1 Flashcards
Permitted fee communications
- Professional lists
- Telephone directories
- Print media (hand delivered flyers)
- Mailings
- Electronic mail
- Radio
- Television
Who may practice before the IRS?
- Attorneys
- EAs
- CPAs
- Enrolled RETIREMENT AGENTS
- Enrolled Actuaries
- Registered Tax Return Preparers
- 20% probability of being sustained
- More than 50% probability - More likely
- 40% probability - Substantial authority
- 33% - Higher standards
Tax Benefits requiring additional due diligence and Form 8867
- EITC
- CTC
- Additional CTC
- ODC - Credit for other dependents
- AOTC
- HOH filing status
Acc to Treasury dept circular 230, a practitioner may charge a ____________for representing a client in connection with a judicial proceeding.
CONTINGENT FEE
Contingent fee is allowed for
- Admin examination or challenge to an original return, an amended return or a claim for refund
- Services related to a claim for credit or refund in connection with statutory int or penalties charged by IRS
- Services related to a judicial proceeding (successfully concluding an IRS examination)
The UAA (AICPA UNIFORM ACCOUNTANCY ACT) :
- ONLY requires accountants to be licensed who perform attest services or compilations of FS to be licensed
- Issuance of CPA certificates is a requirement
- Continuing education is a provision of UAA
- The UAA contains a substantial equivalency provision to allow for movement between states.
Notice of deficiency is known as __________
90 day letter
Tax Shelter
More than 50% Probablity - applicable for tax shelters
Substantial authority (40% - doesn’t need to be disclosed, that means no substantiation required)
20% - Reasonable basis
Form 8275 - Disclosure statement - used to disclose positions that lack substantial authority
Form 8275-R - Regulation Disclosure statement, is used to disclose a tax position that is contract to Treasury Regulations.
Donations equal to or over $250 -document with receipt
Donations over $5,000 generally require a qualified appraisal
All tax returns for the previous 7 years
All records that pertain to a return for the previous 3 years
Other records, no matter how old to support a tax position on a subsequent return
Under circular 230, practitioners must not act as a notary public with respect to matters before the IRS in which _______________
they are interested
The “7525 privilege” refers to a specific legal protection for communications between a CPA and their client. Under the 7525 privilege, certain communications made in the course of preparing tax returns or providing tax advice may be protected from disclosure in legal proceedings. This privilege is similar to attorney-client privilege but is specifically tailored for tax professionals.
Key Points:
Scope: It generally applies to communications related to tax advice and preparation.
Limitations: This privilege may not apply in all situations, particularly if there’s evidence of fraud or other illegal activities.
Regulation: It was established under the IRS Restructuring and Reform Act of 1998.
This privilege is important for CPAs as it helps maintain confidentiality in their client relationships.
Section 6713 of the Internal Revenue Code (IRC) pertains to the confidentiality of tax return information and the penalties for unauthorized disclosure or use of such information by tax preparers.
Key Points:
Confidentiality: Tax return preparers must keep taxpayer information confidential. Unauthorized disclosure of this information is prohibited.
Penalties: If a tax preparer discloses or uses taxpayer information for purposes other than preparing the tax return, they may face civil penalties. The penalties can be substantial, depending on the nature of the violation.
Exceptions: There are specific circumstances under which disclosure may be permissible, such as when the taxpayer consents to the disclosure.
Impact on CPAs: CPAs must ensure they are aware of and comply with Section 6713 to protect their clients’ confidential information and avoid penalties.
This section underscores the importance of ethical standards and confidentiality in the practice of accounting and tax preparation. If
Section 7216 of the Internal Revenue Code (IRC) addresses the confidentiality and disclosure of tax return information by tax return preparers. Here are the key points relevant for the CPA exam:
Key Points of Section 7216:
General Rule: It prohibits tax return preparers from knowingly or recklessly disclosing, or using, any tax return information for any purpose other than preparing the tax return.
Consent Requirement: A tax preparer may disclose tax return information if they obtain explicit consent from the taxpayer.
Penalties: Violating Section 7216 can result in civil penalties. The penalties can include fines for each unauthorized disclosure or use of tax return information.
Scope: The provision applies not only to individuals who prepare tax returns but also to any entity involved in the preparation process, including firms and their employees.
Exceptions: There are certain exceptions where disclosure may be allowed, such as complying with legal requirements or sharing information within the preparer’s firm.
Importance for CPAs:
CPAs must be aware of Section 7216 to maintain client confidentiality and avoid penalties. This regulation emphasizes the ethical obligation to protect client information, which is a crucial aspect of the CPA profession.
Although tax preparer’s responsibilities inlcude the CONFIDENTIALITY of TP’S INFO, there are certain situations in which a preparer may share the information WITHOUT a taxpayer’s consent.
A QUALITY CONTROL PEER REVIEW CONDUCTED by other CPAs is an example of one of the exceptions. Therefore, the preparer’s action does not constitute misconduct.
Punitive damages are not available to plaintiffs in either ___________________
negligence or breach of contract lawsuits. (only available in case of Fraud)
Unreasonable position penalty
$1000 or 50% of CPA’s fee
Wilfully attempts to understate the tax liability or recklessly disregards rules or regulations
Penalty = $5,000 or 75% of CPA’s income
FBAR depends on the PHYSICAL LOCATION of the bank and not the nationality of the fin institution for FBAR purposes:
e.g. an Account maintained with a branch of a U.S. Bank physically located in Italy is a foreign account.
An a/c maintained with a branch of a Mexican bank physically located in TX is not a foreign account
FBAR goes to Treasury using the FinCEN
Financial Crimes Enforcement Network
Need to check FBAR rules, as per Uworld e.g. if a US taxpayer holds crypto in an offshore a/c and the value of crypto is greater than $10k. The taxpayer______________
is not required to file FBAR unless it holds other accounts. Crypto is not a reportable account as of now.
Tax Evasion Sec 7201
Max punishment for individuals is a fine of $100,000 and/or 5 years in jail
Tax Fraud Sec 7206
- Creating or subscribing any doc under penalty of perjury that the TP does not believe to be true
- Aiding the prep of any tax related matter that is fraudulent
- Removing or concealing property to defeat taxes
TPs can ask the IRS to interpret and apply tax laws to the TP’s specific tax situation. The Tax situation usually involves a proposed complex transaction that lacks definitive tax treatment. The resulting IRS interpretation is called ____________
PLR (Private Letter Ruling) Once the PLR is issued, the TP can proceed with the transaction knowing how it will be taxed. e.g. a TP contemplates a complex series of corporate Mergers and acquisitions. e.g. A TP contemplates entering into a complex transaction, the TP wants assurance that there will be no adverse tax effects from the transaction.
Late filing penalty
Capped at 25% of the unpaid taxes or 5% of unpaid taxes per month
C corp IRC 6655 - underpayment penalty
C corp must generally pay estimated taxes equal to the lesser of 100% of its PY tax liability or 100% of its CY tax liability.
Note: PY Tax liability will not suffice to eliminate an underpayment penalty if the corp had no tax liability in the PY or had taxable income exceeding $1million in any of the preceding 3 tax years.
A reportable transaction is any transaction the IRS and/or Treasury dept determines as having a potential for _______________. Reportable transactions must be disclosed annually on Form ______
tax avoidance or tax evasion.
Form 8886 (Reportable Transaction DIsclosure Statement).
Late payment penalty = 0.05% per month
Late filing penalty = 5% per month
If failure to file has been fraudulent, 15% per month
True
Punitive charges for _______ cases
fraud
Rescission - act of rescinding a contract and ___________the parties to their positions before the contract was formed.
restoring
Reliance is for ___________and not for breach of contract.
FRAUD
Negligence - OBID
O=Obligation of duty of care
B=Breach of standard of care
I= Injury
D=Damages
Fraud=MIADS
M=Misrepresentation of a material fact
I= Induce reliance
A= Actual and Justifiable reliance
D= Damages (suffered a loss))
S= Scienter (intent of fraud)
Statute of limitations is generally for a long term such as
15 years , 4-6 years from date of breach
Constructive fraud or gross neligence or reckless
Scienter is actual fraud and not constructive fraud
L - legal
O - Offer
C - Consideration (not required for agency)
A - Acceptance
L- legal capacity (only required for principal)
Agency Relationship
The Statute of Frauds _____________-
is a legal principle that requires certain types of contracts to be in writing to be enforceable. Its purpose is to prevent fraud and misunderstandings in contractual agreements by ensuring there is clear evidence of the terms and conditions.
Applies to 4 situations where it must be in writing : (GROS)
1. Sale of goods $500 or more
2. Real Estate
3. Impossible to complete within 1 year
4 Surety - promise to be liable to debt of another.
Apparent authority also known as ______
Estoppel or Ostensible Authority
> 100,000 only _________authoirty and no actual authority
Apparent
Agency relationship requirements:
- Mutual consent (meeting of the minds)
- Legal capacity of PRINCIPAL only
- Agent’s ability to follow principal’s instructions
- Agent deals with third parties on behalf of principal e.g. An Attorney retained to handle the sale of a family home
Partner is an agent in Partnership and Shareholder is an agent in the corporation.
Gratuitous agent - No Compensation
Nongratuitious (for compensation)
Where the agency is _________, the principal does not have the power to terminate the relationship.
coupled with an interest (i.e. where the agent owns part of the subject matter).
2 kinds of notice (ACTUAL NOTICE-DIRECT LETTERS and CONSTRUCTIVE NOTICE e.g. Newspaper announcement) must be given when duty of an agent is terminated or else Company will still be liable for agent’s act even after termination
e.g. Bolt dismissed Ace as its agent and notified customers via letter. After dismissal, Ace sold YOUNG CORP goods, to be delivered by Bolt and received a cash deposit from YOUNG CORP third party.
1701853
Constructive notice was not provided hence Bolt is liable.
___________ involves the discharge of a contractual duty where one party accepts the performance of a third party in place of the obligated party. It is not used as a remedy when one party violates a contractual duty owed to another.
Novation
LLCs have characteristics of both ____________
Owners of LLCs are referred to as MEMBERS no matter how it is taxed.
PArtnership and Corporation. Referred to as a pass-through entity. Members have no interest in LLCs assets. LLC may be member (bound by actions of all members) managed or manager (only bound by the action of manager) managed. Never considered as a Trust.
Multiple-member LLC is treated as a partnership.
Single-member LLC is treated as a disregarded entity or sole proprietorship (if no election has been made) and is reported on Sch C.
ELection means to treat it as a C Corp or an S corp. If one member withdraws from a 2 member LLC, by default it moves to the status of Sole proprietorship (which is a default entity).
Once an LLC registers its classification (or election to classify it as a certain entity such as S corp, C corp, partnership, etc.), it must wait 60 months (5 years) to make a new election. A 2 member LLC that elected to be treated as an S corp remains an S corp even if one member withdraws. Once the 60 month waiting period is met, the LLC is eligible to change its classification.
Loss limitation = Member’s basis + Personal loans to company (if any)
Conversion of a general partnership to an LLC
It is treated as :
- A non taxable event
- No interim closing of the tax year
- No gain or loss on the conversion is recognized by partnership or partners
- Each Partner’s basis and holding period of their P/S interest carries over
- Partnership keeps same employer identification number
Assume on the exam that a partner is a ____________unless it specifically says that a partner is a limited partner.
PArtnership - Minimum 2 partners and at least one is a general partner.
Liability - Unlimited for general partner and limited for limited partners
Taxed at partner level
Form 1065, Sch K-1 distributed to partners
Active partners - compensated with guaranteed payments (not subject to withholding requirements, taxable to the recipient partner as ordinary income) , not an employee
general partner
Nonseparately stated items in Partnership taxed at _________
e.g. Dividend income and ST capital loss
ordinary rates
Guaranteed payments are reported in 3 places:
Guaranteed payments have no direct effect on basis.
- Deduction on pg 1 of Form 1065, 2. on Schedule K and on the 3. appropriate partners’ Schedule K-1
Partnership Distribution
Distribution - not taxable when a partner HAS SUFFICIENT BASIS (only distributions in excess of basis to be reported as income for partner A)
Partnership, non separately stated items to be reported on _______
pg1 of Form 1065
Distribution do not reduce the partnership’s ordinary business income.
Cash dist should be reported on Sch K, Line 19a
Guaranteed payments does not affect basis of partnership. DO NOT CONSIDER
A partner’s basis may never fall below zero.
Partnership Basis
Less: distribution to be deducted from basis
Less: Share of decrease in P/S liablities
Add: share of P/S income to be added
Add: share of Basis in partneship recourse liabilities
Add: share of tax exempt income
Add: share of portfolio income
___________________________________
Ending basis
A cash nonliquidating distribution is taxable only to the extent it exceeds the partner’s basis. Because the partnership int is considered a CAPITAL ASSET to the partner, the excess is treated as a CAPITAL GAIN.
TP’s basis = 4000
+ share of P/S income = 5000
_______________
Total basis = 9000
DIstb of non liquidating cash distbn = 11,000
It reduces basis to zero and resulting excess of (11000-9000) = 2000 is taxed as a CAPITAL GAIN
Partnership distributions are categorized as either ____________
current (nonliquidating) distributions or liquidating distributions.
When a partnership makes a current distribution, the distribution is generally nontaxable to the partners because it generally represents the distribution of earnings that have already been taxed to partners and have already increased the basis for the partners’ partnership interests.
Partner bailey contributed land with adjusted basis of 25,000 (do not consider FMV), for 30% int. Partnership asssumed Bailey’s 10,000 recourse mortgage on the land. What is Bailey’s basis?
25000
-7000 (net reduction of liability)
_____________
18000
Partnership - separately stated items on Sch K-1 (Form 1065)
- Capital gains and losses
- Sec 1231 gains and losses
- Investment income or interest (e.g. dividends and interest)
- Passive income (rent, royalties)
- Charitable contributions
- Sec 179 depreciation election
- Tax Credits
- Tax-exempt interest Income (affects partner basis, but not taxable)
- Nondeductible expenses (affects partner basis, but not taxable)
Guaranteed payments are __________on partner’s or recipient’s K-1
Separately stated item
A partnership is a form of pass-through entity that does not pay INCOME TAXES. Instead, partnerships file a FORM 1065 and report ordinary income, losses and separately stated items. Form 1065 also includes the allocation of those amounts to each PARTNER in SCHEDULE K-1. Partners then include their SCHEDULE K-1 amounts in their individual tax returns.
Allocations to each partner are based on the percentages specified in the partnership agreement typically each partner’s ownership percentage.
Tax exempt interest is excluded from income and dividends gets taxed in partner’s AGI on his tax return.
Partnership may take deduction for __________
GUARANTEED Payments to limited partners
If distributions (distributions reduce partner’s basis) to a partner do not exceed the tax basis of the individual’s partnership interest, the distributions are considered a______________
return of capital and not income
Loss of share in partnership 21,000
Basis in partnership = 18,000
Partner would be able to deduct an ordinary loss of $18,000 upto the basis of the partner. The remaining $3,000 may be carried forward and taken as a deduction in a subsequent year in which he has basis to absorb the loss.
PArtnership made a cash contribution to a German based foreign charity
Partners are not entitled to a deduction and decrease their basis in the partnership.
PArtnership sold section 1245 depreciable property at a gain in excess of the depreciation allowed on the property
Treated partly as a separately stated section 1231 gain and partly as partnership ordinary business income.
Loss on sale of business assets held short term is deductible as ordinary loss. Thus, it is included in business income on pg 1 of Form 1065.
E.g. R&P had 2,000 loss on sale of an office computer purchased 8 months earlier.
Business use asset is ___________
Section 1231 loss.
LIMITED PARTNERS exclude ________from their basis since they have limited liability.
recourse debt.
Elements of Contract
L
O
C
A
L
Common Law=Non goods (Real estate and services contracts, employer contracts)
UCC, Uniform Commerical Code = Sale of goods (tangible, moveable personal property e.g. fixtures, boats, christmas tree, pets, cars, etc.)
VOID CONTRACT or illegal from the very beginning or the one __________
that’s not valid since inception in the eyes of law e.g. contract of murder or inside information.
VOIDABLE CONTRACT (only innocent party has the choice to enforce it)
It can be set aside because one party has protection under the law and has the right to opt out of the contract or enforce it. E.g. Fraud in formation where one party lacked the required legal capacity.
Quasi contracts - remedy imposed by law to prevent one party from being unjustly enriched.
e.g. if someone comes to mow ur lawn without ur lawn then u need to stop him by ur action or saying no or else u r liable to pay this person (this is quasi contract)
Modifications of Contracts and Consideration - Common Law - must be paid for , for modification to be enforceable. Agreement to pay for it should be there.
Under UCC for modifications of contracts, parties in good faith just need to voluntarily agree, no need to pay for additional consideration (detriment)
Liquidated debt = undisputed - amount due is fixed and certain and is clear to both parties.
Unliquidated debt =disputed debt, it is one in which the parties acknowledge that money is due and owed but they disagree on the amount.
Firm offer conditions (SUM)
- S= Signed
- U=Upto 3 months maximum or less duration if specified (time limit of offer)
- M=Merchant is the offeror, status of the offeree does not matter
Unconscionable contract occurs when there is a great ___________ in which one party exploits the other.
Disparity in the bargaining powers of the contracting parties
Void - Cannot be enforced by either party because of:
- Extreme duress (physical threat)
- Fraud in the execution
- Illegal subject matter
- Incompetent party
- Unconscionability
The Parole Evidence Rule bars from court testimony any prior or concurrent oral or written contracts ________
that contradict the final written contract.
Punitive damages are not authorized under the __________
UCC Sales Article
The doctrine of substantial performance does not apply to the sale of goods. Article 2 of the UCC speficies that the perfect tender rule, which requires that the purchased goods must conform __________
exactly to the specifications in the contract.
Doctrine of anticipatory repudiation
allows a party to either sue at once or wait until after performance is due when the other party indicates she/he will not perform.
Novation - 3 party agreement between the contracting parties and a third party, whereby one of the contracting parties is discharged from his/her duty and the third party in substituted in the discharged party’s place.
e.g. Fiore owed Lutz $5,000. As a result of an unrelated transaction, Lutz owed Bing that same amount. The three parties signed an agreement that Fiore would pay Bing instead of Lutz and Lutz would be discharged from all liability.
Discharge of contractual duties by __________
- Accord and satisfaction - one duty substituted for another
- Mutual rescission - parties agree to end contract
- Novation - New party substituted for an original party
To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a _________
Rescission
Statute of limitations
*5 years after breach of an oral contract
*10 years after breach of a written contract
Prohibited contract assignment -+= the right to be insured under a liability insurance policy.
Assigning insurance contract to a different party who might have a higher risk profile. E.g. a 40 yr old cannot assign her life insurance policy so that it insures the life of a seventy year old with chronic health issues.
STRICT LIABILITY applies without any need to prove _________on the part of the defendant but rather that the product was defective and that damages occurred because of the defect.
negligence
Though an oral agreement to sell goods for more than $500 is normally unenforceable, an exception applies to goods that have been __________by the seller at the request of the buyer.
Custom manufactured
Instead of Salary, partners get ___________
Guaranteed payments
Remedies for Breach of contract
- Compensatory damages - Direct or actual losses
- Consequential damages - Indirect and anticipated losses
- Liquidated damages - Predetermined loss amount (e.g. Deposit forfeitures) agreed to by both parties
- Nominal damages - Trivial sum (e.g. $1) to vindicate the plaintiff’s rights when no actual loss or damage occurs
- Specific performance - Court ordering specific transfer of the contract’s unique subject matter (e.g. patents, works of art) when a monetary award will not suffice
A STATUTE OF LIMITATIONS (SOL) is a law that establishes the time period during which a lawsuit can be filed. In contract law, the SOL time period starts when the contract is breached.
However, if the lawsuit commences (i.e. is filed with a court) during the SOL period, a judgment can be rendered AFTER the SOL period expires.
Remedies of contract law are designed to make the damaged party whole, not better off. So either entitled to ___________
Specific performance OR compensatory damages and NOT both.
SPECIFIC PERFORMANCE is available only under the UCC when the goods are __________________
RARE or UNIQUE
Sec 6701 penalties - Aiding and abetting understatement of TL - $1000 for individuals and $10,000 for corps
Sec 7201 Punishes tax evasion - $100,000 for individuals and $500,000 corp or imprisoment not more than 5 years or both
