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Written by: Joshua Fluegel

Published: 10 January 2012

The IRS recently issued new rules for ethical standards for tax professionals in regard to positions taken on a tax return. 

These provisions reside in §10.34 of the Circular 230 regulations that govern ethical standards and discipline for tax practitioners before the IRS. The provisions are separate and apart from similar (and overlapping) rules under IRC Code §6694, which relate to penalties that may be imposed on return preparers under the Internal Revenue Code.

Essentially, there are three courses of conduct that may get a preparer in trouble under the new Circular 230 rules. The same items apply to persons signing a return or claim for refund and persons advising taxpayers on adopting a return position:

a. If the position lacks a reasonable basis;

b. If it is an unreasonable position under Code §6694(a)(2) (relating to the Code penalties on tax preparers); or

c. If the position is a willful attempt to understate liability or is a reckless or intentional disregard of rules and regulations.

Note that it is possible that the position have a reasonable basis, with a violation still occurring. This is because under Code §6694(a)(2), a reasonable basis will not protect a practitioner against penalties for certain tax shelter and listed transaction standards, nor for positions that lack “substantial authority” if required disclosure rules are not complied with.

However, the preamble to the new rules does provide that a violation of Code §6694(a)(2) is not a per se or automatic violation of Circular 230. An independent determination as to whether the practitioner engaged in willful, reckless or grossly incompetent conduct will be made before such a violation is found.

T.D. 9527, IRS Final Regs. Governing Practice Before the Internal Revenue Service (May 31, 2011)

The chart below provides an overview of the various categories of individuals who are governed by Circular 230.

 

 

* Enrolled Agents have passed a three-part, comprehensive IRS exam covering individual and business returns. They must adhere to ethical standards and complete 72

hours of continuing education courses every three years. EAs have unlimited practice rights before the IRS, which means they can represent clients for any tax matter.

** RTRPs have passed an IRS test establishing minimal competency. The test covers only individual income tax returns (Form 1040). They must adhere to ethical

standards. They must also complete 15 hours of continuing education each year. RTRPs have limited practice rights before the IRS, which means they can represent

clients in only certain circumstances.

*** CPAs and Attorneys have unlimited practice rights before the IRS.

† Do not sign tax returns but are employed by firms at least 80% owned by attorneys, CPAs or EAs.

‡ Only prepare 1040-PR and 1040-SS and may not identify themselves as registered tax return preparers.

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Written by: CPA Magazine

Published: 10 January 2012

Tax preparers are required to pass a competency test in order to achieve the title of Registered Tax Return Preparer. The goal of the IRS is to administer a test that is founded on basic preparer competency. As such, the Registered Tax Return Preparer (RTRP) test will focus on the ethical responsibilities of federal tax return preparers and the completion of Form 1040 series along with the basic related schedules and forms. The test specifications provided here (revised August 11, 2011) are intended to provide guidance on the content of the RTRP test. The examples are not all inclusive of what may be tested in a given area.

This outline lists topic that could be included in the test. Not every topic on the list will necessarily appear on the test, and the list should not be viewed as all-inclusive. However, this list is based on the results of a job analysis survey sent to more than 700,000 tax return preparers who identified the basic knowledge needed for tasks performed by minimally competent Registered Tax Return Preparers.

Domain 1: Preliminary Work and Collection of Taxpayer Data

1.  Review prior year’s return for accuracy, comparison, and carryovers for current year return.

2.  Collect taxpayer’s biographical information (e.g., date of birth, age, marital status, citizenship.

3.  Determine filing status.

4.  Determine all sources of taxable and non-taxable income (e.g., wages, interest, business, sale of property, dividends, rental income, income from flow-through entities, alimony, government payments, and pension distributions).

5.  Determine applicable adjustments to gross income (e.g., self-employed health insurance, self employment tax, student loan interest deduction, alimony paid, tuition, and fees deduction).

6.  Determine standard deduction and Schedule A itemized deductions (i.e., state and local tax, real estate tax, cash contributions, noncash contributions, unreimbursed employee expense, medical expense, and mortgage interest).

7.  Determine applicable credits (e.g., earned income tax credit, child tax credit, education, retirement savings, dependent and child care credit). 8.  Understand tax payments (e.g., withholding, estimated payments).

9.  Recognize items that will affect future returns (e.g., carryovers, depreciation).

10.  Determine special filing requirements (e.g., presidentially declared disaster areas).

11.  Determine filing requirements (including extensions and amended returns).

12.  Understand due dates, including extensions.

13.  Determine personal exemptions, including dependents.

14.  Determine qualifying child/relative tests for Earned Income Credit.

Domain 2: Treatment of Income and Assets

Income

1.  Taxability of wages, salaries, tips, and other earnings (e.g., W-2 Wage and Tax Statement, cash).

2.  Interest Income (taxable and nontaxable) (e.g., Schedule B and 1099-INT).

3.  Dividend Income (e.g., Schedule B and 1099-DIV).

4.  Self-employment income and expenses (e.g., Schedule C Profit or Loss From Business and Form 1099-MISC Miscellaneous Income, cash).

5.  Rental income and expenses (e.g., Schedule E Supplemental Income and Loss).

6.  Identification of forgiveness of debt as income (including Form 1099-C Cancellation of Debt).

7.  Other income (e.g., alimony, barter income, hobby income, non taxable combat pay, state income tax refund from prior years, prizes).

Retirement Income

1.  Reporting requirements of Social Security benefits (e.g., Form SSA-1099 Social Security Benefit Statement).

2.  Taxable distribution from an IRA including basis in an IRA (e.g., Form 8606 Non-deductible IRAs).

3.  Distributions from qualified plans (e.g., 401k, IRA, Roth IRA).

4.  Required minimum distributions from retirement plans.

Property, Real and Personal

1.  Short-term and long-term capital gains and losses (e.g., Schedule D Capital Gains and Losses, Form 1099-B Proceeds From Broker and Barter Exchange Transactions).

2.  Determination of basis of assets (e.g., purchased, gifted, or inherited).

3.  Sale of non-business assets (gains or losses).

4.  Sale of a principal residence (e.g.,IRC 121 exclusions, 1099S Proceeds From Real Estate Transactions).

Adjustments to Income

1.  Self-employment tax (e.g., Schedule SE Self-Employment Tax).

2.  Tuition and fees – (e.g., Form 8917 Tuition and Fees Deduction, Form 1098T Tuition Statement).

3. Eligible Moving expenses – (e.g., Form 3903 Moving Expenses).

4. Other adjustments to income (e.g., IRA contribution deduction).

Domain 3: Deductions and Credits

Itemized deductions

1. Medical and dental expenses.

2. State, local, and real estate taxes.

3. Mortgage interest expense (e.g., Form 1098 Mortgage Interest Statement).

4. Charitable contributions (e.g., cash, non-cash, Form 8283 Non-Cash Charitable Contributions).

5. Miscellaneous itemized deductions (including deductions subject to 2% AGI Limit).

6. Employee travel, transportation, education, and entertainment expenses (e.g., Form 2106-EZ and Form 2106 Unreimbursed Employee Business Expenses).

Credits

1. Child and dependent care credit (e.g., Form 2441 Child and Dependent Care Expenses).

2. Child Tax Credit and Additional Child Tax Credit (e.g., Form 8812, Additional Child Tax Credit).

3. Education credits (e.g., Form 8863 Education Credits (American Opportunity and Lifetime Learning Credits), Form 1098T Tuition Statement).

4. Earned Income Tax Credit (EITC) (e.g., Schedule EIC Earned Income Credit, Form 8867 Paid Preparer’s Earned Income Credit Checklist).

5. Retirement savings contribution credit (e.g., Form 8880 Credit for Qualified Retirement Savings Contributions).

Domain 4: Other Taxes

1. Alternative Minimum Tax (e.g., Form 6251 Alternative Minimum Tax).

2. Early distributions from retirement plans (e.g., Form 5329 Additional Tax on Qualified Plans).

3. Self-employment tax (e.g., Schedule SE Self-Employment Tax).

4. Unreported Social Security and Medicare tax (e.g., Form 4137 Social Security and Medicare Tax on Unreported Tip Income).

5. Repayment of first-time homebuyer credit (including Form 5405 First- Time Homebuyer Credit and Repayment of the Credit).

Domain 5: Completion of the Filing Process

1. Check return for completeness and accuracy.

2. Explain and review tax return.

3. Explain record-keeping requirements to the taxpayer.

4. Discuss significance of signatures (e.g., joint and several liability, penalty of perjury, Form 8879 IRS e-file Signature Authorization).

5. Understand tax preparer’s responsibilities related to rejected electronic returns.

6. Understand timeframe for submitting electronic returns (e.g., Form 8879 taxpayer signature and date prior to submission).

7. Understand payment options (e.g., check, direct debit, EFTPS, credit card, installment agreement-Form 9465).

8. Understand estimated tax payment requirements (e.g., potential for penalties, Form 1040-ES Estimated Tax).

9. Understand refund options (e.g., Form 8888 Allocation of Refund).

Domain 6: Practices and Procedures

1. Penalties to be assessed by the IRS against a preparer for negligent or intentional disregard of rules and regulations, and for a willful understatement of liability (e.g., IRC 6694(a), IRC 6694(b)).

2. Appropriate use of Form 8867 Paid Preparer’s Earned Income Credit Checklist and related penalty for failure to exercise due diligence (e.g., IRC 6695(g)).

3. Furnishing a copy of a return to a taxpayer (e.g., IRC 6695(a)).

4. Signing returns and furnishing identifying (PTIN) numbers (e.g., IRC 6695(b), IRC 6695(c)).

5. Rules for the return preparer for keeping copies and/or lists of returns prepared (e.g., IRC 6695(d)).

6. Compliance with e-file procedures (e.g., timing of taxpayer signature, timing of filing, recordkeeping, prohibited filing with pay stub).

7. Completion and use of Form 2848 Power of Attorney and Declaration of Representative and Form 8821 Tax Information Authorization.

8. Safeguarding taxpayer information (e.g., Publication 4600 Safeguarding Taxpayer Information, Quick Reference Guide for Business, IRC 7216).

Domain 7: Ethics

Circular 230 Subparts A, B, and C (excluding D, E), but not limited to the following:

1. Preparer’s due diligence for accuracy of representations made to clients and IRS; reliance on third-party work products.

2. What constitutes practice before the IRS and categories of individuals who may practice.

3. Limits on practice by a registered tax return preparer.

4. Requirement to furnish information to IRS upon request.

5. Prompt disposition of matters before the IRS.

6. Prohibition on receiving assistance from or providing assistance to disciplined practitioners.

7. Rules regarding fees, including contingent fees.

8. Rules in dealing with clients, including return of client records, conflicts of interest, advising on omissions and errors, solicitation (including advertising), and negotiation of taxpayer refund checks.

9. Due diligence standards with respect to tax returns and other documents; standards for signing, advising positions on returns and advising submissions of other documents; advising on penalties; good faith reliance on client information; reasonable inquiries regarding incomplete, inconsistent, incorrect information.

10. Responsibility of individual(s) who have principal authority over a firm’s tax practices.

11. Incompetence and disreputable conduct that can result in disciplinary proceedings.

12. Sanctions that may be imposed under Circular 230.

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Written by: CPA Magazine

Published: 10 January 2012

The Registered Tax Return Preparer competency test contains 120 questions, 100 scored questions and 20 experimental questions in multiple-choice and true or false format. You will have 2.5 hours to complete the test. The 20 experimental questions will not be scored. They are distributed throughout the test and will not be identified as such. These are used to gather statistical information on the questions before they are added to subsequent tests. The subject content list is based on the results of a job analysis survey sent to more than 700,000 tax return preparers who identified the basic knowledge needed for tasks performed by minimally competent Registered Tax Return Preparers.

-  Tests are administered via computer at Prometric test centers. Test centers are located in most major metropolitan areas.

-  You must pay a fee each time you schedule an appointment to take the test. The fee is paid at the time of scheduling, not at the test center by MasterCard, Visa or American Express. Testing fees are not refundable or transferable.

-  If you do not pass the test, you must schedule another test appointment and pay another test fee. There is currently no limit to the number of times you may take the test.

-  You may take the test at any time during the year except during the annual black-out period from April 1 — April 15, when the system is updated.

-  Rescheduling a test appointment must be done online through your PTIN account at www.irs.gov/ptin or by calling 855.IRS.EXAM. You cannot reschedule an appointment by fax, e-mail or voicemail. If you miss your appointment or arrive late and are not allowed to test, your entire fee will be forfeited and you must pay another fee to schedule a new test appointment.

-  To reschedule a test appointment for another date, time or location, you must contact Prometric. There is no fee if you reschedule 30 calendar days prior to your appointment date. There is a $35 fee if you reschedule five to 29 calendar days before your appointment date. Another full test fee if you reschedule less than five calendar days before your appointment date. If English is your second language, please note that a language barrier is not considered a disability.

Test center procedures

Your test will be administered via computer at a Prometric test center. You do not need any computer experience or typing skills to take your test. Before you start the test, you will receive a personalized introduction to the testing system. You can also take a pre-test computer system tutorial if you wish. You may wish to view the video, “What to Expect on Test Day” prior to your testing appointment by visiting www. irs.gov/ptin. You should arrive at the test center at least 30 minutes before your scheduled appointment.

Identification required:  You must present a valid, non-expired form of identification before you can test. That identification document must be government-issued (e.g., driver’s license, passport, state-issued identification card or military identification card); and have a name that exactly matches the name used to register for the test.

Failure to provide appropriate identification at the time of testing is considered a missed appointment. As a result, you forfeit your test fee and must reschedule your appointment.

Reference materials:  During the test, you will have access to Publication 17 Tax Guide for Individuals, Form 1040, and Form 1040 Instructions. Electronic reference materials will be provided as exhibits for candidates to use while taking the computer-based test. You are not allowed to bring your own reference materials to the test center. Due to the time limit of the test, it is recommended that you research the reference materials only when necessary.

Calculator usage:  You will be able to use an onscreen calculator and will also be provided a handheld calculator that is silent. You are not allowed to bring your own calculator to the test center.

Scratch paper :  You will be provided with a packet of scratch paper and a pencil. You may not bring your own scratch paper or pencil to the test. The test center administrator will collect all scratch paper upon completion of the test.

Ten important test center regulations not previously mentioned include:

-  You will be continuously monitored by video, physical walkthroughs and the observation window during your test.

-  You are required to sign out on the test center roster each time you leave the test room. You must also sign back in and show your identification to the test center administrator in order to be re-admitted.

-  You are prohibited from communicating, publishing, reproducing, or transmitting any part of your test, in any form or by any means, verbal, written, or electronic, for any purpose.

-  You must not talk to other candidates or refer to their screens, testing materials, or written notes.

-  You are allowed to bring soft ear plugs or center-supplied noise-blocking head phones.

-  Any clothing or jewelry items allowed to be worn must remain on your person at all times .

-  You must not bring any personal/unauthorized items. You will be asked to turn your pockets inside out prior to every entry into the test room.

-  You will be scanned with a metal detector wand prior to every entry into the test room. If you refuse, you cannot test.

-  You are not allowed to use any electronic devices or phones during breaks.

-  Your test has no scheduled breaks. If you take an unscheduled break, the test timer will continue to count down.

Question types

The questions in your test are mostly multiple-choice, with some true or false questions. Three different multiple-choice formats are used, each of which provides four options from which you choose your answer. Examples of each multiple-choice format, as well as a true or false example, are shown below.

Direct question

An individual taxpayer’s return consists of Form 1040 and Schedule C. Without an extension, what is the normal due date of the return?

A. March 15

B. October 15

C. April 15

D. June 15

Incomplete sentence

Federal income tax overpayment amounts applied from the prior year’s return

A. cannot be claimed on Form 1040EZ.

B. do not need to be reported on the tax return.

C. are reported as excess Social Security withheld.

D. are reported as part of Federal income tax withholding on the current year return.

“All of the following” except

All of the following are factors in determining if a U.S. citizen or resident taxpayer must file an income tax return EXCEPT the taxpayer’s:

A. gross income

B. filing status

C. location of earning

D. age

True or False item

The client provided the preparer with receipts for the prior year’s business expenses. The client has requested that the preparer return those receipts because the client is now under audit. The preparer refuses to turn over the receipts. The preparer is in violation of Circular 230.

A. True

B. False

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Written by: T. Steel Rose, CPA, ACS Editor

Published: 10 January 2012

Like most aspects of tax law, charitable contributions are rarely a straightforward affair. The simple act of lending a financial helping hand can become riddled with oddities that change from year to year. Disregarding subjective considerations based on your individual tax situation, like if contributing other than cash or to a private foundation, the basic rule concerning contributing cash to a church is 50% of Adjusted Gross Income (AGI). There is also a 5-year carryforward for amounts that exceed the 50%.

If you do not itemize your tax deductions (which normally occurs if you have a mortgage interest deduction) you may not see the full advantage of the charitable contribution. When you cannot deduct a contribution you may choose to contribute directly from an IRA without recognizing the donated amount as income.

Charitable contributions escape alternative minimum tax (AMT) restrictions. While there is a limited advantage to deferring to a non-AMT year, the deduction is not lost. One of the few deductions still allowed under the AMT is a charitable donation. Even if you are subject to the AMT, your charitable contributions will continue to reduce your tax liability. If you expect to be subject to the AMT on a yearly basis, you may take your charitable contributions as deductions, which will reduce your AMT liability, nevertheless. 

There was a phase-out of itemized deductions, which itself has been phased out. This was established by Section 68 of the Internal Revenue Code, first added in 1990 during the George H.W. Bush Administration, which established an overall limitation on itemized deductions. This provision was made permanent during President Clinton’s tenure but its effect was limited by President George W. Bush in 2001. Although it was scheduled to expire — or sunset — in 2010, President Obama has proposed keeping it in place and adding another layer of complexity. The following details suggest that Congress has chipped away at itemized deductions rather than abolishing charitable deductions:

Original Provision

When the law was first passed, the AGI limit was $100,000. With inflation indexing, it is now $166,800 ($83,400 for married filing separately).

To calculate the original charitable contribution limitation, you apply all regular limits to individual itemized deductions. That total would be reduced by the lesser of:

(a) 3% of the amount by which AGI exceeded $100,000 ($50,000 for married filing separately), or

(b) 80% of the otherwise allowed itemized deductions. Thus, a taxpayer would get at least 20% of the total itemized deductions.

Example:

Assume the original AGI threshold limit of $100,000 on married taxpayers. The couple has an AGI of $200,000 and has the following itemized deductions: $10,000 mortgage interest; $15,000 charitable contributions; $5,000 state income taxes, for a total of $30,000 itemized deductions.

Possible reduction:  The lesser of

(a) 3% of $100,000 (the amount by which their AGI exceeds $100,000) = $3,000

(b) 80% of itemized deductions

= $24,000.

In this case, (a) above would be the lesser figure–$3,000. Thus, the taxpayers’ itemized deductions for the year would be reduced by $3,000, from $30,000 to $27,000. The final result would be that these taxpayers would have $3,000 more in income taxed at their highest marginal rate.

Note that the limitation does not apply to certain deductions, including the medical expense deduction, investment interest deduction, casualty and theft loss deductions, and gambling loss deductions.

Bush II Softens the Blow

In 2001, the George W. Bush Administration successfully backed off limiting itemized deductions through legislation phasing out the phaseout. The Senate report on the bill gave this reason: “The Committee believes that the overall limitation on itemized deductions is an unnecessarily complex way to impose taxes and that the ‘hidden’ way in which the limitation raises marginal rates undermines respect for the tax laws.”

Tax Year 2010:

The problem with the George W. Bush tax legislation is that it all goes away entirely in 2011, hence the itemized deduction limit reverts to pre-2001 status with the original full 3% / 80% phaseouts back in place.

Current Proposal

The Obama budget proposal would reinstate the original 3% / 80% Section 68 limit in 2011. On top of this limit, Obama would limit the resulting itemized deduction benefit to a marginal tax rate of 28% for married taxpayers with AGI over $250,000 and single taxpayers with AGI over $200,000. The effect of this cap is that itemized deductions will not create the same amount of tax savings as they previously did.

Example:

A taxpayer who is in the 35% percent tax bracket would normally see a $35.00 benefit for every $100 in itemized deductions. Under the Obama Administration’s proposed cap, that same taxpayer would only see a tax benefit of $28.00 for every $100 in itemized deductions. Coupled with the proposed increase in marginal rates, which under the George W. Bush plan are now scheduled to go back to their pre-2001 levels, the reduction in value can be up to 11.6% (the spread between the top marginal rate of 39.6% and the 28% deduction cap).

From a tax planning standpoint, if you are subject to the AMT in the current tax year but you are generally in a marginal income tax bracket that is higher than the top 28% AMT rate (levied on income that is $175,000 above the exemption amount, $87,500 for married filing separately—the 26% rate applies to income above the exemption amount, but less than $175,000), you may want to consider postponing large charitable contributions to a year when you are not subject to the AMT.

In a non-AMT tax year, your charitable income tax deduction will reduce your tax liability by more than in a year when you are subject to the AMT.

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