Elements of Taxation

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Elements of Taxation
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Elements of Tax Practice
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Elements of Tax Practice

• Tax compliance
• Gathering of pertinent information, evaluation
• Evaluating and classifying the information
• Filing of necessary tax returns
• Representing clients before the IRS during tax
  return audits
• Tax planning
• Arranging transactions to optimize (usually
  minimize) tax liability
• tax avoidance legitimate
• tax evasion illegal
• Planning undertaken for
• open transactions plan for pending future
  transactions
• closed transactions plan for how to best
  present past transactions

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Elements of Tax Practice

• Tax litigation
• Settling disputes with the IRS in court
• Attorneys usually handle litigation beyond
  initial appeal of an IRS audit
• Tax research
• Analyze and determine answers to tax problems
• Steps
• Identify issues
• Determine proper authorities
• Evaluate appropriateness of authorities
• Apply authority to specific fact situation

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Sources of Rules and Ethics for Tax Practitioners
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Who May Practice

• Practice before IRS
• Represent clients during audits
• Who may practice
• Attorneys
• CPAs
• Enrolled agents
• Enrolled passed IRS exam or formerly employed
  by IRS for 5 years
• Enrolled actuaries
• Limited practice without enrollment

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Proposed Requirements for Tax Return Preparers

• Tax Return Preparers
• Must register with IRS, pay a fee, and obtain a
  preparer tax identification number (PTIN)
• Pass competency tests
• Continue education 15 hours per year
• Subject to tax compliance checks
• Must follow Circular 230 ethics standards

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Practice Before the IRS (Circ. 230)

• Circular 230 subpart B provides a set of rules of
  conduct, which includes
• Must furnish information to the IRS on request
• If have knowledge of clients omission, must
  advise client of both error and remedy
• Exercise due diligence
• Must not unreasonably delay matters before the
  IRS
• May not act as a notary public for clients
• May not charge contingent or unconscionable fees
• Must promptly return all client records upon
  request (but may keep copies of client records)

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Solicitation and Advertising (Circ. 230)

• Most media permissible
• Cannot contain false, fraudulent, coercive, or
  unfair statements
• Must comply with ethical standards of other
  authorities (e.g., ABA, AICPA, State CPA
  societies, state regulatory agencies, National
  Association of Enrolled Agents, etc.)

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Best Practices (Circ. 230)

• Aspirational standards to help tax advisors
  provide clients with the highest quality
  representation concerning Federal tax issues.
  Standards address
• Communications with clients
• Establishing relevant facts
• Evaluating reasonableness of assumptions
• Relating the law to the facts
• Arriving at supported conclusions
• Advising clients of the conclusions
• Acting fairly and with integrity before the IRS

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Positions and Covered Opinions (Circ.230)

• A practitioner should not recommend a position
  unless the position has a more-likely-than-not
  possibility of being sustained on its merits
• Strict standards for written communication
  encompassing a covered opinion
• A covered opinion is written advice that
  concerns
• A tax avoidance transaction
• A transaction where the principal purpose is tax
  avoidance or tax evasion
• Reliance or marketed opinion
• A transaction subject to confidentiality
  provisions
• A transaction subject to contractual protection

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Other Written Advice (Circ. 230)

• A practitioner should not give written advice
  that
• is based on unreasonable factual or legal
  assumptions (including assumptions as to future
  events
• unreasonably relies upon representations,
  statements, findings or agreements of the
  taxpayer or any other person
• does not consider all relevant facts that the
  practitioner knows or should know
• takes into account the possibility that the
  return will not be audited, that the issue will
  not be raised in an audit, or that an issue will
  be resolved through settlement if raised

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AICPA Code of Professional Conduct

• Governs AICPA members
• All services provided by CPAs
• Purpose is to provide
• Enforceable comprehensive code of ethical and
  professional conduct
• Guide for members in answering complex questions
• Assurance to the public
• Other guidance comes in the form of
• Interpretation of the rules
• Ethics rulings
• Ethics features
• Departures from this Code must be justified

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AICPA Code of Professional Conduct

• Independence (Rule 101)
• A CPA in public practice must be independent of
  enterprise for which services are being provided
• Independence is impaired if certain financial
  relationships exist with a client, e.g.
• Direct or material financial interest in clients
  business
• Jointly held material investments
• Loans to or from the client
• Officer, director, employee or underwriter of the
  client
• Integrity and objectivity (Rule 102)
• Services must be provided with objectivity and
  integrity and avoid conflicts of interest

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AICPA Code of Professional Conduct

• General standards (Rule 201)
• Competence
• Due professional care
• Adequate planning and supervision
• Obtain sufficient relevant data for conclusions
  or recommendations
• Compliance with standards (Rule 202) and
  accounting principles (Rule 203)
• No departures unless departure is described, its
  effect is described, and justification for
  departure is disclosed
• Confidential client information (Rule 301)
• No disclosure without client consent
• Exceptions
• Conflict with rules 202 and 203
• CPA served with subpoena or summons

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AICPA - Code of Conduct

• Contingent fees (Rule 302)
• Fees must not be contingent on findings of
  services (e.g., type of audit opinion)
• Acts discreditable (Rule 501)
• Committing a felony
• Failing to return client records after a client
  request
• Signing a false concern
• Issuing a misleading audit opinion
• Advertising and solicitation (Rule 502)
• Cannot use false, misleading, or deceptive
  advertising/solicitation

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AICPA - Code of Conduct

• Commissions and referral fees (Rule 503)
• Cannot receive a payment for referral of a
  product or service of a third party to a client
• Accepting payment would create conflict of
  interest
• Exception A CPA performing only tax work or
  other nonaudit work may accept a commission
• Form of organization and name (Rule 505)
• Form
• Only those forms allowed by state law or
  regulation, usually a proprietorship,
  partnership,or professional corporation
• Name
• Cannot use misleading name
• Acceptable to use past owners names

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Statements on Standards for Tax Services

• Statements on Standards for Tax Services (SSTS)
  issued by AICPA intended to
• Address problems inherent in the tax
  practitioners dual role in serving the client
  and the public
• Supplement AICPA Code of Professional Conduct and
  Circular 230

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Statements on Standards for Tax Services

• Tax return positions (SSTS 1)
• Should have good-faith belief that position has a
  realistic possibility of being sustained
• Answers to questions on returns (SSTS 2)
• Reasonable effort to obtain information to answer
  all questions
• Exceptions
• Data not readily available and not significant to
  the outcome of return
• Meaning of question uncertain
• Answer too voluminous
• Not acceptable on Form 1120
• Certain procedural aspects of preparing returns
  (SSTS 3)
• May rely on client information without
  verification unless information appears to be
  incorrect, incomplete, inconsistent
• Not required to examine supporting documents

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Statements on Standards for Tax Services

• Use of estimates (SSTS 4)
• Use estimates if impractical to obtain exact data
  and if estimates appear reasonable
• Disclosure of estimates may be necessary
• Records destroyed by disaster
• K-1s not received
• Departure from a position previously concluded in
  an administrative proceeding or court decision
  (SSTS 5)
• Prior year disposition may not prevent
  recommending a different treatment of a similar
  item in a later year
• CPA and IRS not bound to act consistently with
  previous position, IRS usually is consistent,
  however

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Statements on Standards for Tax Services

• Knowledge of error (SSTS 6)
• Must inform client upon discovery of an error in
  a previously filed return, an error in a return
  that is the subject of an administrative
  proceeding, or a taxpayers failure to file a
  required return
• Must recommend appropriate action
• Not the CPAs duty to inform tax authority
• Form and content of advice to clients (SSTS 8)
• Judgment reflects professional competence
• Use written communication for complex matters
• Oral communication okay for simple matters

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Sarbanes-Oxley and Taxation

• Auditors may not provide certain nonaudit
  services to audit clients
• Sarbanes-Oxley Act of 2002 lists nine such
  prohibited services
• List does not include tax services
• Services not listed may be provided
• But only if approved in advance by the audit
  committee

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Nonregulatory Ethical Behavior Models

• Nonregulatory ethics involve making choices that
  are not always clearly spelled out (resolving
  ethical dilemmas)
• Ethical reasoning
• End-based An action is right if it produces at
  least as much net good as any alternative action
  could have produced
• Rule-based Rules are made to apply to everyone
  with no exceptions
• Zero Tolerance
• Care-based Decisions based on the treatment you
  yourself would like to receive (Golden Rule)

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Sources of Ethical Behavior and Impacts
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Legal Research by CPAs

• When does undertaking tax research become the
  unauthorized practice of law?
• Different tests/standards across time
• Shouldnt be wholly within the field of law
• Should be incidental to accounting practice
• General rule CPAs should avoid providing general
  legal services