01.02 Internal Revenue Code and Regulations Related to Tax Return Preparers Flashcards
Who is a tax return preparer (TRP)?
A TRP includes anyone who prepares for compensation, or who employs one or more persons to prepare, all or a substantial portion of any tax return or claim for refund.
What acts does not classify a person as a TRP?
An individual preparing a return of a taxpayer by whom the individual is employed;
Preparing a return for a family or friend free of charge;
Simply typing, reproducing, or providing other mechanical assistance in preparing a return.
What is a nonsigning TRP?
A nonsigning TRP is any TRP who is not a signing TRP but who prepares all or a substantial portion of a return or provides advice to a taxpayer or to another tax return preparer when that advice leads to a position that constitutes a substantial portion of the return.
What factors are considered to determine whether a portion a return is a “substantial portion”?
The size and complexity of the item relative to the taxpayer’s gross income; and the size of the understatement attributable to the item compared to the taxpayer’s reported tax liability.
When is a portion of the tax return not considered to be a substantial portion if it involves what amounts of gross income or deductions?
A portion of the tax return is not considered to be a substantial portion of it involves amounts of gross income or amounts of deductions: less than $10,000; or less than $400,000 which is also less than 20% of the gross income indicated on the return.
True or False: The IRS can assess numerous monetary civil and criminal penalties for violations.
True.
What are the tax preparer’s duty to verify taxpayer information?
Rely in good faith and without verification on information provided by the taxpayer.
Must make reasonable inquiries if information appears incorrect or incomplete.
Inquire about appropriate documentation if IRC requires it (e.g. travel expenses)
To be guilty of misconduct, what must a prepare knowingly or recklessly do?
To be guilty of misconduct, a preparer must knowingly or recklessly:
1. Understate the tax liability of a client
2. Give erroneous advice or fail to advise a client of tax elections available
3. Endorse or negotiate a refund check for their own account
4. Adopt a frivolous position on a tax issue
How many years must copies of tax returns be kept?
The copies of tax returns must be kept for three years.
What is the definition of a tax return position?
The Statement on Standards for Tax Services No. 1 defines a tax return position as: as position reflected on a tax return on which a TRP has specifically advised a taxpayer; or a position about which a TRP has knowledge of all material facts and, on the basis of those facts, has concluded whether the position is appropriate.
When is a tax position unreasonable?
A tax position is unreasonable unless there is substantial authority for the position, or the position was disclosed and there is a reasonable basis for the position.
What is the substantial authority standard?
The substantial authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts. It is less stringent than the more likely than not standard (>50% likelihood), but more stringent than the reasonable basis standard (20% likelihood). Generally the substantial authority standard is considered to have a 40% likelihood of the position being upheld.
When are the standards for unreasonable positions different?
The standards for unreasonable positions are different depending on whether the position is disclosed or undisclosed on the tax return.
If a position is disclosed, what standard is most likely to be applied?
If a position is disclosed, it is “unreasonable” unless there is a reasonable basis for the position. Because disclosure alerts the IRS to the position, a more lenient standard is applied in determining “unreasonableness”. A position having a “reasonable basis” requires a 20% chance of successfully being sustained if challenged by the IRS.
If a position is undisclosed, what standard is most likely to be applied?
An undisclosed positions is “unreasonable” if there is no substantial authority. The substantial authority standard requires a 40% probability of being sustained on its merits.
