Chapter 11-Tax Return Preparers

Question 1

Performing what duties does NOT classify a person as a tax preparer?

Answer 1

• preparing a return for family or a friend free of charge

- simply typing, reproducing, or providing other mechanical assistance in preparing a return.

Question 2

what is the definition of a tax preparer?

Answer 2

an individual who prepares a tax return for compensation. they are required to register for a preparer tax identification number (ptin). this 9 digit number must be used by paid tax return preparers on all returns or claims for refunds. paid preparers must renew their ptin’s annually to legally prepare tax returns.

Question 3

information that is obtained from a client in connection with the preparation of their tax return is considered what?

Answer 3

confidential and the preparer is not permitted to use it for personal benefit or reveal this information to third parties without the consent of taxpayer except in limited circumstances. the most important exceptions are:

• to respond to a valid government order (while discussions between CPA’s and clients on federal tax matters are privileged, this does not apply to criminal matters and tax shelters)
• as part of quality control peer review program
• to permit the electronic preparation or submission of the taxpayers return.

Question 4

is the CPA required to inform the IRS or any other taxing authority of a clients failure to file a prior year return w/out the clients permission?

Answer 4

no the CPA is not obligated to inform them. the obligation is to inform the CLIENT upon becoming aware of such a circumstance. the CPA owes the duty to inform a client if there are material errors in a previously filed tax return so that the client may file an amended return.

Question 5

the statements on responsibilities in tax practice guide a member in the performance of tax services; what are the rules for the tax preparers?

Answer 5

• the member/tax preparer may rely on information provided by the client w/out verification unless it is clearly incorrect or incomplete
• the member should not adopt any position on the return that is frivolous or doesn’t have a realistic possibility of being sustained
• a preparer is subject to a penalty equal to the greater of $1,000 or 50% of the income derived by the preparer with respect to the return or refund claim if any part of an understatement of liability is due to an undisclosed postion on the return for which there is NOT A REASONABLE BELIEF that the position would MORE LIKELY THAN NOT BE SUSTAINED ON ITS MERITS

Question 6

what does the more likely than not standard require?

Answer 6

• 50% probability of being sustained on its merits, in contrast to the REALISTIC POSSIBILITY OF SUCCESS standard which requires a 1/3 likelihood of success.
• the penalty can be avoided by (1) an adequate disclosure of the questionable position on the return or refund claim and (2) showing that there was a reasonable basis for the position. the reasonable basis standard may require at least a 20% probability of being sustained on its merits
• the penalty can also be avoided if the preparer can show there was a reasonable cause for the understatement and that the return preparer acted in good faith

Question 7

if the cpa identifies an error on a previously submitted return what should they do?

Answer 7

the cpa should advice the client but the client has the final say as to how to proceed. the cpa should consider future dealings w/the client based on the clients handling of the matter once informed.

Question 8

what are some other criteria of tax preparers?

Answer 8

• they don’t have to be independent; but must be an advocate for the client
• they can prepare the return based on all facts known to the preparer
• they should advise clients of errors discovered on previous returns
• they must provided the client with a copy of the return and retain copy’s for 3 years
• they cannot charge a fee based on the return results
• they can do estimates

Question 9

what can a cpa not recommend in regards to completing a tax return?

Answer 9

a cpa may not recommend taking a position, or sign a return taking a position that the cpa does not, in good faith, believe has at least a reasonable chance of being sustained (realistic possibility).

-a position should not be recommended if the cpa is aware that if taken with the intention of exploiting the audit selection process of a taxing authority or is being taken to provide leverage to the taxpayer in a future negotiation with the taxing authority.

Question 10

when a cpa concludes that there is a reasonable basis for the position the cpa can do what?

Answer 10

• recommend the position upon advising the client to appropriately disclose it or sign the return if things are properly disclosed.
• in all cases the cpa has the obligation to inform the client of potential penalties with respect to the tax return position being taken and their possible avoidance through disclosure,

in regard to tax positions appropriately taken the cpa has responsibility to be an advocate for the taxpayer. as long as the more than likely standard the courts will not impose a penalty.

Question 11

what are the probabilities associated with a realistic possibility of the position being sustained?

Answer 11

1/3 likelihood of success is considered as follows:

• more likely than not standard > 50% probability of success if tax position is challenged
• substantial authority standard is approximately 40% probability of success
• realistic possibility of success is approximately 33% probability of success
• reasonable basis standard is approximately 20% probability of success.

Question 12

what kind of effort must be made to obtain information necessary to answer all question on a return before the preparer signs it?

Answer 12

REASONABLE;

• omission of a question may be justifiable
• if omitted for reasonable grounds, an explanation as to the reasons is not required.

Question 13

what is taxpayer not required to do when preparing a tax return?

Answer 13

• verify
• audit
• examine or review information furnished by a taxpayer or third parties, if information appears incorrect, incomplete, or otherwise unsatisfactory, the cpa should make reasonable inquiries.

Question 14

the tax treatment of certain items that require a condition to be met in order to take the deduction or credit, what should the preparer do?

Answer 14

inquire of the client if accurate records have been kept to substantiate the item.

Question 15

if information is obtained from the preparation of another clients tax return, what should the cpa do?

Answer 15

consider any legal limitations and confidentiality requirements in relation to the information. the tax preparer should also refer to the clients prior years returns when applicable.

Question 16

in the use of estimates in tax returns, what should the cpa do as their due diligence?

Answer 16

• make sure it is not practical to obtain exact data and

- the estimates seem reasonable based on the cpa’s knowledge

Question 17

when can a cpa not recommend an alternate tax position?

Answer 17

if the taxpayer is bound to follow the concluded tax position, such as when there is a formal closing agreement.

Question 18

when can a cpa/tax preparer recommend an alternate tax position?

Answer 18

if the requirements for tax positions in TS 100 are met, then the preparer may recommend a tax return position that departs from a previously concluded court decision.

Question 19

what is the cpa’s duty regarding knowledge of errors in the tax return?

Answer 19

• advice the client and it maybe oral

- unless required to do so by law, the cpa may NOT NOTIFY TAX AUTHORITIES (IRS) W/OUT THE CLIENTS PERMISSION

Question 20

when involved in an administrative proceeding related to a return that contains an error of which the cpa is aware, what should the cpa do?

Answer 20

the cpa should request permission from the client to disclose the information to the authority (irs) and upon being denied, should consider withdrawal from representing the client.

Question 21

what type of communication should typically be written between the tax preparer and the tax payer?

Answer 21

in writing is recommended for transactions that are important, unusual, substantial in amount or complicated. in addition since it is assumed that the cpa advice will affect the reporting or disclosure of information on the taxpayers return, the cpa should consider reporting and disclosure requirements relevant to the return and the potential penalty.

once advice has been given, the cpa is not obligated to communicate subsequent developments affecting the advice unless the cpa is assisting the taxpayer in implementing procedures or plans related to it or has agreed to do so

Question 22

what are the requirements under the treasury department circular 230 section 10.3 as it relates to who can practice before the IRS

Answer 22

• the cpa must not be currently under suspension or disbarment from practice before the IRS
• the cpa must file a declaration with the IRS indicating the CPA is currently qualified as a CPA and authorized to represent the part.

NOTE: a cpa not currently under suspension or disbarment may provide written advice w/out filing a written declaration.

Question 23

what are the requirements under the treasury department circular 230 section 10.8 as it relates to return preparation and application of rules to other individuals?

Answer 23

a preparer tax indentification number is required in order to prepare a tax return or claim for refund in exchange for compensation. only attorneys, cpas, enrolled agents, and registered tax return preparers may obtain PTINS

Question 24

what are the requirements under the treasury department circular 230 section 10.20 as it relates to information to be furnished?

Answer 24

unless the practitioner/tax preparer believes the records are privileged, records properly and lawfully requested by the IRS must be promptly submitted. when records are not in the possession of the practitioner the IRS should be notified, and inquiry should be made of the client as to who does have custody.

Question 25

what are the requirements under the treasury department circular 230 section 10.21 knowledge of clients omission?

Answer 25

if a practitioner/tax preparer becomes aware of an incident of a clients noncompliance with revenues laws, or of an error or omission on a filing with the IRS, the practitioner is required to promptly advise the client of the circumstances and advise the client as to the potential consequences.

Question 26

what are the requirements under the treasury department circular 230 section 10.22 as it related to diligence as to accuracy?

Answer 26

while required to exercise due diligence in preparing or assisting the preparations of filings with the IRS, and in determining the correctness of representation made by the practitioner to the IRS and to clients. this does not preclude the practitioner from relying on another person provided the practitioner has exercised reasonable care and due diligence in engaging, supervising, training and evaluating the individual.

Question 27

what are the requirements under the treasury department circular 230 section 10.27 as it relates to fees?

Answer 27

a practitioner/tax preparer can charge a contingent fee only for the following in relation to:

• an administrative examination or a CHALLENGE to an original return, an amended return, or a claim for refund (NOT FOR PREPARING THE ORIGINAL RETURN)
• services related to a claim for credit or refund in connection with statutory interest or penalties charged by the IRS or
• services related to a judicial proceeding under the IRC

Question 28

what are the requirements under the treasury department circular 230 section 10.28 as it relates to return of clients records

Answer 28

a practitioner is generally required to return any and all client records needed for the client to comply with tax obligations, although copies may be retained. a dispute over fees DOES NOT JUSTIFY retention of client records.

Question 29

when can a practitioner represent a client despite a conflict of interest?

Answer 29

• it is reasonable for the practitioner to believe that the representation will be competent and diligent
• representation is not prohibited by law and
• all clients affected waive the conflict of interest, giving a written informed consent.

Question 30

what are the requirements under the treasury department circular 230 section 10.30 as it relates to solicitation?

Answer 30

a practitioner may not make false, fraudulent, or coercive statements or claims, or misleading or deceptive statements of claims with respect to any IRS matter in any form of public communication or private solicitation. nor may a practitioner make an uninvited solicitation to perform services in matters related to the IRS, whether written or oral if doing so violates Federal or State laws or another applicable rule.

any lawful solicitation by or on behalf of a practitioner before the IRS must:
**identify that it is a solicitation; indicate the source of information used to choose the recipient, if applicable.

Question 31

what are the requirements under the treasury department circular 230 section 10.34 as it relates to standards with respect to tax returns and documents, affidavits and other papers?

Answer 31

a practitioner may not willfully, recklessly or through gross incompetence sign a tax return or claim for refund when the practitioner knows or should know that it contains such a position or advise a client to take such a position or prepare a portion of a return or claim for refund containing such a position.

a tax practitioner may not advise a client to take a frivolous tax position on a document, affidavit or other paper submitted to the irs. nor may a tax practitioner advise a client to submit a document, affidavit or other paper to the irs if it is intended to delay or impede administration of federal tax laws; it is frivolous or it contains or omits information indicating an intentional disregard for a rule or regulation; the practitioner may advise the client to submit such a document; the practitioner must also advise the client to submit a document indicating a good faith challenge to the rule or regulation.

a practitioner is required to advise clients regarding potential penalties that are reasonably likely to be assessed, and the opportunity to avoid penalty through disclosure, when those penalties have the potential of arising from a tax position taken if the practitioner either signed or prepared the return or advised the client relative to the position; a document, affidavit, or other paper submitted to the IRS

Question 32

what are the requirements under the treasury department circular 230 section 10.37 as it relates requirements for other written advice?

Answer 32

a practitioner is prohibited from giving written advice that is based on unreasonable assumptions, unreasonably relies on representations, statements, findings, or agreements of the taxpayer or another does not consider all relevant information that is known, or should be known, by the practitioner or considers the possibility that the position or the return on which it is taken will not be audited or will be resolved through settlement

the practitioner may rely on the advice of another provided the advice is reasonable AND reliance is in good faith considering all facts and circumstances.

Question 33

what are the requirements under the treasury department circular 230 section 10.50 as it relates to sanctions?

Answer 33

the secretary of the treasury has the authority to censure, suspend, or disbar a practitioner from practice before the IRS based on the practitioner that is shown to be incompetent or disreputable; who violates requirements either willfully or as a result of gross incompetence or who willfully and knowingly misleads or threatens a client or prospective client with the intent to defraud

the secretary of the Treasury also has the authority to impose a monetary penalty on any practitioner who engages in the prohibited conduct indicate above.

Question 34

who established the irs?

Answer 34

the irs is a bureau of the department of treasury. the secretary is authorized by the internal revenue code to administer and enforce internal revenue laws and created the IRS as the agency to accomplish that purpose. the commissioner of the IRS, appointed by the secretary, is charged with administering and supervising the execution and application of the IRC.

the mission of irs is to “provide america’s taxpayers top quality service” by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all”

Question 35

what does the mission statement of the irs do?

Answer 35

it describes the irs’s role and the public’s expectation about how the irs should perform that role by the following:

• in the US the congress passes tax laws and requires taxpayers to comply
• the taxpayers role is to understand and meet his or her tax obligations
• the irs’s role is to help the large majority of compliant taxpayers with tax law while ensuring that the minority who are unwilling to comply pay their fair share.

Question 36

what does the domain of the IRS cover?

Answer 36

all federal taxes including income taxes, excise taxes, payroll taxes, and gift and estate taxes. most violations will result in civil liability however if it involves fraud the result maybe a criminal action, which could result in incarceration (Jail)

Question 37

why was the SEC created?

Answer 37

it was created by the Securities Exchange Act of 1934 in order to enforce the Securities Act of 1933. it has expanded to include enforcement of the Trust Indenture Act of 1939, the investment company act of 1940, the investment advisers act of 1940 and the SOX act of 2002. Their mission is to protect investors, maintain fair , orderly, and efficient markets and facilitate capital formation.

Question 38

what does the SEC do?

Answer 38

designates the bodies authorized to establish standards for those entities. the sec has designated the public company accounting oversight board (pcaob) as having responsibility for auditing standards and the financial accounting standards board (FASB) as having responsibility for accounting principles.

the SEC staff has issued staff accounting bulletins, which must also be taken into consideration by those who report to the SEC

the PCAOB was created out of SOX to restore investor confidence and to regulate auditors of public companies subject to SEC oversight.

Question 39

what is the exception that allows an auditor of a public company to perform certain nonattest services?

Answer 39

they can do it only if the clients audit committee pre-approves the nonattest service. after obtaining satisfaction that the nature of the service would not impair the auditors independence.

Question 40

who must comply with the private securities litigation reform act of 1995?

Answer 40

a cpa auditing publicly traded companies that report to the sec under the 1934 federal securities exchange act.

Question 41

what does the 1995 private securities litigation reform act stipulate?

Answer 41

rules regarding auditing that include the following:

• related party transactions (the auditor must include substantive tests designed to identify all significant related party transactions)
• illegal acts (the auditor should attempt to identify illegal acts with a direct and material effect on the financial statements (non-compliance with applicable laws and regulations.)
• going concern (the auditor should perform tests to determine if there is substantial doubt as to the ability of the client to continue in existence throughout the following fiscal year.

the auditor should report illegal acts to the appropriate level of management and if the appropriate level of management fails to take appropriate action in connection with material illegal acts, the auditor must inform the board of directors or audit committee as soon as it is practicable. the board is only given one business day to make a filing informing the SEC of these illegal acts and must provide proof of filing to the auditor. if the auditor does not receive this proof by the filing deadline the auditor is then given 1 business day to either resign from the engagement or notify the SEC of the failure of the board to make the appropriate filing. an auditor who fails to comply with the reporting provisions may be held civily liable but an auditor who complies may not be held liable in any private action for statements filed with the SEC. defendants liability is generally proportionate to their degree of fault, unless they knowingly caused the harm then they are jointly and severally liable.

Question 42

what are some exceptions to auditor/client confidentiality?

Answer 42

• valid subpoena (the accountant must honor a valid court order to turn over information)
• irs administrative subpoena
• court order (unless rare state w/privilege statue)
• where disclosures is in compliance with GAAP/GAAS
• quality control peer review (the accountant may allow other accountants and the PCAOB to see confidential information in connection with a valid program of peer review