1. Chapter 1 Copyright ©2006 Thomson South-Western, Mason, Ohio William A. Raabe, Gerald E. Whittenburg, & Debra L. Sanders Introduction to Tax Practice

2. Elements of Taxation

3. Elements of Tax Practice Tax Compliance Tax Compliance Tax Planning Tax Planning Tax Litigation Tax Litigation Tax Research Tax Research

4. Tax Compliance Gathering, evaluating, & classifying information for Gathering, evaluating, & classifying information for Filing tax returns Filing tax returns Representing clients before the IRS during tax return audits Representing clients before the IRS during tax return audits

5. Tax Planning Arrange to minimize tax liability Arrange to minimize tax liability Tax avoidance: legitimate Tax avoidance: legitimate Tax evasion: illegal Tax evasion: illegal Open transactions Open transactions Plan for a pending (future) transactions Plan for a pending (future) transactions Closed transactions Closed transactions Minimize liability for past transactions Minimize liability for past transactions

6. Tax Litigation Settling disputes with the IRS in courts Settling disputes with the IRS in courts Attorneys usually handle litigation beyond initial appeal of an IRS audit Attorneys usually handle litigation beyond initial appeal of an IRS audit

7. Tax Research Analyze and determine answers for tax situations: Identify issues Identify issues Determine proper authorities Determine proper authorities Evaluate appropriateness of authorities Evaluate appropriateness of authorities Apply authority to specific facts Apply authority to specific facts

8. Rules & Ethics in Tax Practice Circular 230 Circular 230 AICPA Code of Professional Conduct AICPA Code of Professional Conduct AICPA Statements on Standards for Tax Services (SSTS) AICPA Statements on Standards for Tax Services (SSTS) Sarbanes-Oxley and Taxation Sarbanes-Oxley and Taxation ABA Model Code of Professional Responsibility ABA Model Code of Professional Responsibility

9. Circular 230 Governs all who practice before the IRS Divided into these Subparts: Divided into these Subparts: A: Rules Governing Authority to Practice A: Rules Governing Authority to PracticeAuthority to PracticeAuthority to Practice B: Duties & Restrictions Relating to Practice before the IRS B: Duties & Restrictions Relating to Practice before the IRSPractice before the IRSPractice before the IRS C: Sanctions for Violation of the Regulations C: Sanctions for Violation of the Regulations D: Rules Applicable to Disciplinary Proceedings D: Rules Applicable to Disciplinary Proceedings E: General Provisions E: General Provisions

10. Circular 230 - Authority to Practice Practice before IRS Practice before IRS Representing clients during audits Representing clients during audits Who may practice Who may practice Attorneys Attorneys CPAs CPAs Enrolled agents Enrolled agents Enrolled actuaries Enrolled actuaries Nonenrolled persons Nonenrolled persons

11. Circular 230 - Enrolled Agents Have either passed a special IRS exam or have worked for the IRS for at least 5 years Have either passed a special IRS exam or have worked for the IRS for at least 5 years Have the same rights as attorneys & CPAs in representing clients before the IRS Have the same rights as attorneys & CPAs in representing clients before the IRS May also be CPA or attorney May also be CPA or attorney Allows one to practice before IRS in any state Allows one to practice before IRS in any state Must meet continuing education requirements Must meet continuing education requirements

12. Circular 230 - Nonenrolled Persons Limited practice without enrollment Limited practice without enrollment Represent oneself Represent oneself Represent immediate family Represent immediate family Employee may represent employer Employee may represent employer General partner may represent partnership General partner may represent partnership Trustee may represent trust Trustee may represent trust

13. Circular 230 - Nonenrolled Tax Return Preparers May not May not Represent taxpayer before appeals & collection division Represent taxpayer before appeals & collection division Execute refund claims or receive refund checks for clients Execute refund claims or receive refund checks for clients Agree to suspend statute of limitations Agree to suspend statute of limitations Execute closing agreements Execute closing agreements Waive restriction on assessment Waive restriction on assessment

14. Circular 230 - Conduct Before the IRS (1 of 2) Must furnish information to the IRS upon request Must furnish information to the IRS upon request If knows of client’s noncompliance, error, or omission, must advise client of this If knows of client’s noncompliance, error, or omission, must advise client of this Must exercise due diligence Must exercise due diligence Must not unreasonably delay matters Must not unreasonably delay matters

15. Circular 230 - Conduct Before the IRS (2 of 2) Cannot be a notary for clients Cannot be a notary for clients Fees must not be contingent or unconscionable Fees must not be contingent or unconscionable Limits on solicitation and advertising Limits on solicitation and advertising Tax return positions must meet realistic possibility standard Tax return positions must meet realistic possibility standard At least a 1 in 3 likelihood of being sustained on its merits At least a 1 in 3 likelihood of being sustained on its merits

16. Circular 230 - Exercise Due Diligence Must make a reasonable effort to comply with tax laws Must make a reasonable effort to comply with tax laws Failure to exercise due diligence is: Failure to exercise due diligence is: More than simple error More than simple error But less than willful & reckless conduct But less than willful & reckless conduct

17. Circular 230 - Contingent & Unconscionable Fees Contingent fees Contingent fees Not on an original tax return Not on an original tax return Acceptable on an amended return or refund claim (other than a claim for refund made on an original return) Acceptable on an amended return or refund claim (other than a claim for refund made on an original return) Unconscionable fees Unconscionable fees Fee is out of line with value of service provided to client Fee is out of line with value of service provided to client

18. Circular 230 - Solicitation & Advertising Most media permissible Most media permissible Cannot contain false, fraudulent, coercive, or unfair statements Cannot contain false, fraudulent, coercive, or unfair statements Must be tasteful Must be tasteful Must comply with other authorities Must comply with other authorities ABA, AICPA, State CPA societies, state regulatory agencies, National Association of Enrolled Agents, etc. ABA, AICPA, State CPA societies, state regulatory agencies, National Association of Enrolled Agents, etc.

19. Circular 230 - Tax Return Positions A position must have a realistic possibility of being sustained on its merits: A position must have a realistic possibility of being sustained on its merits: It has at least a “one in three” chance of being sustained on its merits It has at least a “one in three” chance of being sustained on its merits May recommend position with less than “one in three” chance if position is not frivolous & is disclosed on the return May recommend position with less than “one in three” chance if position is not frivolous & is disclosed on the return

20. Circular 230’s Best Practices Aspirational standards (not rules) that should help tax advisors provide clients with the highest quality representation concerning federal tax issues that cover: Aspirational standards (not rules) that should help tax advisors provide clients with the highest quality representation concerning federal tax issues that cover: Communications with clients Communications with clients Establishing relevant facts Establishing relevant facts Evaluating reasonableness of assumptions Evaluating reasonableness of assumptions Relating the law to the facts Relating the law to the facts Arriving at supported conclusions Arriving at supported conclusions Advising clients of the conclusions Advising clients of the conclusions Acting fairly and with integrity before the IRS Acting fairly and with integrity before the IRS

21. AICPA Code of Professional Conduct (1 of 2) Governs AICPA members Governs AICPA members All services provided by CPAs All services provided by CPAs Purpose is to provide: Purpose is to provide: Enforceable comprehensive code of ethical and professional conduct Enforceable comprehensive code of ethical and professional conduct Guide for members in answering complex questions Guide for members in answering complex questions Assurance to the public Assurance to the public

22. AICPA Code of Professional Conduct (2 of 2) Rules apply to CPAs, their employees, partners/shareholders, and others acting on behalf of CPAs Rules apply to CPAs, their employees, partners/shareholders, and others acting on behalf of CPAs Other guidance comes in the form of: Other guidance comes in the form of: Interpretation of the rules Interpretation of the rules Ethics rulings Ethics rulings Members must justify departure from Ethics Rulings Members must justify departure from Ethics Rulings

23. AICPA Code of Conduct Rules (1 of 2) Independence (Rule 101) Independence (Rule 101) Integrity & objectivity (Rule 102) Integrity & objectivity (Rule 102) General standards (Rule 201) General standards (Rule 201) Compliance with standards (Rule 202) Compliance with standards (Rule 202) Accounting principles (Rule 203) Accounting principles (Rule 203) Confidential client information (Rule 301) Confidential client information (Rule 301)

24. AICPA Code of Conduct Rules (2 of 2) Contingent fees (Rule 302) Contingent fees (Rule 302) Acts discreditable (Rule 501) Acts discreditable (Rule 501) Advertising & solicitation (Rule 502) Advertising & solicitation (Rule 502) Commissions and referral fees (Rule 503) Commissions and referral fees (Rule 503) Form of organization & name (Rule 505) Form of organization & name (Rule 505)

25. Statements on Standards for Tax Services (SSTS) Issued by AICPA Issued by AICPA Enforceable standards Enforceable standards Replaced Statements on Responsibilities in Tax Practice (SRTPs) in August 2000 Replaced Statements on Responsibilities in Tax Practice (SRTPs) in August 2000 SRTPs were advisory in nature SRTPs were advisory in nature Intended to supplement AICPA Code of Professional Conduct and Circular 230 Intended to supplement AICPA Code of Professional Conduct and Circular 230

26. SSTS (1 of 2) Tax return positions (SSTS 1) Tax return positions (SSTS 1) Answers to questions on returns (SSTS 2) Answers to questions on returns (SSTS 2) Certain procedural aspects of preparing returns (SSTS 3) Certain procedural aspects of preparing returns (SSTS 3) Use of estimates (SSTS 4) Use of estimates (SSTS 4)

27. SSTS (2 of 2) Departure from a position previously concluded in an administrative proceeding or court decision (SSTS 5) Departure from a position previously concluded in an administrative proceeding or court decision (SSTS 5) Knowledge of error: Return preparation (SSTS 6) Knowledge of error: Return preparation (SSTS 6) Knowledge of error: Administrative proceedings (SSTS 7) Knowledge of error: Administrative proceedings (SSTS 7) Form & content of advice to clients (SSTS 8) Form & content of advice to clients (SSTS 8)

28. Sarbanes-Oxley and Taxation Auditors may not provide certain services to audit clients Auditors may not provide certain services to audit clients The Sarbanes-Oxley Act of 2002 listed nine such prohibited services The Sarbanes-Oxley Act of 2002 listed nine such prohibited services Tax services may be provided if approved in advance by the audit committee Tax services may be provided if approved in advance by the audit committee

29. ABA Code of Professional Responsibility Canons: are statements of principles Canons: are statements of principles Ethical considerations set objectives for each canon Ethical considerations set objectives for each canon Disciplinary rules: minimum standards of conduct Disciplinary rules: minimum standards of conduct

30. Tax Research by CPAs Tax problems are legal problems Tax problems are legal problems This raises the question of whether CPAs are violating the prohibition against the unauthorized practice of law This raises the question of whether CPAs are violating the prohibition against the unauthorized practice of law

31. Authorized Activities Prepare tax returns Prepare tax returns Tax research Tax research Provide tax advice Provide tax advice Practice before the IRS Practice before the IRS

32. Unauthorized Activities Express legal opinion on nontax matter Express legal opinion on nontax matter Draft wills or trusts Draft wills or trusts Draft contracts Draft contracts Draft incorporation papers Draft incorporation papers Draft partnership agreements Draft partnership agreements