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This course was created by the renowned Sid Kess and taught by top instructors.
Utilizing Circular 230, the IRS is imposing stepped up penalties of up $100,000 per occurrence against taxpayers and their advisors.
With increased IRS scrutiny and audit activity, you will better understand many of the abusive financial strategies, insurance and annuity-based products being marketed to your clients and how you can alleviate your client’s exposure.
Objectives:
Prerequisite: None
733722
Chapter 0 - Overview
Course Objectives
• Identify potentially abusive deductions claimed on your client's tax return.
• Identify whether financial products being marketed or previously sold to your clients are potentially abusive tax shelters and/or listed transactions.
• Enable the practitioner to advise his clients so they can avoid IRS penalties and deduction disallowances.
• Learn the pros and cons of the current strategies being employed by financial professionals in developing comprehensive financial plans for individuals and businesses.
• Learn to avoid financial exposure to yourself and your clients for aggressive insurance, retirement and financial planning strategies being marketed today.
Introduction
The most important goal of this course is to teach you how to apply Circular 230 and the AICPA standards on tax practice to situations identical or similar to those described in this course and, for that matter, to all situations that the CPA is likely to encounter at some point in practice. Secondly, this course will attempt to arm you with the knowledge to ask the salient questions of your client and of his or her advisors to save him or her before he or she puts money into a bad investment or worse.
Your clients are being solicited by numerous financial advisors at this moment. While most of these advisors are honest and want to help your clients solve their financial problems, there are others who range from negligent to, possibly in extreme cases, criminal. Many financial advisors make outlandish claims, such as being able to provide tax deductible life insurance. To your client this seems like a win-win scenario. They purchase the insurance they need, and the Treasury subsidizes a portion. How can you as the trusted advisor know whether your client is purchasing a legitimate product or simply buying further problems?
Organization
As you will learn, most – with the notable exception of at least one – so called 419 plans are abusive and the resulting deductions from abusive plans are not legitimate. The accountant is usually the last one to hear about the client's contribution to the abusive tax reduction scheme. The client typically is sold a tax deduction by a financial planner, insurance agent, or another professional. Without checking with his or her accountant, the client buys a product, with the primary motivation being a tax deduction. When the client finally relates the purchase information to the accountant, sometimes during tax season, the product has usually been paid for. If the product is an abusive tax shelter, or listed transaction, not only will the client be in trouble, but so will the accountant.
As you will learn, not only can this happen to you, there is a good chance that this will happen to you. The accountant's problems may be Circular 230-related or even lawsuit-related. The CPA is allowing the deduction on the return. Who does the CPA think the client will blame when there is a problem?
Circular 230, as amended, became effective on June 20, 2005. In part, the revisions were intended to curb the marketing of abusive tax shelters. Also, "best practices" were established which apply to virtually all tax practitioners and tax advice, though this is largely aspirational in character. Finally, the revisions also address the issues of all written tax advice in general and what are referred to as "covered opinions" in particular.
Penalties for violation of Circular 230 can be severe, both monetarily and in the area of professional discipline. Even actual removal from practice is possible.
The bottom line is that virtually all written tax advice rendered by accounting and law firms is subject to some kind of standard.
Someday a client of yours may receive an audit letter from the IRS dealing with a 419, 412(i) or a 401(k) plan. Most CPAs are not familiar with these increasingly popular tax reduction products, and if you allowed the client to take the tax deduction, this could be a big problem.
Section 419A(f)(6) was added in 1984, and that addition created the 10 or more employer plan. The promoters of these plans sold people on the idea of tax deductible life insurance, but especially large tax deductions. In recent years, the Internal Revenue Service largely regulated these plans out of existence. Evidence indicates that many of the promoters are now pushing plans purporting to comply with Section 419(e) and are doing substantially the same things that they once did. Chances are a client will approach you for advice on one of these plans some day. Worse yet, he may have made a contribution, and now he expects you to sign off on the deduction.
The Internal Revenue Service has recently been conducting a fairly widespread campaign by way of auditing Section 412(i) defined benefit plans. Plans are generally considered either noncompliant (not that bad) or "abusive." The usual treatment for abusive plans is to act as if the plan never existed, triggering the full panoply of back taxes, penalties, and interest. Especially disastrous is being considered a "listed transaction." Any taxpayer participating in such a transaction must so disclose on pain of potential penalties up to $100,000 for individuals and $200,000 for other taxpayers.
The Pension Protection Act, most notably, has made cash balance plans far more popular than before, and also requires that all defined benefit pension plans, except for 412(i) plans, be fully funded.
Today's practicing CPA must be aware of a multitude of financial strategies and products to properly serve, retain, and gain clients.
Almost everyone knows that the cost of both healthcare and health insurance is skyrocketing. Figures over the last decade show the cost of health insurance outpacing inflation, salary increases, increases in profits, and nearly every other important factor affecting the affordability of health insurance. These trends are also having a truly doleful effect on businesses, both large and small, that depend, at least in part, on quality benefits to attract superior employees. More and more, businesses are being forced to find creative solutions in order to continue to offer this essentially mandatory benefit while avoiding bankruptcy. However, many of these solutions are shortsighted and costlier than initially realized.
There is a growing trend toward what are known as health reimbursement arrangements. All money is contributed by the employer, is tax deductible by the employer, and is not includable as income by the employee. Essentially, the employee is provided with money directly, having the options of either purchasing health insurance or directly paying medical expenses.
With the cost of both healthcare and health insurance rising every year and with no end in sight to this trend, CPAs must keep abreast of the rapid changes in this area if they are to properly advise and serve clients, especially business clients. "Dabbling," or engaging in practice in a superficial manner, may be the most dangerous and inappropriate practice that can be engaged in. Aside from the fact that the practice in and of itself often violates the AICPA Code of Conduct, it also creates serious problems from a malpractice standpoint. Loss ratios tend to increase inversely to the percentage that a given service represents of the total practice.
What should you do if you do not wish to dabble? There are two alternatives. First, you may refer the client to practitioners competent in the given area, or you can consult with other experts in the hope of acquiring the requisite expertise or perhaps combine that with appropriate professional education.
Ethical complaints against CPAs tend to fall largely into three categories: failure to return records, failure to exercise due professional care, and conflicts of interest.
The Government is presently conducting an aggressive campaign against tax shelter promoters, with numerous CPAs and attorneys having been charged with fraud and conspiracy. Then there are the severe penalties, enacted in IRC Section 6707A in 2004, for failing to disclose participation in a "listed transaction."
More and more CPAs are engaging in financial planning. This entails being held to a much higher standard in the areas of ethics and competence. What about the question of whether you should become licensed to sell life insurance, mutual funds, and other products? That is obviously your call. First, you may not make as much money as you think, but, more importantly, at least the appearance of a conflict of interest arises. If you receive income from the sale of a product to a client, your financial interests become entangled with the best interests of the client. This is the appearance of conflict. The client may perceive it the wrong way especially if the product and/or investment does not really work out.
The relatively new industry of life insurance settlements has generated considerable interest and controversy. The idea is to buy unwanted and/or unneeded policies from senior citizens in rapidly declining health. The senior citizen who is strapped for cash, for whatever reason, may find this particularly advisable. However, there may be other situations where it is not advisable. As proof, the insured almost never takes the initiative in this area; it is generally an insurance professional. The commissions they receive in connection with these transactions are one of the principal forces driving this market.
There is also the genre known as investor-initiated life insurance. Wealthy seniors are targeted in this investment. The initial enticement is two years of completely free life insurance. After two years, the senior can either take over the policy himself by repaying the premiums for the first two years, with interest, or he can allow the lender to sell the policy in the traditional life settlement market, at which time he receives a portion of the net proceeds.
A wealthy senior citizen who is still in good health is the ideal candidate. Most seniors do not take over the policies, which wind up being sold in the life settlement market. As for the investor, his return on investment largely depends on how soon the senior dies.
The CPA, whether insurance licensed or not, should periodically suggest to clients that they review their life insurance coverage. For example, some of your clients have stopped smoking. Such people may now be eligible for standard rates and lower premiums. If you suggest this review, and they save money, they will love you for it.
A problem has arisen fairly recently, as a result of downsizing and people being offered early retirement packages, involving unscrupulous brokers who prey on such early retirees, making outlandish promises of the good life in an attempt to attract as many investment dollars as possible.
This problem has recently become so pervasive that the National Association of Securities Dealers recently felt compelled to issue an "investor alert" basically warning these retiring employees to be skeptical of sales talk about the easy life.
Chapter 1 - Abusive Tax Avoidance Transactions – Circular 230 Implications and Standards
Learning Objectives
After completing this chapter, you should be able to
• Identify potentially abusive deductions claimed on your client's tax return.
• Identify whether financial products being marketed or previously sold to your clients are potentially abusive tax shelters and/or listed transactions.
• Avoid financial exposure to yourself and your clients for aggressive insurance, retirement, and financial planning strategies being marketed today.
• Conduct your practice free from Circular 230 problems.
Introduction
Circular 230, one way or another, applies to virtually all written Federal tax advice rendered by CPAs, enrolled agents, attorneys, and actuaries. Penalties for violation can be severe, both monetarily and in the area of professional discipline and may even result in the actual removal from practice. Virtually all written tax advice rendered by accounting and law firms is subject to some kind of standard with the most stringent standards applying to marketing type advice and opinions.
The Internal Revenue Service (the Service) is an administrative agency. The Secretary of the Treasury was granted by Congress the authority to enforce and administer the tax laws and the Service does so by delegation by the Secretary.
The Service exercises its power through formal rule or regulation making, investigation, and prosecution, and mostly acts through informal procedures such as issuing advisory rulings to and negotiating with taxpayers.1
The Secretary of the Treasury has the authority to proscribe rules and regulations governing the recognition of persons representing claimants before the department, and he may disbar or suspend any person from practice if that person fails to comply with those rules.2 The promulgation of these rules is found in what is commonly referred to as Treasury Department Circular No. 230.
Proposed revisions to Circular 230 were issued by the Treasury on December 20, 2003. These revisions were finalized on December 17, 2004, and published on December 20, 2004. Additional revisions were issued on May 18, 2005, and June 7, 2005. These new rules became effective on June 20, 2005.
The revisions to Circular 230 were intended to curb the marketing of abusive tax shelters. Additionally, an intention was to raise the ethical bar by setting "best practices" which apply to virtually all tax practitioners and tax advice. The revisions also included certain disclosure and due diligence requirements for practitioners who write "covered opinions."
The American Jobs Creation Act of 2004 amended 31 USC and clarified that the Treasury is authorized to impose standards for written tax advice. The Act also authorized the Secretary to impose monetary penalties on practitioners who violate Circular 230.
1 A description of what constitutes an administrative agency is not within the scope of this course. Accordingly, the
discussion here is selective for illustration purposes only.
2 31 USC 330
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