Chapter 5 Section 1: Ethics and Professional Responsibilities in Tax Services Flashcards
Who falls under the authority of the standard-setters for tax law?
People who prepare returns for a fee
What are the four primary authoritative sources?
IRC and statutory provisions Regulations Revenue rulings and procedures Court cases NOTE: IRS publications are NOT
Are IRS publications a primary authority?
No
Define disregard in the context of malpractice?
Any careless, reckless, or intentional disregard of rules or regulations
Define listed transaction
Reportable transaction that is (basically) the same as a transaction specifically identified by the Secretary of the US Treasury Department as a “tax avoidance transaction” (legal ways to reduce tax) or “tax evasion” (illegal way to avoid tax)
Define more likely than not
Greater than 50% chance of a position being upheld by the courts
Define negligence
Any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws
Failure to exercise ordinary and reasonable care in the preparation of a tax return.
Includes failure by the taxpayer to keep adequate books and records or to substantiate items properly
NOT THE SAME as fraud
What is the difference between ordinary negligence and fraud?
Fraud is willful and reckless
Define reasonable basis
Greater than a 20% chance of a position being upheld by the courts
Define reportable transaction
A transaction for which information is required to be included with a return or statement because it has potential to b used for tax avoidance or evasion.
What is the difference between tax avoidance and tax evasion?
Tax avoidance is legal, and CPAs should do it
Tax evasion is illegal and punishable by law
Define substantial authority
Between a 33% and 50% chance of being upheld by the courts
Define tax return preparer
Someone who prepares for compensation does not have to be a CPA
What is the difference between a tax preparer and tax practitioner?
A practitioner is more - they practice before the IRS
Give examples of tax practitioners
CPAs Attorneys Enrolled agents Enrolled actuaries Enrolled retirement plan agents
Define tax shelter
Anything that has a significant purpose to avoid or evade federal income tax
What are the exceptions to a position being deemed unreasonable?
If undisclosed, there is substantial authority backing it up
If disclosed, there is a reasonable basis for the position
If it’s a tax shelter or reportable transaction, it needs to be more likely than not
Who can be punished for the understatement of taxpayer liability?
The preparer
Is there a penalty if an error was made in calculation in good faith?
No
Define willful or reckless conduct
Basically, fraud
Willful attempt to understate the liability or reckless disregard of the rules
Do preparers need to obtain supporting documents?
What is the exception?
Give an example of a good exception
Usually, no
Unless the preparer has reason (or should know they have reason) to doubt the taxpayer
Business/travel related expenses
What is the penalty for understatement of a liability due to an unreasonable position?
Due to willful or reckless conduct?
Greater of $1,000 or 50% of fees earned
Greater of $5,000 or 50% of fees earned
Give 7 additional examples of things we can be penalized for
Failure to:
- Provide client with a completed copy of the return
- Sign return
- Give tax ID number of preparer
- Retain records properly (3yrs)
- File correct information returns
- Diligently determine eligibility for Earned Inocome Credit (EIC)
- If you negotiate a refund check
How long do you need to keep records?
What do you need to keep?
3 years
Either a copy of the return or a listing of the name and ID of each taxpayer
