TAX ETHICS 2003

By Curtis L. Harrington,  Al Larsen, Brien Downing, and Suzanne Anastasio


Introduction

The idea for this is a presentation of a gleaning of what the IRS Director of Professional Responsibility (formerly Director of Practice) things are important, beyond the basic "gimmie" boring factors like (1) all practitioners are supposed to pay their taxes, and (2) Please don't harm the IRS employees.  These two answers are invariably set forth in response to the question "what does the Director of Professional Responsiblity consider to be important?  For tax practitioners, answers (1) and (2) are not of much help.  This program was given at the 2003 Annual Meeting of the California Tax Bars

 

ETHICS INTERSECTION:

A LOOK AT TAX PRACTITIONER ETHICS

COMPARING STATE BAR, CPA AND CIRCULAR 230

Index: 

Vignette 1 Doing Your Due Diligence

Vignette 2 Privilege Avenue, Remember its a One-Way Street

Vignette 3 Holding Client Records for Ransom

Vignette 4 DeLay is not just a Congressman from Texas

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Hypothetical 1:

Cynthia P. Albright is an Certified Public Accountant and Attorney. She is preparing a 1040 return for Tax Year 2002 for Lucy and Ricky Babaloo, who itemize their deductions. When Cynthia gets to the part about deducting charitable contributions, Ricky asks, "what do most people claim?" Cynthia responds that the IRS will typically not question deductions in the range of 3-5%, but that it's the actual amount of the contributions that matter. Seizing on the numbers that Cynthia just cited, Lucy replies, "That's us; Put down 5%."

 

What should Cynthia do to ensure due diligence?

Model Answer Hypo No. 1

California Bar Rules

Rule 1-120. Assisting, Soliciting, or Inducing Violations

Rule 3-210. Advising the Violation of Law

Rule 3-200. Prohibited objectives of Employment

(B) To present a claim or defense in litigation that is not warranted under existing law, unless it can be supported by a good faith argument for an extension, modification, or reversal of such existing law.

Circular 230 Sections at issue: 10.22, 10.51(d)

Cynthia probably stuck her foot in the mouth when she mentioned the "range" of 3-5% in the first place, but now that Lucy is latching on to that percentage, Cynthia would do well to steer the conversation back to the actual dollar amount of the contributions, in order to assess how accurate Lucy's assertion really is. As one practitioner noted when I gave this one at a CPE recently, "I can't put percentages on a return; I deal in dollars."

Cynthia can ask which organizations they gave contributions to, how much they gave, and what kind of documentation they have to back it up (e.g., canceled checks and receipts). True, the Service does not require receipts for individual contributions of less than $250, but many organizations routinely provide them anyway (try sending $25 to Habitat for Humanity at

Christmas time and see how much correspondence you get back from them over the next year). If the Babaloos fumble around for answers to these questions, Cynthia should probably "encourage" them to scale back the deduction they are claiming to that which can be documented or at least credibly explained. Also, the fact that someone claims more than 5% doesn't mean they are making a false statement -- lots of people tithe, but they are usually the ones that have the records to back it up.

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Hypothetical 2:

The Babaloos ask Cynthia to accompany them to an audit of their 2001 tax return, which Cynthia did not personally prepare. She agrees. Ricky and Lucy file a Power of Attorney designating Cynthia as their representative. While they are preparing for the audit, Ricky tells Cynthia, "You know, I did make a little income off the books that year giving singing lessons to some kids in the neighborhood. We never did declare that income on the return." Understandably concerned, Cynthia asks, "What's 'a little income?' " Ricky replies, "Oh, about $15,000." The audit appointment is scheduled for next week.

 

What should Cynthia do about this side income "revelation?"

Model Answers Hypo No. 2:

Cal. Rules of Evidence. Attorney-Client Privilege.

APPLICABLE EVIDENCE CODE SECTION 900-905

901. "Proceeding" definition.

905. "Presiding officer" definition.

950. As used in this article, "lawyer" means a person authorized, or reasonably believed by the client to be authorized, to practice law in any state or nation.

952. As used in this article, "confidential communication between client and lawyer" means information transmitted between a client and his or her lawyer in the course of that relationship and in confidence by a means which, so far as the client is aware, discloses the information to no third persons other than those who are present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted, and includes a legal opinion formed and the advice given by the lawyer in the course of that relationship.

953. As used in this article, "holder of the privilege" means:

(a) The client when he has no guardian or conservator.

(b) A guardian or conservator of the client when the client has a guardian or conservator.

(c) The personal representative of the client if the client is dead.

(d) A successor, assign, trustee in dissolution, or any similar representative of a firm, association, organization, partnership, business trust, corporation, or public entity that is no longer in existence.

955. The lawyer who received or made a communication subject to the privilege under this article shall claim the privilege whenever he is present when the communication is sought to be disclosed and is authorized to claim the privilege under subdivision (c) of Section 954.

956. There is no privilege under this article if the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan to commit a crime or a fraud.

Accountant-Client Privilege (IRC)

Rule 5-200. Trial Conduct

Rule 5-220. Suppression of Evidence

A member shall not suppress any evidence that the member or the member's client has a legal obligation to reveal or to produce.

Circular 230 Sections at issue: 10.21, 10.22, 10.51(d)

Of course Cynthia should explain to Ricky that he needs to "come clean" about the side income; that's the easy part, and maybe she could blunt the impact with some legitimate business deductions. In fact, many practitioners have suggested to me that they would go as far as to prepare an amended return (Form 1040X) based on this new information, and ask the Babaloos to sign it. If Ricky refuses to report the income, and Cynthia presses on with representing him at the audit, she runs the risk of him becoming an accomplice to his false statement, either through her silence as Ricky lies in response to a direct question or through her continuing to serve as his representative at the audit despite his failure to correct an omission of which she has now been made aware. At this point, the attorneys in the audience ordinarily blurt out, "but how is the Service going to know he confided it in me? After all, that's covered by the attorney-client privilege!" Well, it's important to remember that the privilege is there to protect the client, and it's the client's to waive, so if relations between the attorney and client turn sour, as they sometimes do, there is nothing to stop the taxpayer from "ratting out" his former counsel. In our office's view, an attorney embarking on this course of action and relying on "privilege" to see him or her through is taking a big chance. Yes, it can be awkward to say to the Service, "due to circumstances of which I only recently became aware, I no longer believe I can continue to serve as this taxpayer's representative, and wish to withdraw my power of attorney."

Perhaps this suggests some wrongdoing by the taxpayer (one of many possible explanations), but this unpleasantness, from the standpoint of our office, is far better than sitting idly by while your client lies to the Service.

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Hypothetical 3:

After the audit, the Babaloos fail to pay Cynthia for the services rendered, saying they were "disappointed" with how the audit played out (in other words, that Ricky had to disclose the income from the singing lessons). Assume for the sake of argument that Cynthia is charging only the fees to which the parties previously agreed, and that the 2002 tax return has now been prepared, but not yet filed, and that it is due next week. Also assume that Cynthia is in possession of the completed return, a P&L statement that she prepared for Ricky's club, original sales receipts and equipment leases from Ricky's club, and a W-2 from Lucy's part-time job as a secretary.

 

What documents can Cynthia withhold form the Babaloos as she attempts to collect her fees?

Model Answer Hypo No. 3:

Rule 3-700. Termination of Employment

(D) Papers, Property, and Fees.

A member whose employment has terminated shall:

(1) Subject to any protective order or non-disclosure agreement, promptly release to the client, at the request of the client, all the client papers and property. "Client papers and property" includes correspondence, pleadings, deposition transcripts, exhibits, physical evidence, expert's reports, and other items reasonably necessary to the client's representation, whether the client has paid for them or not...

Circular 230 Section at issue: 10.28

Cynthia shouldn't have to work for free, and if she is not going to be filing the return for the Babaloos, the Service's interest is in making sure the Babaloos are not impeded from getting the return filed by some other means; we do not want to get in the middle of what is essentially a consumer dispute. As I mentioned in my original e-mail message, the decision of whether to return a document to a former client turns on whether it is necessary for the taxpayer to attach it to the return (original must be returned), necessary for the taxpayer to review it in order to complete the return (original may be retained unless state law provides otherwise, but taxpayer must be given a copy), or simply work product of the practitioner, including a fully or partially completed return prepared for the client (these do not need to be turned over). In this hypo, Cynthia need not turn over the 2002 return that she prepared, nor does she need to turn over the P&L from Ricky's club, since these documents are her own work product for which she has not been paid. Review of the original sales receipts will probably be necessary for the preparation of the return by someone else, but since these need not be attached to the return, copies will suffice, so long as withholding the originals is not prohibited by state law. Obviously, the W-2 from Lucy's part time job has to be attached to the return, so the original must be given back to the Babaloos.

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Hypothetical 4:

A revenue officer receives a power of attorney from an IRS practitioner, that is, an attorney, CPA, or enrolled agent, authorizing the practitioner to represent the taxpayer in a collection matter. The revenue offer sends the practitioner a request for information listing 12 specific records to be submitted within two weeks, which is a reasonable time under the circumstances. The practitioner calls the revenue officer the day before the information is due, stating that he is having trouble assembling the records, and requesting a one-week extension. The revenue officer grants the extension. The day the information is due, the practitioner submits three of the items under cover of a letter stating that the taxpayer went on vacation without turning over the other records. Then, over two-weeks, the revenue officer leaves five phone messages for the practitioner, none of which are returned. After the revenue officer sends the practitioner a certified letter requesting the records, the practitioner calls and schedules a meeting. The practitioner does not appear for the meeting, but calls the next day to say that since the taxpayer had not turned over the other records, there was no point in meeting.

 

Has the practitioner unreasonably delayed the prompt disposition of matters pending before the IRS in violation of State Bar Rules or section 10.23 of Circular 230?

Model Answer to Hypo No. 4:

Rule 3-110. Failing to Act Competently.

(A) A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence.

(B) For purposes of this rule, "competence" in any legal service shall mean to apply the 1) diligence, 2) learning and skill, and 3) mental, emotional, and physical ability reasonably necessary for the performance of such service.

(C) If a member does not have sufficient learning and skill when the legal service is undertaken, the member may nonetheless perform such services competently by 1) associating with or, where appropriate, professionally consulting another lawyer reasonably believed to be competent, or 2) by acquiring sufficient learning and skill before performance is required.

Rule 5-220. Suppression of Evidence

A member shall not suppress any evidence that the member or the member's client has a legal obligation to reveal or to produce.

Circular 230 Section at issue: 10.23 Prompt Disposal of Pending Matters

Yes. The request for the extension was reasonable, although the practitioner should not have waited until the last minute to make the request. However, thereafter, the practitioner established a pattern of delay, in that the practitioner: (1) did not notify the revenue officer that he expected to submit fewer records than requested; (2) offered a weak excuse for submitting fewer records than requested (in view of the pending records request, he should have been aware of the taxpayer's plans); (3) ignored a number of phone messages; (4) failed to attend a scheduled meeting without a reasonable explanation; and (5) otherwise gave no indication of good faith efforts to dispose of the pending matters.


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