Avoiding Ethical Violations
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attendance verification quiz is a final exam on the topics
covered during the presentation.
Avoiding Ethical Violations
Robert E. McKenzie
312.876.6927
www.mckenzielaw.com
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Learning Objectives
In 2011 the IRS announced major revisions to Circular 230.
We all try to the right thing but many of us have busy
practices and those pressures may cause us to
inadvertently face an ethical problem.
Circular 230 has recently been revised and it has imposed
new duties and responsibilities upon practitioners who
represent taxpayers before the IRS.
Learning Objectives
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Recognize what is needed to comply with the new requirements
Avoid violating your ethical duties & penalties
Cite standards and penalties for tax preparers
Avoid potential conflicts of interest & know what is and what is not
required when there is a potential conflict
Describe the duties of the Return Preparer Office
Define “substantial authority” when preparing a return
Recognize what to do regarding correction taxpayer mistakes
Determine what fees are unconscionable
Apply the standards with respect to tax returns and documents
Cite which taxpayer confidences you may disclose to the IRS
Define incompetence and disreputable conduct
Assess procedures to ensure compliance
New Preparer Complaint Form
Form 14157
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EITC Due Diligence
8867 Form
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7-15-13 Announcement
The Director of Practice will use certain information to
ensure that:
1. enrolled agents properly complete continuing education
requirements to obtain renewal;
2. practitioners properly obtain consent of taxpayers before
representing conflicting interests;
3. practitioners do not use e-commerce to make misleading
solicitations.
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Conflicting Interests
• Section 10.29
• Express consent of all directly interested parties after full
disclosure.
• Practitioner is required to obtain consents in writing from each
affected client in order to represent the conflicting interests.
• A verbal consent followed by a confirming letter written by the
practitioner will suffice if the client also signs the letter.
Confirmation now can be made "within a reasonable period after
the informed consent," but in no event later than 30 days.
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Avoiding Conflicts of Interest While Representing
Clients Before IRS
• Explain joint and several liability when filing a joint federal or state
income tax return
• Explain what joint and several liability means.
• Explain right of contribution.
• Make reference to the innocent spouse provisions in the Internal
Revenue Code and your state taxation code as well.
• Liability may be determined in a pending audit or Tax Court proceeding.
• Asserting the defense of innocent spouse.
• Discuss the potential conflict of interest.
• Explain that both must acknowledge and waive the conflict
• Advise that they have the right to seek independent counsel
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2011 Rule Change Solicitation
• §10.30(a)(1) of the regulations provides that a
practitioner may not, with respect to any IRS matter, in
any way use or participate in the use of any form of
public communication or private solicitation containing
a false, fraudulent, coercive, misleading, or deceptive
statement or claim.
• RTRPs may not utilize the term “certified” or imply an
employer/employee relationship with the IRS.
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9-17-12 Proposed Regulations
• Modify the standards dealing with written advice and update
certain other provisions.
• Amend Circular 230 by eliminating the rules governing
covered opinions in Section 10.35 of the U.S. Tax Code, expand
the requirements for written advice under Section 10.37.
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9-17-12 Proposed Regulations
• Proposed regulations also broaden the scope of the
procedures to ensure compliance under Section 10.36,
requiring that a practitioner with principal authority for
overseeing a firm’s federal tax practice take reasonable steps
to ensure the firm has adequate procedures in place for
purposes of Circular 230 compliance.
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9-17-12 Proposed Regulations
• Practitioners must exercise competence when engaged in
practice before the IRS, and that the prohibition on a
practitioner endorsing or negotiating any check issued to a
taxpayer regarding a federal tax liability applies to government
payments made by any means.
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9-17-12 Proposed Regulations
• Will eliminate the need to put disclaimer on emails & letters:
This electronic mail transmission may contain confidential or privileged
information. If you believe that you have received this message in error,
please notify the sender by reply transmission and delete the message
without copying or disclosing it. Pursuant to Internal Revenue Service
guidance, be advised that any federal tax advice contained in this written
or electronic communication, including any attachments or enclosures, is
not intended or written to be used and it cannot be used by any person
or entity for the purpose of (i) avoiding any tax penalties that may be
imposed by the Internal Revenue Service or any other U.S. Federal taxing
authority or agency or (ii) promoting, marketing or recommending to
another party any transaction or matter addressed herein.
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Preparer Regulation
• 2011 IRS issued regulations mandating that certain taxreturn preparers
– Complete 15 hours of continuing education each year and
– Pass an initial qualifying exam
– Undergo background checks
• Loving v. IRS, No. 12-385 (JEB) (D.D.C. Jan. 18, 2013), held
IRS’ lacks authority to continue preparer regulation.
• IRS has appealed
• Appeal heard in October, 2013
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PTINs Allowed
Loving court issued an additional opinion and order on 2-1-2013,
clarifying and modifying its previous injunction.
– Denied the IRS' attempt to stay the injunction pending its
appeal
– Modified the injunction allowing IRS to continue PTIN
application and assignment system may continue
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E-file Mandate
• Tax return preparers who prepare 100 or more individual or
trust returns in 2011 will be required to e-file
• Tax return preparers who prepare 10 or more individual or
trust returns in 2012 will be required to e-file
• Form 8948 to explain
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Registration
All preparers should have registered by January 1,2011
for a PTIN
– This included those who already had PTIN
– Preparers include even those who prepare claims for refunds
– Beginning in 2011, those preparers who are not EAs CPAs or
attorneys must pass competency tests by 2013
– Fee to register $64.25
– Began 9-10
– Must register every year
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Tax Return Preparer
• For purposes of obtaining a preparer number (PTIN)
only, a tax return preparer is any individual who is
compensated for preparing, or assisting in the
preparation of, all or substantially all of a tax return or
claim for refund
• The IRS has carved out a system for supervised
assistants to CPAs, EAs & lawyers. Must be sponsored
by these professionals
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Public Database
• IRS will develop a searchable database of tax return preparers
that have registered and passed the competency examination.
• Allow the public to see whether a preparer has taken
appropriate tests and has registered with the IRS.
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New Return Preparer Office (RPO)
• Carol A. Campbell, Director
• New return preparer office was created to administer PTIN
applications, competency testing, and continuing education.
• IRS decided that an office dedicated solely to the matters will
allow the IRS to best serve tax return preparers and taxpayers by
providing efficiency and expertise in this area.
• Concurrently, the Office of Professional Responsibility will
continue to enforce the Circular 230 provisions relating to
practitioner conduct and discipline.
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Progress In Registration
• About 850,000 registered prior to injunction
• In 2011 100,000 return preparers prepared returns with
invalid PTINs or using SSNs. IRS sent warning letters and
taking further actions to enforce rules.
• Pursuing ghost preparers and has found a million
apparent ghost returns. Letters out to those TPs asking
for info on preparers
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Review Questions for Self-Study CPE
For the recorded version of this webinar, now’s the time to
answer review questions 1-3.
You can access the review questions from your handouts.
Detail of Registration
847,970
45,837
212,644
30,912
338,832
54,524
41,894
• Total PTINs (715,046 valid for
2012)
• Enrolled Agents
• CPAs
• Attorneys
• RTRP candidates
• Supervised preparers
• Non-1040 preparers
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 Many preparers would have been required to pass a competency
test by Dec. 31, 2013
 Testing began in Nov., 2011 and stopped in January, 2013 by
court order
 Exempt from testing:
– Attorneys, CPAs, and enrolled agents
– Certain supervised preparers
– Those who prepare no Form 1040 series returns
 After passing the test, the individual would have been officially
an “Registered Tax Return Preparer”
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Continuing Education
• Began 2011 stopped by the injunction
• 15 hour annual CE requirements once you pass the test
• Providers must register with RPO
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New Circular 230 Rules
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Released in 2011
Modifies the rules concerning:
– Adds to covered professionals Registered preparers.
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Definitions – Practice Before the Internal
Revenue Service, Tax Return Preparer
• Definitions – Practice Before the Internal Revenue Service, Tax
Return Preparer
• The final regulations adopt the proposed amendments to
§10.2(a)(4), which clarify that either preparing a document or
filing a document may constitute practice before the IRS. The
final regulations also adopt the proposed amendments to
§10.2(a)(8), which clarify that the definition of “tax return
preparer” in Circular 230 is the same as the meaning in
§7701(a)(36) of the Code and 26 CFR 301.7701-15.
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Representation By RTRPs
• RTRPs also may represent taxpayers before revenue agents, customer
service representatives, or similar officers and employees of the IRS
(including the Taxpayer Advocate Service) during an examination if the
RTRP signed the tax return or claim for refund for the taxable year or
period under examination. ),
• RTRPs are not permitted to represent taxpayers, regardless of the
circumstances requiring representation, before appeals officers,
revenue officers, Counsel, or similar officers or employees of the IRS or
the Treasury Department.
• RTRP’s authorization to practice under this part also does not include
the authority to provide tax advice to a client or another person except
as necessary to prepare a tax return, claim for refund, or other
document intended to be submitted to the IRS.
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Privilege
• §7525 federally authorized tax practitioner privilege generally
does not apply to communications between a taxpayer and a
RTRP because the advice a RTRP provides ordinarily is
intended to be reflected on a tax return and is not intended to
be confidential or privileged.
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Circular 230
• Conduct of a RTRP in connection with the preparation of the
return, claim for refund, or other document, as well as any
representation of the client during an examination, will be
subject to the standards of conduct in Circular 230.
• Provision stayed by injunction
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Exempt From Testing
• Individuals who are not attorneys, CPAs, EAs, or are eligible to
obtain a PTIN and, thus, prepare, or assist in preparing, all or
substantially all of a tax return or claim for refund for
compensation in certain circumstances.
• Individuals supervised by an attorney, CPA, or EA, who signs the
return or claim for refund prepared by the individual may obtain a
PTIN.
• Certify in application to receive a PTIN that:
– Supervised by an attorney, CPA or EA, who signs the tax return or claim for
refund and
– Provide a supervising individual’s PTIN to IRS.
• May not sign any tax return they prepare
• If no longer supervised must notify IRS and will no longer be
permitted to prepare or assist in preparing all or substantially all
of a tax return or claim for refund for compensation under this
exception.
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Continuing Education Providers
• §10.9 of the proposed regulations, proposed a new
requirement that continuing education providers obtain
approval of each program to be qualified as a continuing
education program.
• Not barred by injunction
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Standards With Respect to Tax Returns and
Documents
• §10.34(a)(1)(i), a practitioner may not willfully, recklessly, or through gross
incompetence, sign a tax return or claim for refund that practitioner knows or
reasonably should know contains a position that:
– (A) lacks a reasonable basis;
– (B) is unreasonable position as described in §6694(a)(2); or
– (C) is a willful attempt by practitioner to understate liability for tax or a reckless or
intentional disregard of rules or regulations by practitioner as described in
§6694(b)(2).
• §10.34(a)(1)(ii), practitioner may not willfully, recklessly, or through gross
incompetence, advise a client to take a position on a tax return or claim for
refund, or prepare a portion of a tax return or claim for refund containing a
position, that:
– (A) lacks a reasonable basis;
– (B) is an unreasonable position as described in§6694(a)(2) (including related
regulations and other published guidance); or
– (C) is a willful attempt by practitioner to understate liability for tax or a reckless or
intentional disregard of rules or regulations by practitioner as described in
§6694(b)(2)
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Definitions
• More likely than not
– More than 50%
• Substantial authority
– 40% or more
• Realistic possibility
– 33% or more
• Reasonable basis
– 20% or more
– Must make a disclosure Form 8275
• Frivolous
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Due Diligence
• Karen Hawkins, Director of OPR, has made several speeches
warning of enhanced enforcement of due diligence and has
specifically mentioned FSs & CDPs
• She is hiring more attorneys to do enforcement
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Procedures to Ensure Compliance
• §10.36(b) provides that firm management with principal
authority and responsibility for overseeing a firm’s practice of
preparing tax returns, claims for refunds and other documents
filed with the IRS must take reasonable steps to ensure that the
firm has adequate procedures in effect for purposes of
complying with Circular 230.
• Treasury and IRS believe that expansion of §10.36 to require
firm procedures for tax return preparation practice, in addition
to the pre-existing application to covered opinions, will help
ensure compliance and encourage firms to self-regulate.
• Firm responsibility is a critical factor in ensuring high quality
advice and representation for taxpayers.
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Incompetence and Disreputable Conduct
• §10.51(a)(16), disreputable conduct includes willfully failing to
file on magnetic or other electronic media a tax return prepared
by the practitioner when the practitioner is required to do so by
Federal tax laws (unless the failure is due to reasonable cause
and not due to willful neglect).
• Return preparers are only subject to sanction under
§10.51(a)(16) for not electronically filing if such a failure is willful.
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Failure to Possess PTIN
• §10.51(a)(17), disreputable conduct also includes willfully
preparing all or substantially all of, or signing as a
compensated tax return preparer, a tax return or claim for
refund when the practitioner does not possess a current or
otherwise valid PTIN or other prescribed identifying number.
• §10.51(a)(18) states that it is disreputable conduct for a
practitioner to willfully represent a taxpayer before an officer
or employee of the IRS unless the practitioner is authorized to
do so pursuant to Circular 230.
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Tax Return Preparer Penalty
• IRC Sec 6694
• 2007 act expanded the definition of a tax return
preparer to cover the preparation of a return or claim
for refund of any federal tax, including estate and gift
taxes, employment taxes, excise taxes and the returns
of exempt organizations.
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Preparer Penalties
Increases the penalty to the greater of:
– a) $1,000 or
– b) 50 percent of the income derived by the preparer with
respect to a return or claim of any federal tax.
– The minimum penalty would be increased to $5,000 in the
case of an understatement that is due to willful or reckless
conduct by the preparer.
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2007 Higher Standards
• Prior standard realistic possibility: A position satisfies the
standard if a reasonable and well-informed analysis by a person
knowledgeable in the tax law would lead that person to conclude
that the position has an approximately one in three,
• Temporarily, the penalty applied in the case of ANY
understatement arising from a position the preparer did not
reasonably believe met the “more likely than not” test, unless
there was a reasonable basis for the position and the position is
disclosed.
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2008 Modification of Penalty on Understatement
of Taxpayer’s Liability by Tax Return Preparer
• Changes the standards for imposition of the tax return preparer
penalty. The preparer standard for undisclosed positions is
reduced to “substantial authority.”
• The preparer standard for disclosed positions is “reasonable
basis.”
• For tax shelters and reportable transactions to which section
6662A applies (i.e., listed transactions and reportable
transactions with significant avoidance or evasion purposes), a
tax return preparer is required to have a reasonable belief that
such a transaction was more likely than not to be sustained on
the merits.
• Retroactively effective for returns prepared after May 25, 2007.
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Adequate Disclosure
• Disclosure is adequate with respect to the tax
treatment of an item (or group of similar items, such as
amounts paid or incurred for supplies by a taxpayer
engaged in business) or a position on a return if the
disclosure is made on a properly completed Form 8275
(or Form 8275-R, if the position is contrary to a reg)
that is attached to the return or to a qualified amended
return
• Must have at least a reasonable basis
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Knowledge of Client's Omission
Requires that, in addition to notifying the client of the fact of
the noncompliance, error, or omission, the practitioner advise
the client of the consequences as provided under the Code and
regulations of the noncompliance, error, or omission.
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Review Questions for Self-Study CPE
For the recorded version of this webinar, now’s the time to
answer review questions 4-6.
You can access the review questions from your handouts.
HAVE A LESS
TAXING YEAR!!!!!
Thank You!!
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