MSNA 2007 TAX AND INTERNATIONAL CONFERENCE NOVEMBER 13, 2007 SCOTTSDALE, ARIZONA PREPARER PENALTY PROVISIONS OF FEDERAL TAX LAW John L. Norman, Jr. for Mares Nichols CPE, Inc. TREASURY DEPARTMENT REGULATION OF TAX PRACTITIONERS CIRCULAR 230 AND PROPOSED AMENDMENTS STATUTORY PENALTIES OF INTERNAL REVENUE CODE IRC § 6694 AND SURROUNDING ISSUES IRS Form 2848, Power of Attorney and Declaration of Representative IRS Form 8275, Disclosure Statement IRS Form 8275-R, Regulation Disclosure Statement IRS Form 8886, Reportable Transaction Disclosure Statement IRS Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction AICPA STATEMENTS OF STANDARDS FOR TAX SERVICES 1 TREASURY DEPARTMENT REGULATION OF TAX PRACTITIONERS Learning Objectives: When you complete this module you will: 1. Know the sources of authority for Treasury Department regulation of tax practitioners 2. Know what a federally authorized tax practitioner can and cannot do with respect to tax practice issues such as return of clients’ records, contingent fees, supervision of assistants, tax return positions, etc. 3. Understand sanctions and penalties the IRS can bring to bear on a noncompliant practitioner. 4. Understand the provisions of IRC § 6694 and the interaction of its tax reporting standard with those of Circular 230 and AICPA SSTS # 1 Introduction The Office of Professional Responsibility (OPR) is the agency that interprets and applies Title 31, Code of Federal Regulations; Subtitle A, Part 10, “Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries and Appraisers before the Internal Revenue Service.” These regulations are generally known as “Treasury Department Circular 230,” or simply “Circular 230.” Circular 230 describes the government’s expectations, the rights, and the professional obligations of those who represent taxpayers before the IRS. Circular 230 applies only to a CPA’s Federal tax practice. Circular 230 regulations issued in July 2005 updated the general rules in Circular 230 and proposed regulations issued in 2006 answer the obvious need for regulations governing tax shelters. The new regulations set forth best practices for tax advisors providing advice to taxpayers relating to Federal tax issues or submissions to the IRS and modifies the standards for certain tax shelter opinions. The 2006 proposed regulations were finalized in September 2007, and new regulations were proposed on the tax return reporting position under IRC § 6694 and Circular 230 § 10.34(a) The OPR is also responsible for licensing enrolled agents and investigating allegations of misconduct and negligence brought against enrolled agents, attorneys, CPAs, or any other professional representing taxpayers before the IRS. In addition to Circular 230, the Internal Revenue Code imposes a variety of civil and criminal penalties on any “tax preparer” that fails to practice in accordance with the Code’s provisions. Requirements for recordkeeping, accuracy, diligence, treatment of taxpayer’s refunds, restriction on disclosure of tax return information, and a prohibition against aiding and abetting any understatement of tax are all part of the Code. Some of the monetary penalties for violation of the Code can be severe. The Code also includes a special provision – enacted in 1998 - that protects the confidentiality of communications concerning tax advice between Federally authorized tax practitioners and their clients, generally referred to as privileged communications. This Chapter is organized as an analysis of Circular 230, then privileged communications, and finally, tax preparer penalties. In this program, our focus will be on that last segment, tax preparer penalties. 2 Circular 230 Circular 230 regulates the practice of attorneys, CPAs, enrolled agents and actuaries before the IRS. For purposes of Circular 230, “practice” before the IRS covers all matters relating to any of the following. [Section 10.2 (d)] 1. Communicating with the IRS for a taxpayer regarding the taxpayer's rights, privileges, or liabilities under laws and regulations administered by the IRS. 2. Representing a taxpayer at conferences, hearings, or meetings with the IRS. 3. Preparing and filing necessary documents with the IRS for a taxpayer. Preparing a tax return, furnishing information at the request of the IRS, or appearing as a witness for the taxpayer is not practice before the IRS. These acts can be performed by anyone. • Who Can Practice Before the IRS Any of the following persons can practice, or represent a taxpayer, before the IRS. However, such representation must be documented with a written declaration, filed with the IRS, identifying the representative and providing information about the matter in which the representation is delegated. Form 2848, most recently revised in March 2004, is typically used for that purpose. 1. Attorneys - Any attorney who is not currently under suspension or disbarment from practice before the IRS and who is a member in good standing of the bar of the highest court of any state, possession, territory, commonwealth, or of the District of Columbia may practice before the IRS. [Section 10.3 (a)] 2. Certified Public Accountants (CPAs) - Any CPA who is not currently under suspension or disbarment from practice before the IRS and who is duly qualified to practice as a CPA in any state, possession, territory, commonwealth, or in the District of Columbia may practice before the IRS. [Section 10.3 (b)] 3. Enrolled Agents - Any enrolled agent in active status may practice before the IRS. [Section 10.3 (c)] 4. Enrolled Actuaries - Any individual who is enrolled as an actuary by the Joint Board for the Enrollment of Actuaries may practice before the IRS. The practice of enrolled actuaries before the IRS is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans. [Section 10.3 (d)] 5. Qualified Appraisers – Individuals who have relevant experience and a professional designation as appraisers. On October 19, 2006, the IRS released Notice 2006-96, 2006-46 IRB 902, which contains requirements that appraisers must meet pursuant to the Pension Protection Act of 2006, P. L. 109-280. These requirements appear to apply for purposes of Circular 230. 6. “Unenrolled” Return Preparers - Any individual other than an attorney, CPA, enrolled agent, or enrolled actuary who prepares a return for compensation must sign it as the return preparer, and is an unenrolled return preparer. An individual who prepares a return without compensation is not required to sign it, but is considered to be an unenrolled preparer none the less. Unenrolled return preparers are limited in their practice before the IRS in the following ways: a. An unenrolled return preparer may only represent the taxpayer with respect to a tax liability for the year or period covered by the return that he or she prepared. b. An unenrolled return preparer is only permitted to represent a taxpayer in an examination of the return by the IRS and is not permitted to represent taxpayers before Appeals, Collection, or any other division of the IRS. c. Unenrolled return preparers cannot provide any of these services to a taxpayer – d. Sign claims for refund. 3 e. Receive refund checks. f. Sign consents to extend the statutory period for assessment or collection of tax. g. Sign closing agreements regarding a tax liability. h. Sign waivers of restriction on assessment or collection of a tax deficiency. • Duties and Restrictions Relating to Practice Before the IRS An attorney, CPA, enrolled agent, or enrolled actuary authorized to practice before the IRS has a duty to do certain things and is restricted from doing other things. Further, a practitioner that engages in “disreputable conduct” is subject to disciplinary action. What constitutes “disreputable conduct” is explained later in this material. Unenrolled preparers must also comply with these rules of practice and conduct in order to exercise the privilege of limited practice before the IRS. 1. Information to be furnished [Section 10.20] Practitioners must promptly submit records or information requested by officers or employees of the IRS. Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner's client, the practitioner must promptly notify the requesting IRS officer or employee and must provide any information that she or he has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information. The practitioner must make reasonable inquiry of his or her client regarding the identity of any person who may have possession or control of the requested records or information, but is not required to make inquiry of any other person or independently verify any information provided by the client. When the OPR requests information concerning possible violations of the regulations by other parties, the practitioner must provide the information and be prepared to testify in disbarment or suspension proceedings. A practitioner is not required to produce documents in either case above if he or she believes in good faith and on reasonable grounds that the information requested is privileged or that the request is of doubtful legality. 2. Knowledge of client’s omission [Section 10.21] A practitioner who knows that his or her client has not complied with the revenue laws or has made an error or omission in any return, document, affidavit, or other required paper, has the responsibility to advise the client promptly of the noncompliance, error, or omission. Further, the practitioner must advise the client of the consequences as provided under the tax laws and regulations of such noncompliance, error, or omission. AICPA Statement on Standards for Tax Services # 6, Knowledge of Error: Return Preparation, goes into a great deal more detail on this point and should be read as a stronger ethical statement than Section 10.21 of Circular 230 4 3. Diligence as to accuracy [Section 10.22] A practitioner must exercise due diligence -- a. In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters; b. In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and c. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS. With respect to reliance on the work of others, a practitioner will be presumed to have exercised due diligence if he or she used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person. 4. Unreasonable Delay [Section 10.23] Practitioners may not unreasonably delay the prompt disposition of any matter before the IRS. 5. Assistance From or to Disbarred or Suspended Persons [Section 10.24] A practitioner may not, knowingly, directly or indirectly accept assistance from, or provide assistance to any person who is under disbarment or suspension from practice before the IRS if the assistance relates to a matter or matters constituting practice before the IRS. 6. Assistance from a former government employee [Section 10.25] A practitioner may not accept assistance from any former government employee where provisions of Treasury Department Circular No. 230 or any federal law would be violated. Generally, this means that a former government employee may not be engaged to work on any matter that she or he worked on in an official capacity while employed by the IRS or the Treasury Department. 7. Actions as a Notary [Section 10.26] A practitioner may not perform any official act as a Notary, with respect to any document or matter for which he is representing the client for whom the Notary act is done, before the IRS 8. Fees [Section 10.27] A practitioner may not charge an unconscionable fee for representing a client in a matter before the IRS, nor may a practitioner charge a contingent fee for preparing an original tax return or for any advice rendered in connection with a position taken or to be taken on an original tax return. A contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the IRS or is sustained either by the IRS or in litigation. A contingent fee includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client's fee in the event that a position taken on a tax return or other filing is challenged by the IRS or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect. 5 A contingent fee may be charged for preparation of or advice in connection with an amended tax return or a claim for refund (other than a claim for refund made on an original tax return), but only if the practitioner reasonably anticipates at the time the fee arrangement is entered into that the amended tax return or refund claim will receive substantive review by the IRS. 9. Return of Client’s Records [Section 10.28] A practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. The practitioner may retain copies of the records returned to a client. The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable state law allows or permits the retention of a client's records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the taxpayer's return. The practitioner, however, must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations. Records of the client include all documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner's representation of the client, that pre-existed the retention of the practitioner by the client. The term also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation. The term also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. The term does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner's firm, employees or agents if the practitioner is withholding such document pending the client's performance of its contractual obligation to pay fees with respect to such document. Your State Accountancy Rules probably list refusing to furnish copies of tax returns or other vital business records to a client upon request as “unprofessional conduct” for which the practitioner can be disciplined. 10. Conflicting Interests [Section 10.29] Except as provided in the exception explained below, a practitioner may not represent a client before the IRS if that representation would be a conflict of interest. A conflict of interest exists if the representation of one client will be directly adverse to another client; or there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client, a former client or a third person or by a personal interest of the practitioner. The practitioner may represent a client, even if there is a conflict of interest, only if: a. The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; 6 b. The representation is not prohibited by law; c. Each affected client gives informed consent, confirmed in writing, which the practitioner retains for two years after conclusion of the matter in which the consent is given. 11. Solicitation [Section 10.30] A practitioner may not use or participate in the use of any form of public communication or private solicitation containing a false, misleading, or deceptive statement or claim with regard to her or his tax practice. Examples of acceptable descriptions are "enrolled to represent taxpayers before the Internal Revenue Service," "enrolled to practice before the Internal Revenue Service," and "admitted to practice before the Internal Revenue Service." A practitioner may not make, directly or indirectly, any uninvited solicitation of employment in an IRS matter if the solicitation violates Federal or State law or ethical standards adopted by that profession. For example, attorneys may not engage in solicitation that is prohibited by conduct rules applicable to all attorneys in their State(s) of licensure. Any lawful solicitation made by or on behalf of a practitioner eligible to practice before the IRS must, nevertheless, clearly identify the solicitation as such and, if applicable, identify the source of the information used in choosing the recipient. A practitioner may publish the availability of a written schedule of fees and disseminate the following fee information -- a. Fixed fees for specific routine services. b. Hourly rates. c. Range of fees for particular services. d. Fee charged for an initial consultation. Any statement of fee information concerning matters in which costs may be incurred must include a statement disclosing whether clients will be responsible for such costs. If a fee schedule is published, the practitioner may charge no more than the rate(s) published for at least 30 calendar days following publication. A practitioner may not persist in attempting to contact a prospective client if the prospective client has made it known to the practitioner that he or she does not desire to be solicited. Recorded copies of radio and television commercials and copies of direct mail solicitations (together with a list of recipients) must be retained by the practitioner for a period of at least 36 months from the date of the last transmission or use. Your State Accountancy Regulations also are likely to prohibit advertising or soliciting that is false, fraudulent, etc. 12. Handling taxpayer’s refund checks [Section 10.31] A practitioner may not endorse or otherwise negotiate any refund check issued to the taxpayer. 13. Unauthorized Practice of Law [Section 10.32] Nothing in Circular 230 authorizes a non-lawyer to practice law. 7 14. Best Practices [Section 10.33] To ensure the integrity of the tax system, tax professionals should adhere to best practices when providing advice or assisting their clients in the preparation of a submission to the IRS. Section 10.33 describes the best practices to be observed by all tax advisors in providing clients with the highest quality representation. These best practices include: a. communicating clearly with the client regarding the terms of the engagement and the form and scope of the advice or assistance to be rendered; b. establishing the relevant facts, including evaluating the reasonableness of any assumptions or representations; c. relating applicable law, including potentially applicable judicial doctrines, to the relevant facts; d. arriving at a conclusion supported by the law and the facts; e. advising the client regarding the import of the conclusions reached; and f. acting fairly and with integrity in practice before the IRS. 15. Advising with respect to tax return positions and preparing tax returns [Section 10.34] A practitioner may not sign a return as preparer if she or he determines that a position taken within the returned does not have a “realistic possibility” of being sustained on its merits unless the position is not frivolous, and is adequately disclosed in the return. Neither may a practitioner advise a client to take a position in a return, or prepare a portion of a return unless: a. The practitioner determines that a position satisfies the realistic possibility standard; or b. The position is not frivolous and the client is advised of the opportunity to avoid the IRC § 6662’s accuracy-related penalty by adequately disclosing the position. WARNING: This discussion is focused on Circular 230, as presently in effect. However, IRC § 6694 was amended in May 2007, and the Treasury Department proposed revisions to Section 10.34 in September, 2007. These proposed changes are discussed later in this Outline. When advising a client to take a position on a return, or preparing or signing a return as preparer, a practitioner must inform a client of any penalties reasonably likely to apply to the client with respect to the position. The client must also be informed of any opportunity to of late in the penalty by disclosure and how to make appropriate disclosure. When advising clients with regard to tax return positions, or preparing or signing a return as preparer, practitioners may generally rely in good faith without verification upon information furnished by the client. However, the practitioner may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent, or incomplete. AICPA Statement on Standards for Tax Services #3, Certain Procedural Aspects of Preparing Returns, includes wording very similar to the preceding paragraph and two pages of explanation that should prove useful in understanding the practitioner’s responsibility to inquire about client representations. Treasury Regulation 1.6694-1(e) also addresses the need to inquire about client representations, using similar wording to that found in Circular 230 and the AICPA Standard, in the context of possible penalties against the preparer for negligence in preparation of a return. 8 A tax return position has a “realistic possibility” of being sustained on its merits if a reasonable and well-informed analysis by a person knowledgeable in the tax law would lead to the conclusion that the position has a one in three, or greater, likelihood of being sustained on its merits. Treasury Regulation 1.6662-4 (d) (3) (iii) describes authorities that may be taken into account when determining “realistic possibility” of successful a tax return position. A position is “frivolous” if it is clearly improper. Violations of this section that are willful, reckless, or a result of gross and competence will subject to practitioner to suspension or disbarment from practice before the Internal Revenue Service. AICPA Statement on Standards for Tax Services #1, Tax Return Positions, uses the same term “realistic possibility of success” and the same definition “a one in three, or greater, likelihood . . .” etc. The AICPA has provided extensive explanation and examples of how this rule is intended to work. Since Circular 230 does not include any examples, we should probably look to AICPA Standard #1 and Interpretation #1 for guidance on this important topic. 16. Standards for Certain Tax Shelter Opinions [Section 10.35 ] Prescribes requirements for practitioners providing more likely than not and marketed tax shelter opinions. A more likely than not tax shelter opinion is a tax shelter opinion that reaches a conclusion of at least more likely than not with respect to one or more material Federal tax issue(s). A marketed tax shelter opinion is a tax shelter opinion, including a more likely than not tax shelter opinion, that a practitioner knows, or has reason to know, will be used or referred to by another person who is promoting, marketing or recommending a tax shelter to one or more taxpayers. Requirements for Tax Shelter Opinions The requirements for all more likely than not and marketed tax shelter opinions include: a. identifying and considering all relevant facts and not relying on any unreasonable factual assumptions or representations; b. relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts and not relying on any unreasonable legal assumptions, representations or conclusions; c. considering all material Federal tax issues and reaching a conclusion, supported by the facts and the law, with respect to each material Federal tax issue; and d. providing an overall conclusion as to the Federal tax treatment of the tax shelter item or items and the reasons for that conclusion. Further, while a practitioner is not expected to identify and ascertain facts peculiar to a taxpayer to whom the transaction is marketed, the opinion must include disclosures which will put anyone reading the opinion on notice regarding any conditions or limitations. If a practitioner is unable to reach a conclusion with respect to one or more material Federal tax issues or to reach an overall conclusion in a tax shelter opinion, the opinion must say so. If the practitioner fails to reach a conclusion at a confidence level of at least more likely than not with respect to one or more material Federal tax issues, the opinion must include appropriate disclosures. 9 Clear disclosures are required to be made in the beginning of marketed tax shelter opinions, limited scope opinions, and opinions that fail to reach a conclusion at a confidence level of at least more likely than not. In addition, certain relationships between the practitioner and a person promoting or marketing a tax shelter must be disclosed. In some cases, more than one of the disclosures described below will be necessary. a. Referral and compensation agreements between a practitioner and a promoter must be disclosed. b. A practitioner must disclose that a marketed opinion may not be sufficient to protect a taxpayer from penalties under IRC § 6662(d), and must state that taxpayers should seek advice from their own tax advisors. c. A limited scope opinion must include disclosure that additional issues may exist that could affect the Federal tax treatment of the tax shelter addressed in the opinion, that the opinion does not consider or reach a conclusion with respect to those additional issues and that the opinion was not written, and cannot be used by the recipient, for the purpose of avoiding penalties under IRC § 6662(d) with respect to those issues outside the scope of the opinion. d. Opinions that fail to reach a conclusion at a confidence level of at least more likely than not must include disclosure that the opinion fails to reach a conclusion at a confidence level of at least more likely than not with respect to one or more material Federal tax issues addressed by the opinion and that the opinion was not written, and cannot be used by the recipient, for the purpose of avoiding penalties under IRC § 6662(d) with respect to such issues. 17. Procedures to Ensure Compliance [Section 10.36] Tax practitioners with responsibility for overseeing a firm’s practice (providing advice concerning Federal tax issues or preparing or assisting in the preparation of submissions to the Internal Revenue Service) are required to take reasonable steps to ensure that the firm’s procedure. A practitioner who has, or shares, principal authority and responsibility for overseeing a firm’s practice of providing advice concerning Federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect, consistent with the best practices described in Section 10.33, for all members, associates, and employees for purposes of complying with §10.35. A practitioner will be subject to discipline for failing to comply with the requirements of Section 10:36 if – a. Through willfulness, recklessness, or gross incompetence, she or he does not take reasonable steps to ensure that the firm has adequate procedures to comply with Section 10.35, and anyone in the firm engages in a pattern or practice of failing to comply with §10.35; or b. The practitioner knows or has reason to know that one or more individuals in the firm are, or have, engaged in a practice, in connection with their practice with the firm, that does not comply with §10.35 and, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance. 10 18. Advisory Committees on the Integrity of Tax Professionals [Section 10.37] Authorizes the Director of the OPR to establish one or more advisory committees composed of at least five individuals authorized to practice before the IRS. The purpose and function of the advisory committees is to review and make recommendations regarding professional standards or best practices for tax advisors, and to advise the Director whether a practitioner may have violated Section 10.35 or 10.36. 19. Actions for which a practitioner may be disciplined [Section 10. 51] The Secretary of the Treasury, or his or her delegate, after notice and an opportunity for a proceeding, may censure, suspend or disbar any practitioner from practice before the IRS if the practitioner is shown to be incompetent or disreputable, fails to comply with any regulation in this part, or with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. Censure is a public reprimand that will be disclosed to news media by the IRS. Suspension or disbarment will put the practitioner out of business. Incompetence and disreputable conduct for which a practitioner may be censured, suspended or disbarred from practice before the IRS includes, but is not limited to -- a. Committing any criminal offense under the revenue laws or committing any offense involving dishonesty or breach of trust. b. Knowingly giving false or misleading information in connection with federal tax matters, or participating in such activity. c. Soliciting employment by prohibited means as discussed in section 10.30 of Treasury Department Circular No. 230. d. Willfully failing to file a tax return, evading or attempting to evade any federal tax or payment, or participating in such actions. e. Misappropriating, or failing to properly and promptly remit, funds received from clients for payment of taxes. f. Directly or indirectly attempting to influence the official action of IRS employees by the use of threats, false accusations, duress, or coercion, or by offering gifts, favors, or any special inducements. g. Being disbarred or suspended from practice as an attorney, CPA, public accountant, or actuary, by the District of Columbia or any state, possession, territory, commonwealth, or any federal court, or any body or board of any federal agency. h. Knowingly aiding and abetting another person to practice before the IRS during a period of suspension, disbarment, or ineligibility (maintaining a partnership so that a disbarred person can continue to practice before the IRS is presumed to be a violation of this provision). i. Using abusive language, making false accusations and statements knowing them to be false, circulating or publishing malicious or libelous matter, or engaging in any contemptuous conduct in connection with practice before the IRS. j. Giving a false opinion knowingly, recklessly, or through gross incompetence; or following a pattern of providing incompetent opinions in questions arising under the federal tax laws. The OPR may reprimand or institute proceedings to suspend or disbar any attorney, CPA, or enrolled agent who the OPR has reason to believe violated the rules of practice. Except in certain unusual circumstances, the OPR will not institute a proceeding for suspension or disbarment against a practitioner until the facts or conduct which may warrant such action have been given in writing to that practitioner and the practitioner has been given the opportunity to demonstrate or achieve compliance with the rules. 11 Section 10.53 provides that if an officer or employee of the IRS has reason to believe that a practitioner has violated any provision of this part, the officer or employee will promptly make a written report to the OPR of the suspected violation. Proposed Regulations Modifying Circular 230 (February 8, 2006), Which Were Adopted as Final Guidance (September 25, 2007) and Proposed Regulation on Section 10.34 of Circular 230 (September 24, 2007) • Practice Before the Internal Revenue Service 1. The American Jobs Creation act of 2004 gave the Secretary of the Treasury new authority to impose standards for written advice rendered with respect to any transaction having a potential for tax avoidance or evasion. Section 10.2(a)(4) of the proposed regulations clarified that rendering of such written advice is practice before the IRS subject to Circular 230. This language is unchanged in the Final Regulation. 2. Practice by Former Government Employees, Of their Partners and Associates Section 10.25 of the proposed regulations is conformed to terminology used elsewhere in Federal statutes. Existing statutes, regulations, and codes of professional responsibility are adequate to protect against conflicts of interest. Section 10.25(b)(2) continues to prohibit former government employees who personally and substantially participated in a matter while in government service from participating in representation on the same matter while in private practice. The Final Regulation modified § 10.25(b)(4) by expanding the one-year ban on representation from “appear before any employee … “ to “communicate with or appear before, with the intent to influence any employee … “. The change is consistent with the scope of activities covered by 18 U.S. C. §§ 207(a) and (c). 3. Contingent Fees Believing that a broader prohibition against contingent fee arrangements is appropriate in light of concerns regarding attorney and auditor independence, the proposed regulations do not allow a practitioner to charge a contingent fee for services rendered in connection with any matter before the IRS, including preparation or filing of a tax return, amended tax return, or claim for refund or credit. In the Proposed Regulation, a contingent fee could be charged for services rendered in connection with: a. IRS examination of, or challenge to, an original tax return, or b. a judicial proceeding arising under federal tax law. This provision was heavily criticized by the tax bar and accounting firms. In response to the criticism, the IRS modified the contingent fee rule in Section 10.27 of the Final Regulation. A contingent fee may be charges for services rendered in connection with: a. IRS examination of, or challenge to, an original tax return; b. a judicial proceeding arising under federal tax law; c. an amended return or claim for refund where the amended return or claim is filed within 120 days of the taxpayer receiving written notice of the examination or written challenge to the original return; and d. a claim for credit or refund arising solely in connection with the determination of statutory interest or penalties assessed by the IRS. 12 In order to eliminate any adverse impact on pending or imminent transaction, the changes in Section 10.27 apply to fee arrangements entered into after March 28, 2008. 4. Tax Returns, Documents, Affidavits, and Other Papers Section 10.34 sets standards applicable to tax advice and return positions, including preparing and signing returns. The Proposed Regulations forbad a practitioner to advise a client to take a position on a submission to the IRS unless the position was not frivolous. Further, a practitioner could not advise a client to submit a document to the IRS that was meant primarily for delay, is frivolous or groundless, or contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation. After the Proposed Regulations were released, the Congress revised IRC § 6694, Understatement of Taxpayer’s Liability by Tax Return Preparer, effective for tax returns prepared after May 25, 2007. The reporting standard of revised IRC § 6694 is either (a) “more likely than not” or (b) disclosure and a “reasonable basis”. On June 11, 2007, the IRS released Notice 2007-54, 2007-27 IRB 1, providing guidance and transitional relief for the return preparer provisions under revised IRC § 6694. The standards with respect to tax returns under § 10.34(a) in these Final Regulations do not reflect amendments to the Code made by the Small Business and Work Opportunity Tax Act of 2007. Instead, the Treasury Department and the IRS reserved § 10.34(a) and (e) in these Final Regulations and issued a notice of proposed rulemaking proposing to amend this part to reflect these recent statutory amendments. Before discussing the proposed rulemaking, it is important to review the changes that are included in § 10.34 as finalized in these regulations. In a change from the Proposed Regulation, the language under § 10.34(b)(2)(iii) now provides that a practitioner may not advise a client to submit a document to the IRS that contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation unless the practitioner also advises the client to submit a document showing a good faith challenge to the rule or regulation. The Proposed Regulations issued on September 24, 2007, with respect to § 10.34 parallel the language of the February 8, 2006, Proposed Regulations while reflecting the statutory changes made by the 2007 Act. The following Table highlights the differences in §§ 10.34(a) and (e) in the 2006 and 2008 Proposed Regulations. 13 Proposed Regulation (February 8, 2006) Proposed Regulation (September 24, 2008) 10.34(a) Tax returns. A practitioner may not 10.34(a) Tax returns. A practitioner may not sign a tax return as a preparer if the sign a tax return as a preparer unless the practitioner determines that the tax return practitioner has a reasonable belief that the tax contains a position that does not have a treatment of each position on the return would realistic possibility of being sustained on its more likely than not be sustained on its merits merits (the realistic possibility standard) unless (the more likely than not standard), or there is a the position is not frivolous and is adequately reasonable basis for each position and each disclosed to the Internal Revenue Service. A position is adequately disclosed to the Internal practitioner may not advise a client to take a Revenue Service. A practitioner may not position on a tax return, or prepare the portion advise a client to take a position on a tax of a tax return on which a position is taken, return, or prepare the portion of a tax return on unless -- which a position is taken, unless -- (1) The practitioner determines that the position (1) The practitioner has a reasonable belief that satisfies the realistic possibility standard; or the position satisfies the more likely than not standard; or (2) The position is not frivolous. (2) The position has a reasonable basis and is adequately disclosed to the Internal Revenue Service. 10.34(e) Definitions. For purposes of this 10.34(e) Definitions. For purposes of this section -- section -- (1) Realistic possibility. A position is (1) More likely than not. A practitioner is considered to have a realistic possibility of considered to have a reasonable belief that the being sustained on its merits if a reasonable tax treatment of a position is more likely than person and well-informed analysis of the law not the proper tax treatment if the practitioner and the facts by a persona knowledgeable in analyzes the pertinent facts and authorities, the tax law would lead such a person to and based on that analysis reasonably conclude that the position has approximately a concludes, in good faith, that there is a greater one in three, or greater, likelihood of being than fifty-percent likelihood that the tax sustained on its merits. The authorities treatment will be upheld if the IRS challenges described in 26 CFR 1.6662-4(d)(3)(iii), or any it. The authorities described in 26 CFR 1.6662- successor provision, of the substantial 4(d)(3)(iii), or any successor provision, of the understatement penalty regulations may be substantial understatement penalty regulations taken into account for purposes of this may be taken into account for purposes of this analysis. The possibility that a tax return will analysis. not be audited, that an issue will not be raised on audit, or that an issue will be settled may not be taken into account. 14 (2) Reasonable basis. A position is considered to have a reasonable basis if it is reasonably based on one or more of the authorities described in 26 CFR 1.6662-4(d)(3)(iii), or any successor provision, of the substantial understatement penalty regulations. Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. The possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be settled may not be taken into account. (3) Frivolous. A position is frivolous if it is (3) Frivolous. A position is frivolous if it is patently improper. patently improper. To be consistent with Notice 2007-54, revised Proposed Regulation §§ 10.34(a) and (e) are proposed to apply to returns filed or advice provided on or after the date that final regulations are published, but no earlier than January 1, 2008. 5. Sanctions The American Jobs Creation Act of 2004 authorized the Treasury to impose a monetary penalty on any practitioner shown to be incompetent or disreputable, who fails to comply with any part of Circular 230, or defrauds, misleads, or threatens a client or prospective client. Monetary penalties apply only with respect to prohibited conduct that occurs after October 22, 2004. In Notice 2007-39, 2007-20 IRB 1274 (4/23/07) the IRS warned that monetary penalties will be limited only by the amount of the fee a practitioner receives for an engagement. If a penalty is applicable to any part of an engagement, the entire fee may be recovered as a monetary penalty. The Service may impose the monetary penalties in addition to or instead of suspension, disbarment, or censure. The representative’s employer or firm is also subject to monetary penalties if the employer or firm knew or had reason to know of the prohibited conduct. The amount of the monetary penalties may not exceed the gross income derived or to be derived) from the prohibited conduct giving rise to the penalties. 31 USC §330(b). The penalties may be imposed for a single act of prohibited conduct or for a pattern of misconduct. They may be imposed in addition to, or in lieu of, any suspension, disbarment, or censure of the practitioner. However, the Service does not view monetary penalties as a "bargaining point" that a practitioner may offer to avoid suspension, disbarment, or censure if these sanctions are otherwise appropriate. The Service may impose separate penalties against the practitioner and against the employer, firm, or other entity for any prohibited conduct. The IRS has discretion to impose a monetary penalty in an amount less than the amount allowed by statute. In determining the amount of the penalty (or penalties), the Service will consider the level of culpability of the practitioner, firm, or other entity; whether the practitioner, firm, or other entity violated a duty owed to a client or prospective client; the 15 actual or potential injury caused by the prohibited conduct; and the existence of aggravating or mitigating factors. The IRS said that, in general, it will not impose monetary penalties in cases of minor technical violations, when there is little or no injury to a client, the public, or tax administration, and there is little likelihood of repeated similar misconduct. The Final Regulations are substantially similar to the Proposed Regulations. However, there were two minor changes. The effective date was modified. In the Proposed Regulations the effective date would have been events occurring after the date that final regulations were published. The Final Regulations generally adopt that approach, but except “prohibited conduct” under § 1050(c), which would be effective that occurred after October 22, 2004. In addition, § 10.50(d) was added to provide that any sanctions imposed would take into account all relevant facts and circumstances. 6. Incompetence and Disreputable Conduct Section 10.51 of the Proposed Regulations modified the definition of disreputable conduct to include willful failure to sign a tax return prepared by the practitioner or the unauthorized disclosure or use of returns or return information.” The Final Regulation adopted these changes without modification. Confidentiality Privilege. Internal Revenue Code § 7525 extends a limited privilege of confidentiality to tax advice that is rendered to a current or prospective client by any federally authorized tax practitioner. IRC § 7525 does not modify the attorney-client privilege of confidentiality other than to extend it to Federally authorized practitioners other than attorneys. This privilege of confidentiality applies only to the extent that communications would be privileged if they were between a taxpayer and an attorney. For example, information disclosed to an attorney for the purpose of tax return preparation is not privileged, and would not to be privileged communication if disclosed to a certified public accountant, enrolled agent, or enrolled actuary. This limited the privilege of confidentiality may only be asserted in non-criminal tax proceedings before the IRS and in the federal courts with regard to non-criminal tax matters in proceedings where the United States is a party. It does not apply to prevent the disclosure of information to any other regulatory body such as the Securities and Exchange Commission or a state tax authority. No privilege of confidentiality is available for any written communication between any federally authorized tax practitioner and any director, shareholder, officer, employee, agent, or representative of a corporation in promotion of the direct or indirect participation of the corporation in any tax shelter, as defined in Internal Revenue Code § 6662(d)(2)(C)(iii). Federally authorized tax practitioners who intend to protect their communication with clients under this rule should use separate engagement letters and work paper files for all matters expected to be protected by the privilege of confidentiality. State law does not provide an equivalent to this privilege for State tax matters, nor does the federal privilege protect tax advice documentation from discovery by state authorities. 16 Tax Preparer Penalties Tax preparers are subject to a variety of civil and criminal tax penalties that range, on the civil side, from relatively small dollar amounts to substantial payments. The table below summarizes most of the civil penalties potentially applicable to tax preparers. Section 6694(a)--causing an Greater of $1,000 or 50% of fee for understatement of tax on a return understatement due to position that did not have a “more likely than not” possibility of success, was not disclosed, or was frivolous Greater of $5,000 or 50% of fee for willful understatement of liability, or reckless or intentional disregard of the rules or regulations Section 6695—failure to sign a return as a $50 for each failure with a maximum of preparer $25,000 Section 6695--failure to include the $50 for each failure with a maximum of preparer's identification number on the $25,000 return Section 6695—failure to provide the $50 for each failure with a maximum of taxpayer with a copy of the return. $25,000 Section 6107--failure to keep records of $50 for each failure with a maximum of returns prepared $25,000 Reg. Section 1.6060-1(a)(1)--failure to keep $50 for each failure with a maximum of records of preparers employed to prepare $25,000 returns. Section 6695(g)--Not using due diligence in $100 penalty for each failure to comply. determining a taxpayer's eligibility for the earned income credit Section 6695(f)--negotiating a taxpayer’s $500 for each check so negotiated. refund check Section 6713--improperly disclosing or using $250 for each improper disclosure. Maximum tax return information $10,000 Section 6701--aiding and abetting an $1,000 per violation for non-corporate return. Understatement of tax $10,000 for corporate returns. Section 6707—failure to furnish information Reportable transaction: regarding reportable transactions $50,000 Listed Transaction: $200,000 or 50% of Gross Income from transaction, whichever greater Section 6707A—Penalty for failure to Reportable transaction: include reportable transaction information $10,000 if a natural person with return ** $50,000 if any other taxpayer Listed Transaction: $100,000 if a natural person $200,000 if any other taxpayer ** One might argue that this is not a preparer penalty, and that is true. However, we listed it here because we are certain any client against whom such a penalty would be assessed, would look to the preparer for indemnification. 17 Internal Revenue Code § 6694, Understatement of Taxpayer’s Liability by Income Tax Return Preparer IRC § 6694(a) provides that a tax return preparer is subject to a penalty of the greater of $1,000 or 50% of the fee for each understatement of tax liability on a return or refund claim he or she prepares if the understatement is caused by a position that: 1. did not have a more likely than not of being sustained on its merits, 2. the preparer knew or should have known of the position, and 3. the position was not disclosed or was frivolous. Section 10.34 of Circular 230 provides that a preparer is also prohibited from signing a return that contains such a position that does not have a realistic possibility of success” . . . a lower standard than the new standard in IRC § 6694. This penalty is not imposed if the understatement is not frivolous and due to a reasonable cause. AICPA Statement on Standards #1 explains “realistic possibility” and disclosure in much the same way, but in more detail. IRC § 6694(b) provides that a penalty of the greater of $5,000 or 50% of the fee is imposed if a preparer willfully understates liability for a return or refund claim, or the understatement is caused by the preparer’s reckless or intentional disregard of rules or regulations. Both understatement penalties cannot be imposed with respect to the same return or claim, however. Instead, the $5,000 penalty is reduced by any $1,000 penalty imposed. The revised penalty structure of IRC § 6694 applies, statutorily, to returns prepared after May 25, 2007. However, Notice 2007-54, 2007-27 IRB 1 (June 11, 2007), grants transitional relief to: 1. all returns, amended returns, and refund claims filed before January 1, 2008 (determined with regard to any extension of time for filing), 2. 2007 estimated tax returns due on or before January 15, 2008, and 3. 2007 employment and excise tax returns due on or before January 31, 2008. The transitional relief is divided into two parts. • For income tax returns, amended returns and claims for refund, the standards set forth under prior law under IRC § 6694, including the disclosure standard of Forms 8275 or 8275-R, will apply. • For other returns, such as estate, gift, generation-skipping transfer tax, employment, and excise taxes, the reasonable basis standard of IRC § 6694 will be applied, without regard to the disclosure standard. The penalties associated with IRC § 6694 apply to anyone who is a return preparer. Regulation 1. 6694-1(b)(1) provides that no more than one person, however associated with a firm, is treated as a preparer of any one return. The signing preparer is treated as the sole preparer for these purposes if more than one person in a firm otherwise is a preparer. If two or more individuals associated with a firm are income tax return preparers with respect to a return or claim for refund, and none of them is the signing preparer, only one of the individuals is a preparer for this purpose. Regulation 1.6694-3(a)(2) states that the individual who is a preparer is the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim. An employer (including a sole proprietorship) or partnership of a preparer subject to either of the understatement penalties is also subject to penalty if: 18 1. One or more members of the principal management or officers of the firm or a branch office participated in or knew of the conduct leading to the penalty; 2. The employer or partnership failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or 3. The review procedures were disregarded in the formulating the advice or preparing the return or refund claim that included the position for which the penalty is imposed. The preparer generally may rely in good faith without verification upon information furnished by the taxpayer. Thus, the preparer does not have to audit, examine or review books and records, business operations, or documents or other evidence to verify independently the taxpayer's information. However, the preparer may not ignore the implications of information furnished to the preparer or actually known by the preparer. The preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. The preparer must inquire to determine whether a claimed deduction is supported by any facts and circumstances that the tax laws require as a condition to the claiming the deduction. For example, a preparer who knew that a corporation had borrowed money from and paid interest to its owner was required to inquire as to whether the owner had reported the interest income. This duty to inquire is also required by Circular 230, Section 10.34, and AICPA Standard #3. Here is a summary of the “signing standards” (for taxpayer and practitioner) as they exist as of June 30, 2007. IRC § 6662 (taxpayer) A) substantial authority or B) reasonable basis (one-in-three) and disclosure Old IRC § 6694 (practitioner) A) substantial authority or B) reasonable basis and disclosure New IRC § 6694 (practitioner) A) more likely than not (> 50%) or B) disclosure and not frivolous Treasury Circular 230 (as of September 2007) A) realistic possibility of being sustained on the merits (less than substantial authority, but stricter than reasonable basis) or B) disclosure and not frivolous Treasury Circular 230 (under September 2007 proposed changes) C) more likely than not (> 50%) or D) disclosure and not frivolous AICPA Statement 1 A) realistic possibility of being sustained on the merits or B) disclosure and not frivolous FASB FIN 48 A) more likely than not 19 The following is a listing of the possible (and perhaps generally accepted) definitions of these reporting standards and percentages: More likely than not > 50% Substantial authority Realistic possibility of being sustained on the merits Reasonable basis 33% Frivolous ? 10% < • More Likely Than Not Position An understatement penalty is imposed if the understatement is caused by a position that the taxpayer knew (or reasonably should have known) did not have a reasonable belief that the position would more likely than not be sustained on its merits, or that the position was not disclosed and there was no basis for the position. Regulation Section 1.6694-2(b)(1), which has not been amended since the 2007 revisions to IRC § 6694 discuss the “old law” language of “unrealistic position”. The regulation provides that a position is considered to have a realistic possibility of being sustained on its merits if a reasonable and well-informed analysis by a knowledgeable person would conclude that the position has approximately a one in three, or greater, likelihood of being sustained on its merits. A signing preparer may disclose a position on the form by simply reporting the transaction in accordance with the instructions and as explained in an annual revenue procedure (the most recent is Revenue Procedure 2006-48, 2006-47) or by filing Form 8275, Disclosure Statement or Form 8275-R, Regulation Disclosure Statement. The standard and procedures for disclosure are the same as imposed on the taxpayer under the accuracy-related penalty rules. A non-signing preparer is protected by either: 1. Disclosure by the taxpayer or 2. Advice (which may be in writing or oral, depending on the circumstances) by the non- signing preparer to the taxpayer to disclose. If a non-signing preparer provides advice to a taxpayer with respect to a position that does not satisfy the realistic possibility standard, disclosure of that position is adequate if the advice includes a statement that the position lacks substantial authority and, therefore, may be subject to the accuracy- related penalty unless adequately disclosed. If a non-signing preparer provides advice to another preparer with respect to a position that does not satisfy the realistic possibility standard, disclosure of that position is adequate if the advice includes a statement that disclosure is required. In each case, if the advice is in writing, the statement concerning disclosure also must be in writing; if the advice is oral, advice concerning the need to disclose also may be oral. The determination as to whether oral advice as to disclosure was in fact given is based on all facts and circumstances. Contemporaneously prepared documentation of the oral advice regarding disclosure generally is sufficient to establish that the advice regarding disclosure was given. • Reasonable Cause The IRC § 6694 penalty for understating tax caused by an “more likely than not” position on a return will not apply if the preparer shows that there is reasonable cause for the understatement and that he or she acted in good faith. Factors used to determine reasonable cause and good faith include: 20 1. Nature of the error. Whether the error causing the understatement resulted from a provision that was so complex, uncommon, or highly technical that a competent preparer reasonably could have made the error. The reasonable cause exception does not apply to an error that would have been apparent from a general review of the return or refund claim by the preparer. 2. Frequency of errors. Whether the understatement was the result of an isolated error rather than a number of errors. Although the reasonable cause exception generally applies to an isolated error, it does not apply if the isolated error is so obvious, flagrant or material that it should have been discovered during a review of the return or claim. 3. Materiality of errors. Whether the understatement was material in relation to the correct tax liability. The reasonable cause exception generally applies if the understatement is of a relatively immaterial amount. However, even an immaterial understatement may not qualify for the reasonable cause exception if the error or errors creating the understatement are sufficiently obvious or numerous. 4. Preparer's normal office practice. Whether the preparer's normal office practice, when considered together with other facts and circumstances such as the knowledge of the preparer, indicates that the error in question would rarely occur and the normal office practice was followed in preparing the return or claim in question. 5. Reliance on advice of another preparer. The reasonable cause exception applies if the preparer relied in good faith on the advice of another preparer that the preparer reasonably believed was competent to render the advice. A preparer is not considered to have relied in good faith if the advice is unreasonable on its face or the preparer knew or should have known that the other preparer was not aware of all relevant facts or that the advice was no longer reliable due to developments in the law since the time the advice was given. The advice may be written or oral, but in either case the burden of establishing that the advice was received is on the preparer. • Willfulness, Recklessness, or Intentional Disregard If a preparer willfully understates the tax liability in a return or refund claim, he or she is liable for a minimum penalty of $5,000 for the return or claim. The penalty also applies to any understatement of liability caused by the preparer’s reckless or intentional disregard of rules or regulations. The amount of the penalty is reduced by the amount any penalty paid because the understatement was caused by an unrealistic position. A preparer has acted willfully if he or she deliberately disregards information provided by the taxpayer in an attempt to understate the taxpayer’s tax liability. A preparer recklessly or intentionally disregards a rule or regulation if he or she takes a position on the return or refund claim that is contrary to a rule or regulation that the preparer knows of or is reckless in not knowing of. A preparer is reckless in not knowing of a rule or regulation if the preparer makes little or no effort to determine whether a rule or regulation exists when a reasonable preparer would make such an effort in that situation. A preparer is not considered to have recklessly or intentionally disregarded a rule or regulation if the position contrary to the rule or regulation is not frivolous and is adequately disclosed. The rules on adequate disclosure are substantially similar to rules on adequate disclosure for the penalty for taking an unrealistic position. See Regulation 1.6694-3(e). For a position contrary to a regulation, the position must also be a good faith challenge to the validity of the regulation. For a position contrary to a revenue ruling or notice, other than a notice of proposed rulemaking, published in the Internal Revenue Bulletin, a preparer is not considered to have recklessly or intentionally disregarded the ruling or notice if the position has a realistic possibility of being sustained on its merits. For these purposes, a rule or regulation includes the Code, temporary or final regulations issued under the Code, and revenue rulings or notices, issued by the IRS and published in the Internal Revenue Bulletin. 21 • Aiding and Abetting Understatements Any person who aids or assists in, or gives advice concerning, the preparation or presentation of any portion of a return, affidavit, claim, or other document, with the knowledge that the portion, if submitted, will create an understatement of the tax liability of another person is liable for a penalty for each document that the person helps in preparing. The penalty also applies when a person orders a subordinate to act in a manner that violates this provision or when a person knows that a subordinate will violate this provision and does not attempt to prevent the violation. IRC § 6701. However, a person who provides only mechanical assistance for a document, such as typing or photocopying, does not aid or assist in the preparation of the document. The penalty applies regardless of whether the taxpayer was aware of, or consented to, the document that causes the understatement. The penalty is $1,000 per violation with regard to a return or document concerning a taxpayer other than a corporation, and $10,000 with regard to a return or other document concerning the tax liability of a corporation. The penalty applies only once for assistance given to a taxpayer for a specific tax period regardless of the number of documents prepared that cause an understatement for that tax period. The classic example of how this penalty can snowball is the situation in which an accountant actively participated in a scheme to understate wages taken by the shareholders of a corporation. The scheme involved taking cash from the register, underreporting sales for that day, and never reporting the payments. The IRC § 6701 penalty was assessed at $10,000 on each 941 that underreported wages and $1,000 on each Form W-2. Tax Shelter Penalties Every taxpayer that has participated in a reportable transaction must disclose such participation by attaching a disclosure statement to its tax return. This rule is implemented by two sets of regulations. Regulation 1.6011-4 was effective February 28, 2003, and is applicable to transactions entered into on or after February 28, 2003. For transactions entered into on or after January 1, 2003, and before February 28, 2003, taxpayers may follow these regulations, or may follow the rules that apply to transactions entered into before February 28, 2003, which are set forth in Temporary Regulation 1.6011-4T in effect prior to February 28, 2003. A taxpayer required to file a disclosure statement must file a completed Form 8886, Reportable Transaction Disclosure Statement. Reportable transactions entered into on or after January 1, 2003, and prior to February 28, 2003, for which the taxpayer does not choose to apply the regulations effective February 28, 2003, may be disclosed either on Form 8886 or as provided in Temporary Regulation 1.6011-4T(c). The disclosure statement for a reportable transaction must be attached to the taxpayer's Federal income tax return for each tax year for which the taxpayer's Federal income tax liability is affected by the taxpayer's participation in the transaction. In addition, for transactions entered into on or after December 29, 2003, the disclosure statement for a reportable transaction must be attached to each amended return that reflects a taxpayer’s participation in a reportable transaction. At the same time that any disclosure statement is first attached to the taxpayer's Federal income tax return, the taxpayer must file a copy of that disclosure statement with the Office of Tax Shelter Analysis (OTSA) at: Internal Revenue Service LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111 Constitution Ave., NW., Washington, DC 20224. 22 If a transaction becomes a listed transaction after the filing of the taxpayer's final return (including an amended return) reflecting the tax benefits from the transaction but before the end of the statute of limitations period for that return (whether or not already filed), the taxpayer must file a disclosure statement as an attachment to the tax return next filed after the listing of the transaction, regardless of whether the taxpayer participated in the transaction in that year. If a transaction becomes a loss transaction because the losses equal or exceed the threshold amounts, a disclosure statement must be filed as an attachment to the taxpayer's return for the first tax year in which the threshold amount is reached and to any subsequent tax return that reflects any amount of the requisite loss from the transaction. A taxpayer that fails to include any required information with respect to a reportable transaction is subject to a penalty of $10,000 in the case of a natural person, or $50,000 in any other case, increased to $100,000 and $200,000 in the case of a listed transaction Any material advisor who fails to file an information return, or who files a false or incomplete information return, with respect to a reportable transaction is subject to a penalty of $50,000, in the case of a reportable transaction other than a listed transaction, or, in the case of a listed transaction, the greater of $200,000 or 50 % of the gross income of the material advisor with respect to aid, assistance, or advice that is provided with respect to the listed transaction before the date the information return that includes the transaction is filed. A listed transaction for this purpose is a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the IRS as a tax avoidance transaction. Intentional disregard by a material advisor of the disclosure requirement increases the penalty to 75 percent of gross income. 23 A taxpayer that fails to include any required information with respect to a reportable transaction is subject to a penalty of $10,000 in the case of a natural person, or $50,000 in any other case, increased to $100,000 and $200,000 in the case of a listed transaction Any material advisor who fails to file an information return, or who files a false or incomplete information return, with respect to a reportable transaction is subject to a penalty of $50,000, in the case of a reportable transaction other than a listed transaction, or, in the case of a listed transaction, the greater of $200,000 or 50 % of the gross income of the material advisor with respect to aid, assistance, or advice that is provided with respect to the listed transaction before the date the information return that includes the transaction is filed. A listed transaction for this purpose is a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the IRS as a tax avoidance transaction. Intentional disregard by a material advisor of the disclosure requirement increases the penalty to 75 percent of gross income. AICPA STATEMENTS ON STANDARDS FOR TAX SEVICES Learning Objectives When you complete this module you will: 1. Know who and what is subject to the Standards and their Interpretations 2. Know the ethical guidance that is provided by the Statements on Standards for Tax Services 3. Know how the Standards relate to your State Accountancy Regulations, Treasury Circular 230, and the Your State Association of CPAs Code of Professional Conduct 4. Be prepared to apply the Standards in your tax practice Introduction The Standards began as advisory Statements on Responsibilities in Tax Practice that were introduced over forty years ago. The intervening years saw the original Statements codified in 1976 and revised three times: in 1977, 1982, and 1991. During those years the Statements came to represent, to much of the legal and regulatory community, an enforceable “standard of care” for CPAs performing tax services. In 1999, the AICPA’s Governing Council approved designating the Tax Executive Committee as a standard-setting body authorized to promulgate standards of tax practice. The Standards, developed from the Statements, became effective October 31, 2000. The Standards apply to an AICPA member’s entire tax practice – state, local, Federal, and international. Since the Standards and their precursor, the Statements, are widely accepted as establishing a “standard of care” for CPAs performing tax services, a plaintiff’s attorney would probably argue that you are subject to them whether you are a member of the AICPA or not. The Standards and Interpretations There are eight adopted Standards and two Interpretations, both of which relate to Standard Number 1, Tax Return Positions. A ninth Standard was proposed, but has been withdrawn. Each Standard is presented with an “Introduction, Statement, and Explanation.” The Interpretations contain “Background, General Interpretation, and Specific Illustrations.” The outline that follows is a summary of the most important point or points in each Standard and Interpretation. You should read those documents in their entirety, however, to gain a thorough working knowledge of the Standards. 1. Standard Number 1, Tax Return Positions The first Standard opens with this sentence. “A member should not recommend that a tax return position be taken with respect to any item unless the member has a good-faith belief that the position has a realistic possibility (emphasis added) of being sustained administratively or judicially on its merits if challenged.” The Standard goes on to explain that a practitioner also should not prepare or sign a return when he or she is aware that it takes a position that does not meet the realistic possibility standard. The only way a practitioner can recommend a position or sign a return that does not meet this standard is if the item is: a. Not frivolous, and b. The return contains appropriate disclosure. A frivolous tax return position for the purposes of Standard Number 1 is one that is “knowingly advanced in bad faith and is patently improper.” When preparing or signing a tax return or recommending a tax return position, the practitioner should advise the taxpayer of any penalty consequences of the tax return position and, if disclosure is an option, how to avoid the penalty through adequate disclosure. Disclosure requirements should be based on authorities in the jurisdiction appropriate to the particular circumstances and facts in the taxpayer’s case. When the practitioner recommends a tax return position but does not prepare or sign the return he or she will be in compliance with the Standard if the practitioner “advise the taxpayer concerning appropriate disclosure of the position.” Penalty avoidance through disclosure is the taxpayer’s responsibility. However, the same disclosure that protects the taxpayer protects the preparer from the preparer’s penalty. Therefore, if the practitioner’s advice on disclosure is not heeded by the taxpayer the practitioner should consider withdrawing. The practitioner should not prepare or sign a return or recommend a return position that he or she knows will be used as a “mere arguing position solely in order to obtain leverage” with a taxing authority during the settlement negotiation bargaining process. The practitioner should also not recommend a position, sign, or prepare a return that includes a position that would exploit the taxing authority’s audit selection process. The realistic possibility standard is based on the practitioner’s judgment as to the extent of the needed research “with respect to all the facts and circumstances known to the member.” Where research is necessary the practitioner may use authorities that are not permitted in evaluating whether there is substantial authority under the IRC § 6662 regulations. For purposes of Standard Number 1, acceptable authorities include sources of tax analysis and reference tools used by tax preparers and advisors, as well as articles in recognized professional publications and well-reasoned treatises. The practitioner should also consider the type of authority; whether the taxpayer’s particular facts and circumstances can be distinguished from those covered by the court case, regulation, or other authority; and whether the authority critically analyzes the issue or merely states a conclusion. If more than one tax return position could meet the standard, the practitioner should discuss with the taxpayer the likelihood that each position might or might not cause the taxpayer’s return to be examined and whether the position would be challenged in an examination. The current Treasury Department Circular 230 uses exactly the same language and exactly the same definition to describe the realistic possibility standard, and provides relief if full disclosure is made in the return that includes the item. IRC § 6662, Imposition of the Accuracy-related Penalty to Underpayments, provides relief from penalty for the taxpayer, and IRC § 6694 provides relief for the preparer, when a return position is disclosed. However, there are proposed changes to Circular 230, as discussed in the earlier segment. The operating rule, then, can be summarized this way: a. The practitioner should not advise a position, or sign a return taking a position, that does not have a realistic possibility of success. b. The practitioner may, however, advise or sign so long as an item is not frivolous and is properly disclosed in the return. That allows for the ethical presentation of positions that may not meet the realistic possibility standard but do have a reasonable basis. c. The decision to disclose and how to do so is the taxpayer’s. Whether the practitioner remains associated with the return is his or her decision. d. Finally, it should be noted that the reporting position discussed in Statement 1 remains consistent with the standard of IRC § 6662, but is no longer consistent with the standard of IRC § 6694. 2. Interpretation 1-1, Realistic Possibility Standard Interpretation 1-1 provides additional definitions, interpretations, and fifteen illustrations to help you comply with Standard 1. For example: a. A frivolous position is one that is knowingly advanced in bad faith and is patently improper. b. The ordering, with the highest listed first, of various “standards” imposed by different authorities is – i. More likely than not [IRC § 6662(d)(2)(C)] ii. Substantial authority [IRC § 6662(d)(2)(B)(i)] iii. Realistic possibility [IRC § 6694(a)(1); Circular 230, Sec. 10.34] iv. Reasonable basis [IRC §§ 6662(d)(2)(B)(ii) and 6700(b)(2)] c. The way to determine whether a realistic possibility exists is to – i. Establish relevant background facts’ ii. Distill appropriate questions from those facts’ iii. Search for authoritative answers to those questions’ iv. Resolve the questions by weighing authorities found by that search’ and v. Arrive at a conclusion supported by those authorities. d. With respect to reliance on opinions from attorneys, illustrations 14 and 15 make clear that we may not blindly rely on opinions from attorneys. Practitioners must be satisfied that a non-tax legal opinion is reasonable on its face, and must independently satisfy themselves (emphasis added) as to the source, relevance, and persuasiveness of a legal opinion on a tax matter. 3. Interpretation 1-2, Tax Planning In addition to return preparation, most tax practices involve assisting clients in tax planning. Recently, the press has been filled with reports of transactions that are potentially abusive tax shelters. Taxing authorities, courts, the AICPA, and other professional organizations are struggling to define and regulate such transactions. Sometimes it is difficult to clearly delineate what is considered a tax shelter in a way that will discourage abuse, while allowing tax professionals to help taxpayers arrange their affairs so as to pay no more than their fair share of taxes. For purposes of this Interpretation, tax planning includes, both with respect to prospective and completed transactions, recommending or expressing an opinion on a. a tax return position, or b. a specific tax plan developed by the CPA, the taxpayer, or a third party. When issuing an opinion to reflect the results of the tax planning service, a CPA should do all of the following: a. Establish the relevant background facts, b. Consider the reasonableness of the assumptions and representations, c. Apply the pertinent authorities to the relevant facts, d. Consider whether there is business purpose/economic substance for the transaction and e. Arrive at a conclusion supported by the authorities. When a third party has issued an opinion and the CPA is retained to evaluate that opinion, the CPA should establish that the third party followed those same steps. Here are some of the questions the CPA should ask herself or himself in connection with any tax planning engagement that are suggested by the Interpretation: a. Is it appropriate to rely on any assumption concerning facts instead of employing other procedures to support the advice or obtaining a representation from the taxpayer or another person? (If the answer is “Yes,” then the practitioner must consider the likelihood that they will receive independent advice or that they have sufficient tax knowledge to understand the transaction.) b. Are any assumptions and representations reasonable and consistent with the client’s circumstances? c. Does the transaction have both a business purpose and economic substance relevant to the client’s tax consequences? d. Has the practitioner done enough work to understand and evaluate the entire transaction? This Interpretation puts more responsibility for determining the reasonableness of tax planning ideas on the CPA tax advisor. No longer can the practitioner hide behind the skirts of a promoter or a law firm. Instead, if the practitioner is engaged to offer advice about a tax planning transaction, her or she must take responsibility for the counsel. 4. Standard Number 2, Answers to Questions on Returns This Standard requires the practitioner to make a reasonable effort to obtain the information necessary to provide appropriate answers to all questions on a tax return before signing as preparer. Since the practitioner must usually attest to the return being true, correct, and complete – or some variation on that theme – all the questions should (emphasis added) be answered. That leaves open the possibility that a question might not be answered, and the Standard makes allowance for the fact that there might be reasonable grounds for omitting an answer. Examples given in the Explanation of Standard Number 1 are: a. The information is not readily available and the answer is not significant in terms of either the taxable income, loss, or tax liability. b. There is genuine uncertainty about the meaning of the question on a particular return. c. The answer is voluminous. (In that case, include a statement with the return that the information is available and will be supplied upon request.) The practitioner cannot omit an answer just because it might show the client in an unfavorable light. As with tax return positions discussed in Standard Number 1, if, in the practitioner’s professional judgment, an answer is not required, the client is not required to explain the omission in the return. However, the practitioner must consider whether the omission might render the return “incomplete.” Standard Number 1, Circular 230, and Regulation Section 1.6694-1 require tax return positions to meet the realistic possibility standard although the requirements for meeting this standard differ depending upon the authority that is used. If omitting information on a return results in a failure to comply with the more likely than not/realistic possibility standard, a member of the AICPA could face preparer penalties as well as sanctions under both Circular 230 and the Standards. 5. Standard Number 3, Certain Procedural Aspects of Preparing Returns One of the most frequently asked questions relating to the preparation of tax returns is, “What is my responsibility for the accuracy of information furnished to me by my client for inclusion in a return?” Standard Number 3 provides the answer. The practitioner may, when preparing or signing a return, rely on information furnished by his or her client or third parties without verification unless the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or with other information that the practitioner has. The practitioner should refer to the client’s prior year’s returns, satisfy herself or himself that any required records have been maintained, and investigate transactions for which the client may not understand the conditions for tax treatment of any item. All of this is consistent with the IRS’ interpretation of preparer responsibility in Rev, Proc. 80-40, 1980-2 CB 774, also issued as News Release IR 80-94 on September 15, 1980. In a word, the practitioner is not required to audit the client’s information, but he or she cannot ignore any obvious shortcomings or fail to make proper inquiry about complex transactions for which the client may not be qualified to ascertain the correct tax treatment or recognize required information. 6. Standard Number 4, Use of Estimates For years, a college professor used this question on the mid-term exam for his “Federal Income Taxation” course: “Can estimates be used in the preparation of tax returns?” He does not cover that question in class, but the Standards are part of the required reading for the course. He says he never fails to smoke out the students who are not doing the required reading with that question. The answer, of course, is “yes.” Standard Number 4 allows a practitioner to use the client’s estimates for any item in a return or for the entire return in some circumstances. Estimates may be used when it is not practical to obtain exact data if the practitioner can determine that they are reasonable. If the practitioner does use one or more estimates, he or she should not present them with the implication that they are not estimates; for example, $2,342 is not an estimate, but $2,300 is. Some practitioners favor line item disclosure, much in the manner of the Form 8275, disclosing the form and line number as well as the amount of each estimate along with an explanation of why it was necessary to use an estimate and the method used by the taxpayer to determine the estimated amount. Accruals using all available data and best professional judgment are not the subject matter of this Standard, but situations like the following are. a. Small expenditures that may not be supported with good records. b. Records are missing. c. The client is not available to assist in preparing the return. d. The client has not received a Form K-1 from a pass-through entity. e. Pending litigation has a bearing on the return. f. Records have been lost to fire or some other mishap. 7. Standard Number 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision When a practitioner settles the issues raised in the examination of a tax return, whether at the agent or appellate level or in court, in the absence of an agreement to the contrary, that settlement applies only to the year under examination. Usually the practitioner would recommend that his or her client treat an adjusted item consistently in future tax returns. However there may be exceptions. Standard Number 5 suggests that consistency may not be the right answer when: a. The client is not bound by the previous administrative proceeding; b. The client yielded on the issue due to lack of documentation and the practitioner has the documentation for later years; c. The client yielded on an issue for settlement purposes, even though the position met the conditions of Standard Number 1; or d. Authority favorable to the client’s position has developed that was not available when the settlement was reached. The practitioner should carefully weigh any developments that are not favorable to the client’s position, as well, before deciding that consistency is not required. 8. Standard Number 6, Knowledge of Error: Return Preparation First, the term “error,” as used in this Standard Number 6, means any position, omission, or method of accounting that does not meet the realistic possibility standard when the return is filed; or a position taken on a prior years return that no longer meets the standard due to new law, court decisions, or taxing authority pronouncements that have retroactive effect, that has a significant effect on the tax liability of the client or employer. If the practitioner becomes aware of an error in a return filed by a client or his or her employer, or failure to file any return, the practitioner is expected to recommend corrective measures. That recommendation is not required to be in writing. If the practitioner believes his or her employer or the client may be exposed to penalties, charged with fraud or other criminal conduct the practitioner should advise the client to seek legal counsel before taking any action. However, the practitioner may not, without the client’s permission or a legal duty, notify the taxing authority. Although Standard Number 6 does not address the issue of disclosure to successor preparers, Rule 301 of the AICPA Code for Professional Conduct prohibits disclosure without the client’s consent. To clarify the application of Rule 301, the CPA must examine AICPA Ethics Ruling 391-3, Information to Successor Accountant About Tax Return Irregularities. This ruling suggests that members contacted by successor accountants can indirectly alert them to possible irregularities and errors on prior returns by recommending that the predecessor ask the client for permission “to discuss all matters freely with the successor.” This ruling was intended to make it more difficult to conceal fraud or other illegal acts by changing CPAs. What if the client does not take action to correct the error? The Standard is clear – the practitioner should evaluate the relationship to determine if it is appropriate for him or her to continue your association with the client or the employer. The practitioner might even want to consult his or her own attorney before making the decision. If the practitioner does continue the relationship, the Standard requires that the practitioner take reasonable steps to ensure that the error is not repeated. If a current return cannot be prepared without incorporating or repeating the prior error, the Standard advises the practitioner to consider withdrawal from preparing the return. The taxpayer may also sign a taxpayer’s current return involving an erroneous method of accounting if it is past the due date to request permission to change a method of accounting to satisfy the requirements of Standard Number 1 .- provided that the tax return includes appropriate disclosure of the use of the erroneous method. Preparing a return that perpetuates a prior error also violates Circular 230, which requires preparers to exercise due diligence to determine that representations made to the IRS are correct and prohibits preparers from participating in submitting misleading or false information to the IRS. While Standard Number 3 clarifies the practitioner’s obligation to “examine or verify” information provided by the taxpayer in preparing “true, correct, and complete” returns, Standard Number 6 specifies how to handle errors discovered through due diligence. Standard Number 6 further recommends that the practitioner suggest appropriate measures to correct an error on a return filed with any taxing authority (not just the IRS) and consider withdrawal if the taxpayer refuses to correct the error. Standard Number 6 does not explicitly require the practitioner to inform the taxpayer of the potential consequences, including IRC § 6662 accuracy-related penalties, of taking or not taking corrective action, but Standard Number 1 suggests that the practitioner discuss any position that might lead to taxpayer penalties, and any opportunities to avoid such penalties through appropriate disclosure, with the taxpayer. Although the Standard permits oral recommendations of corrective action or disclosure of errors to the taxpayer’s tax return preparer, the practitioner should document all notice of errors and recommended corrective action in writing. 9. Standard Number 7, Knowledge of Error: Administrative Proceedings The definition of “error” for this Standard Number 7 is the same as for Standard Number 6. If the practitioner becomes aware of an error in a return that is under examination when engaged to represent a client before a taxing authority, he or she has an obligation to inform the client of the error and suggest corrective action. The practitioner may not inform the taxing authority without the client’s permission, or a legal duty to do so. While it is the client’s decision whether to correct the error, it is the practitioner’s decision whether to continue the relationship. If the error is significant, and he or she believes the decision not to correct it may be an indicator of poor character that would cause continuing trouble in the relationship, the practitioner should probably resign the relationship. This Standard recommends that the practitioner advise a taxpayer to consult an attorney if he or she believes that fraud or criminal charges could result from tax-return errors discovered during the administrative proceeding. However, given the complexity of the laws governing the practitioner’s relationship with any client, and the possibility that his or her interests and the interests of the client may be in conflict when an error is discovered, the Standard suggests that the practitioner consult with his or her own legal counsel before taking any action. If disclosure is to be made, it should be made as soon as possible; in any event before concluding the examination. 10. Standard Number 8, Form and Content of Advice to Taxpayers While there is no standard form for how tax advice should be communicated, the practitioner has an ethical responsibility to do so in a form that “appropriately serves the taxpayer’s needs.” The practitioner should assume, when giving requested advice, that it will affect the reporting of the matter in the client’s return. The Standard recognizes that advice may be requested on a wide range of topics, from simple to complex, and acknowledges the utility of oral advice for routine matters, or on well defined issues. Written communications are clearly recommended for matters that are: a. important, b. unusual, or c. complicated. The practitioner may use his or her professional judgment to determine when the advice should be in writing. The Standard provides a method to assist the practitioner in evaluating whether, for a particular transaction, for a particular taxpayer, advice should be documented in writing. Practitioners are instructed to consider: a. the importance of the transaction and the amount involved to the taxpayer seeking the advice, b. whether the inquiry is general or specific, c. how much time the practitioner is given to develop and submit the advice, d. technical complications presented by the issue(s), e. existence of relevant authority and precedent, f. tax sophistication of the taxpayer, and g. the need to seek other professional advice While practitioners are generally not obligated to update advice unless that was part of the engagement, when engaged to implement the advice the Standard suggests that practitioners should monitor new developments and update the advice as necessary. Any CPA who provides advice to clients must exercise care, because either the content or the clarity of the advice could serve as the basis for a malpractice claim. Even advice in routine matters should be given in writing, delineating the practitioner’s responsibilities, and indicating whether he or she will continue to monitor the matter on the client’s behalf on an ongoing basis. 11. Standard Number 9, Quality Control (Proposed and Withdrawn) Changes to Treasury Circular 230, in particular § 10.33, Best Practices and § 10.36, Procedures to Ensure Compliance, increased the profession’s awareness of the need for a quality control standard in tax practice. Standard Number 9 borrowed heavily from the AICPA Tax Division’s Tax Practice Quality Control Guide published in 2002, and was consistent with the General Standards and Rule 202. Statement Number 9 would have established quality control standards that obligated AICPA members to have a system of quality control for their tax practice, if in public practice, or the tax function of an employer (referred to as nonpublic practice). While the Standard was written in aspirational terms, there is no doubt that clients and their attorneys would seek to hold tax practitioners to the "suggestions" in the standard. Five Elements of Quality Control listed in the Standard will be familiar to anyone who as been engaged in the quality control process for an attest function. They were: a. Integrity and Objectivity b. Personnel Management c. Acceptance and Continuance of Clients and Engagements (public practice) d. Performance of Professional Services e. Monitoring and Inspection Compliance with the Integrity and Objectivity Element would be accomplished by requiring that personnel adhere to the AICPA code of Professional Conduct, Treasury Circular 230, and standards of regulatory agencies. In addition, policies relating to integrity and objectivity must be communicated to all personnel, and where appropriate compliance with those procedures documented. Compliance with the Personal Management Element would have included hiring qualified people, assigning work appropriate to their skills, providing adequate supervision, providing adequate training, and periodically evaluating their progress. Acceptance and Continuance of Clients and Engagements would have required the CPA to undertake only engagements that could be completed with professional competence and consider risks associated with providing tax services in particular circumstances. Compliance should be accomplished with a process of evaluation and approval of prospective clients, documentation of the client's understanding of tax services to be provided, and a periodic review and evaluation of clients to determine their continued suitability. Providing Professional Services would be accomplished with appropriate planning and supervision, maintaining control standards, reviewing documentation of tax services, documenting and controlling tax compliance, communicating with clients, as appropriate, and designating persons to serve as authoritative sources on technical matters. The Monitoring and Inspection Element would have required the monitoring of compliance with policies, maintenance of a reference library, and an effective professional development program. The Standard contemplated periodic inspections with the findings reported to appropriate management levels with corrective action taken is necessary. Finally the Standard suggested assigning responsibility for design and maintenance of the quality control system to and appropriate individual within the tax function and communicating the tax practice quality control policies and procedures to all personnel involved in the tax function.” Adoption of the standard has been indefinitely delayed. However, many practitioners will want to follow the guidance in the standard and develop a tax practice quality control system as a way of assuring the delivery of quality tax services and protecting the firm from IRC § 6694 preparer penalties and civil claims by clients. The best way to deal with the multiple sources of guidance for ethics in tax practice is to steer a corrective course.
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