ANSWER: Under Circular 230, the following individuals may represent taxpayers before the IRS beyond the examination stage:
• Attorneys
• CPAs
• Enrolled agents
• Enrolled actuaries
The above individuals must be in good standing and have a current license. Also, certain authorized individuals may represent taxpayers in special situations under the “limited practice without enrollment rules” of Section 10.7.
47. Taxation and tax practice are comprised of the interaction of several disciplines. What are those disciplines? Briefly discuss their impact on the tax system.
ANSWER: Tax practice involves a blend of accounting and law. The tax law itself is a product of economics, political science, and sociology. Each of these disciplines influences taxation in a different way. Economics provides input about how the tax law will affect the economy. Political science is the process by which laws are made, and sociology provides the framework to determine the equity and societal goals of the tax law.
48. What standard must tax practitioners meet under Section 6694 (preparer penalties) of the Internal Revenue Code with respect to undisclosed positions taken on tax returns?
ANSWER: Tax return positions which are not disclosed on the tax return must meet the standard of “substantial authority” to avoid the penalties under Code Section 6694, relating to understatement of taxpayer's liability by tax return preparer.
49. Does the IRS regulate unenrolled tax preparers? Explain your answer.
ANSWER: Yes, unenrolled preparers are now regulated by the IRS under proposed amendments to Circular 230 and recent IRS regulations. Tax return preparers who prepare returns for compensation and sign the return are authorized to conduct “limited practice” before the IRS. The tax return preparer may only make an appearance before the Examination Division of the IRS. All paid preparers must register for a Preparer Tax Identification Number (PTIN) and include that number on all returns submitted to the IRS. In addition, tax return preparers are subject to competency testing and are required to take continuing professional education courses. They also are subject to the Circular 230 ethical standards.
50. Explain the AICPA guidelines under SSTS No. 3 for relying without verification on taxpayer or third-party information when preparing a tax return.
ANSWER: In preparing or signing a return, an AICPA member ordinarily may rely without verification on information that the taxpayer or a third party has provided, unless such information appears to be incorrect, incomplete, or inconsistent. A more formal, audit-like review of documents or supporting evidence is generally not required for a member to sign the tax return. Where material provided by the taxpayer appears to be incorrect or incomplete, however, the member should obtain additional information from the taxpayer. In situations where the tax law requires that specific conditions be met, the member should determine, by inquiry, whether the conditions have been met. For example, the Code and Regulations impose substantiation requirements for the deduction of certain expenditures. In such a case, the member has an obligation to make appropriate inquiries regarding the client’s recordkeeping.
Although members are not required to examine supporting documents, they should encourage the taxpayer to provide such documents when deemed appropriate; for example, in the case of deductions or income from a pass-through entity, such as a partnership, the entity’s documents might be useful in preparing the owner’s tax returns.
The member should make proper use of the prior year’s tax return when feasible to gather information about the taxpayer and to help avoid omissions and errors with respect to income, deductions, and credit computations.
51. What should an AICPA member do upon learning about an error in a prior year’s tax return?
ANSWER: A member must advise the taxpayer promptly, regardless of whether the member prepared or signed the return in question, when he or she learns of an error in a previously filed tax return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. Such advice should include a recommendation for appropriate measures the taxpayer should take. However, the member is neither obligated to inform the IRS of the situation, nor may he or she do so without the taxpayer’s permission, except as provided by law.
The term “error” includes any position, omission, or method of accounting that, at the time the return is filed, fails to meet the standards set out in SSTS No. 1. An error also includes a position taken on a prior year’s return that no longer meets these standards due to legislation, judicial decisions, or administrative pronouncements having retroactive effect. However, an error does not include an item that has an insignificant effect on the taxpayer’s tax liability.