ethics for the tax professional

CHECKPOINT LEARNING®

Ethics for the Tax Professional

DERTG20

800.431.9025 cl.thomsonreuters.com/G


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Registration Numbers

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INTRODUCTION

Ethics for the Tax Professional is an interactive self-study CPE course designed to enhance your understanding of the latest issues in the field. To obtain credit, you must log on to our Online Grading System at cl.thomsonreuters.com/ogs to complete the Examination for CPE Credit by November 30, 2021. Complete instructions are included below and in the Testing Instructions preceding the Examination for CPE Credit.

Taking the Course

You are asked to read the material and, during the course, to test your comprehension of each of the learning objectives by answering self-study quiz questions. After completing each quiz, you can evaluate your progress by comparing your answers to both the correct and incorrect answers and the reason for each. References are also cited so you can go back to the text where the topic is discussed in detail. Once you are satisfied that you understand the material, answer the examination questions at the end of the course and record your answer choices by logging on to our Online Grading System.

Qualifying Credit Hours—NASBA Registry (QAS Self-Study)

Gear Up is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

Gear Up is also approved for “QAS Self-Study” designation.

The requirements for NASBA Registry membership include conformance with the Statement on Standards of Continuing Professional Education (CPE) Programs (the Standards), issued jointly by NASBA and the AICPA. As of this date, not all boards of public accountancy have adopted the Standards in their entirety. Each course is designed to comply with the Standards. For states that have adopted the Standards, credit hours are measured in 50-minute contact hours. Some states, however, may still require 100-minute contact hours for self-study. Your state licensing board has final authority on acceptance of NASBA Registry QAS self-study credit hours. Check with your state board of accountancy to confirm acceptability of NASBA QAS self-study credit hours. Alternatively, you may visit the NASBA website at www.nasbaregistry.org for a listing of states that accept NASBA QAS self-study credit hours and have adopted the Standards. Credit hours for CPE courses vary in length. Credit hours for this course are listed on the “Overview” page before each course.

Obtaining CPE Credit

Log on to our Online Grading Center at cl.thomsonreuters.com/ogs to receive instant CPE credit. Click the purchase link and a list of exams will appear. You may search for the exam by selecting Gear Up/Quickfinder in the drop-down box under Brand. Payment of $35 for the exam is accepted over a secure site using your credit card. For further instructions regarding the Online Grading Center, please refer to the Testing Instructions located at the beginning of the examination. A certificate documenting the CPE credits will be issued for each examination score of 70% or higher.

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Obtaining EA and NCRP Credit

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Retaining CPE Records

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Ethics for the Tax Professional (DERTG20) OVERVIEW

COURSE DESCRIPTION: This interactive self-study course is designed to help the tax professional understand the rules and regulations governing the tax profession and the practical application of these rules in the daily operation of their businesses. The course illustrates the compliance requirements of Treasury Department Circular 230 as it applies to enrolled agents and CPAs, in their practice before the Internal Revenue Service.

PUBLICATION/ REVISION DATE:

November 2020

PREREQUISITE/ADVANCE PREPARATION:

None

CPE CREDIT:

2 NASBA Registry “QAS Self-Study” Hours This course is designed to meet the requirements of the Statement on Standards of Continuing Professional Education (CPE) Programs (the Standards), issued jointly by NASBA and the AICPA. As of this date, not all boards of public accountancy have adopted the Standards in their entirety. For states that have adopted the Standards, credit hours are measured in 50-minute contact hours. Some states, however, may still require 100-minute contact hours for self-study. Your state licensing board has final authority on acceptance of NASBA Registry QAS self-study credit hours. Check with your state board of accountancy to confirm acceptability of NASBA QAS self-study credit hours. Alternatively, you may visit the NASBA website at www.nasbaregistry.org for a listing of states that accept NASBA QAS self-study credit hours and that have adopted the Standards.

Enrolled Agents: This CPE course is designed to enhance professional knowledge for Enrolled Agents. Gear Up is a qualified CPE Sponsor for Enrolled Agents as required by Circular 230 Section 10.6(g)(2)(ii).

CTEC CREDIT: 2 Ethics Hours

EA CREDIT: 2 Ethics Hours

NCRP CREDIT: 2 Ethics Hours

FIELD OF STUDY: Regulatory Ethics

EXPIRATION DATE: Postmarked by November 30, 2021

KNOWLEDGE LEVEL: Basic

http://www.learningmarket.org/


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LEARNING OBJECTIVES

• Identify the subparts of Circular 230 and duties and restrictions relating to practice before the IRS under Subpart B.

• Identify sanctions under Subpart C of Circular 230 and what behaviors are subject to sanctions.

ADMINISTRATIVE POLICIES

For information regarding refunds and complaint resolutions, call 800.431.9025, select the option for Customer Service, and your questions or concerns will be promptly addressed.


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Table of Contents Ethics and Responsibilities of Tax Professionals ............................................... 2

Introduction ..................................................................................................................... 2 Ethics Defined ................................................................................................................. 2 Circular 230 ..................................................................................................................... 4

Appendix ........................................................................................................... 37

Testing Instructions for Examination for CPE Credit ....................................... 39

Examination for CPE Credit .............................................................................. 40

Glossary ............................................................................................................. 43

Index ................................................................................................................... 45


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Ethics and Responsibilities of Tax Professionals

Introduction

This course will focus on the rules that prescribe and proscribe our behavior before the IRS.

Learning Objectives

Completion of this course will enable you to:

• Identify the subparts of Circular 230 and duties and restrictions relating to practice before the IRS under Subpart B.

• Identify sanctions under Subpart C of Circular 230 and what behaviors are subject to sanctions.

Ethics Defined

Defining ethics and ethical behavior would seem simple. The Modern Webster Dictionary actually presents two definitions of the term ethics. As a noun, it is defined as “a principle of right or good or a system of such principles or values.” Ethics also appears as an adjective and is defined as “pertaining to, or dealing with ethics,” in accordance with the accepted principles of right and wrong that govern the conduct of a profession” and “treating of moral feelings, duties, or conduct.” In short, ethical behavior means, “doing the right thing.”

Ethics, also called moral philosophy, is defined in Encyclopedia Britannica as the discipline concerned with what is morally good and bad, right and wrong. The term is also applied to any system or theory of moral values or principles.

A difficulty arises, however, in attempting to define what we mean by “doing the right thing.” The source of the problem lies in the fact that each of us has a unique set of values. These values, in turn, form the basis for our personal judgments about what is the right thing to do. After all, the very essence of personal freedom lies in each individual’s right to make choices. However, individuals in a society are not completely free. Every society adopts a set of rules or laws that prescribe what it believes to be “doing the right thing.”

In a sense, we can think of laws as a set of rules that reflect the values of the society as a whole, as they have evolved up to the present time. There are some who would argue that ethical behavior is more than simply obeying the law. However, for purposes of this course, we recognize that individuals in a free society have the right to disagree about what constitutes “doing the right thing.” For this reason, this course will seldom venture beyond the basic notion that ethical conduct involves abiding by society’s rules. However, we will endeavor to help you understand that some of the ethical dilemmas that have arisen in business in recent years have been produced by behavior that was not at odds to the prevailing law but at odds with the wishes of a large part of the general population. In some of these cases, the ethical dilemmas have provided a catalyst for debate and discussion, which have eventually led to a revision in the body of the law.


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Discussion of ethics predominates in business today, but this is a relatively new phenomenon. This is, in part, due to the three reasons:

1. While business errors can be forgiven, ethical errors tend to end careers and terminate future opportunities. Why is this so? Because unethical behavior eliminates trust, and without trust businesses cannot interact.

2. One of the most damaging events a business can experience is a loss of the public’s confidence in its ethical standards. Again, we have several recent examples of such events in large business entities.

3. Media reports of government investigations of nonprofit organizations are influencing public perception of this sector of society.

Business ethics has also been broadly defined as “…a company’s attitude and conduct toward its employees, customers, community, and shareholders.” High standards of ethical behavior demand that a firm treat each party that it deals with in a fair and honest manner. A firm’s commitment to business ethics can be measured by the tendency of the firm and its employees to adhere to laws and regulations relating to such factors as product safety and quality, fair employment practices, fair marketing and selling practices, the use of confidential information for personal gain, community involvement, bribery, and illegal payments to obtain business.

Also related to the question of ethics in business is the question of social responsibility. In general, corporate social responsibility means that a corporation has responsibilities to the society at large that go beyond the maximization of shareholders’ wealth. In effect, it asserts that a corporation answers to a broader constituency than shareholders alone. As with most debates that center around ethical questions, there is no definitive answer and strong opinions abound. Milton Friedman, in his publication “Milton Friedman on the Social Responsibility of Corporations,” takes the position that since managers are employees of the corporation, and the corporation is owned by the shareholders, the financial managers should run the corporation in such a way that shareholder wealth is maximized. He further suggests that shareholders could then decide to pass on any of the profits to deserving causes. While Friedman presents a strong case, very few corporations consistently act in this way. For example, in 1992 Bristol-Myers Squibb Co. announced it would start an ambitious program to give away heart medications to those who cannot pay for them. This announcement was in the wake of the American Heart Association report that showed that many of the nation’s working poor face severe heath risks because they cannot afford heart drugs. Clearly, Bristol-Myers Squibb felt it had a social responsibility to provide this medicine to the poor at no cost—a decision with which Friedman would have no doubt disagreed.

Most firms today have strong codes of ethical behavior in place, and they also conduct training programs designed to ensure that employees understand the correct behavior in different business situations. However, it is imperative that top management be openly committed to ethical behavior and that they communicate this commitment through their own personal actions as well as through company policies, directives and punishment/reward systems.

This course will focus on the rules that prescribe and proscribe our behavior before the Internal Revenue Service. Treasury Circular 230 governs ethical conduct of CPAs as well as attorneys, enrolled agents, enrolled actuaries, and enrolled retirement plan agents practicing before the IRS.


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Circular 230

Circular 230 was revised as of June 12, 2014 and consists of five subparts—A, B, C, D, and E.

Subpart A describes the rules governing authority to practice before the IRS, explains who is entitled to practice before the IRS, who is eligible to practice as an enrolled agent or enrolled actuary, and how one applies for enrollment. It also discusses limited practice before the IRS that is permitted in some circumstances.

Subpart B discusses the duties and restrictions relating to practice before the IRS including requirements to disclose information to the IRS, diligence as to accuracy, fee and solicitation restrictions, conflict of interest issues and standards for advising with respect to tax return positions. It also addresses practice of law issues and tax shelter opinions.

Subpart C provides sanctions for violations of Circular 230.

Subpart D sets forth detailed rules for the conduct of disciplinary actions and proceedings in connection with violations of Circular 230.

Subpart E contains miscellaneous procedural rules.

After completion of this course, you will have the information you need to fulfill the rules relating to ethical practice before the IRS.

“Practice before the Internal Revenue Service” is defined in Circular 230 §10.2(4). Anytime a practitioner corresponds with the IRS (in writing, by telephone, or face-to-face) regarding a taxpayer's rights, privileges, or liabilities under the Internal Revenue Code, he or she is practicing before the IRS. In addition, written federal tax advice provided to a client is considered practice before the IRS. The IRS is specifically interested in regulating advice regarding arrangements that have a potential for tax avoidance or evasion.

Notably, practice before the IRS also includes the preparation of tax returns. The preparation of a tax return does not require the filing of a power of attorney form.

If a person merely facilitates in an “exchange of information,” the IRS does not consider this act as practicing before the IRS. A non-practitioner may appear before the IRS as a witness or communicate to the IRS on a taxpayer's behalf.

For example, Mark speaks fluent Spanish. He accompanies his friend Paul, a Spanish speaker, to a meeting with the IRS in order to translate for him. Mark is not practicing before the IRS while acting as a translator.

Sec. 10.3 Who may practice

Attorneys

An attorney who is a member in good standing of the bar in the highest court of any state, possession, territory, commonwealth, or the District of Columbia may represent taxpayers before the IRS. An attorney is not permitted to represent a taxpayer while suspended or disbarred from practice before the IRS.

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CPAs

A certified public accountant who is licensed and qualified to practice in any state, possession, territory, commonwealth, or the District of Columbia may represent taxpayers before the IRS. A CPA is not permitted to represent a taxpayer while suspended or disbarred from practice before the IRS.

Enrolled Agents

An enrolled agent is a person who has applied (using Form 23, Application for Enrollment to Practice Before the Internal Revenue Service), paid a fee, taken an examination, and passed a compliance and suitability check. An enrolled agent must maintain a level of proficiency by completing continuing professional education. These individuals must not be engaged in any conduct that is in violation of Circular 230. Every three years an enrolled agent must renew his or her enrollment with the IRS. Enrolled agents, like attorneys and CPAs, have unlimited practice rights before the IRS.

Enrolled Actuaries

Any actuary who has been enrolled by the Joint Board for the Enrollment of Actuaries may practice before the IRS (as long as he or she has not been suspended or disqualified from doing so). Enrolled actuaries concentrate on representing clients on retirement plan issues. Their practice is limited to certain Internal Revenue Code sections, and the actuary must apply with the IRS to become enrolled utilizing Form 5434, Application for Enrollment. The actuary can be enrolled based on past experience without taking an enrollment examination.

Enrolled Retirement Plan Agents

Enrollment as a retirement plan agent is granted though written examination. An enrolled retirement plan agent is limited to representing taxpayers regarding retirement plan programs and IRS forms in the 5300 and 5500 series (forms filed by retirement plans and plan sponsors). Individuals file for enrollment under this title by utilizing Form 23-EP, Application for Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent.

Registered Tax Return Preparers

As a result of the Loving court case ruling which issued an injunction to prevent the IRS from requiring that anyone take an exam to be allowed to prepare an income tax return, the IRS and Treasury do not currently have jurisdiction over the non attorney, non CPA, or non EA. The IRS has appealed. All tax return preparers, including attorneys, CPAs, and enrolled agents are still required to obtain PTINS, but the status of the RTRP designation for the future is in question.

Practice Exercise

For each of the scenarios below, select which type of practitioner would most likely perform the action described.

Jonathan works for a firm that handles mergers and acquisitions. He is frequently asked to provide written advice on joint ventures and investments that may be viewed as off-balance-sheet financing. When providing these opinions, which cover actions for which the significant purpose is the avoidance of income taxes, Jonathan is governed by Circular 230 (even though he may never meet with an IRS agent on behalf of a client). Answer: Attorneys


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Patricia obtained a new client whose payroll company neglected to remit withheld payroll taxes for the first three quarters of the year. She files a power of attorney form with the IRS so that she can discuss a payment schedule. Answer: Enrolled Agents or CPAs

Patrick works for an investment broker and performs calculations for defined benefit plans on life expectancies. The IRS needs more information on a form that has been filed. Patrick is permitted to communicate with the IRS regarding this matter. Answer: Enrolled Actuaries

Perfect Products, Inc. is in danger of having the qualified status for its retirement plan revoked due to late payment and unauthorized distributions. The company feels that it can explain what occurred but would like representation at the IRS meeting from someone knowledgeable about retirement plans. Answer: Enrolled Retirement Plan Agents

Sec.10.7 Representing oneself; participating in rulemaking; limited practice; special appearances; and return preparation

With satisfactory identification, taxpayers may represent themselves before the IRS. Subject to certain limitations, an individual may represent a member of his or her immediate family. Any individual under suspension or disbarment from practice before the IRS may not engage in limited practice before the IRS.


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SELF-STUDY QUIZ

Determine the best answer for each question below. Then check your answers with the correct answers in the following section.

1. Which subpart of Circular 230 addresses the rules governing authority to practice before the IRS?

a. Subpart A.

b. Subpart B.

c. Subpart C.

d. Subpart D.

2. Which of the following individuals would not be subject to the rules contained in Circular 230 under the circumstances presented?

a. Doug is an attorney who prepares federal estate tax returns for his clients.

b. Amy is a recent accounting graduate who has been hired by a CPA firm. She meets with clients to prepare tax returns but does not sign the returns.

c. George is a CPA who contacts the IRS on behalf of a client regarding applying an overpayment of tax to another tax year.

d. Arnold is an enrolled agent who has written his client an e-mail about methods for reducing the client's overall tax bill for the year.


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SELF-STUDY ANSWERS

This section provides the correct answers to the self-study quiz. If you answered a question incorrectly, reread the appropriate material. (References are in parentheses.)

1. Which subpart of Circular 230 addresses the rules governing authority to practice before the IRS? (Page 4)

a. Subpart A. [This answer is correct. Subpart A describes the rules governing authority to practice before the IRS, and explains who is entitled to practice before the IRS.]

b. Subpart B. [This answer is incorrect. Subpart B discusses the duties and restrictions relating to practice before the IRS including requirements to disclose information to the IRS.]

c. Subpart C. [This answer is incorrect. Subpart C provides sanctions for violations of Circular 230.]

d. Subpart D. [This answer is incorrect. Subpart D details the rules for the conduct of disciplinary actions and proceedings in connection with violations of Circular 230.]

2. Which of the following individuals would not be subject to the rules contained in Circular 230 under the circumstances presented? (Page 4)

a. Doug is an attorney who prepares federal estate tax returns for his clients. [This answer is incorrect. Preparing the United States Estate Tax Return (Form 706) is an action that is governed by Circular 230. Preparing and filing documents, including tax returns, with the IRS for a taxpayer is considered practice before the IRS.]

b. Amy is a recent accounting graduate who has been hired by a CPA firm. She meets with clients to prepare tax returns but does not sign the returns. [This answer is correct. Amy is a supervised tax return preparer. She cannot represent taxpayers before the IRS because she has not obtained the qualifications of any of the practitioners who are permitted to represent taxpayers before the IRS.]

c. George is a CPA who contacts the IRS on behalf of a client regarding applying an overpayment of tax to another tax year. [This answer is incorrect. By contacting the IRS to discuss his client's tax liabilities, George is practicing before the IRS. His actions would be governed by Circular 230.]

d. Arnold is an enrolled agent who has written his client an e-mail about methods for reducing the client's overall tax bill for the year. [This answer is incorrect. As an enrolled agent, Arnold is permitted to practice before the IRS. Providing a client with written tax advice which has a potential for tax avoidance or evasion is considered practice before the IRS and would be governed by Circular 230.]


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Subpart B—Duties and Restrictions Relating to Practice Before the Internal Revenue Service

This subpart contains the rules that prescribe and proscribe our behavior before the IRS.

Sec.10.20 Information to be furnished to the IRS

If the IRS contacts the practitioner and requests information, the practitioner must promptly submit the requested records or information. The IRS request should come from an officer or employee that has been authorized to acquire such information. The only exception to obedience of this rule would be the belief that the records or information are privileged and should not be available to the IRS.

If the practitioner and client are not in possession of the requested items, the practitioner must promptly inform the IRS of this fact. The practitioner also needs to inform the IRS as to the person in control of the items after making inquiry of the client. The inquiry about the identity of the person holding the information is not required to extend beyond reasonable inquiry of the client. In other words, the practitioner does not have to contact any third parties or independently verify the client's response.

When requested by the IRS, the practitioner must provide any information he holds regarding a violation of regulations. The practitioner must testify at a hearing if requested, unless the practitioner believes that the information is privileged.

Interference with a Proper and Lawful Request for Records or Information

Practitioners may not interfere with a lawful effort by the IRS to obtain information unless the practitioner believes that it is privileged.

Note that 10.20 mandates submission of records “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.”

Sec. 10.21 Knowledge of client's omission

A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission.

The practitioner must also advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

Following this rule may be difficult if you are the one who made the error on a previous return. Admitting the error to the client is difficult, since the client paid you to accurately prepare the return. Everyone is human, however, and we all make mistakes. The important thing to remember is that we are ethically bound to let the client know about the error.

Although practitioners cannot inform the IRS of the error or amend a return on behalf of a client, if the client chooses not to do so, it is important to inform the client of the options for correcting the error as well as the ramifications of not correcting it. Of course, an admission like this may cost you a client or several hours of non-billable work when you amend the return for free. Your professional reputation, however, demands nothing less.


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Remember that there may also be favorable results for the taxpayer if deductions were not reported in full and an amended return will result in a cash refund for the taxpayer.

Sec. 10.22 Diligence as to accuracy

Tax professors always tell their new students to “go back to the code!” Although interpretations of the Code that have been prepared by others can contribute to understanding the Code, they are not the final authority. Practitioners should research the Internal Revenue Code and the interpretive regulations in order to understand the relevant points of the law. The IRS wants the practitioner to perform the necessary reading, study, and research to be satisfied as to the accuracy of the conclusions reached.

The IRS wants all practitioners to perform due diligence so that tax returns that are signed and filed are accurate as to the facts of the case and the current requirements of the Internal Revenue Code. Any documents filed with the IRS, not just tax returns, are covered under this provision.

The practitioner should also be accurate, up to date, and complete when making oral or written representations to both the Department of the Treasury and to clients.

Due diligence takes a somewhat different tack when referencing any reliance on others. The practitioner is expected to take very seriously the selection, training, and supervision of any employee or contractor that provides support for preparing documents related to any Internal Revenue Service matter or when making representations (oral or written) to the IRS or a client.

Sec. 10.23 Prompt disposition of pending matters

Circular 230 also prohibits any unreasonable delay in dealing with any tax matters. Any questions and requests from the IRS should be dealt with promptly. Many requests from the IRS include deadlines for a response. While deadlines can sometimes be extended, it is best to always reply in a timely manner.

Sec. 10.24 Assistance from or to disbarred or suspended persons and former Internal Revenue Service employees

When individuals have been disbarred from practice, the IRS will not allow those persons to represent tax clients before the IRS. These disbarred persons are not permitted to continue working in the same field by assisting other practitioners with projects relating to practice before the IRS. A practitioner must determine that workers have not been disbarred before employing them on IRS matters, either directly or indirectly.

Sec. 10.27 Fees

In general, no unconscionable fees may be charged by a practitioner related to a matter before the IRS.

Except as listed below, a practitioner may not charge a contingent fee. A contingent fee is one that is based on whether or not a position taken on a tax return or other filing avoids challenge by the IRS or will prevail in litigation with the IRS.

• A contingent fee may be charged for services related to an original return that has been challenged or is being examined by the IRS.

• A contingent fee may be charged for services related to an amended return or claim for refund or credit filed within 120 days of a written notice of an exam by the IRS.


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• A contingent fee may be charged when the claim only concerns interest and penalties.

• A contingent fee may be charged for services related to any judicial proceeding arising from the Internal Revenue Code.

AICPA guidance is found in ET Section 302 (and Interpretation) and they provide a listing indicating where contingent fees would be allowed.

The following are examples, not all-inclusive, of circumstances where a contingent fee would be permitted:

1. Representing a client in an examination by a revenue agent of the client's federal or state income tax return.

2. Filing an amended federal or state income tax return claiming a tax refund based on a tax issue that is either the subject of a test case (involving a different taxpayer) or with respect to which the taxing authority is developing a position.

3. Filing an amended federal or state income tax return (or refund claim) claiming a tax refund in an amount greater than the threshold for review by the Joint Committee on Internal Revenue Taxation ($2 million IRC 6405(a)) or state taxing authority.

4. Requesting a refund of either overpayments of interest or penalties charged to a client's account or deposits of taxes improperly accounted for by the federal or state taxing authority in circumstances where the taxing authority has established procedures for the substantive review of such refund requests.

5. Requesting, by means of "protest" or similar document, consideration by the state or local taxing authority of a reduction in the "assessed value" of property under an established taxing authority review process for hearing all taxpayer arguments relating to assessed value.

6. Representing a client in connection with obtaining a private letter ruling or influencing the drafting of a regulation or statute.

The following is an example of a circumstance where a contingent fee would not be permitted:

1. Preparing an amended federal or state income tax return for a client claiming a refund of taxes because a deduction was inadvertently omitted from the return originally filed.

2. There is no question as to the propriety of the deduction; rather the claim is filed to correct an omission.

Sec. 10.28. Return of client's records

When there is a disagreement over fees, many state laws do not allow the practitioner to retain the records in order to pressure the client for payment. In those states the records must be returned promptly.

In those states where the law allows the retention of records due to a fee dispute, the practitioner is only required to return the records which must be attached to the return when it is filed. The practitioner does not have to provide to the client any tax return, claim for refund, schedule, affidavit, appraisal, or any other document prepared by the practitioner if a fee is outstanding.


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Reasonable access must be allowed to the client to review and copy any additional records held by the practitioner. The practitioner must follow the state law or risk the imposition of a fine or even loss of a professional license. It would be better to arrange for adequate fees in advance.

Sec. 10.29 Conflicting interests

Practitioners cannot represent a client before the IRS if there is a conflict of interest. A conflict of interest exists when representing one client is damaging to another client or when a risk exists that the ability to represent a client will be limited by a practitioner's responsibilities to others. Even with a conflict of interest, the practitioner may represent a client if:

• he reasonably believes he can provide competent representation,

• there is no prohibition under law, and

• each client waives the conflict and gives informed consent in writing.

Any written consent must be kept for 36 months from the conclusion of representation of the involved clients and must be provided to the IRS if it is requested.

Sec. 10.30 Advertising and solicitation restrictions

No practitioner shall use any private or public solicitation containing statements that are false, fraudulent, or coercive. Statements must not be misleading or deceptive (e.g., “All of our clients receive refunds”).

Practitioners' use of solicitation of business must not violate federal or state law. If a solicitation can be made legally, then the communication must be clearly identified as a solicitation.

Practitioners are allowed to publish a schedule of their fees and include such standard items as hourly rates and standard items with fixed fees. For thirty days after the last publication of the rates, the practitioner cannot charge more than these published rates.

Fee information may be communicated by any method available and must not be misleading or deceptive. If radio and television are used for solicitation, the broadcast must be recorded and a copy must be retained by the practitioner for three years.

When direct mail and e-mail is used to send solicitations, a hard copy must be kept for three years, along with a list of the persons who were sent the information.

Enrolled agents and enrolled retirement plan agents may not use the term “certified” or imply an employer/employee relationship with the IRS. An example of an acceptable description is “enrolled to practice before the IRS”.

Sec. 10.31 Negotiation of taxpayer checks

If a check is issued to a client by the government related to the federal income tax, the practitioner is prohibited from endorsing or otherwise negotiating the check. Such prohibition was established because of crimes perpetrated by tax preparers who took refund checks for their own use. More elaborate schemes were developed including falsifying returns in order to generate larger refund checks to steal.


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Sec. 10.32 Practice of law

Circular 230 does not grant anyone the ability to practice law if he or she is not a member of the bar.

Sec. 10.33 Best practices for tax advisors

How does a professional perform due diligence? How can a practitioner protect against incurring sanctions and penalties? Circular 230 calls this gold standard of behavior “best practices.” A practitioner will find that implementing best practices will assist with providing the highest quality representation and service to clients. In addition to compliance with all of the standards of practice mentioned previously, best practices involve communicating clearly with the client, performing thorough research, advising clients of conclusions reached, and acting fairly and with integrity.

Communication

Following best practices means having an understanding with the client regarding the terms of the engagement. Practitioners should consider engagement letters for each service, including tax return preparation. Does the practitioner understand why the client is asking for the advice? What is the form and scope of the advice that will be provided or the service that will be performed? Establishing an understanding in the beginning not only helps to focus the practitioner's task, it provides liability protection should the client decide to claim that orally “agreed-upon” services were not provided.

Research

Best practices for research can be achieved by following FIRAC. FIRAC stands for:

• FACTS: Establish the facts; evaluate the reasonableness of any assumptions

• ISSUE: Determine which facts are relevant and at issue (What is the question that needs to be researched?)

• RULE OF LAW: Research the law

• ANALYSIS/ARGUMENT: Apply the law to the situation and weigh the authorities discovered in the research

• CONCLUSION: Arrive at a conclusion supported by the relevant facts

Advice

After establishing the facts and applying the tax results supported by the tax law, the practitioner should advise the client of the conclusion as well as the importance of the conclusion. What are the consequences of the conclusion? How will the conclusion affect the client's tax liability? Will a taxpayer be able to avoid an accuracy-related penalty if he or she acts on the advice provided?

Integrity

Practitioners must act with integrity, honor, honesty, and fairness in practice before the IRS.

In addition, when a tax advisor is responsible for the firm's tax practice, procedures should be established for all employees that result in everyone following the best practices.


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Competence

A practitioner must be competent. Competence is defined by Circular 230 as having the appropriate level of knowledge, skill, thoroughness, and preparation to represent the taxpayer. The practitioner does not need to have prior experience with the tax matter; he can become competent by consulting with experts or researching and understanding the law.

Exercise

You've been asked by a client to determine if a benefit provided to an employee should be taxable to that employee. Below are the actions that you’ve taken but they are out of sequence. Match each of the five FIRAC principles above to one of the five actions presented.

Facts: The gain or loss from the sale of the house would be long term because the house was inherited. Due to the fact that a loss occurred (the taxpayer sold her share to her brother for less than her basis), no depreciation recapture is required. The sale is to a related party.

Issue: IRC §1223(9) states that inherited property is considered to have been held for more than one year, regardless of the actual holding period in the hands of the person who acquired the property. IRC §1250 requires that depreciation taken on the house used as a rental property be recaptured. IRC §267(a) states that no deduction is allowed for a loss from the sale of any property between related parties. IRC §267(b) states that a brother is a related party.

Rule of Law: The taxpayer and her brother inherited a house from their mother. The house was used as a rental property. After nine months, the taxpayer sold her share to her brother for less than her basis on the estate tax return.

Analysis/Argument: The long-term capital loss that the taxpayer created by selling the property is disallowed because the sale was to a related party (her brother). There will be no tax consequences or benefits from the sale of the house by the taxpayer.

Conclusion: What is the tax consequence or benefit to the taxpayer on the sale of the house to her brother?

Answer

Facts: The taxpayer and her brother inherited a house from their mother. The house was used as a rental property. After nine months, the taxpayer sold her share to her brother for less than her basis on the estate tax return.

Issue: What is the tax consequence or benefit to the taxpayer on the sale of the house to her brother?

Rule of Law: IRC §1223(9) states that inherited property is considered to have been held for more than one year, regardless of the actual holding period in the hands of the person who acquired the property. IRC §1250 requires that depreciation taken on the house used as a rental property be recaptured. IRC §267(a) states that no deduction is allowed for a loss from the sale of any property between related parties. IRC §267(b) states that a brother is a related party.


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Analysis/Argument: The gain or loss from the sale of the house would be long-term because the house was inherited. Due to the fact that a loss occurred (the taxpayer sold her share to her brother for less than her basis), no depreciation recapture is required. The sale is a related party sale.

Conclusion: The long-term capital loss that the taxpayer created by selling the property is disallowed because the sale was to a related party (her brother). There will be no tax consequences or benefits from the sale of the house by the taxpayer.

Sec. 10.34 Standards with respect to tax returns and documents, affidavits and other papers

A practitioner cannot willfully, recklessly, or through gross incompetence sign a tax return or claim for refund that he knows or reasonably should know contains a position that: lacks a reasonable basis; an unreasonable position as described in section 6694(a)(2) of the Internal Revenue Code (including the related regulations and other published guidance); or is a willful attempt to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2) (including the related regulations and other published guidance).

Also, a practitioner cannot willfully, recklessly, or through gross incompetence, advise a client to take a position on a tax return or claim for refund containing a position described in the above paragraph. A practitioner cannot advise a client to take a frivolous position for submission to the IRS. A frivolous position is one that is lacking in substantial correctness or containing information that is knowingly incorrect.

Additionally, practitioners should not have the client submit a document solely designed to delay or impede the processing of the tax laws or to disregard a rule or regulation intentionally.

A practitioner must inform a client of penalties that may result from a tax position on which the practitioner advised the client or if the practitioner prepared or signed the tax return. For example, if a CPA takes an aggressive position on a tax issue for which the guidance is confusing, in dispute, or open to interpretation, the CPA should advise the client that the IRS may disallow the position. If the position is disallowed, the client could be subject to a penalty. In addition, the CPA should also inform the client that penalties may be avoided through adequate disclosure of the tax position on the return.

A practitioner advising a client to take a position on a tax return or other document submitted to the IRS, may generally rely in good faith without verification on information furnished by the client. However, the practitioner may not ignore the implications of information furnished, and must make reasonable inquiries if the information furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.

If the tax law or regulations impose a condition with respect to deductibility or other tax treatment of an item, such as taxpayer maintenance of books and records or substantiating documentation to support the reported deduction or tax treatment, a member should make appropriate inquiries to determine to the member’s satisfaction whether such condition has been met.

When preparing a tax return, a member should consider information actually known to that member from the tax return of another taxpayer if the information is relevant to that tax return and its consideration is necessary to properly prepare that tax return. In using such information, a member should consider any limitations imposed by any law or rule relating to confidentiality.


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Example

Angela, a CPA, prepares a tax return for a client who is a waitress. This waitress' W-2 reports no tip income, and the client has not kept a schedule of tips earned. When Angela asks the client about any tip income, the client responds, “It wasn't reported, so I'm not worried about it.” It's a frivolous tax position to contend that certain types of income (such as tip income) do not need to be reported to the IRS. Under the provisions of Circular 230, Angela is not permitted to sign this return without reporting the tip income.

Sec. 10.37 Requirements for written advice

If a CPA, attorney, or enrolled agent provides written advice (including via e-mail) regarding a federal tax issue, it must not be based on unreasonable factual or legal assumptions. The practitioner must not unreasonably rely on statements or findings from another person; he must consider all relevant facts. The advice should not be based on the possibility that the tax return will be audited.

A practitioner should ensure that the opinion or advice provided to the client is only for the client's use. If the practitioner knows or has reason to know that the advice will be used by another person or entity to evade or avoid any tax, the practitioner will be held to a higher standard of care. This type of written advice is called a “covered opinion.”

Covered Opinions

If a written opinion on a federal tax issue is provided to a client and it is considered a covered opinion, certain standards must be followed.

A covered opinion is written advice regarding one or more Federal tax issues in relation to:

• a transaction that is the same as or similar to a transaction that the IRS considers a tax avoidance transaction (these transactions are published under 26CFE 1.6011-4(b)(2));

• any plan or arrangement that has as its principal purpose the avoidance or evasion of any Federal tax; or

• any a plan or arrangement, the significant purpose of which is the avoidance or evasion of federal taxes and the advice is:

a reliance opinion (the advice concludes at a confidence level of at least more likely than not a greater than 50% likelihood that an issue will be resolved in the taxpayer's favor),

a marketed opinion (the advice will be used or referred to another to promote, market, or recommend an investment or arrangement to another taxpayer),

subject to conditions of confidentiality, or

subject to contractual protection

Disclaimer

To avoid written advice being classified as a marketed opinion, the IRS requires that the practitioner prominently disclose certain information. It is because of the Circular 230 rules that you often see a disclaimer (similar to the example below) after an e-mail sent by a tax professional.


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The requirements and standards for covered opinions are related in Circular 230 Section 10.35(c). It should come as no surprise that the standards are based on best practices and applying FIRAC (Facts, Issues, Rule of law, Analysis, Conclusion) to all opinions. A covered opinion must also contain certain disclosures, depending on the type of covered opinion.

Required IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we are required to notify you that this email is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This advice was written to support only the matter addressed by this advice. Each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.


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SELF-STUDY QUIZ


3. While Sandra Dee is preparing Dan Jay’s tax return she reviews his tax return from the previous year. During this review, Sandra, realizes that Dan deducted real estate taxes on Schedule A that he did not pay until this year. What is Sandra’s responsibility to Dan concerning this discovered error?

a. Sandra must issue a written statement to Dan; detailing the findings and recommendations along with the consequences the taxpayer would face should he choose not to make the correction to the return.

b. Sandra must inform Dan of the findings and recommendations along with the consequences the taxpayer would face should he choose not to make the correction to the return.

c. Sandra is obligated to inform the IRS if Dan chooses not to correct the error.

d. Sandra has no responsibility to Dan in this situation.

4. Per Sec. 10.22, a practitioner must exercise due diligence in all of the following situations except:

a. Filing tax returns.

b. Filing an amended tax return.

c. Tax planning.

d. Determining the accuracy of oral representations.

5. Which of the following statements regarding ethical accounting methods is correct?

a. A tax practitioner can refuse to return client records until the client pays the fee due.

b. A tax practitioner can charge his client any amount of fee to practice before the IRS.

c. A tax practitioner must assure prompt disposition of pending matters.

d. A tax practitioner may accept a client’s refund check as payment for tax preparation.


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6. Sally Ann, a tax practitioner, has prepared Mr. and Mrs. Smith’s joint tax return for years. This year when Mrs. Smith comes to her tax appointment, she tells Sally Ann that she and Mr. Smith are divorcing. Next week, Mr. Smith comes in to have his tax return prepared. What action should Sally Ann take?

a. Sally Ann should recommend that Mr. Smith seek the assistance of another tax preparer.

b. Sally Ann, when asked by Mr. Smith if Mrs. Smith was in this year, responds yes.

c. Sally Ann should not prepare either tax return until the divorce is settled.

d. Sally Ann can prepare both tax returns.

7. Which practitioner below is acting within the scope of Circular 230 Sec. 10.34 with respect to tax returns and documents, affidavits and other papers, and Sec.10.37 requirements for other written advice?

a. Cindy advises her client to submit a document to the IRS in order to delay them from acting.

b. Cathy informs her client of penalties that may reasonably apply to a position on a tax return signed by Cathy.

c. Christy thinks her client’s information appears to be incorrect, but relies in good faith without verifying the information.

d. Carmen sends her client an email with advice based on some legal future event assumptions.


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SELF-STUDY ANSWERS


3. While Sandra Dee is preparing Dan Jay’s tax return she reviews his tax return from the previous year. During this review, Sandra, realizes that Dan deducted real estate taxes on Schedule A that he did not pay until this year. What is Sandra’s responsibility to Dan concerning this discovered error? (Page 9)

a. Sandra must issue a written statement to Dan; detailing the findings and recommendations along with the consequences the taxpayer would face should he choose not to make the correction to the return. [This answer is incorrect. Sandra is not obligated to issue a written statement to Dan about the error. Sandra should document the situation in writing regardless of Dan’s choice to amend or not. The documentation should remain in Dan’s file.]

b. Sandra must inform Dan of the findings and recommendations along with the consequences the taxpayer would face should he choose not to make the correction to the return. [This answer is correct. Sandra is obligated to all of these actions. She does not need to inform Dan in writing. If Dan chooses not to correct the error, Sandra needs to inform Dan of the findings and recommendations along with the consequences he faces by choosing not to make the correction.]

c. Sandra is obligated to inform the IRS if Dan chooses not to correct the error. [This answer is incorrect. Sandra is not obligated to inform the IRS and may not do so without the taxpayer’s permission. It is the client’s responsibility to decide whether to correct the error.]

d. Sandra has no responsibility to Dan in this situation. [This answer is incorrect. Sec. 10.21 of Circular 230 describes the practitioner's responsibilities when he or she has knowledge of a client's omission.]

4. Per Sec. 10.22, a practitioner must exercise due diligence in all of the following situations except: (Page 10)

a. Filing tax returns. [This answer is incorrect. A practitioner must exercise due diligence when preparing and filing tax returns with the IRS.]

b. Filing an amended tax return. [This answer is incorrect. A practitioner is required to exercise due diligence when preparing and filing an amended tax return with the IRS.]

c. Tax planning. [This answer is correct. Tax planning does not require filing documents related to IRS matters.]

d. Determining the accuracy of oral representations. [This answer is incorrect. A practitioner must exercise due diligence in determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury.]


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5. Which of the following statements regarding ethical accounting methods is correct? (Page 10)

a. A tax practitioner can refuse to return client records until the client pays the fee due. [This answer is incorrect. If the client requests his records, a tax practitioner cannot refuse to return the records due to any dispute over fees. The practitioner should return the records promptly.]

b. A tax practitioner can charge his client any amount of fee to practice before the IRS. [This answer is incorrect. In general, a practitioner may not charge unconscionable fees in connection with any matter before the IRS.]

c. A tax practitioner must assure prompt disposition of pending matters. [This answer is correct. According to Sec. 10.23, a tax practitioner may not unreasonably delay the prompt disposition of any matter before the IRS.]

d. A tax practitioner may accept a client’s refund check as payment for tax preparation. [This answer is incorrect. Tax practitioners cannot negotiate a check issued to a taxpayer by the IRS and made in respect of income taxes.]

6. Sally Ann, a tax practitioner, has prepared Mr. and Mrs. Smith’s joint tax return for years. This year when Mrs. Smith comes to her tax appointment, she tells Sally Ann that she and Mr. Smith are divorcing. Next week, Mr. Smith comes in to have his tax return prepared. What action should Sally Ann take? (Page 12)

a. Sally Ann should recommend that Mr. Smith seek the assistance of another tax preparer. [This answer is correct. If Sally Ann is preparing Mrs. Smith’s tax return, due to conflicting interests, she should ask Mr. Smith to go elsewhere.]

b. Sally Ann, when asked by Mr. Smith if Mrs. Smith was in this year, responds yes. [This answer is incorrect. Sally Ann, as a tax preparer, is bound by law not to discuss advice she provided to anyone whether they were a client or not.]

c. Sally Ann should not prepare either tax return until the divorce is settled. [This answer is incorrect. Sally Ann can prepare Mrs. Smith’s return even though there is a divorce.]

d. Sally Ann can prepare both tax returns. [This answer is incorrect. Sally Ann cannot prepare both tax returns due to a conflict of interest between clients.]

7. Which practitioner below is acting within the scope of Circular 230 Sec. 10.34 with respect to tax returns and documents, affidavits and other papers, and Sec.10.37 requirements for other written advice? (Page 15)

a. Cindy advises her client to submit a document to the IRS in order to delay them from acting. [This answer is incorrect. When the purpose of which is to delay or impede the administration of the Federal tax laws, a practitioner may not advise a client to submit a document, affidavit or other paper to the IRS.]

b. Cathy informs her client of penalties that may reasonably apply to a position on a tax return signed by Cathy. [This answer is correct. A practitioner must inform a client of any penalties that are reasonably likely to apply to the client with respect to a position taken on a tax return if the practitioner prepared or signed the tax return.]


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c. Christy thinks her client’s information appears to be incorrect, but relies in good faith without verifying the information. [This answer is incorrect. Generally, a tax practitioner may rely in good faith without verification upon information furnished by the client. However, in this case, the practitioner may not ignore the implications of information furnished to the practitioner since the information appears to be incorrect. The practitioner should make reasonable inquiries concerning this information.]

d. Carmen sends her client an email with advice based on some legal future event assumptions. [This answer is incorrect. Electronic communications are included in written advice. A practitioner must not give written advice concerning one or more Federal tax issues if the practitioner bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events).]


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Subpart C - Sanctions for Violations of the Regulations

Sec. 10.50 Sanctions

Sanctions are penalties imposed by the Secretary of the Treasury (or that person's delegate). A practitioner can be sanctioned for willfully, recklessly, or through gross incompetence violating Circular 230 regulations. Sanctions are meant to punish a violation and to encourage better behavior in the future. The five types of sanctions that may be imposed, depending on the circumstances, are:

• reprimand,

• censure,

• suspension,

• disbarment,

• and monetary penalty.

The Office of Professional Responsibility (OPR) has the ability to work with the practitioner who is out of compliance and prevent full-blown disciplinary proceedings from ever occurring. Mitigating circumstances are often considered.

Reprimand

A reprimand is the least serious type of sanction. This letter is a private admonishment from the director of the OPR to the practitioner acknowledging the self-correction and warning the individual to remain compliant in the future. This penalty may be appropriate if the practitioner remedied the error prior to OPR's referral and investigation. For example, if an ill CPA failed to file his tax return by the extended due date, realized the omission, and then filed immediately, OPR would be tend to be more lenient with its sanction. The practitioner may continue to prepare tax returns and represent taxpayers before the IRS after receiving a reprimand.

Censure

Censure is a public reprimand. The practitioner receives a reprimand letter, and he or she is informed that the situation will be made public. OPR makes its censures public by publishing them in the IRS's Internal Revenue Bulletin. It also publishes all disbarments, suspensions, and resignations there.

Also remember that state boards, bar associations, the AICPA, and state CPA societies all communicate with OPR. Censure by the OPR can have other consequences imposed by these groups.

A practitioner who is censured may continue to prepare tax returns and represent taxpayers before the IRS; however, OPR may decide to subject the practitioner's representations in the future to certain conditions.

Suspension

Suspension is a revocation of a practitioner's privilege to represent taxpayers before the IRS for a certain period. The length of the period is dependent upon the severity of the misconduct. A panel of attorneys associated with OPR is involved in determining the appropriate time period.


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After the term of suspension, a practitioner may request to be readmitted to practice before the IRS. Compliance with Circular 230 regulations is essential to readmittance. For example, all tax returns must have been filed on time during the suspension period.

Disbarment

Disbarment, the most serious of the sanctions, is a permanent revocation of a practitioner's privilege to represent taxpayers before the IRS. “Permanent” is used loosely here, because the practitioner can petition the OPR for reinstatement after a period of five years. Compliance with Circular 230 regulations must be shown before readmittance will be considered. Disbarments are published in the Internal Revenue Bulletin.

Remember that a tax professional is forbidden from knowingly assisting a suspended or debarred individual from practicing before the IRS, or from accepting assistance from one of these individuals.

The IRS publishes suspensions and disbarments, so the practitioner is also subject to censure when suspended or disbarred. During suspension or disbarment, a practitioner is not permitted to practice before the IRS.

Forbidden during suspension or disbarment

If Gary, a CPA, is found to have violated a provision of Circular 230, the OPR may suspend him for a period of time. During that time, Gary may not prepare any tax returns or file any correspondence with the IRS. His PTIN will be revoked.

Even if he does not sign the advice or the advice is part of a larger document, Gary is not permitted to provide any written advice with respect to any entity, transaction, plan, or arrangement that has a potential for tax avoidance or evasion (a covered opinion).

Gary is unable to advocate for a taxpayer, even one he is assisting for no compensation, during a meeting, conference, teleconference, or hearing.

He may not file any power of attorney forms. This prohibition makes him unable to execute waivers, consents, or closing agreements; receive a taxpayer's refund check; or sign a tax return on behalf of a taxpayer.

Gary may not enlist the help of someone who is able to practice before the IRS to assist him in representing a taxpayer. Circular 230 prohibits “knowingly aiding and abetting another person to practice before the IRS during a period of suspension, disbarment, or ineligibility of such other person.” Circular 230 §10.51(a)(11)

His website must remove any mention of being an enrolled agent, enrolled retirement plan agent, or registered tax return preparer, and he may not hand out business cards that state or imply that he is eligible to practice before the IRS during the suspension.

Allowed during suspension or disbarment

The IRS will allow Gary to continue to represent himself as a taxpayer. He may also appear before the IRS in the role of a trustee, executor, or other fiduciary. If Gary is asked to provide information to the IRS or to appear as a witness, he is permitted to do so. Gary can attend a


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hearing with a taxpayer, but if he attempts to negotiate or advocate for the taxpayer at all, he will be in violation of his suspended status. Gary is also permitted to be named on Form 8821, Tax Information Authorization, to receive taxpayer information (but cannot use that information to represent the taxpayer before the IRS).

Monetary Penalty

Fines, or monetary penalties can be up to 100% of income derived from the misconduct, and they can be in addition to, or in lieu of, other sanctions. Monetary penalties are the only sanction available for firms. Firms can be held liable if the individual was acting on its behalf and the firm knew, or reasonably should have known, of the individual's conduct.

Individuals who are sanctioned with only monetary penalties may continue to prepare tax returns and represent taxpayers before the IRS.

Practice Exercise

Match each of the following penalty examples with its overall category of sanctions (reprimand, censure, suspension, disbarment, monetary penalty).

M.K., attorney, is not permitted to represent a taxpayer before the IRS for 50 months.

Suspension. If a practitioner is not permitted to practice before the IRS for a period of less than 5 years, this penalty is termed a suspension.

Employee R.H. is a member of the firm H.Q.K., P.C. R.H. is investigated by OPR, and HQK is ordered to pay $250.

Monetary penalty. One of the few penalties available to firms that should have known of an employee's actions is the monetary fine.

Ron Q. has lost his CPA license in Oklahoma. In addition to being disbarred, this fact is reported in the Internal Revenue Bulletin.

Censure. This question dealt not with the given punishment (disbarment) but with the corresponding public reprimand, or censure, of having his name published in the Internal Revenue Bulletin.

P.D., enrolled actuary, failed to timely pay his tax liability. He receives a letter from OPR letting him know that he violated Circular 230 regulations by failing to pay his tax due and that he has 60 days to remedy the situation. He also must remain compliant in the future

Reprimand. A private letter to the practitioner is considered a reprimand. It basically says, “Don't do it again.”


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SELF-STUDY QUIZ


8. Which of these statements regarding sanctions is correct?

a. Disbarment and monetary penalties are awarded together.

b. Practitioners who are suspended may continue to file tax returns.

c. Censure is enacted after a practitioner has been unsuccessfully suspended.

d. Individuals who have been disbarred may still request information regarding a taxpayer from the IRS.

9. While under suspension, a practitioner may not:

a. Act as a witness for a taxpayer at a hearing.

b. Leave his status as an enrolled agent on his website.

c. Consult with clients regarding taxes.

d. Attend a hearing with a taxpayer regarding a tax return that he prepared.


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SELF-STUDY ANSWERS


8. Which of these statements regarding sanctions is correct? (Page 25)

a. Disbarment and monetary penalties are awarded together. [This answer is incorrect. Monetary penalties, while available to the OPR, are mostly used for firms (which cannot be disbarred). A practitioner can be disbarred without having a monetary penalty assessed.]

b. Practitioners who are suspended may continue to file tax returns. [This answer is incorrect. While under suspension, the practitioner is not permitted to practice before the IRS.]

c. Censure is enacted after a practitioner has been unsuccessfully suspended. [This answer is incorrect. Censure is the publishing of discipline in the Internal Revenue Bulletin. Any practitioner who is suspended will automatically be censured. Censure can also occur if suspension has not been assigned.]

d. Individuals who have been disbarred may still request information regarding a taxpayer from the IRS. [This answer is correct. While it is true that the practitioner may not represent, or argue on behalf of, a taxpayer while disbarred, he may still request (and receive) information about a taxpayer with the taxpayer's permission.]

9. While under suspension, a practitioner may not: (Page 24)

a. Act as a witness for a taxpayer at a hearing. [This answer is incorrect. Acting as a witness at a hearing is still allowed, as long as the practitioner does not attempt to argue on behalf of the taxpayer.]

b. Leave his status as an enrolled agent on his website. [This answer is correct. The suspended practitioner must not advertise on his website that he is an enrolled agent (which implies the ability to represent taxpayers before the IRS).]

c. Consult with clients regarding taxes. [This answer is incorrect. As long as the practitioner does not provide a written covered opinion to his clients or prepare their tax returns, he can continue to provide consultations.]

d. Attend a hearing with a taxpayer regarding a tax return that he prepared. [This answer is incorrect. The practitioner may attend the hearing, but he may not advocate for or represent the client in any manner while under suspension.]


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Sec. 10.51 Incompetence and disreputable conduct

Misconduct related to the practitioner's own return

Any willful failure to file a Federal tax return (or not file according to Federal tax laws) is a breach of duty under Circular 230. Failing to pay taxes owed or attempting to evade any assessment of tax (which is different from lawfully lowering a tax liability) associated with a Federal tax return can bring about sanctions.

Misconduct while representing a taxpayer

When a practitioner assists, encourages, or counsels a client (or prospective client) to violate any Federal tax law or to adopt an illegal plan to evade Federal taxes, he is guilty of disreputable conduct under Circular 230. Failing to remit taxes escrowed for a client or enticing a client with deceitful advertising or statements would fall under this category as well. A practitioner is also forbidden from providing false or misleading information to the Department of Treasury in any form (on a tax return, financial statement, application for enrollment to practice before the IRS, or any written or oral statement).

This category also covers how the practitioner relates to the IRS when representing a client. Coercion, bribery, threats, false accusations and public statements, duress, publishing false information (libel), and abusive language are all forbidden.

When preparing a tax return, a practitioner is required to sign the tax return, keep tax information confidential, file electronically according to Federal tax law, and possess a valid preparer tax identification number (PTIN).

A practitioner is not permitted to represent a taxpayer before the IRS unless he is authorized to do so.

Circular 230 §10.51(a)(4) Giving false or misleading information to the Department of the Treasury

Circular 230 §10.51(a)(5) Solicitation of employment as prohibited under §10.30

Circular 230 §10.51(a)(7) Willfully assisting a client to violate Federal tax law

Circular 230 §10.51(a)(8) Misappropriation of or failing to remit taxes

Circular 230 §10.51(a)(9) Attempting to influence an officer or employee of the IRS

Circular 230 §10.51(a)(12) Contemptuous conduct in connection with practice before the IRS

Circular 230 §10.51(a)(14) Willfully failing to sign a tax return prepared by the practitioner

Circular 230 §10.51(a)(15) Willfully disclosing tax return information

Circular 230 §10.51(a)(16) Willfully failing to file electronically when required to do so

Circular 230 §10.51(a)(17) Willfully preparing a tax return or claim for refund without a PTIN

Circular 230 §10.51(a)(18) Willfully representing a taxpayer before the IRS when not authorized to do so


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Giving a false opinion

If a practitioner knowingly, recklessly, or through gross incompetence, provides a misleading or incompetent opinion to a client regarding Federal tax laws, she is guilty of disreputable conduct. Circular 230 defines reckless conduct as “a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances.”

Misconduct not directly involving IRS representation

Disreputable conduct includes conviction of any criminal offense under Federal tax laws or a conviction involving dishonesty or a breach of trust. In addition, Circular 230 broadly states that any felony conviction under Federal or state law could make the practitioner unfit to practice before the IRS.

If a CPA or attorney loses a license or is disbarred, he is not permitted to practice before the IRS. In fact, a practitioner governed by Circular 230 is not permitted to assist anyone else who has lost a license or has been disbarred to practice before the IRS.

Circular 230 §10.51(a)(1) Conviction of any criminal offense under the Federal tax laws

Circular 230 §10.51(a)(2) Conviction of any criminal offense involving dishonesty or breach of trust

Circular 230 §10.51(a)(3) Conviction of any Federal or State felony that renders the practitioner unfit

Circular 230 §10.51(a)(10) Disbarment or suspension from practice

Circular 230 §10.51(a)(11) Knowingly aiding and abetting another person who is suspended, disbarred, or ineligible to practice

To help you understand these concepts, review the following scenarios and choose the category under Circular 230 that best fits each situation. Each of these examples describes an actual OPR disciplinary case.

Scenario 1

M.B., a CPA in Oregon, lost his CPA license due to a conviction for the criminal offenses of bank fraud and money laundering. In his defense, M.B. stated that he was attempting to obtain a loan at a bank and was told by the loan officers to use the “average earnings for a CPA as posted on ‘Salaries.com’” as his income. M.B. prepared a pro forma tax return using the website income and submitted it as justification for obtaining the loan. He served prison time for this conviction.

After M.B. lost his license, he continued to represent himself as a CPA or retired CPA on documents submitted to the IRS, on the outside of his building, and to clients. As a result of his actions, M.B. was disbarred from practice before the IRS.

Answer

This is case study involving §10.51(a)(3): Conviction of any Federal or State felony that renders the practitioner unfit. M.B.'s crimes of fraud involved dishonesty and made him a poor representative for taxpayers. Additionally, another correct answer would have been Circular 230 §10.51(a)(10): Disbarment or suspension from practice. Because M.B. lost his professional license, he was not permitted to practice before the IRS.


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Scenario 2

J.B., a practitioner governed by Circular 230, advised a client that he was not liable for income taxes because the sixteenth amendment to the Constitution was “not ratified.” J.B. advised another client that his earnings were not considered a “source” of income under the Internal Revenue Code.

Answer

This is case study involving §10.51(a)(13): Giving a false opinion. J.B. should know that this tax advice is contrary to tax law, and his positions are illegal and fraudulent. The Sixteenth Amendment to the Constitution provides that Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration. There are those that argue that the sixteenth amendment does not authorize a direct non-apportioned income tax. This argument is a frivolous one that the IRS encounters frequently. The U.S. Supreme Court has upheld the constitutionality of the income tax laws enacted subsequent to ratification of the Sixteenth Amendment. It is a violation of tax law to refuse to pay income tax, and a tax practitioner that willfully encourages a client to do so is committing disreputable conduct. A practitioner cannot provide an opinion that knowingly misstates the law, assert a position that is known to be unwarranted under law, provide advice that encourages others to commit illegal conduct, conceal matters required by law to be revealed, or consciously disregard information that indicates the opinion is false or misleading. This section of Circular 230 discusses knowing misrepresentation, reckless conduct, and gross incompetence. The OPR will look at the pattern of conduct when determining the degree of misconduct.

Scenario 3

L.W. received two money orders from a client in order to negotiate an offer in compromise with the IRS. She altered the payee line of the money orders to include her name, and she negotiated them. She kept the cash and never filed the offer in compromise for her client. L.W. was disbarred from practice before the IRS.

Answer

This is case study involving §10.51(a)(8): Misappropriation of or failure to remit taxes. The money orders received from her client were made payable to the IRS, and the client's intent were that they be used to negotiate an offer in compromise. L.W. neither properly nor promptly delivered these funds to their intended destination. She breached her duty to her client in representation before the IRS, and she committed disreputable conduct.

Scenario 4

J.P., a CPA, willfully failed to file his own 1040 tax return for tax years 2007-2010; S Corporation Federal Income Tax Returns for his firm for 2008-2011; Form 940, Federal Unemployment Tax Returns for 2008-2011; and Form 941, Employer's Quarterly Federal Tax Returns, for 2008-2011. Also, in past years, several checks to the IRS for tax payments from J.P. were returned for insufficient funds. J.P. was disbarred from practicing before the IRS.

Answer

This is case study involving §10.51(a)(6): Willfully failing to make a Federal tax return. J.P.'s behavior reflects adversely on his fitness to practice before the IRS, and the prior nonpayment of taxes served as an aggravating factor in the OPR decision.


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Exercise

The following are laws under which tax professionals actually received criminal convictions (as published in the Internal Revenue Bulletins). Each individual received heavy sanctions for their misconduct. The specific examples in this exercise are fictional.

Match the action to the law. 18 U.S.C. §371, conspiracy to defraud the United States

• 18 U.S.C. §1341, mail fraud

• 18 U.S.C. §1957, money laundering

• 18 U.S.C. §1344, bank fraud

• 18 U.S.C. §1343, wire fraud

• 18 U.S.C. §513(a), forged securities

• 18 U.S.C. §201(c)(1)(B), bribery of a public official

Marcia, entrusted with check stock by several of her clients, used client checking account information to pay personal expenses through “e-check” and altered the bookkeeping records to disguise the purchases. 18 U.S.C. §1344, bank fraud

Carl promised a large refund to the mayor on his tax return if the mayor would “look the other way” regarding zoning issues for Carl's office. 18 U.S.C. §201(c)(1)(B), bribery of a public official

Simon, an attorney, assisted an individual imprisoned for drug trafficking with setting aside funds for the individual's family's use. 18 U.S.C. §1957, money laundering

John and Mark attempted to disguise campaign contributions on financial statements in order to evade the Federal Election Commission's reporting requirements. 18 U.S.C. §371, conspiracy to defraud the United States

Wanda was involved in twenty-three fraudulent IPOs (Initial Public Offerings) in which investors were solicited through the postal system. 18 U.S.C. §1341, mail fraud

Andrew created fake stock certificates in order to claim worthless stocks and a large loss on a client's Schedule D. 18 U.S.C. §513(a), forged securities

Pat made phone calls impersonating an IRS agent in order to obtain personal information that he could sell. 18 U.S.C. §1343, wire fraud

Case Studies

Darla, a CPA, expanded her public accounting practice to include a year-round payroll processing service. She required that the payroll tax obligations associated with each pay be electronically transferred to her firm's bank account. Darla's office would then remit those taxes to the government on or before the due date. Unfortunately, Darla's large gambling debts placed pressure on her to meet her own firm's obligations. She used money from the client


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escrow account to pay these, fully intending to replace the funds when she was able. Many of her clients' tax obligations were not paid. (§10.51(a)(8) Failing to remit funds received from a client)

Gerald, an enrolled agent, ran an advertisement in the local newspaper that used the term “certified” and implied he had an employment relationship with the IRS. In fact, he had no such relationship, and he failed to use an IRS-approved description of his status (such as “Enrolled to represent taxpayers before the Internal Revenue Service”). (§10.51(a)(5) Use of false or misleading representations with intent to deceive a client)

Mary, a CPA, prepared the corporate return for a local daycare. Mary's sister started a daycare in the same town. Thinking that she was helping her sister, Mary provided specific financial information to Mary from her client's tax return workpapers in order to help her sister judge her own financial progress. (§10.51(a)(15) Willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the IRC)

In order to disclose tax return information, a practitioner must have:

• a client's consent (ET 301.01),

• an order of a court of competent jurisdiction, or

• an order of an administrative law judge in an IRS disciplinary proceeding

Disclosure for purposes of a peer review or a review in association with a prospective purchase, sale, or merger of the practitioner's practice is permitted (the practitioner should have the prospective purchaser sign a confidentiality agreement).

The Internal Revenue Code provides monetary penalties of $250 for each unauthorized disclosure ($10,000 maximum), with possible criminal penalties (IRC §6713(a) and §7216). Circular 230 also classifies this conduct as incompetent and disreputable.

Did you notice that all three of those case studies are directly related to misconduct in working with clients? Darla misappropriated her client's funds that were meant to be used to cover federal tax obligations. Gerald solicited clients under false and misleading pretenses. Mary revealed her client's confidential tax information. Each of these behaviors can erode the public's trust in the practitioner. These are all considered disreputable conduct. Let's look at a few more case studies involving CPA misconduct covered by Circular 230.

Bob was an enrolled agent. His client pressured him to take a risky position on their tax return, and Bob was not willing to risk his status with the IRS over the client's return (should it ever be audited). Bob decided that he would not sign the tax return, and therefore would not be taking responsibility for the information on the return. (§10.51(a)(14) Willfully failing to sign a tax return prepared by the practitioner)

Amanda, a CPA, had a client that asked her to prepare a tax return that omitted a small amount of rental income. Amanda agreed. (§10.51 (a)(7) Willfully assisting a client to violate Federal tax law)

Carter, an attorney, made it his duty to know everything about the IRS agents who were assigned to his client's examinations. He was especially skilled at background checks and had a private investigator on retainer. Armed with this knowledge, in order to achieve the best possible result for his clients, Carter routinely brought up personal information regarding the agent's family or residence that made the agent uncomfortable during negotiations. (§10.51 (a)(9) Attempting to influence an officer or employee of the IRS)


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Prudence was contacted by the IRS regarding a client's return that she had prepared. This return claimed the earned income credit, but Prudence had not done due diligence when filling out the schedule. Now that the IRS was questioning her, Prudence stalled them by not returning calls, pretending to be her secretary when she did answer the phone, claiming that her office had caught on fire and all records were destroyed, and saying that the client had forged her name as preparer. (§10.51 (a)(4) Giving false or misleading information to the Department of Treasury)

Joe used his vast social network (both in person and on the Internet) to disparage an IRS agent involved in an audit with one of Joe's clients. The agent lived local to Joe, and they knew many of the same people. Joe let it “slip” in “confidential conversations” that the agent was behind on alimony and child support; was about to have his home foreclosed upon; and was in danger of losing his job. The intent of Joe's malicious statements was to intimidate the agent. (§10.51 (a)(12) Contemptuous conduct in connection with practice before the IRS)

In these last examples, we're still seeing cases of individuals who aren't complying with proper conduct with regard to their clients. Practitioners, such as Bob, are required to sign any tax return that's prepared for compensation. By agreeing to omit income from her client's tax return, Amanda helped her client violate Federal tax law. Both Carter and Joe bullied and threatened IRS agents in attempts to influence their behavior. Prudence knew the information she was providing to the IRS was false and misleading. Now, let's move on to discuss rules specific to tax preparers that have been added to Circular 230 in the past several years.

Joann had been preparing tax returns for about fifty clients out of her home on weekends and evenings for twenty years. She had received notices about the IRS changes to requirements for tax preparers, but she had not acted on them. She did not obtain a preparer tax identification number (PTIN), nor did she take the necessary steps to be able to e-file her client's returns. Joann figured that she would continue doing what she had been doing for clients, but she would mark all of the returns as “self prepared” in order to get around having to sign the returns as preparer.

In this example, Joann is preparing tax returns for clients for compensation. This act is considered practice before the IRS. Joann is not authorized to practice before the IRS because she has not obtained a PTIN, and she would be required to e-file the returns she is preparing (she has exceeded the threshold). In addition, if this client is contacted by the IRS regarding the return that Joann prepared, Joann would not be permitted to talk with an IRS agent. Her signature as return preparer would have allowed her limited representative rights for that return only; without it, she has no right to practice before the IRS. Any attempt for Joann to submit an affidavit on behalf of the client or to represent this client at a conference would be willful misrepresentation.

§10.51(a)(16) Willfully failing to file electronically when required to do so

§10.51 (a)(17) Willfully preparing a tax return or claim for refund without a PTIN

§10.51 (a)(18) Willfully representing a taxpayer before the IRS when not authorized to do so

Here are two of the earlier scenarios of disciplinary actions, which are still valuable.

Scenarios of Disciplinary Actions for Enrolled Agents From the Office of Director of Practice


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SCENARIO 1 A practitioner was engaged by a physician to prepare the physician's individual income tax return. When the physician delivered his records, he commented to the practitioner that he hoped he could take a substantial deduction for using his car in his practice. The practitioner did not ask for further substantiation and, on the tax return submitted to the IRS, deducted various automobile expenses: depreciation, insurance, maintenance, gas, and oil. When the tax return was audited, the physician explained to the IRS auditor that he considered his car to be used in his practice because he drove it between his home and office. Conclusion—False Statements Thereafter, the Director called the practitioner's attention to possible violations of Circular 230: lack of due diligence in preparing tax returns in violation of section 10.22(a); and giving false information to the Treasury Department in violation of section 10.51(a)(4). The practitioner asserted that he was entitled to place good faith reliance on his client's information. However, the practitioner could not cite any authoritative exception to the general rule that commuting expenses are not deductible. Consequently, the Director considered the practitioner to be in violation of section 10.51(a).

SCENARIO 2 A practitioner called an IRS revenue officer to discuss his client's case. The revenue officer, after listening to the practitioner's comments, stated that the client could still expect enforcement action. Whereupon, the practitioner said, ''How about my coming down there and jerking you around for a while?'' He added he ''would not mind kicking down the door.'' The revenue officer terminated the call and notified IRS' Inspection Service. Later in the day, the practitioner called back to apologize. Conclusion—Contemptuous Conduct The Director contacted the practitioner with regard to possible violations of Circular 230: attempting to influence an IRS employee's official action by use of a threat, a violation of section 10.51(a)(9), and contemptuous conduct consisting of abusive language, a violation of section 10.51(a)(12). In response, the practitioner offered little in the way of explanation, stating that he had simply lost his temper. The Director determined that the practitioner's statements constituted contemptuous conduct in violation of section 10.51(a)(12). Since this was the only such instance involving the practitioner in many years of IRS practice, and in view of the quick apology, the Director determined that a reprimand, with a warning as to future conduct, was the appropriate sanction.

Subpart D, Rules Applicable to Disciplinary Proceedings can be found in Circular 230. The illustrations of disciplinary actions stated above should give you a good picture of what is involved. Subpart D covers 10.60-10.82. Subpart E, General Provisions can also be found in Circular 230 and contains sections 10.90-10.93.


FQ10


SQ10


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SELF-STUDY QUIZ


10. Which of the following is considered misconduct that is directly related to the representation of a taxpayer?

a. Conviction of any criminal offense under Federal tax laws.

b. Disbarment from the state bar (for an attorney).

c. Willful attempts to evade the practitioner's own firm's Federal tax bill.

d. Using a racial slur to describe an IRS agent during a conference.


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SELF-STUDY ANSWERS


10. Which of the following is considered misconduct that is directly related to the representation of a taxpayer? (Page 34)

a. Conviction of any criminal offense under Federal tax laws. [This answer is incorrect. A practitioner can be sanctioned for this offense even if she is not representing a taxpayer. Circular 230 §10.51(a)(1)]

b. Disbarment from the state bar (for an attorney). [This answer is incorrect. An attorney who is eligible to practice before the IRS can lose this eligibility by losing his license to practice law. He does not need to be currently representing a taxpayer for the sanction to be imposed. Circular 230 §10.51(a)(10)]

c. Willful attempts to evade the practitioner's own firm's Federal tax bill. [This answer is incorrect. Willfully failing to make a Federal tax return in violation of the Federal tax laws, or willfully evading, attempting to evade, or participating in any way in evading or attempting to evade any assessment or payment of any Federal tax is disreputable behavior subject to sanctions. No client representation is necessary for sanctions to occur under these circumstances. Circular 230 §10.51(a)(6)]

d. Using a racial slur to describe an IRS agent during a conference. [This answer is correct. Contemptuous conduct in connection with practice before the IRS is forbidden, including abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter. Circular 230 §10.51(a)(12)]


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Appendix CTEC’s Tax Preparer Code of Conduct

It is the policy of CTEC to be sure CTEC Registered Tax Preparers (CRTPs) are aware of the Tax Preparer Code of Conduct and Responsibilities.

Background: In 1996 the California Legislature passed the Tax Preparers Act, Business and Professions Code 22250-22259, which regulates tax preparers. Those sections of the statute pertaining to tax preparer ethics, professional conduct, conduct regarding bonding and penalties for breaking the law are listed below.

A tax preparer is defined as “a person who, for a fee, assists with or prepares tax returns for another person or who assumes final responsibility for completed work on a return on which preliminary work has been done by another person, or who holds himself or herself out as offering those services.”

A tax return is defined as “a return, declaration, statement, refund claim, or other document required to be made or filed in connection with state or federal income taxes or state bank and corporation franchise taxes.”

The statute exempts the following:

• An individual with a current valid license issued by the California Board of Accountancy (and his or her employees while functioning within the scope of his or her employment).

• An individual who is an active member of the State Bar of California (and his or her employees while functioning within the scope of his or her employment).

• Some employees of a trust company or business as defined in the statute, a financial institution and employees thereof who are regulated as defined in the statute.

• Enrolled Agents (and their employees while functioning within the scope of their employment).

CTEC Registered Tax Preparers (CRTPs):

Must register as a tax preparer with the California Tax Education Council (CTEC).

Must maintain a $5,000 tax preparer bond issued by a surety company admitted to do business in California. A tax preparer shall provide to the surety company proof that he or she is at least 18 years of age before a bond can be issued.

Must identify to the surety company all preparers employed or associated with the tax preparer securing the bond. Must file an amendment to the bond within 30 days of any change in the information provided in the bond.

Must not conduct business without having a current surety bond in effect.

Must cease doing business as a tax preparer upon cancellation or termination of bond until a new bond is obtained.

Must furnish evidence of a current bond upon the request of any state or federal agency or law enforcement agency.

Must prior to rendering any tax preparation services, provide the customer, in writing, with the tax preparer’s name, address, telephone number, and evidence of compliance with the bonding requirement.


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Must not make fraudulent, untrue, or misleading statements or representations that are intended to induce a person to use their tax preparation services.

Must not obtain the signature of a customer on a tax return or authorizing document that contains blank spaces to be filled in after it has been signed.

Must not fail or refuse to give a customer a copy of any document requiring the customer’s signature, within a reasonable time after the customer signs. Must not fail to maintain a copy of any tax return prepared for a customer for four years from the later of the due date of the return or the completion date of the return.

May not engage in advertising practices that are fraudulent, untrue, or misleading, including assertions that the tax preparer bond in any way implies licensure or endorsement of a tax preparer by the State of California.

Must not violate provisions of Section 17530.5 or 7216 of Title 26 of the United States Code prohibiting tax preparers from disclosing any information obtained in the business of preparing federal or state income tax returns unless (1) consented to, in writing, by the taxpayer in a separate document; (2) expressly authorized by law; (3) necessary for the preparation of the return; and (4) pursuant to court order.

Must not fail to sign a customer’s tax return when payment for services rendered has been made.

Must not fail to return, upon demand by or on behalf of a customer, records or other data provided to the tax preparer by the customer.

Must not give false or misleading bond information to a consumer or give false or misleading information to a surety company in obtaining their tax preparer bond.

Must apply for their Certificate of Completion within 18 months after completing their 60 hours of qualifying education from an approved provider.

Must complete, on an annual basis, not less than 20 hours of continuing education from an approved curriculum provider (12 hours federal, 4 hours California, and 2 hours ethics and 2 hours of either federal or California).

According to California Business & Professions Code Section 22253.2, and California Revenue & Taxation Code Section 19167, when a person prepares a tax return, for a fee, without the appropriate lawful designation, the Franchise Tax Board, pursuant to an agreement with the California Tax Education Council, will do the following: (1) The amount of the penalty under the subdivision for the first failure to register is two thousand five hundred dollars ($2,500). This penalty shall be waived if proof of registration is provided to the Franchise Tax Board within 90 days from the date of notice of the penalty which is mailed to the tax preparer. (2) The amount of the penalty for a failure to register, other than the first failure to register, is five thousand dollars ($5,000).

Violators of other sections of the statute are guilty of a misdemeanor, which offense is punishable by a fine not exceeding $1,000, or by imprisonment in a county jail for not more than one year, or by both. If a CRTP fails to perform a duty specifically imposed upon him or her pursuant to this statute, any person may maintain an action for enforcement of those duties or to recover a civil penalty in the amount of $1,000, or for both enforcement and recovery.

The Superior Court, in and for the county in which any person acts as a tax preparer in violation of the provisions of this statute, may, upon a petition by any person, issue an injunction or other appropriate order restraining the conduct.


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Testing Instructions for Examination for CPE Credit Ethics for the Tax Professional (DERTG20)

1. Log on to our Online Grading Center at cl.thomsonreuters.com/ogs to receive instant CPE credit. Click the purchase link and a list of exams will appear. You may search for the exam by selecting Gear Up/Quickfinder in the drop-down box under Brand. Payment of $35 for the exam is accepted over a secure site using your credit card. Once you purchase an exam, you may take the exam three times. On the third unsuccessful attempt, the system will request another payment. Once you successfully score 70% on an exam, you may print your completion certificate from the site. The site will retain your exam completion history. If you lose your certificate, you may return to the site and reprint your certificate.

2. Please direct any questions or comments to our Customer Service department at (800) 323-8724.


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Examination for CPE Credit Determine the best answer for each question below.

1. Practice before the IRS is limited for which of the following?

a. Enrolled agents.

b. Enrolled actuaries.

c. Attorneys.

d. CPAs.

2. Which subpart of Circular 230 contains the rules that prescribe and proscribe our behavior before the IRS?

a. Subpart A.

b. Subpart B.

c. Subpart C.

d. Subpart D.

3. With regards to requests for records or information, according to Sec.10.20 of Circular 230, a practitioner:

a. Must submit the records if he “believes in good faith and on reasonable grounds that the records or information are privileged.”

b. Is never required to submit records or information in his custody.

c. Is always required to submit records or information in his custody.

d. Must submit the records unless he “believes in good faith and on reasonable grounds that the records or information are privileged.”

4. When can a practitioner charge a contingent fee for a matter before the Internal Revenue Service?

a. Never.

b. In connection with the Service’s examination of an original tax return.

c. In connection with the Service’s challenge to an amended return where it was filed within 90 days of the taxpayer receiving written notice of the challenge.

d. For preparation of an amended federal tax return claiming a refund of taxes due to a deduction being inadvertently omitted from the original filed return.

ppc

*


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5. In advertising her firm, Sally wanted to catch the attention of customers. Of the following phrases, which one would not be acceptable?

a. “Certified as an Enrolled Agent with the IRS.”

b. “Enrolled to represent taxpayers before the Internal Revenue Service.”

c. “Admitted to practice before the Internal Revenue Service.”

d. Enrolled to represent taxpayers before the Internal Revenue Service as a retirement plan agent.

6. Tom is considering using an engagement letter to provide his tax preparation clients with a higher quality of representation. To which best practice is Tom adhering?

a. Client advisement of conclusions reached.

b. FIRAC.

c. Clear communication regarding form and scope.

d. Fair practice, with integrity, before the IRS.

7. A client demands the return of all records and documents from an attorney even though the client has not paid the attorney’s fees. Under Circular 230 the attorney:

a. Must allow the client to photocopy the tax return.

b. Must return all client records that have to be attached to the return when it is filed, if required by state law.

c. Must provide an electronic copy of any appraisal that his office completed.

d. Should deduct the outstanding fees from the refund expected by the client so that the tax return can be filed.

8. Which of the following statements regarding OPR sanctions for Circular 230 violations is correct?

a. A practitioner may not apply for reinstatement if he is disbarred.

b. Monetary fines can be up to 100% of the income derived from the activity.

c. The length of disciplinary action that differentiates suspension from disbarment is six years.

d. A practitioner may avoid censure by accepting a suspension and issuing an apology.

ppc

*


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9. Which of the following is not a broad category of incompetent and disreputable conduct subject to sanctions under Circular 230?

a. Misconduct related to the practitioner’s own return.

b. Misconduct while representing a taxpayer.

c. Misconduct while acting in an official public capacity.

d. Misconduct not directly involving IRS representation.

10. Below are scenarios of individuals who engaged practitioners to prepare their individual income tax return. Each scenario describes activity on the practitioner’s part that could result in disciplinary action from the IRS. Which of the following might be considered contemptuous conduct by the IRS?

a. Threatening an IRS revenue office over the phone while discussing his client’s case.

b. Taking an automobile expense deduction of depreciation, insurance, maintenance, gas, and oil without asking for substantiation of the use of the vehicle.

c. Signing off on a tax return prepared by the practitioner’s employee who took a business trip deduction without inquiring into the nature of the trips or asking for more substantiation.

d. Cancelling five conferences with an IRS agent by voice mail the morning of the conference within five months due to “prior commitments” or “scheduling problems.”


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Glossary Adequate Disclosure – Sufficient revelation of facts or reasons for a position involving the preparation of a tax return.

American Institute of Certified Public Accountants (AICPA) – An organization head-quartered in New York whose members are certified public accountants. This organization provides educational and industry updates to the members. The AICPA is responsible for the administration of the CPA examination taken by individuals who wish to acquire the CPA credential.

Attorney – Any person who is a member in good standing of the bar of the highest court of any State, territory, or possession of the United States, including a Commonwealth or the District of Columbia.

Audits – An examination of a taxpayer’s books and records performed by the Internal Revenue Service.

CPA – Any person who is duly qualified to practice as a certified public accountant in any State, territory, or possession of the United States, including a Commonwealth or the District of Columbia.

Director of Office of Professional Responsibility – An individual assigned to enforce the rules and regulations for tax professionals.

Disbarred – To be deprived of the right to practice before the Internal Revenue Service—applies to an attorney’s loss of privileges to practice law as well.

Due Diligence – The practice of assuring correctness in tax preparation through thorough tax client interviews. Thoroughly completing the proper worksheet and forms will aid in assuring compliance.

Enrolled Actuary – A person who is enrolled by the Joint Board for the Enrollment of Actuaries. Enrolled actuaries are enrolled to practice in areas regarding pension plans. This classification was established in the Employment Retirement Income Security Act (ERISA) of 1974.

Enrolled Agent – A person who is qualified to practice before the Internal Revenue Service Enrolled agents have passed a two-day IRS examination or have worked in a technical area of the IRS for at least five years.

Ethics – Standards of conduct and moral judgment. The system of morals of an individual person.

Frivolous – Lacking in substantial correctness or containing information that is knowingly incorrect. An attempt to evade taxes.

Internal Revenue Code (IRC) – Legislation passed by Congress that specifies what income is to be taxed, how it is to be taxed, and what deductions may be taken from taxable income.

Internal Revenue Service (IRS) – The agency (which is a division of the Department of the Treasury) that is responsible for the administration and collection of federal taxes.


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Practice before the Internal Revenue Service – Comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayers rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service.” Practice includes, but is not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, and representing a client at conferences, hearings, and meetings.

Practitioner – An individual who practices a profession.

Professional Conduct – Competent, honest, and ethical behavior.

Realistic Possibility – A tax position is considered to have a realistic possibility of being sustained on its merits if the position has at least a one in three, or greater, likelihood of being sustained if challenged by the Internal Revenue Service.

Suspended Persons – An individual who has been ordered to cease practicing within the realm of the tax industry.

Tax Court – A judicial system designed specifically for tax laws.

Tax Preparer – One who prepares tax returns for individuals, companies, trusts, or non-profit organizations.

Tax Professional – One who prepares tax returns for individuals, companies, trusts, or non-profit organizations.


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Index


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C

Circular 230 ............................................................... 4 Circular 230, Subpart A ............................................. 4 Circular 230, Subpart B ......................................... 4, 9 Circular 230, Subpart C ............................................. 4 Circular 230, Subpart D ............................................. 4 Circular 230, Subpart E ............................................. 4 Conflicting Interests ................................................. 12 Contemptuous Conduct .......................................... 20

D

Diligence as to Accuracy ......................................... 10

E

Ethics Defined ........................................................... 2

P

Prompt Disposition of Pending Matters ................... 10

R

Representing Oneself ............................................... 6

S

Solicitation ............................................................... 12

ethics for the tax professional

Documents