103 NINJA AND SURGENT MCQ Flashcards
A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except
A Endorsing the check and depositing it into the client’s bank account
B Holding the check for safe keeping and awaiting the client’s return
C Holding the check until the client is billed, then endorsing and depositing the check into the CPA’s account as payment for the bill
D Endorsing the check and depositing it into an escrow account for the client’s benefit
B Holding the check for safe keeping and awaiting the client’s return
According to the Treasury Department Circular 230 a Practitioner who prepares tax returns, cannot endorse or otherwise negotiate any refund check issued to a client by the government. Options (a), (c) & (d) are incorrect as endorsement or negotiation of the client’s refund check by the CPA violates the Treasury Department Circular 230.
§ 10.31 Negotiation of taxpayer checks.
(a) A practitioner may not endorse or otherwise negotiate any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to a client by the government in respect of a Federal tax liability.
§ 10.31 Negotiation of taxpayer checks.
A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must
A Document the error in the workpapers
B Prepare an amended return within 30 days of the discovery of the error
C Promptly advise the client of the error
D Promptly resign from the engagement and cooperate with the successor accountant
Promptly advise the client of the error
A tax practitioner who knows the client has an error in any return or submitted document must advise the client of the consequences of noncompliance. While prudence suggests the practitioner document the error, this alone is insufficient to comply with the Circular 230 requirements. The practitioner who prepared the return with the error need not be the one preparing the amended return. Likewise, resignation from the engagement is not required; further, resignation and cooperation with a successor—without advising the client of the error—is insufficient to comply with the Circular 230 requirements.
A CPA prepares a client’s tax return containing business travel expenses, including the costs of operating an automobile used for business, without inquiring about the existence of documentation for any of the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry in the event of an IRS audit disallowing certain expenses?
The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
The client will not be subject to a fraud penalty.
The CPA may be assessed a tax return preparer penalty.
The CPA may be charged with preparing a fraudulent return.
The CPA may be assessed a tax return preparer penalty.
A tax preparer may in good faith rely on information provided by the client. The preparer should make reasonable inquiries if the information appears to be incorrect, incomplete, or inconsistent on the basis of known facts. Since documentation is required to deduct automobile expenses, the CPA may receive a tax return preparer penalty.
uthorities
SSTS 3
Treasury Circular 230, 10.34(d)
A practitioner may represent conflicting interests provided that each affected client waives the conflict by:
informed consent.
oral consent.
informed, written consent.
written, notarized consent.
informed, written consent.
(TRP must keep for 36 months)
Generally, a practitioner cannot represent conflicting interests in practice before the IRS. However, if each of the affected clients waives the conflict of interest by informed, written consent, the practitioner may represent the conflicting interests. Section 10.29 of Circular 230 explains that “a conflict of interest exists if (1) The representation of one client will be directly adverse to [the interests of] another client,” or there is significant risk that representing one client will be “materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner.”
The practitioner must retain copies of the written consent for 36 months from the conclusion of the matter for which the consent was given.
Authorities
Treasury Circular 230, 10.29(a)-(b)
A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% probability the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?
The tax preparer has no responsibility for disclosing any potential penalties to the company, because the position will probably be sustained on audit.
The tax preparer is responsible for disclosing the risk of both penalties to the company.
The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.
The tax preparer is responsible for disclosing only the late-payment penalty to the company.
The tax preparer is responsible for disclosing the risk of both penalties to the company.
A practitioner must inform a client of any and all penalties that might to apply to the client with respect to a position taken on a tax return.
Circular 230, Section 10.34(c)(1)
Authorities
Treasury Circular 230, 10.34
A tax preparer filed a return for a taxpayer and used the taxpayer’s detailed check register containing both business and personal expenses. If the tax preparer knowingly included personal expenses as deductible business expenses on the taxpayer’s business, then the:
taxpayer will be liable for penalties attributable to transactions lacking economic substance.
taxpayer will be liable for penalties for taking an unreasonable position that led to an understatement.
tax preparer will be liable only for penalties for taking an unreasonable position that led to an understatement.
tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.
tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.
A compensated tax return preparer can be liable for civil and criminal penalties for negligently or intentionally understating a taxpayer’s liability. A compensated preparer can be liable for the greater of $1,000 or a 50% penalty of income derived (first-tier penalty) for each tax return or claim for refund that understates the taxpayer’s liability due to unreasonable positions. There is a second-tier penalty of $5,000 or 75% penalty of income derived if the preparer willfully or recklessly understated the liability.
Authorities
IRC 6694
According to the AICPA Statements on Standards for Tax Services, which of the following identifies the requirements for a tax advisor who believes that a taxpayer penalty might be assessed related to a position on a tax return?
A The tax advisor may not sign a return if the possibility of a penalty exists and the tax position is not disclosed.
B The tax advisor should advise the taxpayer to disclose the position on the tax return, but the taxpayer is responsible for deciding whether and how to disclose.
C The tax advisor should not recommend a position that could possibly result in a taxpayer penalty.
D The tax advisor is responsible for disclosing the position on the tax return, with or without the taxpayer’s permission.
The tax advisor should advise the taxpayer to disclose the position on the tax return, but the taxpayer is responsible for deciding whether and how to disclose.
When completing a return with the possibility of a taxpayer penalty being assessed, a tax advisor should inform the taxpayer of potential penalties and advise to disclose the position on the tax return. Note that the final decision of whether or not the position is disclosed on the return rests with the taxpayer, not the tax advisor. This is the extent of the practitioner’s responsibility when it comes to a potential penalty on a tax position.
(A) and (C) are incorrect because the standard specifies that a tax advisor may recommend, prepare or sign a tax return that reflects a position if (i) the member (tax advisor) concludes that there is a reasonable basis for the position and (ii) the position is appropriately disclosed on the return. The existence of a potential penalty is considered, but does not deter a tax advisor from, recommending a position or preparing or signing a tax return.
(D) is incorrect because the final decision of whether or not a position is disclosed on the return rests with the taxpayer and not the tax advisor. However, the tax advisor does have the right to reject the preparation or signing of a return wherein a particular position is not disclosed.
According to the standards of the profession, which of the following sources of information should a CPA consider before signing a clients tax return?
I. Information actually known to the CPA from the tax return of another client
II. Information provided by the client that appears to be correct based on the clients returns from prior years
A
I only
B
II only
C
Both I and II
D
Neither I nor II
Both I and II
You are right, The correct answer is: C
Explanation:
According to the standards of the profession, a CPA may consider both information provided by the client that appears to be correct based on prior year filings and information actually known to the CPA from the tax return of another client.
You are correct to question the response regarding the use of information known to a CPA from the tax return of another client. My previous answer may have been overly broad in stating that this information should not be used under any circumstances. Let me clarify:
In practice, a CPA may indeed be aware of information from the tax return of another client that could be relevant to the tax return of the current client. The key ethical and legal issue here is the confidentiality of client information. According to the AICPA Code of Professional Conduct, CPAs are obligated to maintain the confidentiality of client information and cannot disclose this information without the specific consent of the client.
However, in some cases, the information known to the CPA from another client’s tax return could inform their professional judgment or alert them to potential issues or considerations that might be relevant for the current client’s tax return. This doesn’t mean the CPA can or should share or directly use the other client’s specific information. Rather, it means that their broader understanding and insights, gained from their practice including other clients’ cases, can inform their approach to issues that might arise in the current client’s situation.
Question 3
According to the profession’s standards, which of the following actions should be taken by a CPA tax preparer who discovers an error in a client’s previously filed tax return?
Correct the error.
Advise the client.
Advise the IRS.
End the relationship with the client.
Advise the client.
When the CPA tax preparer discovers an error in a previously filed tax return, the CPA is under an obligation to so advise the client. The CPA is not obligated to inform the IRS of the error, and (except where required by law) is not permitted to do so without the client’s permission.
Authorities
SSTS 6
TX 162.03
According to the profession’s ethical standards, a CPA preparing a client’s tax return may rely on unsupported information furnished by the client, without examining underlying information, unless the information:
is derived from a pass-through entity.
concerns dividends received.
appears to be incorrect or inconsistent on its face.
lists charitable contributions.
appears to be incorrect or inconsistent on its face.
According to Statement on Standards for Tax Services 3, Certain Procedural Aspects of Preparing Returns, “In preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer….” This rule would not be applicable if the information provided “appears to be incorrect, incomplete, or inconsistent on its face or on the basis of other facts known to the CPA.”
Circular 230 10.34(d) states that a preparer “may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.
Authorities
SSTS 3
Treasury Circular 230, 10.34(d)
According to the standards of the profession, which of the following statements is correct regarding the action to be taken by a CPA who discovers an error in a client’s previously filed tax return?
Advise the client of the error and recommend the measures to be taken.
Withdraw from the professional relationship regardless of whether or not the client corrects the error.
I only
II only
Both I and II
Neither I nor II
I only
When a CPA discovers an error in a client’s previously filed tax return, the CPA should advise the client of the error and recommend the measures to be taken. If the client refuses to correct the error, the CPA may consider withdrawing from the professional relationship; withdrawal is not required or expected if the client corrects the error.
According to Treasury Circular 230, which of the following rules related to the prompt disposition of pending matters before the IRS applies to CPAs?
A Practitioners may request an extension of time of not more than five years related to the disposition of matters pending before the IRS to avoid any preparer penalties.
B Practitioners will be held responsible for any of the client’s interest and penalties related to the unreasonable delay of matters pending before the IRS.
C Practitioners may not unreasonably delay the prompt disposition of matters pending before the IRS.
D Practitioners must ensure that matters are concluded within three years of the date of formal notification concerning any matters pending before the IRS.
Authorities
SSTS 6.4
Treasury Circular 230, 10.21
Practitioners may not unreasonably delay the prompt disposition of matters pending before the IRS.
As per Treasury Circular 230, Tax Practitioners must try and dispose a matter before IRS as soon as possible and should not cause any unreasonably delay in the prompt disposition of any matter before the Internal Revenue Service.
Therefore, Tax Practitioners must respond to clients and IRS personnel without delay and cannot advise a client to submit any document to the IRS for the purpose of delaying or impeding the administration of the Federal tax laws.
§ 10.23 Prompt disposition of pending matters. A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.
If a practitioner is disbarred from practice before the IRS, when may a practitioner petition for reinstatement?
After 10 years
After 3 years
After 5 years
After 1 year
After 5 years
A practitioner disbarred or suspended may petition for reinstatement before the Internal Revenue Service after 5 years. Reinstatement is not granted unless the IRS is assured that the petitioner is not likely to repeat the actions that led to the disbarment, and that granting such reinstatement would not be contrary to the public interest.
A practitioner who has been disbarred from practice before the IRS may petition for reinstatement after 5 years from the effective date of disbarment. This rule allows practitioners who have been disbarred for misconduct or other reasons to seek reinstatement into practice before the IRS, provided they can demonstrate that they have rectified the reasons for their disbarment and are fit to practice.
Treasury Circular 230, 10.81
In preparing a client’s current-year individual income tax return, a tax practitioner discovers an error in the prior year’s return. Under the rules of practice prescribed in Treasury Circular 230, the tax practitioner.
A Is barred from preparing the current year’s return until the prior-year error is rectified
B Must advise the client of the error
C Is required to notify the IRS of the error
D Must file an amended return to correct the error
Must advise the client of the error
10.21 Knowledge of client’s omission. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.
Question 8
Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take?
Contact the IRS and discuss courses of action
Discuss the requirements of the IRC with the client and recommend that the client amend the return
Contact the prior CPA and discuss the client’s exposure
Wait for the statute of limitations to expire
Discuss the requirements of the IRC with the client and recommend that the client amend the return
If a CPA discovers an error in an earlier tax return that includes material noncompliance, the CPA should promptly notify the client. The CPA should recommend the client amend the return.
Authorities
Treasury Circular 230, 10.21
Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?
A An unrelated party compliance statement
B Taxpayer’s name and identification number or a copy of the tax return
C Workpapers associated with the preparation of each tax return
D A power of attorney
Taxpayer’s name and identification number or a copy of the tax return
The tax return preparer must keep a copy of the return or a list of taxpayer names, identification numbers, and tax years for 3 years following the close of the return period.
Question 4
Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?
A The client’s records are to be destroyed upon submission of a tax return.
B The practitioner may retain copies of the client’s records.
C The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.
D The practitioner does not need to return any client records that are necessary for the client to comply with the client’s federal tax obligations
The practitioner may retain copies of the client’s records.
As per the Treasury Department Circular 230, a practitioner must return all client related records and may retain copies of the records returned. Option (a) is incorrect because client’s records are not to be destroyed upon submission of a tax return, instead copies of such records need to be retained. Option (c) is incorrect because the existence of a dispute over fees does not relieve the practitioner of his responsibility to return client records. Option (d) is incorrect because the practitioner must return all of client’s records that are necessary for the client to comply with federal tax obligations. Copies of such records may be retained with the practitioner.
§ 10.28 Return of client’s records.
(a) In general, a practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. The practitioner may retain copies of the records returned to a client. The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable state law allows or permits the retention of a client’s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the taxpayer’s return. The practitioner, however, must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations.
(b) For purposes of this section — Records of the client include all documents or written or electronic
materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client. The term also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation. The term also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. The term does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner’s firm, employees or agents if the practitioner is withholding such document pending the client’s performance of its contractual obligation to pay fees with respect to such document.
Starr, CPA, prepared and signed Cox’s 20X1 federal income tax return. Cox informed Starr that Cox had paid doctors’ bills of $20,000 although Cox actually had paid only $7,000 in doctors’ bills during 20X1. Based on Cox’s representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox’s figures and Starr did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox’s 20X1 return, Starr is:
liable to Cox for interest on the underpayment of tax.
not liable to the IRS for any penalty or interest.
liable to the IRS for negligently preparing the return.
not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment of tax.
not liable to the IRS for any penalty or interest.
Starr is not liable to the IRS for any penalty or interest. The key issue addressed by this question is the extent of liability an accountant has in the preparation of tax returns. Here the problem tells you that the CPA had no reason to doubt the client’s assertions. A CPA may be liable for:
- negligence in preparing the return—computational errors, failure to file the return in a timely fashion or just plain erroneous advice. None of these elements are present in this particular case.
- an understatement of liability if the tax preparer knows or should know that the deductions or credits resulting in the understatement have no realistic possibility of being sustained on its merits. Again, the problem tells you that Starr had no reason to doubt the accuracy of Cox’s figures.
Authorities
26 US Code
IRC 6671-6711
SSTS 3
Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except:
disclose a conflict of interest.
keep a record of returns prepared.
sign a tax return as a preparer.
provide a client with a copy of the tax return.
disclose a conflict of interest.
The tax preparer must sign the tax return and include the preparer’s address and IRS identification number. A copy of the return must be provided to the taxpayer when the return is signed. The tax preparer must maintain a file of returns and log of all returns for three years after the close of the return period. These are all addressed in the Internal Revenue Code; conflict of interest is not.
The rule regarding conflicts of interest is contained in Treasury Circular 230.
The tax preparer is not allowed to represent conflicting interests before the IRS. However, each affected client can give consent and waive the conflict of interest. No penalty is designated for a conflict of interest.
Authorities
IRC 6695(a)-(d)
Treasury Circular 230, 10.29(a)-(b)
The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must:
obtain the records from the client and submit them to the IRS.
notify the IRS of the identity of any person the CPA believes could have the records.
contact all third parties associated with the records, such as banks and employers, to obtain the requested records for submission to the IRS.
require the client to submit the records to the IRS or withdraw from the engagement.
notify the IRS of the identity of any person the CPA believes could have the records.
Pursuant to Treasury Circular 230, Section 10.20(a), “A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.”
In addition, “Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information.”
Hence, the CPA must notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.
Authorities
Treasury Circular 230, 10.20(a)
To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?
Review the accuracy of the taxpayer’s books and records.
Make reasonable inquiries to determine if the taxpayer’s information is incomplete.
Audit the taxpayer’s corresponding business operations.
Examine the taxpayer’s supporting documents.
Make reasonable inquiries to determine if the taxpayer’s information is incomplete.
Tax return preparer penalties are covered in both Circular 230 and 26 CFR 1.6694-1(e). An audit or review is not required and examination of the taxpayer’s supporting documents is only sometimes required. Reasonable inquiries, however, are generally required.
Authorities
26 CFR 1.6694-1(e)
Treasury Circular 230, 10.50(c)(1)
Under Circular 230, a practitioner may be:
A. censured.
B. suspended.
C. disbarred.
D. censured, suspended, or disbarred.
D. censured, suspended, or disbarred.
If a practitioner is shown to be incompetent, refuses to comply with the rules of Circular 230, or acts with intent to defraud or willingly and knowingly mislead or threaten a client, then the Secretary of the Treasury can censure, suspend, or even disbar the practitioner
Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?
A The CPA takes into account the possibility that a tax return will not be audited.
B The CPA reasonably relies upon representations of the client.
C The CPA considers all relevant facts that are known.
D The CPA takes into consideration assumptions about future events related to the relevant facts.
The CPA takes into account the possibility that a tax return will not be audited.
A practitioner’s written advice concerning one or more federal tax issues must be based on the following: (i) Reasonable factual and legal assumption, including assumptions on future events. (ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know. (iii) Reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter. (iv) Not rely on representations, statements, findings or agreements of the taxpayer or any other person if the reliance on them is reasonable. (v) Relate applicable laws and authorities to facts. and (vi) Not in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised in an audit.
*Options (b), (c) and (d) are incorrect because these actions are not prohibited, but required under Treasury Circular 230 for practitioner to provide written advice.
(2) The practitioner must—
(i) Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events);
(ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
(iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter;
(iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
(v) Relate applicable law and authorities to facts; and
(vi) Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.
Under Treasury Circular 230, a practitioner may be sanctioned for which of the following?
Gross incompetence
Willful violation of the regulations
Prohibited solicitation of employment
All of the answer choices are correct.
All of the answer choices are correct.
A practitioner may be sanctioned for a variety of items, including violating any of the regulations willfully, recklessly, or through gross incompetence (Treasury Circular 230, Section 10.52). The practitioner may also be sanctioned for “solicitation of employment as prohibited under §10.30, the use of false or misleading representations with intent to deceive a client or prospective client in order to procure employment, or intimating that the practitioner is able improperly to obtain special consideration or action from the Internal Revenue Service or any officer or employee thereof.” (Section 10.51(a)(5))
Authorities
Treasury Circular 230, 10.51-.52
