Tax Season Reminders

Tax Season Reminders

Continued from the Home Page

First, as tax advisors and return preparers, we have a duty both to our clients and to the tax system. No citizen has an obligation to pay any more tax than legally required. The tax laws are complex, sometimes vague and often difficult to apply to a client’s facts. We have a responsibility to our clients to help them interpret the law in a way that is most favorable to them. At the same time, our tax system is one of self-assessment, and we should not be recommending tax positions that are either frivolous or obviously improper. We should not condone a tax return position that will only be successful if a return is not audited.

The standard for signing a tax return or providing tax advice is the “realistic possibility of success” standard. If, after reviewing the facts and considering the applicable authority, we conclude that a tax return position has a realistic possibility of being sustained on its merits, we can sign the return. In reaching that conclusion, we can rely on a well-reasoned interpretation of the applicable statute, pronouncements issued by the applicable taxing authority or well-reasoned articles or treatises. The realistic-possibility-of-success standard is generally viewed as a one-in-three chance of success.

If we conclude that a tax return position does not meet that standard, we can still sign the return as long as the position is disclosed and is not frivolous. Of course, the various standards for avoiding penalties—for example, the “substantial authority” standard—may be more stringent than the realistic-possibility-of-success standard. In these cases we have an obligation to inform a client of the potential for a penalty and the steps, such as disclosure, that can be taken to avoid the penalty.

When preparing a return, we need to make a reasonable effort to procure from the taxpayer all of the information necessary to complete the return, including answers to all of the questions on the return. Once we receive information from a client, we do not have an obligation to verify the information. However, we must make reasonable inquiries if the furnished information appears to be incorrect, incomplete or inconsistent either on its face or on the basis of other facts that we know.

When detailed, factual information is not available, it is generally permissible to use reasonable estimates unless prohibited by statute. It’s important that the client provides the estimates, and that the estimates are not presented in a manner that suggests greater accuracy than exists.

If in the course of preparing a return or advising a client, we discover an error in a prior return, we have a duty to advise the client of the error, and to recommend corrective measures. If the client fails to correct the error, we must consider withdrawing from the engagement. Consider means consider. If we decide not to withdraw, we must take reasonable steps to insure that the error is not repeated.

There is no substitute for good client communications. Good communication starts with a signed engagement letter and a good tax questionnaire. While there is no required format, the communication should be clear and appropriate, taking into account the circumstances and sophistication of the client. Oral communication is acceptable, but written communication is generally preferred. Both written and oral communication should be documented in the client’s file.

Finally, there is no place in our tax system for abusive tax shelters or tax advice. We should not be signing tax returns that contain tax positions that have no business purpose or economic substance other than tax avoidance, unless specifically permitted by statute.

Enough said. Here is to a successful tax season, however you define it.