TAX PRACTICE DEVELOPMENTS

Transcription

1 TAX PRACTICE DEVELOPMENTS Section: Circular 230 IRS Revises Circular 230, Publishes New Edition Section: Circular 230 Registered Tax Return Preparers Required to Attach Statement to Any Advertising Section: AICPA AICPA Issues Exposure Draft of Updated SSTS Interpretations 1-1 and Section: FBAR Reporting Offshore Voluntary Disclosure Program Restarted by IRS With Higher Base Penalty, No Stated Deadline for Filing Section: Circular 230 CPA Disbarred for Failing to File Returns, Inadequate Due Diligence on Client Information Section: Accountants Liability Accountant Who Failed to Disclose Proper Amount of Tax on 7004 Found Liable to Clients for Treble Damages and Attorney Fees Section: Circular 230 Attorney Suspended from Practice for 48 Months for Failure to File and Late Filing of Income Tax Returns Section: Circular 230 CPA Suspended by OPR for Twelve Months For Plan Involving Overstated Deductions Section: 446 Taxpayer's Failure to Include Reporting of Specific Type of Income in Automatic Change Request Prohibited Later Claim the Omission of Those Transactions was a Math Error to Allow Revision of Income Reported Section: 446 IRS Justified in Rejecting Request for Change in Accounting Method on 12- Month Expenses Prior to Effective Date of Final Regulations Section: 446 IRS Revises Change of Accounting Method Revenue Procedure Section: 6001 Legal Authority for SBSE Requests fot Taxpayers Electronic Data Files Outlined Section: 6001 SB/SE Division Issues Memo to Agents on Asking for Electronic Accounting Records in an Examination Section: 6001 District Court Upholds IRS Subpeona for Original Quickbooks Data Files.. 31 Section: 6001 DC Circuit Rules Disclosures to Auditors Did Not Remove Work Product Privilege Section: 6011 Fact Sheet Published That Discusses Foreign Reporting Obligations, Reasonable Cause for Reporting Failures

2 Section: 6011 IRS LB&I Division Issues Updated Memorandum of the Use of the Schedule UTP Information in Examinations Section: 6011 IRS Will Process Form 1040X in Both Three Column and Two Column Format, Recognizing 2009 Tax Software Contains Two Column Version Section: 6011 Failure to Attach Withholding Forms Rendered Return Not Processible, Interest on Overpayment Did Not Begin to Run Until Information Submitted Section: 6013 IRS Informally Holds Opposite Sex Civil Union Couples in Illinois are Married for Federal Tax Purposes Section: 6015 Innocent Spouse Refund Claim For Taxes Paid Via Levy Against Joint Account in Collection Activities Against Nonrequesting Spouse Is Found Not to Be Prohibited Under Federal Law Section: 6015 Failure of Taxpayer's Counsel to Disclose Conflict of Interest and Obtain Waiver Allows Taxpayer to Obtain Innocent Spouse Relief Section: 6065 Returns Modified Without Client Knowledge by Preparer After Receipt of Form 8453 Not Valid Returns Section: 6103 SB/SE Fast Track Settlement Pilot Program Extended for Test Locations. 47 Section: 6103 IRS Can Disclose Information from Joint Return to Spouse Who Denies Signing Return Section: 6103 IRS Can Disclose Information to Employees of Corporation Named as Fiduciary on Form Section: 6103 Collection Employees Should Not Inspect IRS Records to Determine if Taxpayer's Appointed Representative is Current on Filing and Payment Obligations.. 48 Section: 6109 Registered Tax Return Preparer Exam Testing Begins Section: 6109 Commissioner Indicates IRS to Send Letters to High Risk Tax Preparers, Increase Resources at the Office of Professional Responsibility Section: 6109 IRS Explains Transition Rules for Provisional PTIN Holders Along with PTIN Proposed Fingerprinting Requirements Section: 6109 IRS Grants PTIN Relief for Preparers Who Make Reasonable Efforts Described in Notice for 2011 Filing Season Section: 6109 Rules for Preparation Under Supervision of CPA and FATPs, Other Guidance for PTIN Program in Section: 6110 Tax Court Has No Jurisdiction to Prevent IRS From Publishing Private Letter Ruling

3 Section: 6111 Fees Received Prior to Effective Dates of 6111 and 6707 Will Count If Advice Was Given After Effective Date Section: 6161 SBSE Releases Updated Guidance for Processing Taxpayer's Request for Extensions of Time to Pay Taxes Due to Undue Financial Hardship Section: 6212 Notice of Deficiency Sent to POA Holder Generally Will Not Count as Received by Taxpayer Section: 6212 IRS Had Duty to Exercise Reasonable Diligence in Determining Taxpayer's Address When It Had Previously Had Letters Returned as Undeliverable Section: 6212 IRS Updates Procedures to Inform Service of Change in Last Known Address Section: 6213 Offset of Refund Against Proposed Deficiency During 90 Day Period to File Tax Court Petition Allowed Section: 6214 Tax Court Had No Jurisdiction to Determine If Overpayments Existed in Years Prior to Year Before Court Section: 6303 CDP Levy Notice Issued Within 60 Day 6303 Notice and Demand Period That Detailed Periods and Amounts of Tax Due Served As Proper Notice and Demand Section: 6320 Appeals Officer's Admitted Lack of Understanding of Transcript Relied Upon to Verify Tax Assessment Found Sufficient to Overturn CDP Hearing Holding Against Taxpayer Section: 6321 California Stop Notice To Be Treated as Superior to Federal Tax Lien Section: 6321 Property Transferred in Divorce to Spouse by Unrecorded Quit Claim Deed Still Available for IRS Lien Against Post Divorce Tax Liabilities of the Now Nonowner Spouse Section: 6321 IRS Lien on Right to Future Pension Income Survived Taxpayer's Bankruptcy That Otherwise Discharged Liability on Tax for Year in Question Section: 6323 Mortgages May Have Priority Over IRS Lien Despite No Transfer of Cash at Date Security Interest Granted Section: 6325 Third Party That Fails to Follow Statutory Procedures to Challenge IRS Lien Loses Right to Any Challenge Section: 6331 Levy Against Payments to Vendors Expanded to Include All Payments Due

4 Section: 6331 IRS Only Needs to Serve Notice of Levy to IRA Custodian and Not Also to Financial Clearing House Actually Holding IRA Funds Section: 6331 Partners Draws Are Subject to IRS Levy on Wages Section: 6331 Failure to Immediately Honor Levy Makes Medical Clinic Liable for Amounts Not Paid Over Section: 6402 Even Though Form 870-AD Covered Year in Question, IRS Can Issue IDR for Year When Taxpayer Files Claim for Refund Section: 6402 Chief Counsel Explains Procedures for Issuing Refund Checks on Joint Returns in Various Situations Section: 6404 IRS Disagrees With District Court Holding, Asserts Can Restore Assessment Erroneously Reversed After Liability Reduced to Judgment Section: 6404 Interest Abatement Properly Denied When TMP for Partnership Ceased Cooperating, Even Though Binding Agreement Existed on Resolving Case Section: 6404 Passage of Time Alone Not Sufficient to Require IRS to Abate Interest on Assessment Section: 6501 Supreme Court Agrees to Review Issues Related to IRS Revised Regulation on Six Year Statute Section: 6501 IRS Regulations Applying Six Year Statute to Large Overstatement of Basis Held Invalid by Tax Court, But Court of Appeals Reverses Citing Mayo Decision Section: 6501 Analysis of Impact of Change in Implication of Failure to Provide Required Foreign Information on Statute of Limitations Analyzed Section: 6501 Use of Stolen Social Security Number on Tax Return Does Not, By Itself, Render the Return Invalid for Statute of Limitations Purposes Section: 6501 Payments Made Before Expiration of Statute on Assessments May Be Retained by IRS When Proper Tax Determined After that Date Section: 6501 Later Amended Return Does Not Change Applicability of Six Year Statute If Sufficient Income Omitted from Original Return Section: 6501 IRS Can Redetermine Tax in Closed Year To Determine Available Carryovers to Open Years Section: 6501 IRS, After Losing in Court, Revises Regulations to Redefine an Overstatement of Basis as Creating an Understatement of Income Under 6501(e)(1)(A)

5 Section: 6501 Gross Receipts Not Reduced By Returns or Allowances for Purposes of 25% Test for Six Year Statute Section: 6501 Extended Six Year Statute to Apply to Understatements in Excess of $5,000 from Undisclosed Foreign Assets Section: 6501 Credits Carried Back After Release of Credit from Net Operating Loss Carryback to Later Year Do Open Year to Assessment Section: 6501 Husband's Failure to Claim Signature on Statute Waiver Was Forged Until After Statute Had Otherwise Expired Amounted to Acceptance of Waiver Section: 6511 Increased Interest Deduction in Year Closed for Claim for Refund Still Can Increase Net Operating Loss From That Year as it Impacts Open Years Section: 6511 Filing of Form 4868 and Later Letter Did Not Serve As Informal Claim for Refund Section: 6511 NOL Could Be Carried Back to "Closed" Year to Reduce Outstanding Tax Liability Section: 6511 Taxpayer Failed to Demonstrate Financial Disability Sufficient to Extend Statute of Limitations on Refund Claim Section: 6511 Standards for Treating A New Claim for Refund as Amendment to Original Claim Detailed by Chief Counsel Section: 6532 Two Year Statute of Limitations on Filing Suit to Challenge IRS Denial of Refund Claim Applies Even If Appeals Is Still Considering the Matter on the Two Year Anniversary Section: 6532 Appeals Office Can Award Refund to Taxpayer When 2 Year Statute to Challenge IRS Initial Denial Expires While Appeal is Pending Section: 6621 Taxpayer Cannot Elect to "Redesignate" Application of Overpayment After Return is Filed Section: 6621 Consolidated Group Not Eligible for Interest Netting With Overpayments from Subsidiaries Acquired After Year of Underpayment Section: 6651 Tax Court Has No Authority to Treat Amounts Seized by Government In Offshore Trust Promoter's Account as Payment of Tax Liability for Promoter's Client. 92 Section: 6651 Lack of Access to Records, Other Factors, Not Reasonable Cause for Failure to Timely File Tax Return Section: 6652 Exempt Organization Late Filing Penalty Is To Be Either Completely Abated Due to Reasonable Cause or Applies in Full

6 Section: 6662 Taxpayer Escapes Penalty Due to Reasonble Reliance on Incorrect Advice from Preparer, Tax Court Indicates Displeasure With Same Preparer Section: 6662 IRS Outlines Adequate Disclosure for Purposes of 6662 and Section: 6662 No Accuracy Penalty Against Taxpayer Who Made Transcription Error in Entering Data Into Tax Software Section: 6662 IRS Notice of Investigation Into Promoter Penalty Terminated Period to File Qualified Amended Return Even Though No Penalty Ever Assessed Against Promoter Section: 6662 Taxpayers Escape Penalties Due to Reasonable Reliance on Professional, Even Though Professional Had Preparer Penalty Imposed Section: 6662 Taxpayers Denied Relief from Negligence Penalty Due to Claimed Reliance on Software, Nor Did a Prior IRS Settlement Offer to Waive Penalties Require the Court to Waive the Penalty Section: 6662 No Reasonable Cause Found for Taxpayer in Failing to Report Self- Employment Tax on IMF Wages Section: 6662 Taxpayer Use of Consumer Tax Software Was Not Sufficient to Show Reasonable Cause to Avoid Accuracy Penalty Section: 6662 Accuracy Related Penalty and Excessive Claim for Refund Penalties Will Apply to Amounts Attributable to Transactions Lacking Economic Substance Section: 6662 Taxpayer's Mistaken Belief Social Security Had Been Previously Taxed Held to Be Reasonable Cause for Understatement, No Penalty Imposed Section: 6662 Negligence Penalty of 40% to Apply to Understatements Related to Undisclosed Foreign Accounts Section: 6662 Taxpayer Not Liable for Substantial Understatement Penalty Only on Portion of Income Disclosed on Form Section: 6662A Ignorance of Listed Transaction Reporting Requirements No Defense Against Penalty Section: 6663 IRS Holds Tax Court Erronously Required a Showning of a Majority of 11 Badges of Fraud, Will Not Follow Norris Decision Section: 6664 Fraud Penalty Applies to Overstatement of Withholding, Not Just Understatements of Taxes Section: 6676 IRS Decides that False Claim for Withheld Taxes Triggers Penalties Other Than Erroneous Refund Penalty

7 Section: 6677 Taxpayers Must Pay Entire Assessed Penalties for Failure to Report Information on Forms 3520/3520A Prior to Bringing Suit In Order to Challenge Entire Assessment Section: 6694 Coordinated Issue Paper Does Not Constitute Authority for Purposes of 6694 Analysis Section: 6695 IRS Proposes Regulations to Require Filing of Form 8867 With Any Return Claiming Earned Income Tax Credit Section: 6707 IRS Outlines How to Apply 6707A Penalty for Transactions Identified as Listed Transaction in Year After Year Taxpayer Originally Participated in Activity Section: 6707 In IRS Suggests That Maximum Penalty Would Apply to a Passthrough That Failed to Disclose Reportable or Listed Transaction Section: 6707 IRS Clarifies Extent of Judicial Review in 6707A Reportable Transactions Section: 6901 Despite Both Participating in Similar Transactions from Same Promoter, Only One Set of Shareholders Found to Have Transferee Liability for Unpaid Corporate Tax on Sale of Assets Section: 6901 No Transferee Liability to Widow Who Was Beneficiary of Marital Trust Section: 6901 Individual Found Liable for Transferee Liability Due to Unpaid Tax Liability of Bankruptcy Estate Section: 6901 IRS Can Collect Unpaid Estate Tax From Heirs Who Settled Lawsuit Against Estate Due to Transferee Liability Section: 6901 Transferee Liability Applied to Son Who Received Condominium from Dad, Even Though Property Covered by Florida Homestead Exemption Section: 7122 IRS Supervisor Abused Discretion in Rejecting OIC Original Settlement Officer Had Recommended Accepting Section: 7425 Nonjudicial Mail Notice Sent to IRS by Regular Mail With Delivery Confirmation Held Not to Meet Notice Requirements of Section 7525, Lien Still Valid After Sale Section: 7430 Taxpayer Awarded Fees When IRS Fails to Consult Return Filed Three Months Before Issuance of Deficiency Notice Section: 7434 Mother-in-Law Filing Form 1099C Not Liable to Ex-Son-in-Law for Fraudulent Information Return

8 Section: 7502 Receipt of Petition From USPS Early in the Morning Following the Last Date to Mail Petition Treated as Adequate Extrinsic Evidence of Timely Mailing of Petition Section: 7502 IRS Finalizes Proof of Delivery Regulation, Imposes Strict Limits on Obtaining Prima Facia Proof of Delivery Section: 7502 Timely Mailing Rule Does Not Apply to Amended Returns Reporting Tax Due, Does Apply to Amended Returns Asking for Refund Section: 7502 Taxpayer Allowed to Introduce Evidence for Timely Mailing For Envelope Destroyed by USPS Section: 7525 Supreme Court Declines to Review Holding that Tax Accrual Workpapers Not Protected by Work Product Privilege Section: 7604 Taxpayer Not Allowed to Assert Fifth Amendment Against Production of Records on Offshore Credit Cards IRS Was Independently Aware Of Section: 7605 IRS Can Reexamine Previoulsy Examined Issues When A Net Operating Loss Carried Back to Year Section: 7609 IRS Given OK to Issue Summons to Board of Equalization to Obtain Names of Taxpayers Transferring Property to Relatives at Less than Fair Value Section: 7623 IRS Letter Denying Whistleblower Award Was A Determination the Tax Court Has Jurisdiction to Review Section: 7701 IRS Gives Guidance on Application of Economic Substance Rule to Agents Section: 7701 IRS Issues Guidance on Economic Substance Codification Section: 7701 Economic Substance Doctrine Codified Section: 7804 Appeals Officers Do Not Have to Be Appointed by President to Conduct CDP Hearing Section: 7805 Supreme Court Rules that All IRS Regulations Eligible for Chevron Deference Section: 9100 Relief Denied for Late 5 Year Carryback Election Due to Date Set by Statute and Not by Regulation Section: 9100 Reg Does Not Offer Relief For Taxpayer That Failed to Elect 5 Year Carryback of Net Operating Loss

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10 SECTION: CIRCULAR 230 IRS REVISES CIRCULAR 230, PUBLISHES NEW EDITION Citation: Circular 230, 8/2/11 The IRS has issued revisions to Circular 230 which became effective August 2, In general this revision expanded Circular 230 to cover all preparers, implemented the IRS preparer licensing program, brought the standards for signing a return under Circular 230 in line with the requirements under IRC 6694, expanded the responsibilities for individuals in charge of the tax practice, and put teeth into the efiling program. Listed below are some of the highlights of the revisions. PROCEDURES TO ENSURE COMPLIANCE [SECTION 10.36] In its current form, this section requires 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, to insure the all employees comply with all of the requirements of Circular 230 (not merely the covered opinion rules under 10.35). In addition to the previous issues related to supervising the covered opinion provisions of Circular 230, a practitioner will be subject to discipline for failing to comply with the requirements of Section 10:36 in the area of return preparation 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 Circular 230, and anyone in the firm engages in a pattern or practice of failing to comply with the standards under Circular 230; 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 the standards under Circular 230 and, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance. The May 2011 changes to Circular 230 greatly expanded the reach of Section far beyond the limited realm of covered opinions that it had previously been limited to. Off all the May 2011 changes, this one will have the potential to have the most significant impact on most practices. ADVISING WITH RESPECT TO TAX RETURN POSITIONS AND PREPARING TAX RETURNS [SECTION 10.34] 11-10

11 The IRS in May of 2011 issued changes to Section to bring these standards back into agreement with the revised requirements under The revised portion of 10.34(a) would read as follows: Standards with respect to tax returns and documents, affidavits and other papers. a) Tax returns. (1) A practitioner may not willfully, recklessly, or through gross incompetence- (i) Sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that- (A) Lacks a reasonable basis; (B) Is an unreasonable position as described in section 6694(a)(2) of the Internal Revenue Code (Code) (including the related regulations and other published guidance); or (C) Is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2) of the Code (including the related regulations and other published guidance). (ii) Advise a client to take a position on a tax return or claim for refund, or prepare a portion of a tax return or claim for refund containing a position, that- (A) Lacks a reasonable basis; (B) Is an unreasonable position as described in section 6694(a)(2) of the Code (including the related regulations and other published guidance); or (C) Is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2) of the Code (including the related regulations and other published guidance). (2) A pattern of conduct is a factor that will be taken into account in determining whether a practitioner acted willfully, recklessly, or through gross incompetence

12 The standards aren t quite the same as the 6694 standards, as the OPR will need to demonstrate the tax preparer acted willfully, recklessly or through gross incompetence, while under 6694 the penalty applies merely if the preparer cannot show a reasonable basis for having been in violation. All of the return signing standards demand at least a reasonable basis even for disclosed positions. No longer will a preparer be able to defend his actions in advocating a position merely by showing it is not frivolous but rather must show a minimum of a reasonable basis even for disclosed positions. ACTIONS FOR WHICH A PRACTITIONER MAY BE DISCIPLINED [SECTION ] The May 2011 revisions to Circular 230 expanded the list of items that are deemed to be disreputable conduct in practice to include willfully failing to file a return electronically that is required to be filed electronically unless the failure is due to reasonable cause. Some had noted that the new electronic filing requirement of 6011 for 2011 did not have a penalty clause the IRS, noting the same, has now decided to use Circular 230 to provide the big stick to insure preparers electronically file returns as mandated by law. As well, anyone preparing a return that does not possess a valid PTIN will also be deemed to have violated Circular 230 under the May 2011 revisions to Circular 230. Coupled with the revision to this would allow the IRS to take action against the CPA with primary responsibility for the firm s tax practice if he/she allowed individuals to be involved in return preparation who are not registered with the IRS. Some relief for CPA firms with regard to the registered return preparer rules were issued early in the year. The IRS in Notice offered additional guidance as 2010 ended on the application of the PTIN rules for The notice creates some new categories of PTIN holding preparers, including carving out special treatment for individuals that work under the supervision of CPAs, EAs, attorneys or enrolled actuaries. The notice begins by noting that those have applied for and been granted a PTIN, or renewed their PTIN, after September 28, 2010 will be treated as meeting the requirements under Reg to have obtained a PTIN that qualifies one to prepare tax returns in The IRS carves out a special rule for individuals who prepare returns under the supervision of a CPA, EA, attorney or enrolled actuary. These individuals will not be required to take the competency test, nor will they be subject to mandatory continuing professional education. These individuals will still need to obtain a PTIN, pay the user fees annually to obtain and renew that PTIN and pass the tax compliance and suitability checks. These individuals will not be able to sign a return, represent clients in any form before the IRS, nor hold themselves out to the IRS or the general public as a registered tax return preparer

13 This non-registered tax return preparer individuals will have to meet the following requirements: The individual must be 18 years of age or older; The supervising CPA, EA, attorney or enrolled actuary must sign any returns or claims for refund prepared by this individual and The individual must be employed at the CPA firm, law firm or other recognized firm of the preparer who signs the return. CPA firms and law firms are defined by local law definitions authorizing practice in those licensed areas. The third category, the other recognized firm, is a firm other than a CPA firm or law firm, must have one or more employees engaged in practice before the IRS and is 80% or more owned by one or more CPAs, EAs, attorneys, enrolled retirement plan agents or enrolled actuaries who are currently allowed to practice before the IRS. Firms practicing in alternative practice units should note that this relief may not apply to their tax practices if non-cpa/ea/attorney ownership of the entity providing tax preparation services is greater than 20% and that entity is not recognized as a licensed firm. An individual obtaining a PTIN under this rule must certify on the application that they will be preparing return solely under the supervision of one of the preparers noted above and may be required by the IRS to give a supervising preparer s PTIN or other number assigned by the IRS. If the individual is no longer supervised by that authorized preparer, the PTIN holder must notify the IRS of this fact and cease preparing returns. The IRS will retain the right to revoke the PTIN of this individual if the person willfully violates the rules found in Circular 230 or engages in disreputable conduct. SECTION: CIRCULAR 230 REGISTERED TAX RETURN PREPARERS REQUIRED TO ATTACH STATEMENT TO ANY ADVERTISING Citation: Notice , 5/31/11 In Notice the IRS repeated its earlier admonition that until the testing program is in place, no individual may refer to him/herself as a Registered Tax Return Preparer since no individual can meet all of the conditions required to become a Registered Tax Return Preparer. As well, those individuals who qualify under Notice to be exempted from meeting the requirements to be a Registered Tax Return Preparer to obtain a PTIN will also be prohibited from referring to themselves by that title. Such individuals are generally those who are either working under the direct supervision of an attorney, CPA, enrolled agent, enrolled retirement plan agent or enrolled actuary, or those who certify they do not prepare or assist in the preparation of all or substantially all of any tax return or claim for refund covered by a competency examination

14 However the Notice adds a new wrinkle to the rules in this area. Concern had been voiced by attorneys, CPAs and EAs that the title Registered Tax Return Preparer might be confusing to the public, who might see such individuals as more qualified than the groups that had always been subject to Circular 230. In response to such concerns, this notice announces that Circular 230 Section will be modified to require such individuals using any paid advertising in which he/she refers to him/herself as a registered return preparer to display or broadcast the following statement: The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov. SECTION: AICPA AICPA ISSUES EXPOSURE DRAFT OF UPDATED SSTS INTERPRETATIONS 1-1 AND 1-2 Citation: Exposure Draft - Proposed Interpretations of SSTS No. 1, 2/3/11 The AICPA has issued an exposure draft to restore Interpretations 1-1 and 1-2 to the Statements on Standards for Tax Services Statement No. 1. When SSTS No. 1 was recently revised, the old interpretations (which reflected the old rules) were withdrawn. At the August 2011 meeting of the Tax Executive Committee the interpretations were approved for issuance without changes. Final publication and issuance is expected to occur prior to the end of the year. Below is a summary of the two proposed new interpretations. INTERPRETATION 1-1 REALISTIC POSSIBILITY STANDARD (EXPOSURE DRAFT) Old Interpretation 1-1 provided additional definitions, interpretations, and fifteen illustrations to help you comply with the Standard. However, the changes made to SSTS No. 1 rendered the old interpretation obsolete. The AICPA has released an exposure draft of the proposed new standard. While not yet in effect, it does provide some insight that may prove useful in attempting to comply with requirements of SSTS No.1. The preface to the new interpretations contains description of the various reporting standards applicable to CPAs. Of special interest is that the interpretation notes specific percentages to the likelihood of success to normally be practically achieved for each standard. The preface notes that for more likely than not a greater than 50% likelihood of success must exist. The preface continues to note that for a substantial authority position is generally interpreted to require approximately a 40 percent likelihood of success on the merits if the position is challenged. For realistic possibility of success that level drops to 33 percent, and down to 20 percent for a reasonable basis position

15 The preface also points out that what constitutes an authority can vary depending upon whether the CPA is attempting to meet SSTS No. 1 s general realistic possibility of success test or a taxing agency s standards. Specifically, federal regulations do not recognize editorial commentary from respected individuals and publications as constituting authority, though SSTS No. 1 does. Therefore, the preface implies, if the measuring standard under SSTS No. 1 becomes the federal regulations, those documents cannot be used. Interpretation No. 1 makes clear that, however, if the SSTS realistic possibility of success rule is the applicable rule, those sources can be used. Interpretation No. 1 begins by noting that since the substantial authority and more likely than not standard are higher standards than the realistic possibility standard, if the taxing agency laws and regulations require meeting those standards the CPA must comply with those higher standards for undisclosed positions to comply with SSTS No.1. However, if the taxing agency has a lower standard than realistic possibility of success (or no standard), the CPA must meet the realistic possibility of success standard for nondisclosed positions. The interpretation requires the CPA to advise the client if a penalty could be asserted to discuss with the client the possibility of avoiding a penalty with disclosure. However, the decision of whether and how to disclose is the taxpayer s responsibility. Note, though, that if SSTS No. 1 requires disclosure in order for the CPA to sign the return the CPA may be unable to complete the engagement if the client refuses to authorize the disclosure. The proposed interpretation outlines the following steps that are to be followed to determine if the reporting and disclosure standards have been satisfied: 1. Establish the relevant background facts. 2. Consider the reasonableness of the assumptions and representations. 3. Consider applicable regulations and standards regarding reliance on information and advice received from a third party. 4. Apply the pertinent authorities to the relevant facts. 5. Consider the business purpose and economic substance of the transaction, if relevant to the tax consequences of the transaction. (Mere reliance on a representation that there is a business purpose or economic substance generally is insufficient.) 6. Consider whether the issue involves a listed transaction or a reportable transaction (or their equivalents) as defined by the applicable taxing authority. 7. Arrive at a conclusion supported by the authorities

16 More than one position may be found by the CPA to satisfy the various standards. As well, the mere fact that certain types of authority do not exist does not prevent the CPA from determining the relevant level of authority has been achieved. That can include situations when the only authority that exists is the statute itself quite often the case shortly after a new provision is enacted into law. The proposed interpretation includes 16 illustrations. Two of the illustrations are new, outlining both when a higher taxing agency standard exists and when the taxing agency has no specific standards. Two old illustrations outlining frivolous positions are deleted from this interpretation, likely because no longer is frivolous the cut-off level where the CPA cannot sign the return or advise a position even with disclosure. Now that level has risen to the level of reasonable basis. INTERPRETATION 1-2 TAX PLANNING (EXPOSURE DRAFT) As with Interpretation 1-1, this interpretation was withdrawn with the issuance of the new SSTS No. 1. Again, while the new interpretation is still (at the time this manual was last revised) issued only in the form of an exposure draft, it still gives some helpful guidance on applying the revised SSTS No. 1 to tax planning engagements. In addition to return preparation, most tax practices involve assisting clients in tax planning. 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. The proposed interpretation makes clear that a position can be aggressive but still be a legitimate position. For purposes of this Interpretation, tax planning includes, both with respect to prospective and completed transactions, recommending or expressing an opinion on 1. a tax return position, or 2. a specific tax plan developed by the CPA, the taxpayer, or a third party. The service may include both proposed transactions and transactions that have already been completed. The proposed interpretation cautions the CPA that if a transaction has been completed, the preparer may be treated as a non-signing preparer under federal law on the issue even if the CPA does not prepare the related return. When issuing an opinion to reflect the results of the tax planning service, a CPA should do all of the following: 1. Establish the relevant background facts, 2. Consider the reasonableness of the assumptions and representations, 11-16

17 3. Consider applicable regulations and standards regarding reliance on information and advice received from a third party, 4. Apply the pertinent authorities to the relevant facts, 5. Consider whether there is business purpose/economic substance for the transaction (the revision notes that it is generally not sufficient to solely rely on a representation there is a business purpose), 6. Consider whether the issue involves a listed transaction or a reportable transaction (or their equivalents) as defined by the applicable taxing authority, 7. Consider other regulations and standards applicable to written tax advice promulgated by the applicable taxing authority and 8. 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 her/himself in connection with any tax planning engagement that are suggested by the Interpretation: 1. 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 you must consider the likelihood that they will receive independent advice or that they have sufficient tax knowledge to understand the transaction.) 2. Are all assumptions and representations reasonable and consistent with my client s circumstances? 3. Does the transaction have both a business purpose and economic substance relevant to my client s tax consequences? The revision again cautions that the CPA cannot merely accept a statement there is economic substance, but must specify the basis for making that determination and evaluate the reasonableness of that basis. 4. Have I done enough work to understand and evaluate the entire transaction? The new interpretation adds the strong suggestion (the word used is should consider the necessity ) that the CPA obtain an engagement letter for the engagement

18 Like proposed interpretation 1-1, this interpretation updates the examples that were in the old version for the changes in SSTS No. 2. The proposed standard also adds a new example that clarifies if a CPA is engaged to advise a taxpayer on a transaction in a planning engagement where penalties could apply to the adviser if the transaction fails to meet certain standards, the conclusions found at the advice engagement must be updated to insure the level of assurance is still met if the CPA later prepares the tax return. Law develops and changes over time, and it is possible a position that met the more likely than not standard earlier in the year when the transaction was being planned may no longer meet that standard at the time the return is prepared. The Interpretation puts significant responsibility for determining the reasonableness of tax planning ideas on the CPA tax advisor. We cannot hide behind the skirts of a promoter or a law firm. Instead, if we are engaged to offer advice about a tax planning transaction, we must take responsibility for it. SECTION: FBAR REPORTING OFFSHORE VOLUNTARY DISCLOSURE PROGRAM RESTARTED BY IRS WITH HIGHER BASE PENALTY, NO STATED DEADLINE FOR FILING Citation: News Release IR , 1/9/12 In News Release IR the IRS announced the third round of its Offshore Voluntary Disclosure Program (OVDP). The latest version has similarities to the earlier versions of the program, but as was true with the second version the penalties are increased in the latest version. The major provisions of the latest program are as follows: There is no set deadline to apply, but the IRS reserves the right to change the terms of program in the future. The news release specifically indicates the IRS may choose to increase penalties in the future for all taxpayers or certain classes or taxpayers. As well, the IRS reserves the right to end the program at any time. The standard penalty rises to 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In the 2011 program that maximum penalty was 25%. The reduced penalties remain at 12.5% and 5%, with the requirements for those reduced penalties also remaining the same as under the 2011 program. Thus, individuals whose maximum value of foreign bank accounts/entities or assets did not exceed $75,000 in any calendar year covered by the program (prior 8 years) will qualify for the 12.5% rate. The 5% rate is provided for foreign residents who meet certain requirements. Taxpayers who feel the penalties under this program are disproportionate to the violation can opt to go the examination route instead

19 Those entering the program must file all original and amended returns for the past eight years. The participants must pay all addition tax due for that period, as well as interest and penalties (accuracy related and delinquency). As was true before, this program is designed for those with unpaid tax liabilities. The IRS announced in this release that they are currently developing procedures for those who have failed to comply but owe no tax. Those individuals are not covered by this program and should not file under it. In prior revisions of OVDP the IRS has suggested that such individuals file the delinquent returns with an explanation of the reasons for late filing, indicating those that did so by the OVDP deadline date would not be penalized. Presumably similar relief will be offered, but practitioners need to watch for future developments. The IRS will update information on this program on their website at The IRS has committed to updating its frequently asked questions and providing additional information. Practitioners who have clients that inform them about potential offshore accounts and unreported income should be careful in handling such issues. Generally CPAs should initially refer such clients to a tax attorney for the initial discussion of facts, since information may be disclosed that the IRS might view as evidence of criminal tax evasion. As well, it is possible such offshore activities might have violated other U.S. laws outside the tax realm. An attorney, with privilege in both civil and criminal matters, can be given this information and push the client to give a full confession of the facts. Once the attorney clears the client the CPA may be brought back in to deal with the actual filing. But the danger is that if the CPA goes forward and becomes aware of damaging information, the CPA may become a key witness against the client should prosecution later be undertaken. So care is needed in this area. SECTION: CIRCULAR 230 CPA DISBARRED FOR FAILING TO FILE RETURNS, INADEQUATE DUE DILIGENCE ON CLIENT INFORMATION Citation: IR , OPR v. Kaskey, OPR Complaint No , 7/6/10 A CPA was disbarred by the Office of Professional Responsibility, and the disbarment imposed by the Administrative Law Judge was sustained on appeal, the IRS announced in a news release this week

20 While the news release concentrates on preparer's lack of due diligence in relying on the representations of his client, the actual decision of the ALJ noted most prominently that the CPA had failed to file his personal returns for five consecutive years, an offense which happens to the one that the OPR most often takes action against. But this CPA had also prepared tax returns for a client where there was significant evidence that the CPA did not perform adequate due diligence on the information provided. The appeals report noted that the officer compensation reported on the corporate return did not agree with the amounts reported on the individual returns, the corporate books clearly identified personal expenses of the owners that had been paid by the corporation that were not reported as either loans or income by the individual taxpayers and it should have been obvious the taxpayers could not maintain their lifestyle based solely on the reported income. The CPA also did not help his case by ignoring the original complaint filed by the OPR and the later Motion by the OPR to the administrative law judge for a default finding against the CPA. As preparers we are clearly allowed to accept the representations of our clients unless we have reason to believe those representations are either false or in error. In that case we cannot turn a blind eye towards things we are aware of (such as the officers' salary reported on the corporate return we also prepared) or the implications of other information we become aware of (such as clearly personal expenses reported in a ledger analysis we may prepare in doing accounting work for the taxpayer's business). The IRS definitely spun this case in the press release to emphasize the client information issues, even if the actual decisions seemed to treat those as secondary issues. The IRS uses such press releases to influence the actions of tax preparers and their clients, and this press release may be read as notice that the IRS believes preparers have been taking too many liberties with the law and information they are aware of. SECTION: ACCOUNTANTS LIABILITY ACCOUNTANT WHO FAILED TO DISCLOSE PROPER AMOUNT OF TAX ON 7004 FOUND LIABLE TO CLIENTS FOR TREBLE DAMAGES AND ATTORNEY FEES Citation: Haddad Motor Group v. Karp, Ackerman, CA1 Nos , , 4/20/10 In the 2010 case of Haddad Motor Group, Inc. v. Karp, Ackerman, Skabowski & Hogan, P.C., (603 F.3d 1, CA1) an accounting firm found that even though it was found not liable for the major claim of damages against it, its actions were enough to trigger an award of treble damages under Massachusetts law and, as well, a complete award of attorney fees and costs incurred by the plaintiffs amounts that were far in excess of the actual damages found

21 The CPA firm in question acquired a client in December of 1997 that was already a party to a margin-against-the-box transaction that gave the corporation access to the funds represented by appreciated stock it held, but delayed the payment of tax on that transaction until the position was closed out. The corporation continued with the accountant, and in December of 1998 met to discuss whether to close out the marginagainst-the-box transaction (which incurred fees each year it was kept open) and whether the corporation should make an S election. On February 11, 1999 the corporation closed out the transaction, triggering the gain. On March 15, 1999 the corporation filed an S election retroactive to the beginning of the year and causing the February transaction to be subject to built-in gains tax. In December of 1999 the accounting firm informed the corporation it was subject to the built in gains tax, and suggested the corporation file an extension at March 15 due to the ongoing audit of the corporation s 1997 return. An extension was prepared, but no amount was shown as being due with the extension. When the return was filed on the extended due date, the tax due, plus penalties for underpayment of estimated taxes, late payment of taxes and interest were imposed. The client sued the CPA firm asking for damages from the BIG tax and the penalties and interest. The trial court found no damages from the BIG tax itself, but did find that the penalties and interest were related to the CPA firm s failure to advise the client to make payment earlier. More troubling, the court found that the firm acted willfully, rather than merely negligently, based on the fact that the Form 7004 the firm prepared showed a very small tax liability when the firm at that point knew a substantial liability for the built in gain tax on this transaction was due. The willful action triggered an automatic trebling of the $12,345 of damages to $37,035. But that wasn t the worst of it the finding also triggered an award of attorney s fees and costs in the case that amounted to over $250,000, which included costs incurred on the portion of the claim for which the plaintiffs did not prevail (in fact, that appears to have made up the vast majority of such costs). On appeal the First Circuit Court of Appeals sustained the result. The Court found it plausible that the accounting firm had failed to discuss the payments due largely to avoid having to admit the large amount of tax due that they had failed to warn the client about, and found very damaging the preparation of the Form 7004 that failed to include taxes the firm knew were due

22 SECTION: CIRCULAR 230 ATTORNEY SUSPENDED FROM PRACTICE FOR 48 MONTHS FOR FAILURE TO FILE AND LATE FILING OF INCOME TAX RETURNS Citation: IR , OPR v. Kilduff, 3/4/10 In a news release, the IRS announced that the Office of Professional Responsibility was able to obtain a 48 month suspension of an attorney from practice before the IRS. The Massachusetts tax attorney, who was with a large law firm in Boston, had failed to file returns at all for 2002, and filed returns late for , and The OPR had originally sought the 48 month suspension, but the Administrative Law Judge who heard the case set the penalty at 24 months. Both the attorney and the IRS appealed to Secretary of the Treasury s Appellate Authority, which ultimately imposed the harsher suspension period sought by the OPR. Even when the 48 month period is up, the attorney is not assured of being reinstated to practice. At a minimum the IRS announced that the attorney would need to file all outstanding federal returns, pay all taxes he is responsible for or enter an acceptable installment agreement or offer in compromise. The IRS news release announcing the decision noted that the attorney in question had formerly worked for the IRS Office of Chief Counsel. SECTION: CIRCULAR 230 CPA SUSPENDED BY OPR FOR TWELVE MONTHS FOR PLAN INVOLVING OVERSTATED DEDUCTIONS Citation: IR , 2/5/10 The IRS Office of Professional Responsibility suspended a CPA pursuant to Circular for twelve months for providing false or misleading information in connection with the preparation of client s tax returns. The IRS news release stated that the CPA advised his clients to forward funds from their businesses to two corporations the CPA controlled, claiming the amounts as an expense on the tax returns he prepared. However, the CPA had the corporations rebate the funds back to the clients. The OPR suspended the CPA for twelve months and entered into a settlement that included allowing the IRS to issue a press release naming the CPA specifically and outlining his conduct

23 SECTION: 446 TAXPAYER'S FAILURE TO INCLUDE REPORTING OF SPECIFIC TYPE OF INCOME IN AUTOMATIC CHANGE REQUEST PROHIBITED LATER CLAIM THE OMISSION OF THOSE TRANSACTIONS WAS A MATH ERROR TO ALLOW REVISION OF INCOME REPORTED Citation: Capital One v. Commissioner, U.S.T.C. 50,687, CA4, 10/21/11 In Capital One v. Commissioner ( U.S.T.C. 50,687, CA4) the Fourth Circuit affirmed the Tax Court s holding that a taxpayer could not count as a mere math error its failure to include a significant component of transactions for which it now wanted to secure an automatic change of accounting method. The case involved a credit card issuer that wanted to change its method for accounting for late fees, arguing it needed to do to comply with changes made in the Taxpayer Relief Act of In that law, Congress required the use of OID methods for reporting certain fees received by lenders. For the two years in question there was some issue whether late fees were to be included in such required OID treatment. The issuer had filed a Form 3115, in compliance with the automatic consent requirements the IRS had issued on this item, to change its reporting for covered fees. The Revenue Procedure applicable to this change required the taxpayer to submit detailed information on the nature of the fees to be impacted. The analysis did not include late fees among those the lender was going to change, and the tax returns for the years in question did not include late fees in the OID computations. The lender in the third year began to include such late fees, a position the IRS later accepted in a published Revenue Procedure indicating such fees were covered by the change in the law. The lender at the same time claimed that such a treatment was also required for the first two years, making revisions to those returns that generated large reductions in tax. The IRS argued that the issuer had not obtained consent to change its method. The lender argued that its filing under the Revenue Procedure for automatic consent should be read to include late fees. The Tax Court and the Court of Appeals did not agree. Both found that the treatment of late fees were, by themselves, a material item for purposes of a change in accounting method, and thus the original Form 3115 did not cover these items