Chapter 2 - Tax standards and Research Flashcards
Internal Revenue Code (IRC)
The IRC holds the most authoritative value in the tax law and was enacted by congress in title 26 of the US.S code.
IRS Regulations
The IRS regulations are the U.S. department of treasury’s interpretations of the IRC. They give directions on how to apply the laws outlined in the IRC and have the second most force and effect after the IRC.
Tax court decisions
Tax court decisions interpret the IRC, but they do not have the authority of the IRC.
IRS Agents Reports
IRS agents reports are used to report on specific taxpayer situations. They apply the IRC, IRS regulations and other forms of authoritative literature, but they do not hold any value that the IRC, IRS regulations or even tax court decisions.
AICPA statements on standards for tax services
The AICPA’s tax executive committee published the 7 AICPA statements on standards for tax services (SSTSs). The SSTSs set forth the ethical practice standards for members of the AICPA.
Sections of the AICPA standards include
introduction, statement (several paragraphs) and explanation.
Statements are often followed by Interpretations - which includes a background, general interpretation and possibly some illustrations.
Topics covered in the AICPA standards
- tax return positions
- answers to questions on returns
- certain procedural aspects of preparing returns
- use of estimates
- departure from a positions previously concluded in an administrative or court hearing
- knowledge of error: return preparation and administrative proceedings
- form and content of advice to taxpayers
IF a tax return position does not have at least a realistic probability of being sustained, the tax preparer may recommend that position anyway under what circumstances?
The tax preparer:
- Concludes that there is a reasonable basis for the positions and
- Advises the taxpayer to disclose appropriately that position
IF a tax return reflects a tax return position which the taxpayer has concluded has only a reasonable basis, under what circumstances may the preparer sign that return?
Sign the return only if that return position is appropriately disclosed.
List the levels of support from the least stringent to the most stringent
- Reasonable basis standard (most flexible)
- Realistic probability standard
- Substantial Authority standard
- More likely than not standard (most stringent/strict)
The SSTSs (AICPA standards on tax services) do not define these standards.
Required disclosure of tax preparer
Tax preparer should inform taxpayer of the penalty with respect to the tax effects of a transaction. The courts will not uphold the imposition of the penalty if the transaction, at a minimum, meets the more likely than not standard.
Responsibility to taxpayer and tax system
A taxpayer is not legally required to pay more tax than owed. IT is the duty of the tax preparer to achieve a result that legally minimizes taxes owed.
What is the tax preparer’s responsibilities with regard to answering questions on the return?
Make a reasonable effort to answer all questions on tax returns; there must be reasonable grounds for omission of an answer.
Failure to answer a questions may result in an incomplete return or a penalty.
Reasonable grounds for an omission include:
- not easily obtainable and insignificant
- uncertainty regarding the meaning of the question
- voluminous answer
What are the proceural aspects of preparing a return?
Generally, no responsibility to verify information by the taxpayer.
However, taxpayer should make reasonable inquiries if the information appears to be incomplete, incorrect or inconsistent.
Tax preparer’s should also determine whether the taxpayer (1) maintains appropriate books and records when required by statute or rule, and (2) possesses substantiating documentation when required by statute or rule.
Whenever possible, tax preparer’s should review one or more returns from previous years in order to obtain information concerning the taxpayer.
What is the standards regarding the tax preparer’s use of estimates?
- The tax preparer may use estimates provided by the taxpayer, however, the tax preparer should determine that the estimates are reasonable based on the facts and
- The Disclosure of estimates is not generally required unless unusual circumstances (records have been destroyed).
When can a tax preparer depart from a position previously concluded by an administrative proceeding or court decision?
A tax preparer may recommend a tax position that is different from an administrative proceeding or court decision with respect to a previous year’s return if:
1) the taxpayer is not bound to specified treatment in the later year (deduction not allowed in prior year because do not have appropriate documentation, but have appropriate documentation in current year) and
2) the tax return preparer follows statements on standards for tax services NO. 1, “Tax Return Positions”
The taxpayer should consider the justification for inconsistent treatment.
What is required of the tax return preparer who becomes aware of an error in a previously filed return?
Notify the taxpayer but do not notify any taxing authority regarding an error (omission or failing to meet standards no.1, tax return positions) without first obtaining permission from the taxpayers, except when required to by law.
What is reuired of the tax return preparer who becomes aware that the taxpayer has failed to file a tax return?
Notify the taxpayer but do not notify any taxing authority regarding the non-filing without first obtaining permission from the taxpayers, except when required to by law.
Advise the taxpayer of the appropriate measures to be taken to correct the situation, however it is ultimately the taxpayers decision whether to correct the error.
What is required of the tax preparer who, while representing the taxpayer in the administrative proceeding, becomes aware of an error or non-filing?
Request the taxpayer’s agreement to disclose to the taxing authority the error or non-filing. If the taxpayer doesn’t agree, the tax preparer should consider whether it is appropriate to continue the professional relationship.
Do not notify any taxing authority regarding the error or non-filing without first obtaining permission from the taxpayers, except when required to by law.
When must the tax preparer notify the taxpayer about new or changing tax developments occurring after the preparer has given advice to the client?
When assisting a taxpayer implementing a plan associated with advice previously given, revise the plan if there are new developments.
If not assisting in implementing the plan, there is no requirement to notify the taxpayer of subsequent developments that may affect the advice previously given.
Form and Content of Advice to taxpayers
Advice to taxpayers can be either oral or in writing, which is up to the discretion of the tax preparer.
When considering whether to provide the advice in writing the tax preparer should consider :
- the importance of the transaction and amounts involved
- existence of authorities
- penalty consequences
-sophistication of the tax client
Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships.According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore’s professional responsibility regarding the reporting of these partnership losses on Fuller’s federal income tax return?
a. To verify the initial investment in each partnership entity unless Shore has reason to believe that the information is incorrect.
b. To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect.
c. To verify the client’s basis by examining client’s records from the initial investment to the present.
d. To request the complete partnership returns of the partnership entities unless Shore has reason to believe that the information is incorrect.
.To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect.
Explanation:
Choice “b” is correct. Without obtaining verification, a tax preparer may in good faith rely on information furnished by a taxpayer or third parties when preparing a tax return. The tax preparer should, however, make reasonable inquiries if the information appears to be incomplete, incorrect, or inconsistent.
Choices “c”, “a”, and “d” are incorrect, per the above rule.
While preparing a client’s individual federal tax return, the CPA noticed that there was an error in the previous year’s tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?
a. Inform the client and recommend corrective action.
b. Notify the IRS if the error could be considered fraudulent or could involve other taxpayers.
c. Inform the client and the previous CPA in writing, and leave it to their discretion whether a correction should be made.
d. Discuss the matter verbally with the former CPA and suggest that corrective action be taken for the client.
Inform the client and recommend corrective action.
Explanation:
Choice “a” is correct. When an AICPA member becomes aware of an error in a previously filed return, he should promptly notify the taxpayer.
Choice “c” is incorrect, per the above explanation.
Choice “d” is incorrect, per the above explanation.
Choice “b” is incorrect. A tax preparer is not required to notify the IRS and may not notify any taxing authority without the client’s permission.
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
a. Internal Revenue Code. b. IRS regulations. c. IRS agents' reports. d. Tax court decisions.
Internal Revenue Code.
Explanation:
Choice “a” is correct. According to the IRS’s website under Tax Code, Regulations and Official Guidance, the “federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.).” The IRC holds the most authoritative value.
Choice “b” is incorrect. According to the IRS’s website under Tax Code, Regulations and Official Guidance, the IRS regulations or “Treasury regulations (26 C.F.R.)—commonly referred to as Federal tax regulations—pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRS by the U.S. Department of Treasury.” Regulations give directions on how to apply the law outlined in the Internal Revenue Code. Regulations have the second most force and effect, second only to the IRC.
Choice “d” is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not have the authority of the IRC.
Choice “c” is incorrect. The reports of IRS agents are used to report on specific taxpayer situations. IRS agents’ reports apply the Internal Revenue Code, IRS regulations, and other forms of authoritative literature, but they do not hold the value that the IRC, the IRS regulations, or even tax court decisions have.