Ways of accessing formal training

Assignment 1 After a lucrative career on Broadway and as an astrologer, your client decides to change careers and open up a tax preparation service called “Tax by the Stars.” He has no formal tax training. He wants to know the following: What does he have to file with the IRS to be able to prepare tax returns for his family as a favor? What does he have to file with the IRS to be able to prepare tax returns for paying clients? What rules will he be subject to in his new business? After several years of preparing tax returns by the stars, he comes back to you for more advice. He says that was caught completely unaware but the IRS seems to disagree with what the stars told him his clients and family should report on their tax returns. Rather than leave things to fate, he has assured his clients that he will represent them in their audits. He asks for your advice on the following: What does he have to do to be able to represent his clients during their audits? What regulatory rules will he be subject to? Your client continues and tells you that he has a deep distrust (and slightly concerning obsession) with the American Bar Association (“ABA”) and wants nothing to do with it. He says that he did not become a lawyer simply so that he wouldn’t be subject to the ABA’s model rules. He wants you to reassure him that his strategy will be successful and that he won’t ever be subject to ABA rules in a tax practice because he is not a lawyer. Your client requests that you please write a memo addressing his six questions. Citation to statutes and case law is not necessary but can make your memo more complete, earning you a bigger fee.

Sample Solution

     

Memo to Client: Tax by the Stars and Legal Risks

Re: Your inquiries regarding tax preparation & IRS audits

This memo addresses your six questions regarding establishing a tax preparation service and representing clients during IRS audits. Please note that while I can provide general information, seeking advice from a licensed tax professional and legal counsel is crucial before proceeding.

Tax Preparation Service:

1. Preparing Tax Returns for Family (Free):

You do not need any specific IRS filing to prepare your family's tax returns as long as you do not receive any compensation. Remember, you remain responsible for any errors or omissions resulting from your advice.

2. Preparing Tax Returns for Paying Clients:

To prepare tax returns for paying clients, you must register as a Paid Tax Preparer with the IRS. This involves passing a competency exam, meeting continuing education requirements, and maintaining a Preparer Tax Identification Number (PTIN).

Full Answer Section

     

3. Rules Governing Your Tax Preparation Business:

Several rules govern your tax preparation business, including:

  • Circular 230: Outlines ethical standards and practice requirements for tax professionals.
  • General Rules of Practice and Procedure: Covers taxpayer representation before the IRS.
  • Specific tax code sections: Relevant to specific tax situations and client circumstances.

Representing Clients in Audits:

4. Representing Clients During Audits:

Representing clients during audits requires specific qualifications:

  • Enrolled Agent (EA): Pass a comprehensive IRS exam and meet experience requirements.
  • Attorney: Licensed to practice law, with tax expertise.
  • CPA: Certified Public Accountant with relevant tax qualifications.

5. Regulatory Rules for Representing Clients:

The regulatory rules you face depend on your chosen qualification:

  • Enrolled Agents: Subject to Circular 230 and IRS regulations for EAs.
  • Attorneys: Subject to the ABA Model Rules of Professional Conduct and state bar rules.
  • CPAs: Subject to AICPA Code of Professional Conduct and state licensing requirements.

Distrust of the ABA:

6. Avoiding ABA Rules:

Unfortunately, your distrust of the ABA does not exempt you from its rules if you qualify as a lawyer representing clients before the IRS. The ABA Model Rules apply to any attorney practicing law, regardless of specialization.

Risks and Recommendations:

Continuing with your current approach poses significant risks, including:

  • Penalties and sanctions: For unauthorized practice of law and potential harm to clients.
  • Reputational damage: For unprofessional conduct and potential client lawsuits.

I strongly recommend:

  • Seeking legal counsel: From a qualified tax attorney to understand your options and obligations.
  • Obtaining proper qualifications: To legally represent clients in audits.
  • Prioritizing client protection: By ensuring competence and ethical conduct in your tax practice.

Remember, navigating the legal and ethical complexities of tax representation without proper qualifications can have severe consequences. Choosing the right path protects you, your clients, and your professional reputation.

Disclaimer: This memo is for informational purposes only and does not constitute legal advice. Please consult with qualified professionals for guidance specific to your situation.

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