Federal Income Tax Ethics. 2 Continuing Education units IRS approval Cpefastneasy

Transcription

1 Federal Income Tax Ethics 2 Continuing Education units IRS approval Cpefastneasy

2 Ethics All rights reserved. Permission in writing must be obtained from the publisher before any part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system.

3 Federal Income Tax Ethics Welcome to the course, Federal Income Tax Ethics. In this course, you'll learn the rules and regulations governing tax preparers, due diligence requirements and additional rules governing other processes a tax practitioner may be involved with. In addition you will learn what the preparer penalties are, the rules governing Powers of Attorney for taxation, safeguarding taxpayer information, and e-file compliance.

4 Introduction The Treasury Department has a comprehensive set of rules governing practice as a preparer of federal income tax returns. The list of rules governing all paid preparers can be found in the Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service, or Circular 230 as it is more commonly referred to. Circular 230 contains rules governing tax preparation, the requirements for Registered Tax Return Preparers (RTRPs), Enrolled Agents (EAs), and Enrolled Retirement Plan Agents (ERPAs), and other persons representing taxpayers before the IRS. Additional regulations issued by the Treasury Department govern Practitioner Tax Identification Numbers (PTINs) and PTIN Holders. Circular 230 was updated August of 2011 and has pending updates in process again. When reviewing Circular 230, ensure you have downloaded the most recent copy from the IRS website,

5 Objectives After completing this session, you will know the regulations governing Practice before the IRS, including the rules governing: Authority to practice Duties and restrictions relating to practice Sanctions for violations of the rules and regulations. Define practice before the IRS. Determine who can practice before the IRS. Identify the practice limits of those individuals permitted to practice before the IRS. Describe Prompt Disposition of matters before the IRS. Determine who a practitioner may not receive assistance from while practicing as a tax return preparer. Define fees as allowed for tax preparation and other tax matters. Identify the rules dealing with clients. Discuss what represents due diligence by a tax return preparer.

6 Objectives List the responsibilities of the principal authority over a firm s practice. Identify incompetent and disreputable conduct that can result in disciplinary proceedings. Define the term, tax return preparer. Know the IRS preparer penalties and the associated penalties Identify IRS e-file procedures Know the penalties for violating IRS e-file procedures Know the rules governing powers of attorney Know the rules governing tax information authorization Know the rules and associated penalties about safeguarding taxpayer information

7 History Income tax return preparers are governed by the United States Code, Title 26, Internal Revenue Code (IRC or Code). The Treasury Department and IRS are tasked with the responsibility of ensuring income tax preparers abide by these rules. The rules are intended to protect taxpayers, tax return preparers, and the federal government from unscrupulous tax return preparers. Included in the rules are various penalties against tax preparers who willingly, knowingly, or negligently violate the rules governing practice. The penalties vary based on the severity of infraction and start as low as $50 per infraction with an annual maximum amount and can be higher than $10,000 per incident and up to three years in prison. In addition the IRS can suspend or disbar an tax return preparer from practice for varying lengths of time. The regulations are intended to keep those few who are disreputable preparers out of the system. Prior to 2010, only those tax return preparers that were certified by a state governing agency, attorneys and CPAs, and licensed by the IRS, enrolled agents (EAs) and enrolled retirement plan agents (EPRAs) were governed by these regulations. Beginning in 2010, all tax return preparers who are paid to do tax preparation are now governed by these rules and regulations. So what is the definition of tax return preparers who are governed by these rules and regulations? The IRC defines a tax return preparer as: An individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund. Owners of tax preparation services are also covered by these regulations. Currently the regulations do not include preparers that work as volunteers, such as the VITA, TCE, and LITC programs. Let s look at the tax return preparer regulations and learn what determines a violation of the rules.

8 Definitions Attorney Any person who is a member in good standing of the bar of the highest court of any state, territory, or possession of the U.S, including a Commonwealth, or the District of Columbia. Certified Public Accountant Any person who is duly qualified to practice as a certified public accountant in any state, territory, or possession of the U.S, including a Commonwealth, or the District of Columbia. Commissioner refers to the commissioner of the IRS Practice before the IRS comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings. Practitioner Any individual how is currently in good standing to practice as an Attorney, Certified Public Accountant (CPA), Enrolled Agent, Enrolled Actuary, Enrolled Retirement Plan Agent, or Registered Tax Return Preparer. Practitioner Tax Identification Number Also known as a PTIN, is an identifying number issued by the IRS to a tax preparer to use when signing tax return. The PTIN consists of the letter P and 8 digits and must be renewed annually before practicing for the year. Service means the Internal Revenue Service Tax Return Set of documents used by the IRS to report and pay tax liability to the United States Treasury. The documents include amended tax returns and claims for refund. Tax Return Preparer - An individual who, for compensation, prepares all or substantially all of a federal tax return or claim for refund. Owners of tax preparation services are also covered by these regulations. Currently the regulations do not include preparers that work as volunteers, such as the VITA, TCE, and LITC programs.

9 Rules Governing Authority to Practice - Offices There are two offices within the IRS established to oversee tax return preparers, the Office of Professional Responsibility (OPR) and the Return Preparer Office (RPO). The Office of Professional Responsibility mission is the ensure all tax return preparers adhere to the professional standards and follow the laws governing tax return preparation. OPR is the department that determines if a tax return preparer has violated standards and is subject to fines. OPR also works with the Criminal Investigation Division (CID) within the IRS to ensure those preparers that are guilty of the most egregious violations are punished and removed from the system of tax return preparers. The Return Preparer Office mission is to improve taxpayer compliance by providing comprehensive oversight and support of tax professionals. The RPO is responsible for providing individuals with Preparer Identification Numbers (PTINs), tracking continuing education providers and courses, tracking return preparers annual continuing education requirements, overseeing the Registered Tax Return Preparer Minimum Competency Test (RTRP Test) and the Special Enrollment Exam (SEE) for enrolled agents. All tax return preparers will deal with the RPO on an annual basis through PTIN application and renewal, special registration testing for RTRPs or EAs, and through annual continuing education (CE) tracking. Most tax return preparers will not deal with the OPR throughout their career as a tax return preparer.

10 Rules Governing Authority to Practice - Who May Practice Attorneys Any attorney who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the IRS by filing a written declaration with the RPO. The declaration must state that they are currently qualified as an attorney and is authorized to represent the party or parties. Attorneys in tax preparation practice must maintain an IRS authorized PTIN annually. Certified Public Accountants Also known as a CPA. Any certified public accountant who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the IRS by filing a written declaration with the RPO. The declaration must state that they are currently qualified as a certified pubic accountant and is authorized to represent the party or parties. CPAs must maintain an IRS authorized PTIN annually. Enrolled Agent Also known as an EA. Any individual who has passed the IRS Special Enrollment Exam and has an approved application from the RPO designating them an EA. The individual must maintain the minimum education requirements for each enrollment cycle, must maintain an IRS authorized PTIN annually, and not be under suspension or disbarment from practice. Enrolled Retirement Plan Agent Also known as an ERPA. An individual who has passed the IRS ERPA Special Enrollment Exam and has an approved application from the IRS approving them as an ERPA. The individual must maintain the minimum education requirements for each enrollment cycle, must maintain an IRS authorized PTIN annually, and not be under suspension or disbarment from practice. Registered Tax Return Preparer Also known as an RTRP. An individual who is at least 18 years old and has passed a minimum competency test, the RTRP Test, overseen by the IRS. The individual must maintain the minimum education requirements for each enrollment cycle, must maintain an IRS authorized PTIN annually, and not be under suspension or disbarment from practice. PTIN Holder This is a provisional designation allowed tax current practicing tax return preparers prior to January 1, The individual must maintain the minimum education requirements for each enrollment cycle, must maintain an IRS authorized PTIN annually, and not be under suspension or disbarment from practice.

11 Rules Governing Authority to Practice - How to Become an EA, RTRP, or PTIN Holder Enrolled Agent The individual must successfully pass the three-part Special Enrollment Exam. The Exam is provided by Prometric, Inc and overseen by the IRS. The test covers all areas of practice including representing taxpayers. Each part of the Exam is $105 and must be paid in full before scheduling a testing time. All EA candidates must apply for and receive an authorized PTIN prior to taking the examination. Once the individual has passed all three parts of the exam, they must submit Form 23, Application for Enrollment to Practice Before the Internal Revenue Service. The application must be submitted with a payment of $30. Once the IRS receives the application, they will review the individual s personal tax history to ensure they are in compliance their own tax filings and all tax liabilities are paid or in a properly executed and timely payment plan. In addition, they will review the individual s practice history to ensure there are no outstanding suspensions or investigations. An individual can t refer to themselves as an Enrolled Agent, or an EA, until the IRS issues their Enrolled Agent number and card. Registered Tax Return Preparer The individual must successfully pass the Registered Tax Return Preparer Competency Test. The Exam is provided by Prometric, Inc and overseen by the IRS. The test covers the basics in federal individual income taxes, rules governing ethical practice, penalties associated with practice, tax return filing procedures and customer care as it relates to taxpayers. The exam is $116 and must be paid in fill before schedule a testing time. All RTRP candidates must apply for and receive an authorized PTIN prior to taking the examination. Once the IRS receives the application, they will review the individual s personal tax history to ensure they are in compliance their own tax filings and all tax liabilities are paid or in a properly executed and timely payment plan. An individual can t refer to themselves as a Registered Tax Return Preparer, or an RTRP, until the IRS issues their Registered Tax Return Preparer certificate.

12 Rules Governing Authority to Practice - How to Become an EA, RTRP, or PTIN Holder PTIN Holder This is a provisional regulation that will only be effective through December 31, Individuals who applied for a PTIN prior to passing the RTRP Test. These individuals must have filed all personal tax returns timely and paid in, or be in a current payment plan, all of their federal tax liabilities. The PTIN Holder must pass the RTRP Test no later than December 31, All individuals must have a current PTIN to practice tax return preparation annually. Individuals must complete the application, or the renewal application, either online at or mail Form W-12, Paid Preparer Tax Identification Number (PTIN) Application and Renewal, and pay a $64.25 application fee, $63.25 for renewals. Individuals must have filed all personal tax returns timely and paid in, or be in a current payment plan, all of their federal tax liabilities. In addition, individuals must be prepared to submit fingerprints for a background check upon request by the IRS.

13 Rules Governing Authority to Practice - Renewal Enrollment year is January 1 through December 31 of any calendar year. Enrollment cycle - is all three successive calendar years preceding the effective date of the enrollment renewal. Registration year is the 12-month period between January 1 and December 31 of any calendar year a registered tax return preparer or PTIN holder is authorized to practice before the IRS. Effective date of enrollment is the April 1 of the calendar year following the end of the enrollment cycle. Enrolled Agents Enrolled Agents have a three year enrollment cycle. They cycles are split into three separate three year periods and are based on the individuals last digit of their social security number. Social security numbers ending in 0, 1, 2, and 3 must apply for renewal between November 1, 2011 and January 31, The renewal will be effective April 1, Social security numbers ending in 4, 5, and 6 must apply for renewal between November 1, 2012 and January 31, The renewal will be effective April 1, Social security numbers ending in 7, 8, and 9 must apply for renewal between November 1, 2013 and January 31, The renewal will be effective April 1, Registered Tax Return Preparers and PTIN holders renew their registration annually when they renew their PTIN.

14 Rules Governing Authority to Practice - Continuing Education Enrolled Agents Enrolled Agents must receive a minimum of 72 hours of continuing education (CE) in an enrollment cycle. An EA must receive a minimum of 16 of their total CE annually with two of the hours in ethics or professional conduct. An individual who becomes enrolled during an enrollment cycle must complete two hours of qualifying continuing education credit for each month enrolled during the enrollment cycle. Each year of the enrollment cycle must contain 2 CE credits in ethics or professional conduct. Registered Tax Return Preparers Registered Tax Return Preparers and PTIN Holders must receive a minimum of 15 hours of CE annually including two hours of ethics or professional conduct, three hours of annual tax update, and ten hours of federal tax law topics. Requirements for Continuing Education Enrolled Agents Courses must be designed to enhance existing professional knowledge in taxes or tax matters. Eligible courses can cover current tax laws, or federal tax related matters including accounting, taxation, or ethics. Courses in the basics of income tax are not eligible for an EA to receive CE. Courses must be from an IRS approved Course Provider and must have a current IRS course number.

15 Rules Governing Authority to Practice - Continuing Education Registered Tax Return Preparers and PTIN Holders Courses must be designed to enhance existing professional knowledge in taxes or tax matters. Eligible courses can cover current tax laws, or federal tax related matters including accounting, taxation, or ethics. Courses in the basics of income tax are eligible for an RTRP or PTIN Holder to receive CE. Courses must be from an IRS approved Course Provider and must have a current IRS course number. Course qualifications Courses must be 50 minutes in length for each single continuing education hour. There is no rounding up for the contact hour. Therefore a 26 minute course is not eligible for CE and a 76 minute course is eligible for only one CE. A formal course must require attendance and must present all those in attendance successfully with a certificate of attendance. The course must be conducted by a Subject Matter Expert (SME) in the course subject. The course must provide all attendees with written outline, textbook, or suitable electronic educational materials. The course must have a current IRS approval number. Correspondence or self-study programs must require registration of the participant. Must have a test for each participant to pass. The course must provide a certificate of completion based on the successful passing of the test. The course must provide all attendees with written outline, textbook, or suitable electronic educational materials. The course must have a current IRS approval number. Individuals may serve as a discussion leader, instructor, or speaker and receive CE. One hour of CE will be awarded for each contact hour completed. A maximum of two hours can be awarded for actual subject preparation time for each contact hour as the discussion leader, instructor, or speaker. The maximum CE for instruction and preparation may not exceed six hours annually for an EA and 4 hours annually for an RTRP. An discussion leader, instructor, or speaker may only receive CE for one instance of a presentation for the enrollment cycle or the registration year.

16 Rules Governing Authority to Practice - Continuing Education Recordkeeping Continuing Education Providers are required to upload all successful CE credits for PTIN holders to the IRS. However, PTIN holders, RTRPs and EAs are required to keep records of their CE for four years following the date of renewal. These records include: Proof of PTIN copy of the PTIN verification provided by the PTIN account management system on IRS.gov The certificate of completion or attendance with: Name of the course Program number of the course Name of program sponsor Location of program Number of CE received Dates attended Name of speaker, instructor, or discussion leader if appropriate The description of course content This is often included on the certificate Written outlines, course syllabi, textbook, and/or any electronic materials provided To receive CE credit as an instructor, speaker, or discussion leader, the individual must keep the following: The name of the sponsoring organization The location of the program The title of the program and copy of its contents The dates of the program The credit hours claimed

17 Rules Governing Authority to Practice - Representation and Return Preparation Representation The following individuals may represent themselves or an associated business without additional certification or registration: Themselves or an immediate family member A full-time employee may represent their employer A general partner or full-time employee may represent the partnership A bona fide officer or full-time employee of a corporation, association, or organized group An officer, or a regular employee of a governmental unit, agency, or authority may represent their employer in the course of their official duties An individual may represent any individual or entity who is outside the U.S. before personnel of the IRS when the representation takes place outside the U.S. Return Preparation Any individual who prepares, or assists in the preparation of, all or part of a tax return or claim for refund must have an active PTIN. An individual must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer to obtain a preparer tax identification number. Current tax preparers may receive a valid PTIN before becoming a registered tax return preparer before January 1, 2014, but they must pass the RTRP Test before January 1, Any individual who prepares, or assists in the preparation of, all or part of a tax return or claim for refund is subject to the duties and restrictions relating to practice in Treasury Department Circular 230.

18 Practice Before the IRS EAs, attorneys, and CPAs have unlimited practice rights before the IRS. Attorneys also have the right to represent taxpayers before a judge. An RTRP may only represent the client s whose tax returns or claims for refund they have signed and only for the year prepared. RTRPs are further limited to representation before revenue agents, customer service representatives and similar officers and employees of the IRS. In addition, RTRPs are not permitted to give advice unless it pertains to the tax return prepared for the client requesting advice. Disposition of Matters Before the IRS Practitioners must promptly provide copies of any records or information requested by an IRS officer or employee if requested. If the practitioner does not have the records, but knows who does, they must provide the name of the individual with the records. Practitioners must attempt to ask the taxpayer who holds the records, but are not require to question or verify who is holding the information. Practitioners must promptly provide or testify if an IRS officer or employee inquires into an alleged violation of regulations. The practitioner should never interfere with a request for records or information. Practitioners should obtain legal counsel if they feel their information is privileged. If a client is omitting income information from a tax return, the practitioner should advise the client of the tax laws. If the information is submitted during tax return preparation, the practitioner should not continue with tax preparation unless the taxpayer is willing to properly include the information. The practitioner is not required to report the taxpayer to the IRS.

19 Practice Before the IRS Practitioners may not retain an individual who is under suspension or disbarment from practice as an employee, nor may the practitioner request or rely on information received from the individual in question. Practitioners may not perform any official act as a notary with respect to any matter before the IRS that they are employed, or in any way have an interest, to represent the client as counsel, attorney, or agent before the IRS. Practitioners must return a client s records upon request. These records include any working papers and information reporting forms such as a W-2, 1099s, and K-1s. The information does not include a copy of the tax return or any working papers created by the practitioner, the practitioner s firm, or an employee of the practitioner if the taxpayer has not paid the practitioner. A practitioner may not represent a client if there is a conflict of interest arising between that client and any other client. Practitioners advertise their services and certification, but they may not make false or misleading, fraudulent, or coercive statements in their advertisements. EAs, ERPAs and RTRPs may not use the term certified when describing their professional designation nor may they imply an employer/employee relationship.

20 Practice Before the IRS Practitioners may advertise their fees, but must maintain the fees advertised for a minimum of 30 days after publishing the fees. All advertisements, including electronic media, that include fees must be kept on file for 36 months after the last transmission of the advertisement. Fees Practitioners may not charge an unconscionable fee for services related to federal tax matters. Contingent fees can t be charged by a practitioner unless: The tax return is being examined or challenged by the IRS An amended tax return or claim for refund that is fi led within 120 days of being challenged or examined by the IRS A claim for refund or credit in solely in connection with a determination of statutory interest and penalties assessed by the IRS. 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 by the IRS or is in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, or that otherwise depends on a specific result attained. A contingent fee also 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. For example, Practitioner A charges their clients 10% of the refund as a fee for completing their tax returns. This is in direct violation of the rules in Circular 230 and can result in suspension from practice.

21 Practice Before the IRS A practitioner may not contact, attempt to contact, or market to a potential client if the client makes it known they do not want to be contacted. A practitioner may not endorse or otherwise negotiate any check U.S. Treasury issued tax refund check. This includes, but is not limited to, direct deposit of the check into the practitioner s personal or business account. The rules and regulations governing tax preparation do not authorize an individual to practice law.

22 Due Diligence Requirements Due diligence is a term used by the IRS to describe a practitioner s responsibility to follow the laws pertaining to income tax preparation, know the rules and regulations governing income taxation, and to practice in an ethical manner. IRS regulations require all practitioners to practice due diligence in all areas of tax return preparation, claim of refund, communication with the IRS, and advising clients. In addition, new proposed regulations require tax return preparers to not file a claim for income taxes with information the practitioner knows through outside knowledge or suspects based on reasonableness to be inaccurate. If the information doesn t pass the reasonableness test, the practitioner should ask specific questions relating to the information and record the questions and answers when they are asked and keep the information in the practitioners files. An example of the reasonableness test would be an individual with a $50,000 income and itemized deductions that claims a $25,000 deductible real estate expense. This is an unreasonable amount or real estate taxes paid and the practitioner should ask if there is a mistake in the amount reported on any provided documentation and if not, how were the taxes paid and how many properties they are for. There is no specific rule on what questions to ask, each taxpayer s situation is unique and the questions will be based on the taxpayer s individual situation. Practitioners may not purposely, or through gross incompetence, sign a tax return that contains a tax deduction or income position, that has no reasonable basis in tax law, can t be more than likely sustained by the rules and regulations or common accepted practices governing income taxes. Practitioners may complete and sign a tax return that has an intentional understatement of income tax created, or known, by the practitioner.

23 Due Diligence Requirements Practitioners may not advise a taxpayer to take a position that has no reasonable basis in tax rules and regulations or is an intentional understatement of income by the taxpayer. Remember, practitioner tax knowledge is the best resource for ensuring due diligence. A tax return preparer many not advise a client to submit a tax return or other documentation to the IRS that includes a frivolous position. Practitioners should advise a taxpayer of any potential inaccuracies found an a previously filed tax return. The practitioner is not required to correct the previous error nor are they required to report the error to the IRS. The practitioner is required to complete any new returns or claims for refund correctly and not continue the error. Practitioners may rely on information provided by their clients, however if the practitioner knows of, or suspects, information that is different from what is supplied by the taxpayer the practitioner should make sure the client can explain the situation satisfactorily, and document the explanation, before completing the tax return. The owner of, or principal authority over, a tax practice is the individual responsible for the daily operations of a tax practice. This individual must ensure the practice has procedures in place to ensure tax preparers follow IRS rules and regulations, practice due diligence, and meet all IRS record keeping requirements. The principal authority is subject to the same penalties as preparers if there are no procedures in place.

24 Sanctions The Secretary of the Treasury, or a delegate, may censure, suspend, or disbar any practitioner from practice before the IRS if the practitioner is shown to be incompetent or disreputable. Practitioners that have been suspended or disbarred may not practice nor may they provide help or training to, or oversee another practitioner or tax business. The Secretary has the authority to impose a monetary penalty on any practitioner who engages in conduct subject to sanction. The Secretary can impose the penalty and sanctions on their employer if they knew of or reasonably should have known of the infraction. All affected parties must be notified of the proceeding before the any penalty is assessed. The penalty may not exceed the gross income derived, or to be derived, from the conduct subject to the penalty. The various types of disreputable a practitioner may be sanctioned for include: Conviction of any criminal offense under Federal tax laws. Conviction of any criminal offense involving dishonesty or breach of trust. Conviction of any felony under Federal or State law for which the conduct involved renders the practitioner unfit to practice before IRS. For example, embezzlement, grand theft, and writing bad checks. The conduct does not necessarily have to be a financial based crime, the crime can be a moral or violent crime as well. Giving false or misleading information, or participating in such, to the Department of Treasury or any officer or employee, to any court authorized to judge Federal tax matters. Facts or other information contained in testimony, Federal income tax returns, financial statements, application for enrollment, affidavits, declarations, and any other document or statement written or oral are included in the term information. Solicitation of employment using false or misleading statements, intentionally using false or misleading statements to a potential client with the intent to gain employment, implying or intimating the ability to obtain special consideration from the IRS or any IRS officers or employees.

25 Sanctions The various types of disreputable a practitioner may be sanctioned for continued: Willfully failing to file a required personal Federal tax return, willfully evading, or attempting to evade, tax law, or participating in any way, in evading or attempting to evade, any assessment or payment of Federal tax. Willfully assisting, encouraging, or counseling a taxpayer to evade, or attempt to evade, or suggesting to any taxpayer to violate any Federal tax law, or suggesting or counseling in an illegal plan to evade Federal taxes or payment of these taxes. Misappropriating, or failure to properly remit, any funds received from a client to pay a tax bill or other obligation due the United States. Influencing or attempting to influence any officer or employee of the IRS by threats, false accusations, duress or coercion, or by offering any special inducement or promise of an advantage or by bestowing of a gift, favor, or thing of any value. Disbarment or suspension form practice as an attorney, CPA, public accountant, or actuary by any state, territorial, commonwealth, or the District of Columbia government in the United States. Knowingly aiding and abetting another person to practice before the IRS while that person is suspended, disbarred or ineligible. Contemptuous conduct in connection with practice before the IRS including abusive language, making false accusations or statements, circulating or publishing malicious or libelous matters. Intentionally creating and fi ling tax returns, requests for refunds, or any other document with false statements and submitting them to the IRS. Willfully failing to sign a tax return that requires signature as the paid preparer. Intentionally disclosing information, without taxpayer authorization, from a tax return outside of the taxpayer, and spouse if joint, and the IRS as required. Failing to e-fi le, or fi le using magnetic media, as required by the IRS. Knowingly preparing tax returns without a valid PTIN. Representing taxpayers before the IRS when not authorized to do so.

26 Preparer Penalties Income taxes and income tax return preparers are generally governed by United States Code, Title 26, Internal Revenue Code (IRC or Code). In order to ensure the integrity of the U.S. income tax system, the Treasury Department and the IRS are tasked with ensuring taxpayers and tax return preparers abide by these rules. The intention of the rules governing tax return preparers is to protect the individual taxpayers, tax return preparers, and the federal government from unscrupulous tax return preparers. The rules include penalties which vary based on the severity of the infraction. In most cases, the penalty is a dollar amount as low as $50 with an annual maximum amount of penalty. In addition to the penalties that can be assessed, the IRS can also suspend or disbar a tax return preparer from practice for varying lengths of time. These regulations are intended to weed out the few disreputable tax return preparers that are in the system. All tax practitioners governed by Circular 230 are subject to the preparer penalties in the Code.

27 Preparer Penalties Tax return preparers (practitioners) are required to prepare a return that is true and accurate to their knowledge. This means practitioners must know the rules that apply to the tax concepts they are dealing with in a taxpayer s tax return. If they don t know the rules, they should now how to look them up in IRS materials. In addition, practitioners should be sure to ask questions of the taxpayer to ensure they have all the information necessary to create an accurate tax return. When determining a position on a tax return, a practitioner is generally only required to follow the more likely than not standard set by the Code. The more likely than not standard refers to a practitioners confidence that the position taken on the tax return can be support by the Authorities. Authorities include the tax code, tax regulations, revenue procedures, internal revenue notices and tax court decisions. Authorities do not include IRS publications, however, on common positions, such as including a W-2 on a tax return, the tax return preparer can rely on common industry practice and IRS publications for advice. Intentional Disregard If a practitioner intentionally disregards IRS rules and regulations when completing a tax return, the IRS can fine the practitioner. The penalty is the greater of $5,000 or 50 percent of the income derived or to be derived from the tax return. Intentional disregard usually occurs when a practitioner ignores the IRS rules governing who an income item, deduction, or credit should be determined and treated.

28 Preparer Penalties Negligence A practitioner is negligent in following the rules and regulations when completing a tax return if they should have known the specific rules governing a position on a tax return when an error occurs or if they knew or should have known specific information from the taxpayer regarding a position. The negligence penalty for a practitioner is the greater of $1,000 or 50 percent of the income derived from the tax return. Negligence occurs when a tax return preparer ignores information from the taxpayer of the IRS rules or guidelines that determine how a tax position should be handled. Tax Return Copies and Signatures A practitioner is required to provide a copy of the completed tax return to a client when the taxpayer signs the return. The copy does not have to be on official IRS forms, but must clearly state the form number (or schedule) and the line numbers with their corresponding entries. The penalty for not signing the tax return or for not providing copies is $50 per failure with an annual $25,000 maximum penalty for each. All tax returns completed by a practitioner are required to have the practitioners signature and PTIN number. In addition, the IRS requires the business employer identifying number (EIN), when there is one, in the practitioner signature section of the tax return. The penalty for not providing the practitioner s PTIN or for not the business EIN is $50 per failure with an annual $25,000 maximum penalty for each.

29 Preparer Penalty Recordkeeping Practitioners are required to keep a completed copy of each tax return completed on file. The copies can be in an electronic format, such as scanned and filed. Instead of keeping a copy of the completed returns the practitioner can retain a list with the taxpayer s name and SSN or ITIN. The copies must be kept for three years after the June 30 following the signature of the taxpayer on the return. The penalty for not keeping copies of the tax return or the list is $50 per failure with an annual $25,000 maximum penalty for each. Earned Income Tax Credit Due Diligence The Earned Income Tax Credit, commonly referred to as EITC or EIC, is a refundable credit that provides low income taxpayers with potentially large income when they have qualifying dependent children. In order to keep the high incidence of fraud down, there are penalties specifically geared towards practitioners who complete returns with EIC claims. This is a four part penalty and practitioners must abide by all four parts with each return completed that has a claim. The four parts are: 1. Completion of Form 8867, Paid Preparer s Earned Income Credit Checklist This form is a series of questions geared towards both the taxpayer and the practitioner. The questions include asking preparers if they made notes in their records when a claim does not pass the reasonable test and if the practitioners asked the tax preparer questions to verify the marital status, child s relationship, and earned income of the taxpayer. The practitioner must complete the form and sign it for each return with a claim for EIC.

30 Preparer Penalty Earned Income Tax Credit Due Diligence continued: 2. Computation of the credit The practitioner is required to use the EIC computation worksheet, or a reasonable facsimile, to determine the credit amount. The worksheet must be kept with the taxpayer s records. 3. Knowledge The knowledge requirement is the most stringent and far reaching. Practitioners are required to know the rules and regulations governing EIC. In addition, the practitioner is required to consider all information known from outside the taxpayer interview and to ask questions if a situation doesn t appear reasonable. For example a taxpayer claims they are a single parent head of household with their niece and nephew as their dependent. The practitioner should ask the taxpayer why the children s parents are not claiming them, where the children s parents live, and why there is no court order granting the taxpayer custody of the children. 4. Recordkeeping The practitioner must keep a copy of the tax return, the Form 8867, the computation worksheet and all information relied on to support the documentation of the claim for EIC on record for three years following the signature of the tax return or the due date of the return whichever comes later. The penalty for failing to comply with the EIC due diligence regulations is $50 for each violation with no annual maximum. In addition to the practitioner being subject to the penalty, the principal authority may be subject to the same penalties for all violations in their business if they do not have procedures in place to require due diligence.

31 e-file Compliance e-file, or electronic filing, is a computerized transfer of a taxpayers tax return to the IRS via computers. The rules and regulations governing IRS e-file can be found in IRS Publication 1345, Handbook for Authorized IRS e- file Providers of Individual Income Tax Returns, Publication 3112, IRS e-file Application and Participation, and Revenue Procedure Internal Revenue Bulletin (I.R.B.) 1488 (or the latest update). Violating a provision of these regulations can result in suspension from the e-file program and sanctions against the practitioners and the firm. There are six categories of authorized IRS e-file providers: An Electronic Return Originator, ERO A business that originates electronic submission of returns either prepared in their offices or collected from taxpayers who bring completed returns to e-file. Generally, tax preparation firms are EROs. An ERO can transmit tax returns for practitioners who do not participate directly in e-file, for taxpayers who do their own returns, and for tax returns generated in their business. Intermediate Service Provider A business that receives tax information from an ERO, processes the information and either forwards the information to a Transmitter or sends the information back to the ERO. Reporting Agent A business that collects and submits payroll tax deposits and their associated forms to IRS. Software Developer A business that develops software for the purposes of formatting electronic returns according to IRS regulations and/or transmits returns directly to the IRS.

32 e-file Compliance There are six categories of authorized IRS e-file providers continued: Transmitter A business that transmits returns directly to the IRS. Online Provider an Online Provider allows taxpayers to self-prepare returns from an online, or downloaded, software application. In order to be an e-file provider you must submit an application to the IRS. Approved Providers, EROs, Intermediate Service Providers, and Reporting Agents will receive an Electronic Filing Identification Number (EFIN) for each location where they will be transmitting the tax return information collected from tax return preparers. Intermediate Service Providers, Transmitters, and Online Providers all receive an Electronic Transmission Identification Number (ETIN). All practitioners that complete and file eleven or more tax returns during the year must participate in the e-file program. EROs must follow the rules and regulations governing e-file. The regulations include: Maintaining the integrity of the e-file system Notifying taxpayers of any e-file rejects Collecting signatures of the taxpayer, spouse, and tax return preparer. Keeping copies of required documentation. Protecting taxpayer information under the federal privacy regulations.

33 e-file Compliance Maintaining the integrity of the e-file system includes filing, and paying, personal income taxes timely. Individuals approved for e-file can not be under suspension or disbarment from practicing tax preparation and can not have any financial crime convictions in their personal history. The Responsible Official listed on the e-file application must ensure they, or a designated representative, are available to respond in a timely manner to any questions requests for information throughout the year. EROs must file a tax return within three days of receiving the taxpayer s signature on the return. Keeping returns longer than three days after signature, when the e-file program is open, is considered stockpiling and can result in suspension from the IRS e-file program. The penalty for stockpiling is $50 per incident with an annual maximum of $25,000. Tax practitioners are not permitted to receive directly or as a direct deposit, endorse, or otherwise negotiate a taxpayer s refund check. The penalty for negotiating a taxpayer s refund check is $500 per incident with no annual maximum. Notify, or attempt to notify, taxpayers of any e-file rejects from the e-file system within 24 hours of IRS notification. Tax returns that have been rejected by the e-file service have not been received by the IRS and are considered not filed. There are many reasons for a return to reject in e-file and the IRS acknowledgement file includes an error code (ERC) that explains the reject. The fine for failing to attempt to notify a taxpayer of a rejected tax return is up to $50 per incident with an annual maximum of $25,000.

34 e-file Compliance Collecting signatures of the taxpayer, spouse, and tax return preparer EROs are required to maintain the taxpayer, spouse and tax return preparer signature on file for each tax return filed. IRS allows an electronic signature for e-filed returns but requires the ERO to keep a copy of Form 8879, IRS e-file Signature Authorization, or Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350 with the taxpayer and spouse signatures and personal identification number (PIN) for the electronic signature on file. The taxpayer, spouse and tax return preparer electronic signature is equivalent to signing a tax return. The IRS can fine an ERO $50, up to $25,000 annually, per missing signature. Keeping copies of required documentation EROs are required to keep a copy of all tax return documents and primary source documents for three years from the due date of the tax return or the date of signature, whichever is later. The paperwork can be kept electronically and must be readily available by the Responsible Official at any time. The required paperwork includes: Copies of all W-2s Copies of all Forms 1099s with income tax withholding Copies of all signed Form 8879 or 8878 Copies of all tax returns the tax return must have a preparer signature if prepared by a tax practitioner other than the ERO. Protecting taxpayer information under the federal privacy regulations The IRS may assess a fine of $50, up to $25,000 annually, per incident.

35 e-file Compliance Protecting taxpayer information under the federal privacy regulations - EROs must ensure that taxpayer information is protected under the rules governing safeguarding taxpayer information. In addition, EROs and other Providers must not disclose taxpayer information to another individual or business without proper authorization from the taxpayer and/or a sanctioned request for information. The penalty for improperly disclosing taxpayer information can be a fi ne of up to $1,000, imprisonment for up to one year, or both. Certain documents must be submitted to the IRS in original form and are transmitted with the e-file return information. These documents must be mailed to the IRS attached to Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, within three business days for IRS acknowledgement of the e-filed return. The attachments include: Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes (or equivalent contemporaneous written acknowledgement) Form 2848, Power of Attorney and Declaration of Representative (or POA that states the agent is granted authority to sign the return) Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent Form 8949, Sales and Other Dispositions of Capital Assets, (or a statement with the same information), if you elect not to report your transactions electronically on Form 8949 Copies of these forms and Form 8453 must be kept with the taxpayers files.

36 Power of Attorney A power of attorney is a written authorization to represent or act on another s behalf in tax matters. If the authority is not limited, the appointed individual can perform all acts you can perform. The IRS requires taxpayers to submit a power of attorney to authorize another person to sign their tax return for them, to represent the taxpayer at a conference with the IRS, and to prepare and file written response to the IRS in their behalf. The level of representation varies based on the practitioner s professional level. Individuals must use a properly executed Form 2848 for Power of Attorney. An individual may provide a properly executed Power of Attorney but the practitioner must submit a completed Form 2848 along with the Power of Attorney. A individual is generally required to have a Power of Attorney to sign for their spouse. A registered tax return preparer can represent a taxpayer whose return they prepared by appearing before a customer service representative, revenue agent, or examination officer in respect to examination of the tax return they prepared. This includes receiving copies of notifications and letters from the IRS and submitting requests for information and information on the tax return in question. A registered tax return preparer can t sign paperwork for a taxpayer. An enrolled agent or certified public accountant can represent any taxpayer at all levels of the IRS except in a court of law.

37 Tax Return Information Authorization A taxpayer can designate a practitioner to receive specific, confidential information from the IRS without providing a power of attorney. Form 8821, Tax Information Authorization, is used to allow a taxpayer to designate a specific individual to receive information form their tax return. The form 8821 does not permit the designated individual to represent the taxpayer before the IRS. Form 8821 must be revoked by the taxpayer if it is no longer applicable.

38 Safeguarding Taxpayer Information Protecting taxpayer s personal information is a top priority for the IRS and tax practitioners. Due to the rise in identity theft, ensuring storage of all information that is received, transmitted, and stored in a manner that protects it from unauthorized use, identity fraud, or destruction of information at all times is imperative. Taxpayer information includes, but is not limited to: Name and address Any social security numbers used on the tax return or shared Income and expenses Receipts Deductions Exemptions address Phone numbers All tax preparation businesses, including tax return preparers, data processors, transmitters, affiliates, service providers, and others involved in financial products and services associated with income tax return preparation, are governed by the Gramm-Leach Bliley Act (GBA). The GBA requires business to provide their customers with a copy of their privacy notice explaining the business : Information collection practices Information sharing practices

39 Safeguarding Taxpayer Information Clients have the right to limit some sharing of their information and businesses may be limited in their ability to use the information gathered. These rights include, but are not limited to, refusal to allow their personal information to be used for training purposes, and marketing purposes. To help ensure taxpayer information is protected by tax return preparers and tax preparation businesses, the are number of laws, regulations, standards and best practices in place. The processes needed to safeguard information include: Maintaining a list of locations where client data is collected Assess the risk of unauthorized use, disclosure, modification, or destruction of the information handled Assess the impact to your clients if the information is compromised Write and follow a security plan for your business Test, monitor and revise your security plan on a periodic basis Add additional safeguards as needed Follow all federal, state, and local laws and regulations governing privacy The penalties associated with disclosure of information by practitioners includes a $250 penalty for each disclosure without permission with an annual maximum of $10,000. Any practitioner who knowingly or recklessly discloses taxpayer information is guilty of a misdemeanor and upon conviction can be fined up to $1,000, imprisoned for up to one year, or a combination of both.

40 Summary Tax practitioners are governed by the rules and regulations of the Internal Revenue Code and Treasury Department Circular 230. Tax practitioners are required to practice ethically. A tax return preparer is any individual who prepares, or helps prepare, all or substantially all of a federal income tax return or claim for refund. The Office of Professional Responsibility mission is to ensure all tax return preparers adhere to the professional standards and rules governing tax return preparation. The Return Preparer Office mission is to improve taxpayer compliance by providing comprehensive oversight to tax professionals. Enrolled Agents (EAs) are individuals who have passed a rigorous test on federal income taxation and been approved by IRS as an enrolled agent. EAs must meet minimum annual continuing education requirements, have a valid IRS preparer identification number (PTIN) and renew enrollment every three years. They may represent any taxpayer at any level of the IRS except in a court of law. Certified Public Accountants (CPAs) are individuals who have attained certification by a state as a public accountant and has a valid IRS preparer identification number (PTIN). They may represent any taxpayer at any level of the IRS except in a court of law. Registered Tax Return Preparers (RTRPs) are individuals who have passed a minimum competency test on federal income tax preparation and are approved by the IRS as a registered tax return preparer. RTRPs must meet minimum annual continuing education requirements. They must be at least 18 years old and must have a valid preparer identification number (PTIN). RTRPs may represent taxpayers whose returns they completed before a revenue agent or employee of the IRS.

41 Summary Continuing Education (CE) must be provided by an IRS authorized CE Provider and must be approved by the IRS. Practitioners must keep a copy of their course materials and their certificate of completion for four years after the year their enrollment or registration ends. A qualified course is 50 minutes for each continuing education unit or credit. Practitioners may not retain or rely on information from an individual under suspension or disbarment from practice. Practitioners may not charge unconscionable or contingent fees and must charge the fees advertised for 30 days after the advertisement. They must keep a copy of the fees advertised for 36 months after the advertisement. Practitioners must practice due diligence in all areas of tax preparation. The Secretary of the Treasury may censure, suspend, or disbar any practitioner from practice if shown they are incompetent or disreputable. They may also fine the practitioner up to the gross income received, or to be received from the conduct. Practitioners are required to prepare true and accurate terms and are subject to a more likely than not standard when determining a position on a tax return. Preparers negligent in following IRS rules and regulations can be fined the greater of $1,000 or 50 percent of the income received from a violation.

42 Summary The IRS can charge a $50 fine, up to an annual max of $25,000, per incident for the following: Failure to keep records Failure to sign as a paid preparer Failure to include a PTIN, EFIN, or both Failure to provide a copy of the return to the taxpayer The fine for failing to follow EITC due diligence is $50 per incident with no annual maximum. EITC due diligence includes: Completion of Form 8867, Paid Preparer s Earned Income Credit Checklist Computation of the credit and retention of the worksheet used Knowledge of the rules and knowledge of the taxpayer s situation Records must be kept for three years past the due date of the return or the signing of the return by the taxpayer whichever is later EROs are required to transmit tax returns within three days of taxpayer or signature or they are subject to a penalty of $50 per incident with an annual maximum of $25,000. EROs must attempt to notify a taxpayer within 24 hours of an IRS reject. The penalty for failure to notify, or attempt to notify, is $50 per incident with an annual maximum of $25,000. Practitioners may not negotiate taxpayer refund checks. The penalty if $500 per incident with no annual maximum. Taxpayer s, spouses, and practitioners must sign a completed tax return. Failure to receive and maintain signatures on file is subject to a penalty of $50 per incident with an annual maximum of $25,000.

43 Summary EROs must safeguard taxpayer personal information. The penalty for improper disclosure if taxpayer information is up to $1,000, imprisonment up to one year, or both. Individuals representing a taxpayer must have a properly executed Power of Attorney. Taxpayers can authorize an individual to receive certain information without authorizing representation from the IRS by signing and submitting a Form 8821, Tax Information Authorization.