1.3 - Tax Return Preparers

Question 1

Tax Return Preparers

Define a tax return preparer

Answer 1

• Any person who prepares for compensation, or employs one or more persons to prepare for compensation a substantial portion (or more) of any return or refund claim

Question 2

Tax Return Preparers

Is a tax return preparer the same a tax practitioner?

Answer 2

No

Question 3

Tax Return Preparers

Give 3 examples of a tax practitioner

Answer 3

• CPA
• Enrolled Agent
• Attorney

Question 4

Tax Return Preparers

Define a “signing preparer”

Answer 4

• Person who has primary responsibility for the overall return or claim for refund

Question 5

Tax Return Preparers

Define a non-signing preparer

Answer 5

• Prepares all or a substantial portion of a return or claim for refund but does not have primary responsibility for the overall return

Question 6

Tax Return Preparers

What does “insubstantial portion” mean in the case of a tax return preparer completing a tax return?

Answer 6

• Insubstantial portion
  
  • < $10,000 or
  • < $400,000 and also < 20% of GI on return

Question 7

Tax Return Preparers

Are tax return preparers who are “not compensated” subject to tax return preparer rules?

Answer 7

No

Question 8

Tax Return Preparers

Identify the parties not subject to tax return preparer rules

Answer 8

• Employee
• Fiduciary (trustee preparing for a trust)
• Person preparing refund claim in response to notice of deficiency
• Person furnishing typing, reproducing or other mechanical assistance

Question 9

Tax Return Preparers

Are tax return preparers allowed to rely upon information furnished by client when establishing a tax return position?

Answer 9

Yes - but cannot ignore the implications if the information provided

Question 10

Tax Return Preparers

Are tax preparers allowed to adopt a position without “substantial authority”?

Answer 10

No

Question 11

Tax Return Preparers

What level of authority is required for “tax shelters”?

Answer 11

• More likely than not standard

Question 12

Tax Return Preparers

Is the “more likely than not standard” greater than the “substantial authority standard”?

Answer 12

Yes

Question 13

Tax Return Preparers

Identify the procedural requirements for tax return preparers when filing a return

Answer 13

• Manually sign after completion
• Must have tax preparer ID #
• Must furnish a completed copy to taxpayer
  
  • When taxpayer is required to sign
• Retain returns for 3 years, or keep a list

Question 14

Tax Return Preparers

What information is a list required to contain if the tax preparer decides to keep a list instead of a copy of the actual return for 3 years?

Answer 14

• Name
• ID #
• Tax years
• Types of returns or claims prepared

Question 15

Tax Return Preparers

What is the procedural requirement if the initial preparer is unavailable to sign the return?

Answer 15

Another preparer must review the entire preparation of the return and sign

Question 16

Tax Return Preparers

If a tax return preparer is out of the office for the day is another preparer required to sign the return according to procedural requirements?

Answer 16

No - preparer out of the office for a day is not considered to be unavailable

Question 17

Tax Return Preparers

When is a tax return preparer excused from being charged a penalty for understating a client’s tax liability?

Answer 17

• Preparer must prove that he / she acted in good faith and reasonable cause for the understatement

Question 18

Tax Return Preparers

What is the tax preparer penalty for supporting an undisclosed position or understating tax liability of a client?

Answer 18

• Penalty > of $1,000 or 50% of income to be derived

Question 19

Tax Return Preparers

What is the penalty for willful or reckless conduct?

Answer 19

• Penalty is > of $5,000 or 50% of income to be derived

Question 20

Tax Return Preparers

What is the tax preparer penalty for endorsing or negotiating any check issued to the taxpayer by the IRS?

Answer 20

$500 penalty per check

Question 21

Tax Return Preparers

What is the tax preparer penalty for failing to keep a list or a copy of the prepared tax return for 3 years?

Answer 21

• $50 penalty for each return failed to keep a copy of

Question 22

Tax Return Preparers

What is the penalty imposed for using tax payer information without their consent?

Answer 22

• $250 per disclosure with max = $10,000 a year

Question 23

Tax Return Preparers

What is the tax preparer penalty for knowing or reckless disclosure of a taxpayer’s information?

Answer 23

• $1,000 in fines & up to 1 year in prison (misdemeanor)

Question 24

Tax Return Preparers

Identify the exceptions provided to the tax preparer in disclosing tax payer’s information without being penalized.

HINT: 8

Answer 24

• Disclosure made pursuant to other provisions within the code
• To a related taxpayer provided the taxpayer does not prohibit the disclosure
• Pursuant to a court order
• Tax return preparers within the same firm
• For a quality or peer review
• Partners in a partnership
• IRS inquiry
• Bankruptcy filing
  
  • Return made available to court appointed fiduciary

Question 25

Define a related taxpayer

HINT: 8

Answer 25

• Husband and wife
• Child and parent
• Grandchild and grandparent
• Partner and partnership
• Trust or estate and beneficiary
• Trust or estate and fiduciary
• Corporation and shareholder
• Members of a controlled group of corporations

Question 26

Tax Return Preparers

Who is required to file the “information return” required to be filed for income tax preparers?

Answer 26

Person employing the income tax preparers

Question 27

Tax Return Preparers

What information is the person employing the income tax preparers required to provide on the information return of income tax preparers?

Answer 27

• Name
• Identifying #
• Place of work for each preparer

Question 28

Tax Return Preparers

How long should the information return of income tax preparers be made available?

Answer 28

• Available upon request for 3 years after close of return period

Question 29

Tax Return Preparers

What is the return period?

Answer 29

• Return period – 12-month period beginning July 1 of each year

Question 30

Identify other types of tax returns that would qualify a person as a tax return preparer

HINT: (3)

Answer 30

• estate or gift tax returns
• excise tax returns
• withholding tax returns

Question 31

What does understatement of liability mean?

Answer 31

any understatement of the tax liability or overstatement of the amount to be refunded or credited

Question 32

When will understating a client’s tax liability not result in the imposition of an IRS penalty?

Answer 32

when it is the result of an error in calculation unless it is the result of gross negligence or a willful attempt to avoid tax liability