SETTING UP A TAX PRACTICE.   Term Paper ID:30798 Click to get this paper

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Paper Abstract: Discusses legal risks involved. Tax law. Liabilities of a tax practice. CPAs and lawyers as practitioners. Codes of conduct. Importance of maintaining good records. IRS Standards, and tax advice to clients. Written presentation of advice. Cases of negligence. Liabilities to tax practitioners from clients. Liability insurance; types of policies. Risk of lawsuits. Paper Introduction: LEGAL RISKS IN SETTING UP A TAX PRACTICE Introduction Banoff (1999), writing in Taxes, suggests that the practice of tax law in today’s economy is much like the dying tradition of sumo wrestling. This is because the typical tax practitioner (a lawyer or accountant) spends many years preparing for the profession (e.g., college degrees, an M.S.T., a J.D. or an LL.M. in Taxation) and may have devoted himself or herself (often fanatically) to constant training and study in order to become an expert at his or her craft...[which was becoming impossible because] Along with an increasingly complex world of tax law, the publication of numerous quarterly, monthly, weekly a Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. To avoid this possibility, the practitioner should always makesure to inform the client in writing of the possibility that the IRS mayimpose penalties(Winston, 1995). In this paper, the assumption is made that the "practitioner" iseither a lawyer or a CPA, either of which is fully licensed to practice thefield of tax preparation and advising (Pepper, 1995). App. There is, however, a Safe Harbor clause (Regulation 1.6694-2(b)) thatlets the practitioner apply the "realistic possibility" standard. 1998). It isprudent to keep a copy of all the client's information going into thereturn. Publication 23 , Section 1 .21, states clearly that a preparer, if andwhen he or she gets knowledge of a client's omission, then it is obligatoryto advise the client promptly in writing of the fact of such noncompliance,error or omission. In addition, ifthere is fraud or deliberate intent to defraud proven, then the situationcan have criminal liabilities. 1987). Critics of the profession suggest that auditor neglect and corruption may be responsible. The investing and lending public, on the other hand, has become cynical about the accounting profession and its role in the financial reporting process. IRC 61 7 requires a preparer to retain a copy of the return for threeyears. Most experts suggest that tax advice to clients should be delivered inwritten form, both for good business practice and in order to assure thatthere are no misunderstandings regarding the nature of the advice given(Winston, 1995). In some cases cited below, there can be aliability from both sources based on the same incident. Winston (1995) suggests that there are primarily twooptions: Buy as Much as you Can Afford, or Buy to Cover the ProjectedRisks. Definitions and Limitations In such a paper, definitions and limitations are essential. Regarding tax shelters, the IRS has placed restrictions on preparerswho prepare opinion letters covering a tax shelter's benefits (Seagren v.Peterson). Generally Accepted Codes of Conduct The major liabilities come from two sources: the Internal RevenueService, if the practitioner gives bad or erroneous advice, and from theclient, for the same reasons (Murphy v. al's comments could betaken to also apply to the great majority of tax practitioners in America. The tax practice of the 21st century is predicted to become even morelitigious, and the risks for the tax practitioner will continue toescalate. Within the bounds of prudence, Bazerman et. Asset overvaluation will produce a penalty of the greater of $1, or 3 percent of the shelter's gross income. "In the current competitive climate, mostfirms are in a position to purchase higher limits since the premiums havedecreased. A penalty of $5 applies to each omission, but is limited to atotal of $25, per year. IRS Regulation 1.6694-2(b) suggests that there is a 1 in 3 chance ofsuccess. In addition, the practitioner should have a good-faith belief that the(tax return) position (being recommended) has a realistic possibility ofbeing sustained (administratively or judicially) on its merits ifchallenged. in Taxation) and may have devoted himself or herself (often fanatically) to constant training and study in order to become an expert at his or her craft...[which was becoming impossible because] Along with an increasingly complex world of tax law, the publication of numerous quarterly, monthly, weekly and even daily tax-oriented journals, magazines and reports was forcing tax advisors into the development of sub-specializations, particularly in the larger firms and firms with substantial tax practices (Banoff, 1999, 13). Rubenstein, Sam A; Hicks, Robert L. Bazerman, Max H.; Morgan, Kimberly P.; Loewenstein, George F., (1997,June 22), The impossibility of auditor independence, Sloan ManagementReview, 89. Further, if the client then is fined and hires anattorney, that attorney could sue the preparer for negligence, even thoughhe was relying on information provided by the client. This goes along withIRC 72 6 that allows for potential criminal felony charges of up to threeyears imprisonment and $1 , fine. $5, , /$2 , , provides $5, , per claim or$2 , , in the aggregate for all claims pertaining to the policyperiod). July 23,1997). Merow v. LEGAL RISKS IN SETTING UP A TAX PRACTICE Introduction Banoff (1999), writing in Taxes, suggests that the practice of tax lawin today's economy is much like the dying tradition of sumo wrestling.This is because the typical tax practitioner (a lawyer or accountant) spends many years preparing for the profession (e.g., college degrees, an M.S.T., a J.D. or an LL.M. It is often pointed out that with the exception of the medicalprofession, no other profession has such serious liabilities connected withit as does the establishment of a tax practice. 96-1756, 1997 WL 4 8895 (Wis. On the other hand, many practitioners fear that high limits mayattract lawsuits; the fear being that if they have higher limits, plaintiffattorneys may automatically include them in suits in an attempt to obtainproceeds from the firm's policy. In the paper that follows,some of these liabilities are detailed. Todres, Jacob L. Kox, No. An opinion letter covering thetax consequences of an investment must reach an overall conclusion whetherin the aggregate the tax benefits are more likely than not to be realized(Rubenstein & Hicks, 1996). Instead, we maintain that audit failures are the natural product of the auditor-client relationship. (Generally accepted would refer to standard guidelines andtraditional amounts for charity deductions and other Schedule C items). To avoid the penalty, the preparer must demonstrate a reasonable supportfor the position; it must be arguable but does not have to rise to thelevel of more likely than not. In many instances, firms are obtaining more coverage for a lowerpremium than they paid in the early 198 s" (Winston, 1995, 1 3). Kox). Murphy v. This is intended to be a higher standardthan the previous negligence standard of "reasonable support". Negligence includes the disregard of the law or a misapplication ofthe Revenue Code or regulations. Under current institutional arrangements, it is psychologically impossible for auditors to maintain their objectivity; cases of audit failure are inevitable, even with the most honest auditors (Bazerman, Morgan and Loewenstein (1997, 437). References Banoff, Sheldon I. How could auditors not see that so many of their savings and loan clients were about to fail? Ct. IRC 67 1 added "aiding and abetting" penalties of $1, perindividual return raising to $1 , for a partnership or corporate return. (1999, Feb. Liabilities from Clients Bazerman, Morgan and Loewenstein (1997), arguing about the difficultyof dispassionate auditing suggest that accounting profession is todaymaintaining that it is being unfairly assaulted by plaintiffs looking for a convenient "deep pocket" from which to recover losses that may result from their own poor investment decisions. We argue, however, that only very rarely are audit failures the result of deliberate collusion of auditors with clients in issuing faulty financial statements. Pepper, Stephen L. However, the practitioner can offer in the written informationevidence cited by other supporting authorities (usually case rulings) thathave the weight of supporting authority. However, if there is support in the legislativecommittee reports, IRS Notices, or applicable court opinions, thepractitioner may more safely take a contrary position, usually with the aidof a tax attorney's opinion letter attached to the claim. (1995, June), Marketing for Cpas, Accountants, and TaxProfessionals, New York: Haworth Marketing Resources. The IRSdeems this standard to be met if a reasonable and well-informed analysis bya person knowledgeable in the tax law would lead such a person to concludethat the position has a 1 in 3, or greater, likelihood of being sustainedon its merits. In traditional lexicography,"tax practice" is usually considered to be made up of tax compliance, taxadvice and planning, and tax lobbying (Winston, 1995). In addition, some practitioners and tax publications suggest that itis unnecessarily risky to take a position contrary to a new statute that isclear and unambiguous. Historically, themost significant portion has been compliance (Todres, 1995). (1996, July), Taxes in 2 1, TheTax Adviser, 436. IRS Standards Since the entire IRS code takes up to 14 linear feet on a bookshelf,this paper will just deal with situations that have traditionally causedpenalties in the past. IRC 6694 dictates that a willful attempt to understate tax liabilityor endorse another's refund check will produce a $1, preparer penalty."Willful" means the understatement is intentional, conscious and voluntary. Winston, W.J. How could a prominent auditing firm with a reputation for integrity overlook such large misstatements in Phar-Mor's financial records? Housel & Housel, 955 P.2d 88 (Wyo. Courts usually find against the preparer or practitioner, and thepenalties can also be dual, as in the case of a plaintiff's attorneyarguing the preparer penalties are conclusive evidence of tax malpracticeand thus were a liability to the client (Merow v. A tax attorney's opinion letter may qualify. Another type of policy that can be bought is a Defense Inside Limit(since defense costs are usually, but not always, within the limits ofliability and, therefore, reduce the amount of available coverage. Seagren v. Peterson, 4 7 N.W.2d 79 (Neb. 21), The tax lawyer as Sumo Wrestler:End of a tradition?, Taxes, 13. We shallbegin with a definition of the term of art. (1995), Malpractice and the Tax Practitioner: AnAnalyses of the Areas in Which Malpractice Occurs, New York: Kingston. The buying decision will also be helpedby considering "split limits" (policies offered by many companies) thatoffer a per claim limit with a larger limit as an aggregate for the policyperiod (i.e. The advice should generally state all major assumptions,cite relevant authorities, and include a general statement that changes incircumstances may change the advice given. When insurance premiums were high in the late 198 s, most firmsmaintained relatively low limits of liability because the cost for higherlimits coverage was prohibitive. In other words, ifa client lies to the practitioner, and the IRS questions the claim andthere is no evidence to back up the deduction, the IRS can levy a penaltyon the preparer. IRS Procedures would allow an agent to accept estimates (in lieuof actual numbers) if generally accepted and the obtaining of exact data isimpracticable. A penalty of $25 now applies if thepreparer takes a position for which there is not a "realistic possibility"of being sustained on the merits. The ultimate sanction and penalty is found in IRC 72 1 which providesthat the IRS can enjoin a preparer from practicing. Publication 23 , Section 1 .33 requires a practitioner renderingan opinion on a tax shelter to provide a concise overall evaluation whetherthe material tax benefits in the aggregate are more likely than not to berealized. (1995, May), Counseling at the limits of the law:an exercise in the jurisprudence and ethics of lawyering, Yale Law Journal,14. The IRS does not make it a duty to file an amendedreturn, but practitioners should consider withdrawing to avoid beingassociated with the fraud. Insuring Against Tax Practice Liability One of the biggest decisions someone thinking about opening a taxpractice should make is how much liability insurance to buy to protectagainst the possibility of either lawsuits from clients or penalties fromthe IRS.The decision concerning the limits to obtain is typically emotional ratherthan scientific. IRC 6695 specifies that a preparer must sign the return and enter hisor her identifying number, and must also furnish the taxpayer a copy. Many taxadvisers say that they cover all their basic operating costs with their taxcompliance work, and that their profit comes from the tax planning workthey do. Non-opinion opinion letters are no longer allowed. In addition to following best business practices and maintaining goodrecords, when providing tax advice to a client, the practitioner agrees toassure that the advice reflects professional competence and appropriatelyserves the client's needs and there are no standard formats to follow. Housel & Housel; Cameron v.Montgomery; Todres, 1995). The IRS now intends to curtail professional advisors assisting orparticipating in organized tax-related crimes including abusive tax shelterpromotion. A tax preparer must exercise "due diligence" but it is not required toindependently verify a taxpayer's information, but must make reasonableinquiries if such information appears to be incorrect or incomplete. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.