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Basic Income Tax Ethics 24-1

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24-2 Ethics Basic Income Tax

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Lesson I: Authority to Practice ........................................................................24-7Regulatory Offices .........................................................................................................................24-7

Practice Before the IRS .................................................................................................................24-8

Who Can Practice..........................................................................................................................24-8

Limits and Requirements .............................................................................................................24-10

Attorneys and CPAs .........................................................................................................24-10

Enrolled Agents ................................................................................................................24-10

Registered Tax Return Preparers ....................................................................................24-11

Lesson II: Practice Before the IRS ................................................................ 24-13

Disposition of Matters Before the IRS .........................................................................................24-14

Assistance from Disciplined Practitioners....................................................................................24-15

Fees.............................................................................................................................................24-15

Rules for Dealing With Clients .....................................................................................................24-16

Records ...........................................................................................................................24-16

Conflicts of Interest ..........................................................................................................24-16

Public Statements ............................................................................................................24-16Other Restrictions ............................................................................................................24-17

Lesson III: Due Diligence .............................................................................. 24-19

Standards for Due Diligence........................................................................................................24-19

Responsibilities of a Principle Authority .......................................................................................24-20

Lesson IV: Sanctions For Violating Circular 230 Regulations ....................... 24-22

Incompetence and Disreputable Conduct ...................................................................................24-22

Sanctions .....................................................................................................................................24-24

Session 24 Summary ..................................................................................... 24-26

Session 24 Knowledge Check Answers ......................................................... 24-29

Contents

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Introduction

The Treasury Department has a

comprehensive list of rules

governing tax return preparers

practice. These rules cover

authority to practice, duties and

restrictions relating to practice,sanctions for violations of the rules

and regulations, and rules governing

disciplinary proceedings. The list of

rules and regulations can be found in the IRS Treasury Department

Circular No. 230, Regulations Governing Practice before the Internal

Revenue Service, or Circular 230 as it is more commonly known.

Circular 230 also contains rules governing the recognition of attorneys,

certified public accountants (CPAs), enrolled agents (EAs), enrolled

retirement plan agents (ERPAs), and other persons representing

taxpayers before the IRS.

The most recent Circular 230 update occurred in August of 2011 and

includes the regulations governing registered tax return preparers

(RTRPs) and all necessary updates to the existing regulations.

Objectives

After completing this session, you will be able to

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

Define 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

Identify what represents due diligence by a tax return preparer

List the responsibilities of the principal authority over a firms

practice

Identify incompetent and disreputable conduct that can result in

disciplinary proceedings

Recognize the sanctions that may be imposed under

Circular 230

For more information on

the topics discussed in this

session, refer to IRS Treasury

Department Circular No. 230,

Regulations Governing

Practice before the Internal

Revenue Service.

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Definitions of Terms

The IRS has defined a set of terms to be used by the preparer community,

as well as the IRS, when working with the rules and regulations

governing tax return preparers.

Service - The Internal Revenue Service (IRS)

Tax Return - Any forms required to be submitted to show taxes due by

an individual or entity, including an amended tax return and a claim for

refund.

Tax Return Preparer- Any person who prepares for compensation,

or who employs one or more persons to prepare for compensation,

any tax return imposed by U.S. Code Title 26. The preparation of

a substantial portion of a tax return shall be treated as if it were the

preparation of a tax return.

A person shall not be a tax return preparer merely because the person

Furnishes typing, reproducing, or other mechanical assistance

Prepares a tax return of the employer (or one of their officers

or employees) by whom they are regularly and continuously

employed

Prepares as a fiduciary a tax return for any person

Prepares a claim for refund for a taxpayer in response to any

notice of deficiency

Practitioner- Defined by the code as any individual who is an

Attorney or certified public accountant (CPA) in good standing

with the appropriate state licensing board

Enrolled agent (EA), enrolled actuary, or enrolled retirement plan

agent (ERPA) not currently under suspension or disbarment from

practice before the IRS

Registered tax return preparer (RTRP) not currently under

suspension or disbarment from practice before the IRS

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Lesson I: Authority to Practice

Circular 230 provides ethical standards and best practices, and is

applicable to attorneys, accountants and other tax professionals who

practice before the IRS. Circular 230, Subpart A, contains the rules

that cover the authority to practice before the IRS. They include

Establishment of of

fices

Listing of who can practice

Eligibility requirements for practitioners

An explanation of what constitutes practice

Application to practice requirements

Requirements to maintain eligibility

Eligibility requirements of continuing education providers and

programs

Regulatory Offices

There are two offices established to oversee tax return preparers:

Office of Professional Responsibility (OPR)

Return Preparers Office (RPO)

The OPR is responsible for enforcing

Circular 230s standards of conduct. All tax

practitioner complaints will be handled by

the OPR.

The purpose of the RPO is to improve

taxpayer compliance by providing oversight

and support to the tax preparer community.

The RPO is responsible for Preparer Tax

Identification Number (PTIN) matters,

including

Practitioners tax compliance

Practitioner compliance with regulations governing registration

Initial review of e-file violations

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Practice Before the IRS

Practice before the IRS means the ability to participate in all matters

connected with apresentation to the IRS or any of its officers or

employees, relating to a taxpayers rights, privileges, or liabilities under

laws or regulations administered by the IRS. Presentation includes the

following activities:

Preparing documents such as a tax return

Filing documents such as a tax return

Corresponding and communicating with the IRS

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

Representing a client at conferences, hearings, and meetings

Practice before the IRS includes preparing any type of tax return and

all working papers associated with the return. In order to representa taxpayer before the IRS or IRS employees (beyond the scope of

preparing a tax return), a practitioner generally needs a signed

power of attorney document, or its equivalent. Form 2848, Power

of Attorney and Declaration of Representative, can be used for this

purpose.

Who Can Practice

Circular 230 defines who is eligible to practice before the IRS, and

outlines the rules for those professionals that are directly controlled by

the IRS. Guidelines are provided for all other professionals permitted topractice. For a complete list of eligible professionals, refer to

Circular 230. In this session we discuss the following professionals

eligible to practice:

Attorney - A 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.

Certified Public Accountant (CPA) - A person who is qualified

to practice as a CPA in any state, territory, or possession of

the U.S.

Enrolled Agent (EA) - A person who has earned the privilege of

representing taxpayers before the IRS by either passing a three-

part comprehensive IRS test covering individual and business

tax returns, or through experience as a former IRS employee.

EAs must adhere to ethical standards and complete 72 hours of

approved continuing education (CE) courses every three years,

and maintain an active PTIN annually.

For more information, refer to

Session 23.

For an explanation of the

eligibility requirements and

practice limits for enrolled

actuaries, enrolled retirement

plan agents, government

officers and employees, state

officers and employees, and

others, refer to IRS Treasury

Circular 230.

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Registered Tax Return Preparer (RTRP) - An individual

who has earned the privilege of preparing tax returns and

representing taxpayers in a limited capacity by passing a

minimum competency test covering individual income tax returns

and a tax compliance check. RTRPs must adhere to ethical

standards and complete 15 hours of approved CE and maintain

an active PTIN annually.

All tax return preparers are required to apply for, and renew annually,

a PTIN. The PTIN is a unique alpha-numeric identifier with either a P

or an S in the first position and eight numbers following. It is used in

place of the tax preparers SSN, or individual taxpayer identification

number (ITIN), when the practitioner signs completed tax forms and for

correspondence with the IRS.

Preparers can apply for a PTIN online at

www.irs.gov/taxpros, or by mailing a

completed Form W-12, IRS Paid Preparer

Tax Identification Number (PTIN) Applicationand Renewal. The cost of the initial PTIN

application is $64.25 and each annual renewal

is $63. Be prepared to provide the following

information when applying for your PTIN:

Personal information (name and date

of birth)

Filing status and mailing address from your last filed return

Business information (name, mailing address, telephone

number)

Explanations of felony convictions (if any)

Explanations of problems with your U.S. individual or business

tax obligations (if any)

Credit or debit card information for the PTIN application fee

(American Express is not accepted)

Include any U.S.-based professional certification information

(CPA, attorney, EA, enrolled retirement plan agent, enrolled

actuary, certified acceptance agent, or state license), if applicable,

including certification number, jurisdiction of issuance, and

expiration date

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Limits and Requirements

Circular 230 outlines the requirements for professionals who are

eligible to practice before the IRS, dependent upon their individual

qualification.

Attorneys and CPAs

In order to represent a client before

the IRS, attorneys and CPAs must

submit a written statement that

they are qualified by their licensing

board and not currently disbarred or

suspended by any licensing board.

Circular 230 does not currently require any specific number, or type, of

CE credits for either attorneys or CPAs. Each licensing board has its

own CE requirements on which the IRS relies.

Enrolled Agents

An EA must be at least 18 years old, hold a current PTIN, and either

pass the Special Enrollment Exam (SEE), or be a prior IRS employee.

EAs must complete 72 hours of approved CE during each three-year

enrollment cycle.

The SEE is a three-part test governed by the IRS and administered by

Prometric Inc. The test covers all forms of federal income tax, ethics,

practices and procedures, and electronic filing requirements. The SEE

is available at test centers throughout the U.S. and certain foreign

countries between May 1 and February 28 annually.

The exam covers the tax law and Circular 230 requirements currently

in effect when the testing period begins. The testing period that begins

May 1, 2012, and closes February 28, 2013, will cover 2011 tax law

and the Circular 230 revised as of August 2011.

An individual must pass all three parts of the exam within a two-year

time frame, beginning with the date the first section was passed.

Example: Herman took Part I of the SEE on December 2, 2010, and

failed. He took Part III of the SEE on January 15, 2011, and passed.Herman must pass the remaining two parts of the SEE (Parts I and II)

before January 14, 2013, or he will be required to retake and pass

Part III.

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After passing all three parts of the exam, the individual must submit

Form 23,Application for Enrollment to Practice Before the Internal

Revenue Service. The IRS may also conduct a tax compliance check

and suitability check. The tax compliance check verifies the applicant

has completed all required individual and business returns, and has

paid all taxes owed (or is in a timely payment plan). The suitability

check is limited to an inquiry regarding any convictions of activity or

crimes that would result in suspension or disbarment from practice.

An EAs enrollment cycle is a three-year period determined by the last

digit of their taxpayer identification number (TIN). During each year

within the enrollment cycle, an EA must complete at least two CE hours

of Ethics and an additional 14 hours of courses designed to enhance

knowledge in federal taxation or federal tax matters. Courses in

federal tax matters include programs comprised of current federal tax

law, accounting, tax return preparation software, and ethics.

Enrollment cycles run for a three-year period, from January 1 of year one

through December 31 of year three. Each year within an enrollmentcycle also runs on a calendar basis, January 1 through December 31.

The renewal period for each enrollment cycle starts on November 1

of the year the cycle ends and continues through January 31 of the

following year.

Example: The current enrollment cycle for EAs with a TIN ending in 7,

8, or 9 is January 1, 2012, through December 31, 2015. The renewal

period will start November 1, 2015 and end January 31, 2016.

To renew their certification, an EA must submit Form 8554,Application

for Renewal of Enrollment to Practice Before the Internal Revenue

Service, and keep their PTIN current at all times.

Registered Tax Return Preparers

To be an RTRP, you must be at least 18 years old, hold a current PTIN,

and must pass a minimum competency test on federal taxation (RTRP

Test). You must also complete a minimum of 15 hours of CE annually.

The RTRP Test is governed by the IRS and administered by Prometric Inc.

The test covers basic federal tax principles including federal taxation,

electronic filing requirements for electronic return originators, ethics,and practices and procedures for tax return preparers.

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Prometric has more than 200 test centers administering the test across

the U.S. Individuals may take the test as often as necessary during

each testing cycle. The RTRP Test is available annually from mid-April

through February 28, and contains information on the current version

of Circular 230 and federal tax law applicable for the year the test

opens (in April).

Example: The RTRP Test available from April 2012 through February 28,

2013, will cover tax law for 2011 and the Circular 230 revised as of

August 2011.

Once an individual has passed the RTRP Test, they receive a certificate

from the IRS and may use the title RTRP.

An RTRP must renew their registration annually by renewing their

PTIN, and completing 15 hours of CE courses. The registration year

for an RTRP is the same as their PTIN and runs from January 1

through December 31. The CE requirement includes two hours ofethics in federal taxation, three hours of annual tax update, and 10

hours of federal taxation. Courses in federal taxation include programs

comprised of current federal tax law, accounting, tax return preparation

software, and ethics.

The initial phase of the RTRP initiative required tax return preparers

to receive and maintain their PTIN annually beginning no later than

January 1, 2011, and pass the RTRP Test prior to December 31, 2013.

Tax return preparers could receive a provisional PTIN before passing

the RTRP Test during this time frame. Individuals who hold a current

PTINpriorto passing the RTRP Test are considered PTIN Holders.

PTIN Holders must maintain the same minimum 15 hours of annual CE

courses as an RTRP, and must also renew their PTIN annually before

January 1 of the calendar year.

PTIN Holders and RTRPs may be subject to a compliance check for

their personal and business federal income taxes and federal income

tax liability, and may also be subject to a suitability check.

Beginning January 1, 2014, alltax return

preparers mustbe registered as either an RTRP,

EA, CPA, attorney, or other as prescribed in

Circular 230.

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Knowledge Check One

1. An RTRP must renew their certification how often?

Every year

Every three years

Never

When the IRS requests

2. An EA must renew their certification how often?

Every year

Every three years

Never

When the IRS requests

3. How many CE hours must an RTRP obtain annually?

2

3

10

15

Lesson II: Practice Before the IRS

There are various types of practice before the IRS, including

Disposition of matters before the IRS

Receiving assistance from disciplined practitioners

Fees

Rules dealing with clients

Attorneys and CPAs have unlimited practice rights before the IRS,

and attorneys have the right to represent their clients before a judge.RTRPs may represent only those taxpayers whose returns they have

signed, and only for the year they prepared the return. They are

further limited to only representing before revenue agents, customer

service representatives, or similar officers and employees of the IRS,

and are notpermitted to give tax advice unless it pertains to a specific

tax return prepared for that client.

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Disposition of Matters Before the IRS

Practitioners may not unreasonably delay the prompt disposition of any

matter before the IRS.

Practitioners must promptly provide a copy

of any records or information requested

by an IRS officer or employee. If the taxpractitioner does not hold the records

but knows the individual who does, the

practitioner must provide the individuals

name to the IRS. If the client knows, the

practitioner must ask, or attempt to ask,the

client for the name of the person holding

the records. The practitioner is not required

to question or independently verify who the individual is that is holding

the records.

Practitioners must provide any information, or testify when necessary,if an IRS officer or employee inquires into an alleged violation of the

regulations. At no time should a practitioner interfere with a request for

records or information from an IRS officer or employee.

If the practitioner believes in good faith and on reasonable grounds

that the request from the IRS officer or employee is privileged, they

may deny the request. Practitioners should obtain legal counsel to

determine if a request of an IRS officer or employee is considered

privileged.

If a practitioner is aware that a client is omitting income information

required to be reported to the IRS, the practitioner should advise the

client of the tax laws surrounding the omission. If the information

presents while in the process of completing the tax return, the

practitioner should stop immediately, explain why the information must

be included, and should not continue or complete the return without

including the information. If the omission is not presented until after

the return is completed, the practitioner is requiredto explain both

the tax laws and the consequences of omitting the information. The

practitioner is not required to notify the IRS, nor are they required to

complete an amended tax return without the permission of the client.

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Assistance from Disciplined Practitioners

A practitioner may not, knowingly and directly or indirectly

Accept assistance from or assist any person who is under

disbarment or suspension from practice before the IRS if the

assistance is any form of practice before the IRS.

Accept assistance from any former government employee whereany federal law may be violated.

A practitioner may not act as a notary public for any tax matter for their

clients or themselves.

Fees

Practitioners may not charge an unconscionable fee for services

related to federal tax matters. Contingent fees cant 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 is filed within 120 days

of being challenged or examined by the IRS

A claim for refund or credit is filed 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 otherfiling) avoids

challenge by the IRS, is sustained by the IRS, or is in litigation. A

contingent fee is generally based on a percentage of the refund

reported on a return, or otherwise depends on a specific result

attained. A contingent fee could also include any fee arrangement in

which the practitioner will reimburse the client for all, or a portion of,

the clients fee in the event that a position taken on a tax return or other

filing is challenged by the IRS or is not sustained.

Example: Frieda charges her clients 10% of

their refund as a fee for doing their tax returns.

She is in violation of the fees regulation

in Circular 230, and can be penalized and

suspended from practice by the IRS.

For more informationconcerning practice by former

government employees see

IRS Treasury Circular 230,

10.25.

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Rules for Dealing With Clients

Circular 230 includes standards and practices governing the

relationship and interaction between practitioners and their clients.

Records

Practitioners must return a clients records ina reasonable amount of time after the client

requests them. The practitioner does not

have to provide a copy of any records created

by the practitioner if the client has not paid,

but any recordsprovided by the client must

be returned, even if they have not yet paid for

services. In states where the practitioner

may keep records until any fees have been paid, the practitioner must

return those records necessary for the client to complete their tax

obligation. Only those records the client has provided to the

practitioner must be returned, or provided, to the client. If the clienthas paid for previous work done by the practitioner, and a copy of that

work is necessary for the client to complete their current federal tax

obligation, the practitioner must provide any required copies to the

client.

If the tax return has been completed and submitted successfully to the

IRS, the practitioner must provide a copy, or acceptable facsimile, of

the return to the client, even if the fees have not been paid.

Conflicts of Interest

A practitioner may not represent a client before the IRS if the

representation involves a conflict of interest. This includes cases such

as representing both taxpayers from a previous joint return if either

return would provide information for the other return. Practitioners also

may not represent a client if there would be a conflict of interest with

the practitioners personal interest.

Practitioners may continue to represent clients in potential conflicts

of interest as long as each party has been notified in writing within 30

days of the practitioner recognizing the conflict. The written statement

must explain both the potential conflict and the identities of the involved

parties. The applicable client(s) must sign the statement, agreeing to

proceed. Such signed statements must be kept with the clients records

for a minimum of 36 months.

Public Statements

Practitioners may not in any way participate in fraudulent, false, or

misleading statements or claims privately, or to the public.

Refer to your states

Department of Taxation for

more information.

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EAs may not use the term certified, or imply an employer/employee

relationship with the IRS when describing their professional

designation.

EAs may use the following examples of acceptable descriptions:

Enrolled to represent taxpayers before the Internal Revenue

Service (or IRS) Enrolled to practice before the Internal Revenue Service (or IRS)

Admitted to practice before the Internal Revenue Service (or IRS)

An RTRP may use designated as a registered tax return preparer by

the Internal Revenue Service (or IRS) as an acceptable description.

Practitioners may publicly publish their fee information for the following:

Fixed fees or specific routine services

Hourly rates

Range of fees for particular services

Fee charged for an initial consultation

Any statement of fees mustinclude a disclosure stating if the client

will be responsible for such costs. A practitioner may charge no more

than the published rates for at least 30 calendar days after the last

date the schedule of fees was published. Fee information may be

communicated via most forms of media, however, the method used

cannot be misleading or cause the information to become untruthful.

Practitioners must keep a copy of any broadcast, print, or e-commerce

media for at least 36 months after the date of publishing. In the case

of e-commerce, the records must include a copy of the actual

communication, and a list of the persons mailed to or otherwise

distributed to.

Other Restrictions

A practitioner must cease attempts to contact or otherwise market to a

potential client once it is made known they dont wish to be contacted.

A practitioner may not endorse or otherwise negotiate any check

issued to a client in respect to federal tax liability. This includes, but

is not limited to, direct deposit of a refund check into the practitionerspersonal or business account.

The rules and regulations governing tax return preparers do not

authorize individuals to practice law if they are not otherwise an

attorney and permitted by a state bar to practice law.

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Knowledge Check Two

1. A practitioner may delay responding to an IRS request for client

records to help the client prepare for an audit. True or False?

True

False

2. A taxpayer may split their refund and have the practitioners

fees deposited directly into the practitioners business checking

account. True or False?

True

False

3. When must a practitioner return records a taxpayer provides?

Within 24 hours of the request

Within two weeks of the request

Within a reasonable amount of time

Never

4. How may a practitioner charge a client for work performed?

Based on the hours, or increments of hours, worked

Based on the amount of refund the taxpayer receives

Based on the percentage of income tax due from thecompleted return

Based on the likelihood of a successful audit

5. Which of the following is notacceptable wording for advertising

services as an EA?

Enrolled to represent taxpayers before the IRS

Enrolled to practice before the IRS

Admitted to practice before the IRS

Certified by the IRS

6. Which of the following individuals must be registered with theIRS and have a PTIN?

Jon, who works as a paid tax preparer during tax season.

Lucy, who files only her own tax return.

Seng, who helps his parents prepare their return for free.

Harriet, who works as a receptionist in a tax preparationoffice but does not prepare any returns for clients.

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Lesson III: Due Diligence

There is more to a practitioners due diligence requirements than the

specific Earned Income Tax Credit (EITC) due diligence rules and

regulations discussed previously. IRS regulations require allpractitioners

to practice due diligence in all areas of tax return preparation, refund

claims, IRS communications, and client advice.

Due diligence occurs when the practitioner ensures a tax return is

accurate to the best of their ability. It includes having the necessary

knowledge of federal taxation to complete the tax return.

Standards for Due Diligence

Practitioner tax knowledge is the best resource

for ensuring due diligence. Practitioners should

be vigilant about staying up-to-date on tax law;

using IRS rules, regulations and publications

to research areas in which they are less thansure of the rules; and documenting any areas

of concern they find in the tax returns they

prepare.

To document an area of concern, the practitioner should make notes

in the return file that include any questions they asked, the answers

they received, and information from documentation provided by the

client. Including copies of the documents the client provided in the

return file is the best practice for a practitioner when documentation

other than tax forms are provided. In addition, if a practitioner has

reason to suspect the information provided by a client is incompleteor inaccurate, the practitioner must ask additional questions and

document the questions and answers. If the practitioner is still unsure,

they should explain to the client the consequences if the information is

incorrect or incomplete.

When determining if a practitioner is violating due diligence procedures,

the IRS will look for a fact pattern that denies or supports the possibility

of violating due diligence.

The due diligence standards for practitioners defined in Circular 230

include the following:

Practitioners may not purposely or through gross incompetence

sign a return that contains a tax deduction or income position,

(claim) that has no reasonable basis in tax law, that cannot

be more than likely sustained by the rules and regulations

or common accepted practices for tax preparation, or is a

intentional understatement of income by a tax preparer.

For more information on

EITC due diligence rules and

regulations, refer to Session 23.

Due Diligence - The practice

by a tax preparer of acting as a

reasonable, prudent individual

with respect to the information

supplied to them.

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Practitioners may not advise a client to take a position on a tax

return that has no reasonable basis in tax rules and regulations,

that cannot be more than likely sustained by the rules and

regulations or common accepted practices, for tax preparation,

or is a intentional understatement of income by the practitioner.

Practitioners may not advise a client to submit a tax return or

other documentation to the IRS that includes a frivolous position. 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.

Practitioners should advise a client of the potential penalties of

any inaccuracies identified on previously prepared tax returns, or

of making an inaccurate, false, or frivolous claim on a current tax

return.If the inaccuracy is part of a previously filed tax return, the

practitioner is responsible for notifying the client of the error and

any potential penalties from the IRS. The practitioner is not

required to amend the previous return, but must do the current

return accurately.

Example: Germaine and Eileen are working

with Helen to complete their 2011 tax return.

While reviewing the 2010 tax return, Helen

notices an error in how rental property

losses were claimed on the return. Helen is

responsible for notifying Germaine and Eileen

of the error and explaining any consequences

they could receive from the IRS, such as

penalty and interest assessments. Helen is notresponsible to force

Germaine and Eileen to amend their 2010 tax return. Helen is only

responsible for preparing their 2011 tax return correctly.

Responsibilities of a Principle Authority

The principle authority over a tax practice is the individual who isresponsible for the daily operations of the tax practice. This individual

must ensure the practice has procedures in place that require their tax

preparers to follow IRS rules and regulations, practice due diligence,

and meet all IRS recordkeeping requirements. The principle authority

over the practice can be subject to penalties for the practices of the

firms preparers if procedures are not in place to ensure the regulations

of Circular 230 are followed.

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Knowledge Check Three

1. What is a good way to demonstrate that you have exercised

necessary due diligence during the tax preparation process?

Take notes to document your conversations with clients.

Refer all clients that you suspect of fraud to the IRS. Require the client to provide two separate types of proof for

all income items.

Refuse to prepare the return for any client whosecircumstances appear unusual.

2. Which of the following statements is notcorrect?

You may generally rely in good faith on informationprovided by your client.

You must reality check information provided by your clientif it appears incorrect, incomplete, or inconsistent.

You should never send your clients away without firstexploring all available options to help them prepare their

return.

You must review all records your client says they canprovide to the IRS in the event of an IRS inquiry.

3. Which of the following is nota responsibility of the principle

authority over a tax practice?

The principle authority is the individual who is responsiblefor the daily operations of the tax practice.

The principle authority must ensure there are proceduresin place requiring tax preparers to follow IRS rules and

regulations.

The principle authority must ensure the business tax

returns are filed.

The principle authority is subject to penalties if their taxpreparers are not following the IRS rules and regulations,

and the principle authority had reason to know or should

have known.

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Lesson IV: Sanctions For ViolatingCircular 230 Regulations

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 notpractice, nor may they providehelp or training to, or oversee, another practitioner or tax business.

Incompetence and Disreputable Conduct

Incompetence and disreputable conduct is conduct for which a

practitioner may be sanctioned. The various types of disreputable

conduct include the following:

Conviction of any criminal

offense under the 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

the IRS, such as embezzlement, grand theft, or writing bad

checks. The felony does not necessarily have to be financial in

nature. The crime can be a moral or violent crime as well.

Giving false or misleading information, or participating in such, to

the Department of the Treasury or any officer or employee, or 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 client or

potential client with the intent to gain employment, and implying

or intimating the ability to obtain special consideration from the

IRS or any IRS officers or employees.

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 any federal tax.

Censure is a harshly written

notice of an individuals

practices. It can include

listing the practitioners name,

business name, and location ina public document.

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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 failing 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 from practice as an attorney,

CPA, public accountant, or actuary by any state, territory,

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 filing tax

returns, requests for refunds, or any other

documents 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 married filing jointly) and

the IRS as required.

Failing to e-file, orfile 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.

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Sanctions

The Secretary of the Treasury, or a delegate, has the authority to

impose a monetary penalty on any practitioner who engages in

conduct subject to sanction. The Secretary, or delegate, must review

the case and can not impose the penalty until after the practitioner is

notified of a proceeding.

If the practitioner was acting on behalf of an employer or other entity

when the actions occurred that allowed a penalty, the Secretary, or

delegate, may impose the penalty on the employer or other entity if

they knew or reasonably should have know of such action.

The penalty may not exceed the gross income derived, or to be

derived, from the conduct subject to the penalty.

Example: Stanley was told by his employer, Alternative Tax Preparation,

to include 10% of income as an employee business expense on all tax

returns with itemized deductions. The Secretary of Treasury delegatesanctioned Stanley for gross overstatement of income and penalized

him $5,000 in addition to the 6694(a) penalty of $20,000. Stanleys

employer was also fined $50,000.

Knowledge Check Four

1. Which of the following is an example of incompetence and

disreputable conduct?

Applying for a job as a tax preparer and stating your

expired PTIN is valid.

Transposing the rent expenses on a Schedule C.

Requiring the client to provide two separate types of prooffor all income items.

Refusing to prepare the return for any client whosecircumstances appear unusual.

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2. What is the maximum penalty the Secretary of the Treasury can

impose on an individual that has been sanctioned?

$50,000

Half of the gross income received from the conduct subjectto the penalty

Equal to the net income received from the conduct subjectto the penalty

Equal to the gross income received from the conductsubject to the penalty

3. Which of the following is notconsidered an example of

incompetence and disreputable conduct?

Refusing to sign a tax return as the paid preparer whencharging to prepare tax returns.

Refusing to prepare a tax return for a prospective client.

Practicing as a tax preparer without an active PTIN.

Being convicted of embezzlement by a former employer.

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Session 24 Summary

Practice before the IRS is defined as, all matters connected

with apresentation to the IRS relating to a taxpayers rights,

privileges, or liabilities under the laws and regulations

administered by the IRS. Presentation includes tax return

preparation and filing, communication and correspondence with

the IRS, rendering written advice, and client representation.

Attorneys, certified public accountants (CPAs), enrolled agents

(EAs), registered tax return preparer (RTRPs), and certain others

are authorized to practice before the IRS and are governed by

IRS Treasury Department Circular 230, Regulations Governing

Practice before the Internal Revenue Service.

Attorneys must be current and in good standing with the state

authority that governs their professional certification, and both

the Return Preparer Office (RPO) and the Office of Professional

Responsibility (OPR). Attorneys have no limits on their rights to

practice.

CPAs must be current and in good standing with the state

authority that governs their professional certification, and both

the RPO and the OPR. CPAs have no limits on their rights to

practice.

EAs have no limits on their rights to practice, and must

Be at least 18 years of age

Be current in all personal and business taxes

Pass the Special Enrollment Exam (SEE)

Receive 72 hours of qualifying continuing education (CE) in a

three-year enrollment cycle

Be in good standing with the RPO and the OPR

RTRPs are limited to representing only those taxpayers whose

tax returns they completed. They are further limited to only

representing before revenue agents and customer service

representatives, and may not give tax advice unless it pertains to

the tax return prepared for the taxpayer. RTRPs must

Be at least 18 years of age

Be current in all personal and business taxes

Pass the RTRP minimum competency test

Receive 15 hours of qualifying CE in an enrollment year

Be in good standing with the RPO and the OPR

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All tax return preparers (practitioners) must maintain an active

PTIN, and renew annually, to practice.

Practitioners must promptly provide the IRS or its employees

with any taxpayer records that have been requested by such.

Practitioners must promptly provide information or testify as

requested by the IRS or its employees, and should at no time

interfere with a request for records or information from the IRS orits employees.

Practitioners must notify a taxpayer of the consequences of

omitting information from a tax return, and must not knowingly

participate in such omission.

Practitioners are not required to voluntarily notify the IRS of a

taxpayers omission.

Practitioners may not knowingly accept assistance in tax matters

from any practitioner under suspension or disbarment from the

IRS, or any former government employee that has violated a

federal law.

Practitioners may not charge unconscionable fees for services

pertaining to tax matters.

Generally, practitioners may not charge contingency fees for tax

return preparation or preparation for claims for refund.

Practitioners must return to their clients any records or

documents provided by the clients when requested, even if the

clients fees have not been paid. Practitioners must also provide

a copy of a tax return, or reasonable facsimile of one, if the tax

return has been successfully filed with the IRS. Practitioners must disclose in writing any potential conflict of

interest to all involved clients within 30 days of recognizing the

conflict. The statement must be signed by the client and a copy

kept in the clients records for at least 36 months.

Practitioners may not submit false, fraudulent, or misleading

statements to the public, clients, or potential clients. This includes

advertisements that state a practitioner is certified by the IRS, or

to imply an employer/employee relationship with the IRS.

Fee advertising must be honored for at least 30 days after the

last published date and records of the advertising must bemaintained for at least 36 months.

Practitioners may not endorse or negotiate a taxpayers federal

refund of taxes or penalties and interest.

Circular 230 does not authorize any individual to practice law if

they are not otherwise an attorney.

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Practitioners are required to practice due diligence in all areas of

tax matters.

Practitioners may not intentionally create and claim

unreasonable deductions or tax credits.

Practitioners may not intentionally understate a taxpayers income.

Practitioners may not make frivolous tax return claims.

Practitioners should explain the consequences of an error found

in a previously filed tax return, but are not required to correct the

error unless requested to by the taxpayer. Practitioners must

complete any current tax return or claim for refund correctly

regardless of previous year errors.

Practitioners may rely on information provided by their clients.

However, if the practitioner knows, or suspects, that information

supplied by the taxpayer is misleading or false, the practitioner

should request a further explanation from the taxpayer and act

accordingly.

Theprinciple authorityis the individual with responsibility over

the daily operations of the practice. The principle authority is

required to have procedures in place to ensure the practice

and its individual preparers follow IRS rules and regulations,

practice due diligence, and meet all IRS recordkeeping rules.

The principle authority is subject to penalties for not ensuring the

procedures are in place and followed.

Incompetence and disreputable conduct by a practitioner

can result in sanctions by the Secretary of the Treasury, or a

delegate.

The Secretary of the Treasury, or a delegate, can penalize both

a practitioner who has been sanctioned, and the practitioners

employer, if the employer knew or had reason to know of the

conduct leading to the sanction. The Secretary of the Treasury,

or a delegate, may impose a monetary penalty up to the amount

of income derived, or to be derived, from the conduct leading to

the sanction.

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Session 24 Knowledge Check Answers

Use the following to help verify your Knowledge Check responses.

Knowledge Check One

1. Every year. An RTRP must renew their certification every year

by renewing their PTIN.

2. Every three years. An EA must renew their certification every

three years. They must complete a minimum of 72 hours of

qualifying CE over the three-year period, including an annual

minimum CE requirement of 16 hours.

3. 15. An RTRP must obtain a minimum of 15 CE hours annually.

They must complete two hours of federal ethics, three hours of

federal tax update, and 10 hours of federal tax matters.

Knowledge Check Two

1. False. A practitioner may notdelay responding to an IRS request

for client records to help the client prepare for an audit. They

must respond within a reasonable amount of time.

2. False. A taxpayer may split their refund if they choose, but the

practitioner cannot have their fees deposited directly into their

business checking account. A practitioner may not negotiate any

check issued to a client by the government in respect of a federal

tax liability.

3. Within a reasonable amount of time. A practitioner must return

the records a taxpayer provides them within a reasonable amount

of time.

4. Based on the hours, or increments of hours, worked. A

practitioner may charge a client for work performed based on the

hours, or increments of hours, worked. They may not charge a

contingent fee for their services.

5. Certified by the IRS. An EA may not advertise that they are

certified by the IRS.

6. Jon, who works as a paid tax preparer during tax season. A

paid tax preparer must be registered with the IRS and have a

PTIN.

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Knowledge Check Three

1. Take notes to document your conversations with clients.

Taking notes of your conversations with clients, and keeping

them in the clients file, is a good way to show the IRS your due

diligence efforts.

2. You must review all records your client says they can provideto the IRS in the event of an IRS inquiry. The IRS does not

require a practitioner to review all records clients say they can

provide to the IRS in the event of an IRS inquiry. Instead, they

should explain that the IRS may request the records.

3. The principle authority must ensure the business tax

returns are filed. The principle authority is notrequired to

ensure business tax returns are filed. They are responsible for

the daily activities of a tax business and are required to provide

procedures to ensure tax return preparers are following IRS

rules and guidelines. They are subject to penalties if their taxreturn preparers do not follow IRS rules and guidelines and are

sanctioned and penalized.

Knowledge Check Four

1. Applying for a job as a tax preparer and stating your expired

PTIN is valid. Applying for a job as a tax preparer and presenting

false information or credentials, such as a PTIN, is incompetence

and disreputable conduct.

2. Equal to the gross income received from the conduct subjectto the penalty. When a preparer is sanctioned, the maximum

penalty allowed is the equivalent of the gross income received at

any time from the conduct subject to the penalty.

3. Refusing to prepare a tax return for a prospective client.

Refusing to prepare a tax return for a prospective client is not

considered incompetence or disreputable conduct.

2012 Bit 24 Ethics Pm

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