or
assumption, or incomplete.
o
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88
U.S. Treasury Department’s Circular 230
Section 10.34: Standards with Respect to
Tax Returns and Documents

Relying on information furnished by clients.
No “Don’t ask, don’t tell.”
o No willful blindness.
o
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89
U.S. Treasury Department’s Circular 230
Section 10.35: Competence
A practitioner must possess the necessary competence to
engage in practice before the Internal Revenue Service.
Competent practice requires the knowledge, skill,
thoroughness, and preparation necessary for the matter
for which the practitioner is engaged.
o If a practitioner does not possess the requisite skills and
knowledge, the practitioner can acquire them, seek out
assistance (e.g., co-counsel), or decline representation.
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90
U.S. Treasury Department’s Circular 230
Section 10.36: Procedures
to Ensure Compliance
Practitioners with “principal authority and responsibility for
overseeing a firm’s practices…must take reasonable steps to ensure
that the firm has adequate procedures in effect…for purposes of
complying with” Circular 230.
 Subject to discipline if, through willfulness, recklessness, or gross
incompetence, supervisory personnel —

o
o
Do not take reasonable steps to ensure adequate procedures and a person
associated with the firm fails to comply with Circular 230, or
Know or should know that a person associated with the firm engages in
practice that violates Circular 230 and does not take remedial action.
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91
U.S. Treasury Department’s Circular 230
Section 10.37: Requirements for Written Advice


Separate treatment of “covered opinions” (old § 10.35) and
“other written advice” (old § 10.37) eliminated.
Overarching requirement of reasonableness —
o
o
o
o
Reasonable factual and legal assumptions.
Reasonably consider all relevant facts.
Reasonable efforts to identify and ascertain the relevant facts.
No reliance on representations, statements, findings, or agreements if
reliance would be unreasonable.
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92
U.S. Treasury Department’s Circular 230
Section 10.37: Requirements for Written Advice



May not take into account the possibility that a tax return will
not be audited, or that a matter will not be raised on audit.
May consider the possibility of resolution through settlement,
if challenged.
Reliance on taxpayer information is unreasonable if the
practitioner knows or should know that one or more
representations, or assumptions on which any representation
is based, are incorrect or incomplete.
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93
U.S. Treasury Department’s Circular 230
Section 10.37: Requirements for Written Advice

May rely on the advice of another practitioner only if the
advice was reasonable and the reliance is in good faith
considering all the facts and circumstances.
 Reliance on another practitioner is unreasonable if the
practitioner is unqualified to render the advice, or is
incompetent.
 Reliance on another practitioner is unreasonable if you know
or should know the other practitioner has a conflict of
interest.
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94
U.S. Treasury Department’s Circular 230
Section 10.37: Requirements for Written Advice


Rules apply to written advice concerning a “federal tax
matter,” which is broadly defined to include matters under
the Internal Revenue Code and “any other law or regulation
administered by the Internal Revenue Service.”
Thus, written advice relating to Foreign Bank and Financial
Accounts Reports (FBARs) would be subject to Circular 230,
even though the applicable rules were promulgated, not by
the IRS, but by the Financial Crimes Enforcement Network.
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95
U.S. Treasury Department’s Circular 230
Section 10.50: Sanctions

After notice and an opportunity for a proceeding, a practitioner
may be censured, suspended, or disbarred from practice before
the IRS (and subject to monetary penalty) if the practitioner:
o
o
o

Is shown to be incompetent or disreputable;
Fails to comply with any regulation in Circular 230; or
With intent to defraud, willfully and knowingly misleads or threatens a
client or prospective client.
If the practitioner was acting on behalf of an employer or any
firm or other entity in connection with the conduct giving rise to
the penalty, a monetary penalty may also be imposed in the
employer, firm, or other entity if it knew, or reasonably should
have known of such conduct.
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96
U.S. Treasury Department’s Circular 230
Section 10.51: Incompetence
and Disreputable Conduct

Incompetence and disreputable conduct for which a practitioner
may be sanctioned includes but is not limited to:
o
o
o
o
Conviction of crimes under federal tax laws, offense involving dishonesty or
breach of trust, or any felony for which the conduct involved renders the
practitioner unfit to practice before the IRS.
Knowingly giving (or participating in giving) false or misleading information
to the IRS.
Willfully failing to file federal tax returns, or willfully evading, or attempting
to evade federal taxes.
Willfully aiding or abetting any violation of federal tax law.
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97
U.S. Treasury Department’s Circular 230
Section 10.51: Incompetence and
Disreputable Conduct






Misappropriation of funds.
Bribery.
Disbarment or suspension from practice as attorney, CPA, etc.
Contemptuous conduct before the IRS.
Giving a false opinion, knowingly, recklessly, or through gross
incompetence, including an opinion which is intentionally or recklessly
misleading, or engaging in a pattern of providing incompetent federal
tax opinions.
Willfully failing to sign a tax return prepared by the practitioner.
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98
U.S. Treasury Department’s Circular 230
Section 10.51: Incompetence and
Disreputable Conduct

False Opinion
o
o
o
o

Knowing misstatements of fact or law.
Assertion of unwarranted positions.
Counseling conduct known to be illegal or fraudulent.
Concealing matters required by law to be revealed.
Reckless conduct
o Highly unreasonable omission or misrepresentation involving extreme
departure from standards of ordinary care that a practitioner should
observe under the circumstances.
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99
U.S. Treasury Department’s Circular 230
Section 10.51: Incompetence and
Disreputable Conduct
 Gross
Incompetence.
o Gross indifference, grossly inadequate preparation, or consistent failure
to perform obligations to client.
 Patterns
matter.
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100
U.S. Treasury Department’s Circular 230
 Are
in-house professionals the principal target of
Circular 230?
o No.
 Does
Circular 230 apply to in-house tax
professionals?
o Yes.
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101
U.S. Treasury Department’s Circular 230
How Might Revised Circular 230
Affect Tax Opinions?



Short-form opinions.
Discussion of settlement opportunities in the event the
taxpayer’s treatment of an item is challenged (i.e., “hazards of
litigation”).
Cost?
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102
IRS Office of Professional Responsibility
OPR Disciplinary Actions

In 2013, of 784 cases considered, OPR recorded 11
disbarments, 128 reprimands, and 48 expedited suspensions.

By comparison, in 2012 OPR received 516 cases for potential
discipline, resulting in 2 disbarments, 150 reprimands, and 61
expedited suspensions; in 2011, it considered 726 cases,
resulting in 7 disbarments, 280 reprimands, and 149
expedited suspensions.
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103
IRS Office of Professional Responsibility
Guidance on Need for Forms 2848
for In-House Employees

IRS Form 4764, Communications Agreement, allows a
corporate taxpayer to designate one or more employees to
discuss tax matters, provide and receive information, or
receive and discuss adjustments.

The form operates as an authorization to receive tax
information, similar to Form 8821, Tax Information
Authorization, but is not a substitute for Form 2848, Power of
Attorney and Declaration of Representative.
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104
IRS Office of Professional Responsibility
Guidance on Need for Forms 2848
for In-House Employees

On September 9, 2014, the IRS Office of Professional
Responsibility confirmed that providing or accepting
information to, or from, the IRS, does not constitute a
“representation” activity or “practice before the IRS.” When
the employee advocates, negotiates, disputes, or does anything
beyond mere delivery of facts, general explanation, or
acceptance of materials, the employee is engaged in
representation activities (“practicing”) before the agency and
the Form 4764 is not sufficient.
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105
IRS Office of Professional Responsibility
Guidance on Need for Forms 2848
for In-House Employees

If the corporation wants an employee to advocate, negotiate,
or dispute issues on its behalf, a Form 2848, Power of
Attorney, must be signed by a duly elected officer or director
of the corporation as identified in the corporate articles or
by-laws (typically, the same officer who signs the
corporation’s tax returns and consents to extend the time for
assessment of tax).
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106
IRS Office of Professional Responsibility
Guidance on Need for Forms 2848
for In-House Employees

An in-house employee who engages in “practice before the
IRS” without a required Form 2848 could be referred to OPR
for discipline.
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107
IRS Office of Professional Responsibility
What is the most important thing you can do to stay
out of trouble with the OPR?
File personal income tax returns on time.
Personal compliance reflects fitness to practice since
“honesty, integrity, and competence are paramount to
[the] representation of taxpayers.”
— Karen Hawkins (Director, IRS Office of Professional
Responsibility).
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108
IRS Office of Professional Responsibility
Keep your temper in check
Practitioner suspended for 6 months for threatening to kill an
IRS Revenue Agent.
— Director v. Diehl, Complaint No. 2006-19
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109
TEI Standards of Conduct
Overview
Tax Executives Institute is dedicated to “the development of sound
tax policy, compliance with and uniform enforcement of tax laws,
and minimization of administration and compliance costs to the
benefit of both government and taxpayers. These goals can be
attained only through the members’ voluntary actions and their
adherence to the highest standards of professional competence and
integrity.”
 TEI developed formal Standards of Conduct in 1962 because the
standards of bar associations and CPA societies tend to focus on
problems and challenges of tax advisers engaged in public practice.

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110
TEI Standards of Conduct
Overview

Tax executives enjoy a unique status: They are not only advisers
but frequently “doers”; they have final responsibility for deciding
what the company does.
 TEI’s By-Laws provide a mechanism for terminating an
individual’s membership upon a determination by the Board of
Directors that the member committed an act prejudicial to the
Institute or to its Principle and Purposes.
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111
TEI Standards of Conduct
Specific Standards

The member accepts taxes as a cost of civilization and accepts the
laws imposing taxes as the mechanism for distributing that cost
among businesses, individuals, and other entities. The member will
comply with those laws, whether or not agreeing with them.
 The member recognizes an obligation to minimize company tax
liability, within the bounds of the law and to the extent consistent
with policies or objectives of the company, having due regard for
the interests of society in sound tax policy, and will advise and
support action to obtain that objective, to the best of the member’s
ability.
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112
TEI Standards of Conduct
Specific Standards

The member recognizes an obligation to make an affirmative
contribution to the sound administration of tax laws, and to the
adoption of sound tax legislation, by cooperation and consultation
with the persons charged with those functions, having due regard
for the interests of society, as well as the interest of the company
and its employees.
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113
TEI Standards of Conduct
Specific Standards

The member accepts each government representative as a person
devoted to fulfilling the obligation to collect revenue honorably in
accordance with law. The member will deal with the representatives on
that basis, and will take occasion with others to uphold this view of
government representatives. In case of any deviation of a representative
from that standard, the member will present the pertinent facts to the
authorities authorized to take action with respect to the deviation.
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114
TEI Standards of Conduct
Specific Standards

The member will present the facts required in tax returns and all
the facts pertinent to the resolution of questions at issue with
representatives of the government imposing the tax.
 The member will employ assistants and outside representatives
upon the basis of their technical competence, always having due
regard for the highest standards of professional ethics.
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115
TEI Standards of Conduct
Specific Standards

The member will at all times recognize a duty of professionalism
and will not use TEI membership to solicit business or sell products
to other members.
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116
Civil Penalties
I.R.C. § 6694(a): Tax Return Preparer Penalty
●
If a tax return preparer prepares a return or claim for
refund:
o
o
●
Containing an “unreasonable position” that results in an understatement of
liability; and
The preparer knew or should have known of the position, then:
The preparer is subject to a penalty equal to the greater of
$1,000 or 50% of the income derived by the tax return
preparer with respect to the return.
o
If the tax return preparer’s conduct is willful or reckless, the penalty
increases to the greater of $5,000 or 50% of the income derived by the tax
return preparer with respect to the return. I.R.C. § 6694(b).
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117
Civil Penalties
I.R.C. § 6694(a): Tax Return Preparer Penalty
● Unreasonable positions do not include:
o A position for which there is substantial authority;
o A disclosed position that is neither a tax shelter nor a reportable
transaction and for which there is a reasonable basis; or
o A position with respect to a tax shelter or a reportable transaction and
for which it is reasonable to believe that the position would more
likely than not be sustained on its merits.
● No penalty shall be imposed if it is shown that there is
reasonable cause for the understatement and the tax
return preparer acted in good faith.
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118
Document Management: Dos & Don’ts
 Circular
230, § 10.20
o Tax practitioners must promptly submit records or information
requested by IRS.
o If the documents or information requested are not in the
possession of, or subject to the control of, the practitioner or
the practitioner’s client, the practitioner must promptly notify
the IRS.
o The practitioner must make reasonable inquiry of the client
regarding the identity of any person who may have possession
or control of the requested records.
 But the practitioner is not required to make inquiry of any other person
or independently verify any information provided by the client
regarding the identity of such person.
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119
Document Management: Dos & Don’ts

When the IRS seeks production of relevant materials, the
taxpayer must produce that material as it then exists.
o The original document must be produced, unless it is subject
to an evidentiary privilege.
o Any copy of an original document that differs in any way from
the original is a distinct document.
o Excessive delay can be an ethical violation under Circular 230.
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120
Document Management: Dos & Don’ts
Example
The IRS seeks production of a document. Upon review, the
taxpayer sees that the document has handwritten notes in the
margins.
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Document Management: Dos & Don’ts



A practitioner cannot:
o Alter documents from the form in which they exist and
produce the altered documents as the originals.
A practitioner can:
o Redact handwritten words added to a copy of a document that
do not constitute part of the requested document, keep the
original with the handwritten notes, inform the recipient that
handwritten comments have been redacted, and produce the
document
as it was originally prepared.
The IRS may require the unredacted version to be
produced unless the notes are protected.
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122
Document Management: Dos & Don’ts
Example
The IRS seeks production of a document that existed at
some point, but has since been lost in the client’s files.
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123
Document Management: Dos & Don’ts

A practitioner cannot:
o Create new documents and indicate that they are
contemporaneous materials.

A practitioner can:
o Identify materials that have been lost and create new materials
that attempt to memorialize what the relevant parties recall the
missing documents said, as long as the new document clearly
indicates that that is what he has done and does not
masquerade as the original.
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124
Document Management: Dos & Don’ts

A practitioner cannot:
o Redact a document without disclosing it was redacted.
o Change a document and produce the changed document,
without disclosure.
o Falsely state that a requested document does not exist.
o Describe a document as something it is not.
o Assert that all responsive documents have been produced
when they have not.
o Adopt an unreasonable reading of a request and reply on that
basis.
o Present a new document as an existing piece of evidence.
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Document Management: Dos & Don’ts

A practitioner can:
o Redact documents to protect privileged material, with
disclosure.
o Practitioner may not withhold (or redact) documents by falsely
asserting privilege, or falsely describe documents on a privilege log to
mislead the IRS.
o Adopt a reasonable reading of a request and reply on that
basis, with an explanation of the reading.
o Create a document in response to a request for information, as
long as the nature of the document is disclosed.
o Produce fewer than all documents with disclosure that the
production is a subset believed to be adequate.
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Document Management: Duty to Preserve



A practitioner (and client) may be under a duty to preserve
documents.
“Spoliation” is the destruction or significant alteration of
evidence or the failure to preserve property for another’s use
as evidence in pending or reasonably foreseeable litigation.
o Can lead to sanctions against practitioner or client, including
criminal penalties or disciplinary action.
Audit or appeals proceeding does not automatically trigger a
duty to preserve, though at some point litigation may become
reasonable foreseeable.
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Document Management: Electronic Records






●
Electronic documents can create unique challenges for document
preservation.
Understand the client’s Information Technology architecture and
practices to ensure that location of potentially relevant documents
can be identified.
Collect electronic documents before or during the audit and repeat
measures once litigation is anticipated.
Ensure that collected records are kept outside of the automatic
record retention and destruction procedures.
Keep records of document collection process, including rules for
instituting (and releasing) a litigation hold.
Pay special attention to metadata.
The IRS has not revised its record retention rules since 1998.
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Scenarios and
Case Study
129
Case Studies and Scenarios
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130
Case Studies and Scenarios
Scenario 1 — Tax Planning

Company A, a large and very profitable company
headquartered in the U.S. with an operating subsidiary in the
U.K., is contemplating a transaction with a shell company
located in a tax haven that will take advantage of differences
in the U.S. and U.K. tax laws. As a result of this transaction,
taxes in the U.S. and the U.K. will be reduced significantly
without any incremental tax obligation being imposed in the
third location.

What is a tax professional to do?
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Case Studies and Scenarios
Scenario 1 — References




Circular 230
§ 10.22(a) — Diligence as to accuracy
§ 10.33(a) — Best practices for tax advisers
§ 10.34 — Standard with respect to tax returns and documents
§ 10.35 — Competence
§ 10.37 — Requirements for written tax advice
§ 10.51(a)(7) & § 10.51(a)(13) — Incompetence and disreputable conduct
SSTS
No. 1 — Tax Return Positions
No. 7 — Form and Content of Tax Advice
Model Rules
Preamble: A Lawyer’s Responsibilities paragraphs [1], [2], [7], [8] and [9]
Rule 1.2 — Scope of Representation
Rule 2.1 — Advisor
Rule 3.1 — Meritorious Claims
Other
I.R.C. § 6694 — ‘Understatement of Taxpayer’s Liability by Tax Return Preparer’
Commissioner v. Newman, 159 F.2d 848 (2d Cir. 1947)
OECD Base Erosion and Profit Shifting Initiative
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132
Case Studies and Scenarios
Scenario 2 — Tax Return Preparation

In the process of preparing Company A’s 2013 Federal
income tax return, you identify an inadvertent error in the
Company’s prior year (2011) filed tax return that would
result in an additional payment due. This is a clear-cut yet
innocent mistake, not an uncertain tax position.

Do you have an obligation to take any action with respect to
an innocent mistake identified on a previously filed tax
return?
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Case Studies and Scenarios
Scenario 2 — References




Circular 230
§ 10.21 — Knowledge of client’s omission
§ 10.22(a) — Diligence as to Accuracy
§ 10.34 — Standard with respect to tax returns and documents
§ 10.35 — Competence
§ 10.51(a)(4) — Incompetence and disreputable conduct
SSTS
No. 6 — Knowledge of Error: Return Preparation and Administrative Proceedings
ABA Model Rules
Preamble: A Lawyer’s Responsibilities paragraphs [1], [2], [4], [7], [8], and [9]
Rule 1.2 — Scope of Representation
Rule 1.4 — Communication
Rule 2.1 — Advisor
Rule 3.1 — Meritorious Claims
Rule 4.1 — Truthfulness in Statements
Rule 8.4(c) — Misconduct
Other
Badaracco v. Commissioner, 464 U.S. 386 (1984)
Broadhead v. Commissioner, TC Memo 1955-328
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Case Studies and Scenarios
Scenario 3 — Tax Representation

During an IRS examination, you determine that information you
provided in response to a previous IDR was inaccurate. The
response was believed to be correct when submitted, but additional
facts subsequently came to your attention. Complete and accurate
information might open up an area that could delay the exam but,
while the issue is somewhat uncertain, you believe that the taxpayer
is at least more likely than not to prevail on the merits.

Do you have an obligation to inform the agent of the inaccurate
information provided previously?
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135
Case Studies and Scenarios
Scenario 3 — References



Circular 230
§ 10.20 — Information to Be Furnished
§ 10.33(a)(4) — Best practices for tax advisers
§ 10.21 — Knowledge of client’s omission
§ 10.34(b) — Standard with respect to tax returns and documents
§ 10.22(a) — Diligence as to Accuracy
§ 10.35 — Competence
§ 10.29 — Conflicting Interest
§ 10.51(a)(4) — Incompetence and disreputable conduct
SSTS
No. 6 — Knowledge of Error: Return Preparation and Administrative Proceedings
Also: AICPA Code of Professional Conduct Rules 102 (Integrity & Objectivity) and 301 (Client Confidential Information)
ABA Model Rules
Preamble: A Lawyer’s Responsibilities paragraphs [1], [2], [4], [7], [8], and [9]
Rule 1.2 — Scope of Representation
Rule 3.1 — Meritorious Claims
Rule 1.3 — Diligence
Rule 3.3 — Candor toward the Tribunal
Rule 1.4 — Communication
Rule 3.4 — Fairness to Opposing Party
Rule 1.6 — Confidentiality of Information
Rule 4.1 — Truthfulness in Statements
Rule 2.1 — Advisor
Rule 8.4(c) — Misconduct
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Case Studies and Scenarios
Scenario 4 — Tax Representation

You are in the midst of an IRS examination that has been going on
for an extended period of time without an end in sight, and you
realize that the statute of limitations is scheduled to expire at the
end of June. The agent appears to be oblivious of the statute date
and, in fact, has just handed you another round of far-reaching and
unfocused IDRs with a due date of July 15th (after the statute of
limitations is scheduled to expire).

Do you have an obligation to take any action with respect to the
impending statute expiration date?
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137
Case Studies and Scenarios
Scenario 4 — References



Circular 230
§ 10.20 — Information to Be Furnished
§ 10.33(a)(4) — Best practices for tax advisers
§ 10.34(b) — Standard with respect to tax returns and documents
§ 10.51(a)(4) — Incompetence and disreputable conduct
AICPA Code of Professional Conduct
Rules102 (Integrity & Objectivity)
Rule 301 (Client Confidential Information)
ABA Model Rules
Preamble: A Lawyer’s Responsibilities paragraphs [1], [2], [4], [7], [8], and [9]
Rule 1.2 — Scope of Representation
Rule 1.4 — Communication
Rule 1.6 — Confidentiality of Information
Rule 2.1 — Advisor
Rule 3.3 — Candor toward the Tribunal
Rule 3.4 — Fairness to Opposing Party
Rule 4.1 — Truthfulness in Statements
Rule 8.4(c) — Misconduct
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138
Ethics Case Study
Big US Corp. (BUSC) is a CIC taxpayer which is always under exam but is not in the CAP program. The Exam, which
began 18 months ago, is coming to conclusion. Mr. Tax Director, who joined BUSC just before this cycle began, is
responsible for handling the IRS and state audits. Mr. Director is both a CPA and an attorney. There are a number of
IDRs that are outstanding and there are only two months left on the statute. Ms. Team Coordinator, a recently promoted
Team Coordinator, hasn’t mentioned a Form 872. She is keenly focused on closing the case and is most concerned with the
outstanding IDRs. Apparently, she has missed the fact that the statute will expire soon. It doesn’t appear that the case will
be agreed; it will have to go to Appeals.
BUSC is also in the midst of a restatement and is preparing to file its 2012 tax return. A lot of information remains
uncertain and won’t be final before the return is due. BUSC is committed to timely filing the return. It is now clear to Mr.
Director that the prior year returns for 2011 and 2010 contain errors that will affect the 2012 return. It seems that Mr.
Director’s predecessor had claimed some questionable deductions, and no one noticed until now when Mr. Director was
answering one of the outstanding IDRs. The IRS team is unaware of the errors on the prior years’ returns, but the IDR
response will make this fact crystal clear. Mr. Director recently realized that his predecessor had signed off on prior cycle
closing documents which contained a very large BUSC-favorable math error. In addition, it seems that employment tax
returns for a very small mom-and-pop entity which BUSC had recently acquired were never filed. Mr. Director isn’t sure
what he needs to do or should do about that.
Yesterday, Mr. Director met with the team, the Team Coordinator, and the Case Manager to discuss the outstanding IDRs
and the timing for closing the exam. The proposed timetable extends past the statute date, but no one seems to have
noticed. Mr. Case Manager is focused on meeting his closing date, which has already been extended once with great
difficulty.
Mr. Director is not sure what he should do — other than immediately take two extra-strength Tylenol. What are his
obligations and duties?
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139
Appendix
140
Appendix: Enforcement of Standards
High-Profile Examples
Salem Financial, Inc. v. United States (Sept. 2013)


Federal Court of Claims found taxpayer liable for $100 million in
penalties associated with foreign tax credit structure.
Finding reliance on the advisers’ opinion insufficient to avoid a penalty,
the court strongly criticized the advisers:
“Perhaps the business environment at the time was ‘everyone else is doing it, why don’t we?’ Perhaps
some of those who participated simply were following directing from others. Nevertheless, the
professionals involved should have known better. . . .”

But see Santander Holdings v. United States (Sept. 2013) (federal district
court rejected the IRS’s challenge to the same transaction under the
economic substance doctrine).
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141
Appendix: Enforcement of Standards
High-Profile Examples
Ernst & Young Tax Shelter Defendants



In May 2009, four current and former EY partners were found guilty of
fraud involving tax shelters for wealthy people.
In January 2010, defendants were sentenced to 3 years in prison and 120
hours/year in community service, with at least half devoted to addressing
tax professionals on how their careers were ruined by fooling with the tax
code. The convictions of two defendants were reversed by the Second
Circuit (because of interpretation of conspiracy statute); other two
convictions were upheld. On October 2013, the Supreme Court declined to
review those convictions.
In February 2013, EY admitted wrongful conduct and agreed to pay $123
million to resolve investigation.
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142
Appendix: Enforcement of Standards
High-Profile Examples
Other Tax Shelter Defendants



Attorneys from defunct law firm Jenkins & Gilchrist found
guilty of $7 billion tax fraud scheme, including conspiracy to
prevent IRS from obtaining relevant documents.
One defendant (CEO of BDO) was acquitted, but another was
sentenced to 15 years in prison, $371 million in restitution, and
forfeiture of $164 million; and a third was sentenced to 8 years
in prison, $190 million in restitution, and forfeiture of $1.6
million.
Advisers charged fees of more than $130 million and
government alleged $1.6 billion of lost tax revenues was
involved.
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143
Appendix: Enforcement of Standards
High-Profile Examples
IRS OPR v. Sykes (July 2009)



After receiving a referral from Department of Justice after district court
upheld penalty against a taxpayer, OPR challenged sufficiency of advice in
“short-form” opinion provided by Sykes, a partner with Shearman &
Sterling.
Subsequent to the time opinion was provided, section 10.35 of Circular
230 was amended to require opinions to “relate the applicable law
(including potentially applicable judicial doctrines) to the relevant facts.”
ALJ ultimately dismissed complaint, with comment that if practitioner
“had been more forthcoming during OPR’s investigation of his conduct in
preparing the basis opinions, this complaint might not have been issued.”
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144
Appendix: Enforcement of Standards
High-Profile Examples
Canal Corp. v. Commissioner (August 2010)







Leveraged partnership transaction to defer gain.
Issue: Whether taxpayer qualified for reasonable cause defense to
substantial understatement penalty. Treas. Reg. § 1.6664-4.
Transaction conditioned on receipt of “should” tax opinion from
adviser (PricewaterhouseCoopers).
Fee for opinion = $800,000 (flat fee).
Opinion writer also planned transaction; taxpayer received opinion on
the day the deal closed.
OPR indicated it would investigate practitioner.
Sustention of penalty has been vigorously criticized.
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Appendix: Enforcement of Standards
High-Profile Examples
Canal Corp. v. Commissioner


Court observed:
o “[T]he opinion was riddled with questionable conclusions and unreasonable
assumptions” … and “littered with typographical errors, disorganized and
complete.” (Taxpayer couldn’t produce final opinion, only a draft.)
o It was “inherently unreasonable for [the taxpayer] to have relied on an
analysis based on the specious legal assumptions.”
o It was unreasonable for the taxpayer to rely on advice from a tax adviser
who is “tainted by an inherent conflict.”
o “Independence of advisors is sacrosanct to good faith reliance”; any
modicum of independent auditing was clearly lacking in this case.
Held: No reasonable cause defense for taxpayer.
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146
Appendix: Enforcement of Standards
Tax Karma?
Zoeller v. Aisin USA Manufacturing (May 2011)

Indiana Supreme Court decision.
 Taxpayer received erroneous refund.
 DoR requested return of refund after SOL had run.
 Taxpayer said “No.”
 Held: DoR not barred by tax statute of limitations allowing
pursuit of case under unjust enrichment theory.
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147
Appendix: Enforcement of Standards
Practical Advice
for minimizing problems

Be professional; treat your government counterparts with respect.
Stated colloquially, “Don’t be a jerk.”
o e.g., Sykes
 Mind your P’s and Q’s in terms of documentation. Review, refine,
and then follow your document management policy.
o e.g., Canal
 You’re not alone: Seek advice (and consolation) from colleagues
and other tax professionals.
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148
Appendix: Federal Whistleblower Rules
Not Just the News, but the Headlines

Whistleblowers in the News: Not just national security, but
taxes.

Most prominent tax whistleblower is Bradley Birkenfeld. He’s
the former UBS employee who secured a $104 million
whistleblower award from the U.S. government for telling the
Internal Revenue Service about his employer’s involvement in
helping UBS clients evade their U.S. tax obligations.
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149
Appendix: Federal Whistleblower Rules
UBS Case Is Special, but not Unique
— Other Headlines




Tax Whistleblower Gets $2 Million IRS Award: Lawyer
(Chicago Tribune).
Tax Informants Are On The Loose (Forbes).
IRS Gives $4.5 Million Award to Tax Whistle-blower
(Associated Press).
First False Claims Act Recovery in New York, Whistleblower
Awarded $1.1 Million (Corporate Crime Reporter).
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Appendix: Federal Whistleblower Rules
Letting the Facts Get in the Way . . .
●
In 2013, Google officials were called before a U.K.
parliamentary committee after Thomson Reuters published
stories undermining the company’s claims about having no
permanent establishment in the country. Tipped off by a
whistleblower, TR reporters researched LinkedIn profiles of
Google employees.
● U.K. tax authorities defended its scrutiny of Google’s
activities, but the whistleblower’s tips led to days of headlines
such as “UK lawmakers challenge Google’s ‘smoke and
mirrors’ on tax.”
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Appendix: Federal Whistleblower Rules
I.R.C. § 7623

Awards for provision of information relating to a violation of
the internal revenue law.
 When amounts exceed $2 million, statutory award is between
15% and 30% of amount collected (reduced to 10% when
information is publicly available).
 IRS has discretionary authority to grant awards for cases less
than $2 million.
 Regulations issued in August 2014.
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152
Appendix: Federal Whistleblower Rules
Awards, Even for Those Who Participated
in Tax Evasion Scheme
The Whistleblower Office may reduce an award if informant “planned
and initiated” actions leading to the underpayment. I.R.C. §
7623(d)(3).
 Where informant is convicted of criminal conduct related to
underpayment, no award may be given at all.
 In September 2012, IRS announced the payment of a $104 million
award to Bradley Birkenfeld for information leading to IRS’s $5
billion settlement with UBS Bank, even though he served prison
sentence for assisting certain individuals in hiding foreign bank
accounts from IRS. ($4,600/hour served.)

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Appendix: Federal Whistleblower Rules
Awards, Even for Those Who Participated
in Tax Evasion Scheme




In October 2012, IRS awarded a whistleblower $38 million.
Since enactment of 2006 amendments, there have been claims relating to
nearly 20,000 taxpayers, and in FY2013 alone, there were 1,324 LB&I
taxpayers implicated.
Treasury Department’s Inspector General for Tax Administration
reported that tips received in 2008 added up to $65 billion in unreported
income.
For six years ending September 30, 2013, IRS paid out approximately
$230 million in whistleblower awards, including about $53 million in
FY2013 (when there were 122 awards paid).
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154
Appendix: Federal Whistleblower Rules
Recent Examples Involving Large Companies

In-house tax professional indicted for participating in filing of false tax return
after colleague raised internal concerns about research tax credit claim. The
company, a government contractor, conducted internal investigation and
subsequently referred matter to Justice Department. After jury trial, tax
professional was acquitted of criminal charges under I.R.C. § 7206(2).

Tax department employee filed federal job-protection suit under SOX claiming he
was reassigned (and denied certain compensation) after raising concerns internally
about certain international transactions. Suit, which alleged “unlawful scheme to
avoid over $2 billion in federal income tax,” was settled without any adjudication
of underlying tax claims.

Tax department employee filed wrongful discharge suit under SOX and RICO
alleging company misled IRS and hid tax shelter from outside auditor. (Tax at
issue alleged to be $7 million.) Case dismissed and, in separate state case by the
company, employee was found liable for defamation. (Separate internal
investigation upheld company’s tax position.)
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Appendix: Federal Whistleblower Rules
Non-Tax Costs Can Be Substantial
Even assuming whistleblower’s claims do not lead to additional tax liability
or penalty, costs to company could be substantial:
Financial:
o Legal and other fees incurred in responding to merits of tax claims.
o Legal costs and possible monetary damages if retaliation (or unlawful
discharge) is alleged, either under general employment law principles,
Sarbanes-Oxley Act (SOX), or Racketeer Influenced and Corrupt
Organization Act (RICO).
o Consulting fees paid to crisis management, government affairs, or
public relations firms relating to claim.
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Appendix: Federal Whistleblower Rules
Non-Tax Costs Can Be Substantial
Human Resources:
o Decline in employee productivity and morale, both within and
outside tax department.
Reputational:
o If whistleblower’s claim becomes public — for example, by leak
to media or suit for unlawful retaliation — company could find
its name in headlines. Even if claim does not become public,
company’s credibility with IRS or other governmental bodies
could be impaired.
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157
Appendix: Federal Whistleblower Rules
Mitigating Whistleblower Risk




Don’t Make Matters Worse — Avoid Actual or Perceived Retaliation.
Confirm Adequacy of Company’s Ethics Hotline and Tax Department
Awareness of Procedures.
Review and Revise Tax Department Procedures and Practices.
o Demystify Tax.
o Set Proper Tone at the Top; Listen to Your Team.
o Train Your Team.
o Review Performance Standards.
o Review the Company’s Policy for Making Disclosures to IRS.
See Michael P. Dolan & Timothy J. McCormally, Which Way the Wind
Blows: Mitigating Whistleblower Risk, 139 Tax Notes 1537 (June 24, 2013).
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Appendix: State False Claims Acts




Federal False Claims Act does not apply to taxes.
State ex rel. Beeler, Schad and Diamond, P.C. v. Ritz Camera
Centers, Inc., 878 N.E.2d 1152 (Ill. Appl. 1st Dist. 2007)
(Illinois Use Tax Act can be prosecuted by private persons
under the Illinois False Claims Act).
International Game Technology, Inc. v. Second Judicial Dist.
Ct. of Nev., 127 P.3d 1088 (Nev. 2006) (Nevada False Claims
Act allows for prosecution of tax cases by private parties).
In March 2014, Kentucky mandated a study whether a tax
whistleblower program should be enacted (initial legislation
would have instituted such a program).
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Appendix: State False Claims Acts
New York v. Sprint
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In 2010, New York amended false claims statute to cover tax matters.
There has been at least one $5.5 million settlement.
In 2011, a qui tam action was initiated by whistleblower in respect of
Sprint-Nextel for deliberating failing to pay sales tax.
In 2012, NY Attorney General took over, claiming company did not collect
and pay over sales taxes on flat-rate access charges for wireless calling
plans. Trial court declined to dismiss the case.
New York alleges that more than $100 million in taxes is involved, which
— with penalties and interest — has grown to nearly $400 million. The
total grows by about $210,000 a week.
In 2014, a $6.2 million settlement paid to New York by a Massachusetts
company led to New York’s paying a “tax services provider” an award of
$1.137 million.
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Appendix: State False Claims Acts
Delaware ex rel. French v. Card Compliant
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Qui tam action filed in 2013 relating to whether unredeemed gift card
balances constituted unclaimed property subject to escheat in Delaware.
Case filed by former executive of gift card service company, naming 27
Delaware-incorporated companies that sold gift cards. Legal question is
whether those companies (as opposed to the gift card service company)
was the holder of the unclaimed property.
Case unsealed in March 2014 when Delaware Attorney General
intervened.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (”KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
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Appendix: State False Claims Acts
New York ex rel. Danon v. Vanguard Group
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Former in-house tax lawyer at large mutual fund company filed a
multimillion dollar whistleblower suit in New York state court and
submitted complementary claims relating to the same set of transactions
and arrangements involving former employer to the IRS and the SEC.
The claims, which are pending, allege that mutual fund’s pricing practices
violate section 482 of the Code and the comparable provisions of New
York law, allowing it to evade more than $1 billion in federal taxes and
$20 million in New York taxes over a 10-year period.
unredeemed gift card balances constituted unclaimed property subject to
escheat in Delaware.
Qui tam action filed after New York’s attorney general declined to
prosecute case.
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Speaker Biography and Acknowledgments
Timothy J. McCormally is a Director in the Washington National Tax practice of KPMG LLP. He has
served as Executive Director of Tax Executives Institute and as the organization’s top lawyer. Mr.
McCormally received his B.A. degree from the University of Iowa and his J.D. degree from Georgetown
University Law Center. Throughout his 30-years with TEI, he was editor of The Tax Executive magazine,
and he has also contributed to Tax Notes, Tax Adviser, and other publications. He lectures extensively on tax
ethics and is author or co-author of articles on Circular 230, best practices to mitigate the risk of tax
whistleblowing, and the Internal Revenue Service’s protocols for risk assessing taxpayers. Timothy serves
as a Fellow of the American College of Tax Counsel, and is a recipient of TEI’s Honorary Membership
Award. For three years in a row while at TEI, Timothy was named one of the top ten most influential people
in the sphere of global taxation for three years in a row by the U.K. publication Tax Business. In 2014, he
was appointed to a three-year term on the Internal Revenue Service Advisory Council, and serves on its
Large Business & International subgroup.
Special thanks to Daniel B. De Jong of Tax Executives Institute and Matthew D. Lerner of Sidley & Austin
LLP for their contributions on prior versions of this presentation and to Donald M. Griswold of Crowell &
Moring LLP who developed the analytical framework on Slide 35.
The information in this document is of a general nature and based on authorities that are subject to change.
Applicability of the information to specific situations should be determined through consultation with your
tax adviser. These materials represent the views of the speakers only and do not necessarily represent the
views or professional advice of KPMG LLP.
© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (”KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
163
Thank you!
Timothy J. McCormally
tmccormally@kpmg.com
202.533.3079
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