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2020 NATIONAL INCOME TAX WORKBOOK
CHAPTER2: ETHICS P. 33
Due Diligence
Understatement of Liability
Referrals
Whistleblower Awards
Electronic Document Management
Case Studies - Covered in first day and second hour of ethics
CHAPTER 2: ETHICS P.33
Q: REFERRAL SERVICE – Can you pay for referrals?
A: YES – But comply w/ advertising rules and disclose payment
◦ Referral service should have basis for recommending (years,
geography, etc.)
◦ Disclose amount to client, in writing
RECEIVING REFERRALS PP. 49-50
Do your due diligence
Provide several referrals
Put responsibility on client to investigate
Follow up, in writing (Figure 2.4)
Disclose fee, in writing
CHECK STATE LAW – FEE MAY NOT BE ALLOWED
MAKING REFERRALS PP. 50-52
IRS says do not inform on a client
Third party? Consider harm to
reported party, family, employer,
employees, owners, investors, clients,
lenders, suppliers, vendors
WHISTLEBLOWING – CONFLICT OF INTEREST P. 56
Confidentiality◦ Internet faxing – at a minimum review privacy policy
◦ Online backup/ storage – reasonable care to protect
◦ Client portals – use when highly sensitive info or email is not
secure
ELECTRONIC DOCUMENT MANAGEMENT PP. 57-59
Duty to preserve documents
◦Record retention requirements (Outlook calendar)
◦Check cloud storage provider policy (fax Figure 2.6)
◦Have a record retention policy (Figure 2.7)net operating loss returns can be audited until the loss is no longer available for use
◦ IRS requirements for taxpayers
ELECTRONIC DOCUMENT MANAGEMENT, CONT. PP. 59-62
FIGURE 2.7 Sample Record Retention Policy
Application. This Record Retention Policy (“Policy”) applies to ABC Accounting, Inc. (ABC).
All records and documentation, both physical and electronic are subject to the retention
requirements of this Policy.
Purpose. The purpose of this Policy is to ensure that records and documents are
adequately retained in accordance with statutory and regulatory authority, and
operational needs. This Policy is also intended to help ABC employees understand their
obligations to retain electronic documents, including email, web files, text files, sound
and movie files, PDF documents, and all other files.
Administrator.
FIGURE 2.7 RECORD RETENTION POLICY P.67
Record retention policy should be shared with all employees. How do you dispose of expired documents?
1. 1.) I close my eyes and hope for the best
2. 2.) I have the newest person in the office pull and shred paper documents
3. 3.) Electronic jump drives are wiped after 7 years, unless litigation is pending
POLLING QUESTION CH 2 B QUESTION1
We put this at the end of the day, in case you have met the continuing
education credits for this cycle.
Good luck in applying your
ethical standards.
SELECTED CASE STUDIES ARE COVERED BY THE OTHER TEAM
This Photo by Unknown Author is licensed under CC BY-SA-NC
FOR: a discussion of ethical guidelines and
education
NOT FOR: malice, discrimination or favoritism
TOTALLY (ALMOST) FICTITIOUS AND HYPOTHETICAL
10 CASE STUDIES PP. 63-71
Whitehall Accounting going paperless◦ Intern scans and shreds
◦ IT person ensures security and backup
Linda hires Whitehall for help with examination of 2019 return – gives all her docs
IRS asks for info to support residential energy credit
Gary Whitehall posts a request in Linda’s client portal – automatically emails Linda – no response
Additional IRS request for mileage documentation
Gary remembers seeing a mileage log, but can’t find it
CASE STUDY 4 – ELECTRONIC DOC MANAGEMENT P. 64
Can Gary rely on the client portal to communicate important info?
Can Gary help Linda recreate a new driving log and indicate
contemporaneous?
How to avoid these problems?
CASE STUDY 4 CON’T P. 64
Client portal protects info – but not great for time sensitive info – Gary should
have tried to call or email Linda
Gary can help Linda recreate a new driving log based on her appointment
calendar or other corroborating records – but can’t represent that it is original
Avoid these problems: have an electronic document management policy that
requires return of original documents to client, client portal access agreement
limits use as sole source of communication for time-sensitive info
CASE STUDY 4 RESPONSE P. 69
Are you aware that we are posting our PowerPoint slides on the
web?
◦ Yes, see MSU Income Tax Class and click on instructor, authored
documents and find their power points
◦ No
◦ I don’t use them after I have heard the class.
POLLING QUESTION CH 2 NUMBER 2
Jim does tax prep and bookkeeping for Jennifer
Jennifer asks Jim to recommend a financial adviser
Jim recommends Robert because Robert sends him business
Jim says Robert makes his clients lots of money
Jim, Robert, and Jennifer meet
Jennifer gives Robert 30K to invest in a company that promised huge returns
Investment is a scam, Robert is convicted, Jennifer loses all her money
CASE STUDY 5 – REFERRAL P. 65
Does Jennifer have a claim against Jim?
If so, what could Jim have done differently?
CASE STUDY 5 CONT. P. 65
Jim made representations about Robert’s success rate and Jennifer
relied on those representations – she could claim that Jim
contributed to her loss
Jim should have
◦ Investigated Robert’s background, license, training, reputation, etc.
◦ Given Jennifer several names as referrals
◦ Put the burden on Jennifer to make her own determination
◦ Followed up in writing (Figure 2.4)
CASE STUDY 5 RESPONSE P. 69
Abacus Tax Prep joins online referral service, pays $35 per referral. Service
advertises
Our referral team will find an expert tax professional for your business. Each of our
referrals are hand-selected specifically for your small business, based on your
individual needs, and will save you time and money. We guarantee your full
satisfaction.
Referral service randomly generates referrals based on geography
CASE STUDY 6 – ONLINE REFERRAL SERVICE P. 65
Abacus also sends out this email to its clients
CASE STUDY 6 CONT. P. 65
Should Abacus participate in the online referral
service?
Does the $50 referral program violate any ethical
rules?
CASE STUDY 6 CONT. P. 65
Online referral service - false, misleading, or deceptive?◦ No objective basis for referral
◦ Not hand selected
◦ Use of the term “expert” may be prohibited
◦ “Save time and money” and “guarantee results” may create false expectations
$50 referral program allowed?
◦Disclose payment to referral clients
◦Encourage them to make only objective recommendations
◦Email likely violates CAN-SPAM Act
CASE STUDY 6 RESPONSE P. 69
Susan is a doctor with a good income
Craft beer brewing business generated a loss
Susan has a narrative of activities dated 4/14/20◦ Shows 500+ hours research, procuring supplies, brewing, bottling, and tasting
Can tax practitioner Joe rely on the narrative?
What other due diligence should Joe conduct?
CASE STUDY 7 – ESTIMATING PARTICIPATION PP. 65-66
Joe can typically rely on info provided, BUT
◦ Narrative is not contemporaneous
◦ How does Susan have that much time to brew beer?
◦ Beer sampling sounds recreational
Ask for substantiation:
Appointment books, when did she start? Does she have any sales or did the beer get sampled until it was gone?
Calendar
Phone records
Credit card/bank statements
CASE STUDY 7 RESPONSE P. 70
J&T Accounting Instagram launch – only 112 followers
◦ Buys 1,000 followers for $100
J&T LinkedIn network – wants to increase
◦ Draft reviews and offer clients incentives to post them?
◦ Create a fake account and write its own reviews?
◦ Pay a third party to write reviews?
Instagram and LinkedIn marketing strategy problems?
CASE STUDY 8 – ADVERTISING/SOLICITATION P. 66
Social media advertising can’t be false or deceptive
Fake followers give the impression that they are clients, or endorse J&T
OK to ask clients for reviews – objective and true
Fake reviews are misleading
CASE STUDY 8 RESPONSE P. 70
Case study 9
Are you qualified to value a going concern with underlying assets?
◦Yes
◦No
POLLING QUESTION CH. 2 NUMBER 3
Mark was a manufacturer
Daughter Jessica has successful career and son Niles to take over the family
business
Mark dies and his Will directs distribution of the business to Niles and an equalizing
distribution to Jessica
Ellen is Mark’s CPA – extensive knowledge of the business
Can Ellen perform the valuation for Jessica?
What due diligence steps should she take?
CASE STUDY 9 – VALUATIONS P. 66
Ellen can perform the valuation if she is:
Experienced & competent, and
No conflict of interest
It’s in Jessica’s interest to have a high valuation, which is likely consistent with the
company’s interest, but contrary to Niles’s interest who would like to pay less
GET A WRITTEN CONFLICT WAIVER
CASE STUDY 9 RESPONSE PP. 70-71
Greta is a full-time nurse
17-year-old son Grant competes in motocross competitions
Greta looking to buy a motocross complex
Operates at a loss, but she wants to add a restaurant, bar, hotel – make $$
4/4/20 Greta emails Kris a “quick question” from her work address:
◦ Will losses offset other income? Any other tax advice for me?
Greta needs a response ASAP. How should Kris respond?
CASE STUDY 10 – TAX ADVICE PP. 66-67
Email from work may not be confidential
Best practices – establish facts, evaluate, apply the law, reach conclusion
Simple “yes” won’t suffice
AICPA – written advice must contain sufficient explanation
Sample response addresses material participation and hobby loss rule
7-year depreciation for motorsports expires
Research before answering (a hotel is not included in the definition of
motorsports entertainment complex)
CASE STUDY 10 RESPONSE P. 71
Thinking about next year, do you prefer in person or webinar classes for MSU
Income Tax Schools?
•Webinar
•In Person
•Either
•Both
POLLING QUESTION CH. 2 NUMBER 4
QUESTIONS?
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