It is significantly important for all tax practitioners to comply with high standard of professional ethics in tax practice. Many regulations have stated standards that practitioners must meet and any violation of these standards will result in penalties.
When providing tax return preparation service, the tax professional must accurately state the tax liability of taxpayer. There should be no understatement of the amount payable or overstatement of credit or refund to reduce the tax liability. According to the U.S. Code Section 6694, a tax return preparer who conducts understatement of taxpayer’s liability shall be subject to penalties.
First of all, there would be a penalty if the tax preparer understated tax liabilities due to an unreasonable position with knowledge of that position. The “unreasonable position” means a position that the tax preparer doesn’t have necessary technical authorities or skills to perform the tax return practice without disclosure. If the position is disclosed, the tax preparer need only a reasonable basis, a tax reporting standard higher than a patently improper or frivolous, to support the position. The “unreasonable position” also refers a position with respect to a tax shelter and it is not reasonable to believe the position depends more on its merits. However, if there was evidence to prove that the tax preparer acted in good faith with a reasonable reason for the understatement, there would be no penalty.
Secondly, there would be also a penalty if the tax preparer understated the tax liability due to a willful attempt or reckless. A willful misconduct implies intentionally doing acts resulting deviation from a duty or rule of conduct with knowledge of the consequence. A reckless conduct implies the negligence of knowing obvious risk of negative results what are not reasonable. The penalty can be reduced by the amount paid due to the unreasonable position.
The U.S Section 6695 also identifies other penalties regarding the tax return preparation practice. If the tax preparer failed with any of requirements below, there would be a penalty unless the failure was due to reasonable cause and not due to willful neglect.
Firstly, the Section 6107(a) requires the tax preparer to provide a completed copy of the tax return before it is presented for taxpayer’s signature. Secondly, the tax preparer must sign the return or claim for refund. Thirdly, the Section 6109(a)(4) requires the tax preparer to provide a identifying number for securing proper identification the tax return practice regarding both the preparer and his employer. Fourthly, the Section 6107(b) requires the tax preparer to keep the copy or list of the return for the period ending 3 years after the close of the return period and to make it available for inspection requested by the Secretary. Fifthly, the Section 6060 requires the tax preparer to file correct information returns on or before the first July 31 following the end of the return period. Information includes the name, taxpayer identification number, and place of work of each tax preparer employed by him. Sixthly, the tax preparer is not allowed to endorse or negotiate, directly or through an agent, any check made by the taxpayer for the tax return. Lastly, the tax preparer must meet the due diligence requirements to determine eligibility for allowance of credit against the tax.
Other than the U.S. Section 6694 and 6695, the Circular 230 also provides ethics guide for the tax practice. The Circular 230 contains rules governing tax practice before the IRS. It requires attorneys, certificated public accountants, enrolled agents, and other practitioners to comply with the rules when prepare tax returns and provide tax advice. Any violation of regulations will result in penalties on those identified practitioners.
There are five parts in the Circular 230. In the subpart A, rules relating to the authority to…