04 Legal Duties and Responsibilities

Question 1

Define “breach of contract.”

Answer 1

Failure to perform substantially as agreed under contract

Question 2

Define implied agreement.

Answer 2

To perform in a non-negligent manner, consistent with the standards of the profession.

Question 3

List the elements of recovery.

Answer 3

Duty, Breach, Damages, Proximate Cause.

Question 4

List the sources for which standards should be followed by a tax professional.

Answer 4

State and Federal statutes
Court decisions
Contract with client
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Auditing Standards (GAAS)
Customs of the Profession

Question 5

Define “standard”.

Answer 5

That degree of judgment and skill possessed by a reasonable accountant under all the circumstances.

Question 6

Define “negligence”.

Answer 6

The performance of a contract in a careless manner. Negligence does not lead to punitive damages.

Question 7

Define “constructive fraud.”

Answer 7

Reckless disregard or gross negligence.

Question 8

Define “actual fraud.”

Answer 8

Fraud is an intentional tort that is made with scienter or a knowledge to deceive.

Question 9

List the three primary approaches to accountant liability.

Answer 9

The Privity Approach of Ultramares v. Touche.
The Restatement “Limited Class” Approach.
The Reasonable Foreseeability Approach.

Question 10

Describe the Privity Approach of Ultra mares v. Touche to accountant liability.

Answer 10

The Accountant is liable only to those with whom s/he is in privity of contract.

Question 11

Describe the Reasonable Foreseeability Approach to accountant liability.

Answer 11

The Accountant is liable to whomever s/he can reasonably foresee may use the financial statements s/he certifies or prepares.

Question 12

What occurs when the breach of a contract is minor?

Answer 12

In common law, if a breach is only minor, the non-breaching party is not discharged from the terms and conditions of the contract, but is entitled to damages.

Question 13

List the two types of agreements.

Answer 13

Express or Implied.

Question 14

What types of damages can a tax client recover?

Answer 14

Compensatory damages, but not punitive

Question 15

What must be proven by a contracting party to establish the defense of fraud?

Answer 15

Misrepresentation or omission of fact
Materiality
Scienter
Reasonable reliance
Damages.

Question 16

Describe the Restatement “Limited Class” approach to accountant liability.

Answer 16

The accountant has third-party liability to a limited class of known or intended users of financial statements whose specific identity need not be known by the CPA.

Question 17

To what items do accountant–client privilege apply?

Answer 17

An accountant is prohibited from sharing work papers with anyone without the client’s permission (except in certain situations) and may not disclose information obtained during work performed in testimonials unless subpoenaed and relevant to a court case.

Question 18

List some examples of when evidentiary privilege is not recognized.

Answer 18

State common law
Federal common law
Most states’ statutes

Question 19

List the exceptions to a practitioner’s privilege as outlined in the Internal Revenue Code §7525.

Answer 19

Criminal matters;
U.S. matters not before IRS or federal courts;
State or local tax matters;
Written tax shelter advice.

Question 20

List the six conditions under which disclosure of client information is acceptable.

Answer 20

1. Client consents
2. GAAP calls for disclosure
3. Enforceable summons
4. Ethical examination
5. Peer review
6. To others in firm on “need to know” basis

Question 21

List the two actions that are punishable conditions under §7216 of the Internal Revenue Code.

Answer 21

1. Disclosing any information obtained in preparation of a tax return.
2. Using information for any purpose other than to prepare a return.

Question 22

What does the acronym GAPP stand for?

Answer 22

Generally Accepted Privacy Principles.

Question 23

What does the Bank Secrecy Act require of taxpayers?

Answer 23

This act requires taxpayers to report foreign bank accounts.