CPA REG Ethics, Professional Responsibilities, and Federal Tax Procedures Sa

Question 1

While reviewing a new client’s prior-year tax returns, a CPA became aware that the client did not properly file all required federal income tax returns. Under Treasury Circular 230 what should the CPA do in this situation?

Answer 1

Advise the client of the consequences of the noncompliance

Question 2

Under Circular 230, it is proper to delay as long as possible in fulfilling an IRS request for records or information if:

Answer 2

You have investigated and believe in good faith that the information is privileged

Question 3

If you learn that the tax return you prepared for your client last year contained a material error, you should

Answer 3

Promptly inform your client

Question 4

Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?

Answer 4

The practitioner may retain copies of the clients records

Question 5

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

Answer 5

Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum

Question 6

Under Circular 230, which of the following describes improper activity by a CPA giving federal tax advice?

Answer 6

The CPA takes into account the possibility that a tax return will not be audited

Question 7

While preparing a tax return for a new client and reviewing the client’s prior-year return, a CPA noticed an error made by the client’s former tax preparer. According to Treasury Department Circular 230, which of the following is the CPA specifically required to do in this case?

Answer 7

Inform the client of the error and advise of the consequences

Question 8

With respect to any given tax return, which of the following statements is correct?

Answer 8

More than one person may be deemed to be a preparer of a return

Question 9

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 taxpayer knowingly included personal expenses as deductible business expenses on the taxpayer’s business then the

Answer 9

Tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct

Question 10

Which of the following will not get CPA Sandy in trouble with the IRS?

Answer 10

Failure to furnish her preparer’s identifying number to her clients

Question 11

Pak worked for EPS marketing trusts and other asset protection devices through a nationwide multi-level marketing network of financial planners. THe IRS labeled the trusts illicit tax shelters. EPS then started calling the trusts by new names, but continued to market them. Pak was EPS’s executive vice president, spoke at its public events, and received sales overrrides from agents he recruited as sales reps for EPS, As Pak explained them, the trusts allowed for clients to transfer all their income to a “donor directed” trust from which they could spend the money on anything they wanted without paying taxes on it. The IRS brought an action against Pak seeking to fine him for promoting an abusive tax shelter in violation of 26 U.S.C 6700. Which of the following is true?

Answer 11

Pak is probably liable

Question 12

Under which of the following scenarios will Jenny be in trouble under section 6718’s confidentiality provisions?

Answer 12

When she sells a celerity client’s confidential tax information to a tabloid newspaper

Question 13

CPA Monrow included several rich tax clients to invest in a domesticated beaver tax shelter device. When the IRS sought to audit one of Monrew’s clients, he realized that among other difficulties, he had not had the client sign proper documentation. While an IRS agent sat in the waiting room of one of his clients, Monrow slipped in a back door and had the client sign a backdated document. When the government discovered all this, Monrow was indicted for tax fraud in violation of section 7206. Which of the following is true?

Answer 13

Monrow is probably guilty

Question 14

Louis, the volunteer treasurer of a nonprofit org and a member of its board of directors, compiles the data and fills out its annual form 990, Return of Or Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:

Answer 14

He is not compensated

Question 15

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following except

Answer 15

Disclose a conflict of interest

Question 16

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?

Answer 16

The board of accountancy for the state in which the licensed CPA practices

Question 17

To whom must a CPA pay license fees in order to maintain a CPA license?

Answer 17

The state board of accountancy of the CPA’s state of licensure

Question 18

When an ethics complaint carrying national implication rises, which entity typically handles it?

Answer 18

AICPA

Question 19

When an ethics complaint carrying national implication rises, which entity typically handles it?

Answer 19

AICPA

Question 20

CPA Smithers has had some professional difficulties. Which of the following is true?

Answer 20

If the state board of accountancy revokes Smither’s CPA license, s/he will be automatically expulsed from the AICPA

Question 21

Which of the following can grant a CPA license?

Answer 21

A state board of accountancy

Question 22

Cherokee wants to know which of the following is a requirement to earn a CPA license:

Answer 22

All of the above (150 hrs, pass cpa, one yr work experience)

Question 23

Lola has had a few serious professional problems. Which of the following will probably cause a state board of accountancy to revoke her license or order a lesser punishment

Answer 23

All of the above (Failing to complete required continuing professional education, failing to pay her own income tax, violating professional standards)

Question 24

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA’s license to practice public accounting?

Answer 24

A state board of accountancy

Question 25

Taxpayer Clegg would certainly like to take a particular deduction that is barred by an IRS regulation. However, after considerable research, Clegg’s tax attorney believes that there is a one-third chance that a court would overturn the regulation as invalidly promulgated by the IRS. What should Clegg do?

Answer 25

Take the deduction, but disclose it

Question 26

Fitely hired a tax accountant whom his attorney recommended. The accountant, Tilder, recommended that Fitley take a particular tax position that resulted in an understatement of taxes and the IRS is now seeking to penalize Fitley. In order to establish a good faith defense against the 20% understatement penalty, which of the following does Fitley need to establish:

Answer 26

All of the above (Tilder was a competent professional, he gave him all necessary an accurate info, and relied on good faith in his judgement)

Question 27

Which of the following burdens of proof must be met when a disclosed position regarding a particular individual deduction is evaluated to determine it was taken in good faith

Answer 27

> or equal to 20%

Question 28

Tribble carelessly filed his taxes four months late. He owes 60,000. What is his late filing penalty?

Answer 28

12,000 (20%)

Question 29

Xina carelessly filed her taxes 10 months later. She owed 100,000 in taxes. What is Xina’s late filing penalty?

Answer 29

25,000 25%

Question 30

Tera filed her tax return on time but did not pay her taxes until four months after they were due. She owed 20,000. What is her late payment penalty amount?

Answer 30

400 2%

Question 31

Omar’s correct tax amount is $500,000, but he filed a form reporting that it was only $400,000. There is no claim of fraud. Is this a “substantial understatement” that will subject him to 20% understatement penalty?

Answer 31

Yes and his penalty will be $20,000 20% of missing 100,000

Question 32

ABC Corporation, a Chapter C corporation, had a correct tax amount of 1,000,000, but reported only 800,000. There is no claim of fraud. Is this a “substantial understatement” that will subject ABC to the 20% understatement penalty?

Answer 32

Yes and the penalty will be 40,000 (20% of missing amount)

Question 33

Slim is considering taking an aggressive tax position on his income tax return. His experience tax CPA has evaluated the position carefully and determined that there is one in four chance that it will if challenged be sustained. What should Slim do?

Answer 33

Take the position and disclose it

Question 34

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

Answer 34

Internal Revenue Code

Question 35

Which of the following is Not considered a primary authoritative source when conducting tax research?

Answer 35

IRS publications

Question 36

Which of the following type of regulations cannot be cited as authority to support a tax position?

Answer 36

Proposed regulations

Question 37

Which of the following courts is not a court of original jurisdiction?

Answer 37

United States Court of Appeals

Question 38

Which Senate committee considers new tax legislation?

Answer 38

Finance

Question 39

A CPA is researching a tax issue and is attempting to understand the intent of Congress. Which of the following would generally be least useful for that purpose?

Answer 39

A Notice of Proposed Rulemaking

Question 40

Which of the following is a list of courts that are referred to as courts of original jurisdiction or trial courts, for tax matters?

Answer 40

The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims

Question 41

If a taxpayer receives a 30-day letter from the IRS, the taxpayer:

Answer 41

May ignore the letter and take no action

Question 42

Which of the following documents does not govern the conduct of a CPA who is engaged in providing tax services?

Answer 42

Internal Revenue Service Audit Guides

Question 43

An IRS agent has just completed an examination of a corporation and issued a “no change” report. Which of the following statements about that situation is correct?

Answer 43

The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.

Question 44

A statuory notice of deficiency explains that the taxpayer has 90 days to either pay the deficiency or else to file a

Answer 44

petition with the U.S. Tax Court

Question 45

A C corporation had a federal income tax liability of $40,000 for each of the last five years, each covering a 12 month period. The tax for the current year is $48,000. What is the lowest amount that must have been paid as estimated taxes for the current year so that no penalty for underpayment is applicable?

Answer 45

$40,000

Question 46

A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed?

Answer 46

5,000

Question 47

A tax return preparer may disclose or use tax return information without the taxpayers consent to

Answer 47

Be evaluated by a quality or peer review

Question 48

Which, if any, of the following could result in penalties against an income tax return preparer?
I. Knowing or reckless disclosure or use of tax information obtained in preparing a return
II. A willfill attempt to understate any client’s tax liability on a return or claim for a refund

Answer 48

Both I and II

Question 49

An accuracy-related penalty applies to the portion of tax underpayment attributable to
I. Negligence or disregard of the tax rules or regulations
II. Any substantial understatement of income

Answer 49

Both I and II

Question 50

Chris Baker’s adjusted gross income on her Year 8 tax return was $160,000. The amount covered a 12-month period. For the year 9 tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of
I. 90% of the tax return for the current year paid in four equal installments
II. 100% of prior year’s tax liability paid in four equal installments

Answer 50

I only

Question 51

A civil fraud penalty can be imposed on a corporation that underpays tax by

Answer 51

Maintaining false records and reporting fictitious transactions to minimize corporate tax liability

Question 52

A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to

Answer 52

Make reasonable inquiries when taxpayer information appears incorrect.

Question 53

Morgan, a sole practioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?

Answer 53

Taxpayer’s name and identification number or a copy of the tax return

Question 54

An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor’s report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company.
Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank

Answer 54

Can sue the accounting firm for loss of the loan because of negligence

Question 55

CPA Crane agreed to audit Banner Co. The audit did not go well, especially because Crane did not audit Banner’s subsidiary, which created various prbems for Banner. Banner sued Crane for breach of contract, because Crane alledgly did not comply with the engagement letter. Which of the following might Crane successfully raise in defense?

Answer 55

A and B
Evidence that Banner did not provide Crane with all records needed to successfully complete the audit
A provision in the engagement letter that provided that Crane would audit Banner, but not is subsidiaries

Question 56

Bosco Corporation had a very complicated tax situation. It hired CPA Arnold to prepare its corporate income tax return. Arnold made an error that caused Bosco to overpay its taxes by $3,000. The payment could have been avoided had Arnold advised Bosco to structure a particular transaction in a slightly different way. Bosoco paid $233,000 rather than the $230,000, that it might have paid. Upset with Arnold’s error, Bosco refused to pay the $20,000 fee specified in the engagement letter on grounds that Arnold had breached the contract by giving inaccurate advice. Which of the following is true regarding Arnold’s fee?

Answer 56

Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco (20,000-3,000= 17,000)

Question 57

A CPA who has agreed to prepare a corporation’s taxes and to provide tax advice will generally be liable for breaching

Answer 57

A and B
Promises made in the written engagement letter
Promises made orally

Question 58

A company engaged a CPA to perform the annual audit of its financial statements. The audit failed to reveal an embezzlement scheme by one of the employees. Which of the following statements best describes the CPA’s potential liability for this failure?

Answer 58

The CPA’s adherence to generally accepted auditing standards (GAAS) may prevent liability

Question 59

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?

Answer 59

Any foreseen or known third party who relied on the report

Question 60

Mix and Associates, CPAs, issued an unqualified opinion on the financial statements of Glass Corp. for the year ended Dec 31 2005. It was determined that Glass’s treasurer had embezzled $300,000 from Glass during 2005. Glass sued Mix because of Mix’s failure to discover the embezzlement. Mix was unaware of the embezzlement. Which of the following is Mix’s best defense?

Answer 60

The audit was performed in accordance with GAAS

Question 61

When performing an audit, a CPA

Answer 61

must exercise the level of care, skills, and judgment expected of a reasonably prudent CPA under the circumstances

Question 62

Phillips, CPA, was engaged by Veda, Inc. to audit Veda’s financial statements. Phillips was told that the financial statements and the audit report were to be shown to Ryan, a potential investor. As a result of the audit, Phillips issued an audit report containing an unqualified opinion on Veda’s financial statements. Ryan, after seeing financial statements and audit report made a substantial investment in Veda shares. Although Phillips exercised reasonable care in performing that audit, inaccuracies in the financial statements were later discovered causing Veda share prices to fall. Ryan claimed that had Ryan known of the inaccuracies, Ryan would not have purchased the shares. Will Ryan succeed in a suit against Phillips for negligence?

Answer 62

No, because Phillps exercised reasonable care in performing the audit

Question 63

A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any tax work. The husband believed that the tax return was negligently prepared and that he was financially harmed. He hired an attorney without his wife consent, to pursue negligence claim against the CPA. The CPA hired an attorney to defend against the claim. To which party, if any, may the CPA dislose the wife’s tax return information without the wife’s consent?

Answer 63

The CPA’s attorney, for the evaluation of the negligence claim

Question 64

Salina wants to know which of the following is true regarding recognition of an accountant client testimonial privilege

Answer 64

Approximately 15 state legislatures have recognized an accountant-client testimonial privilege that applies in the states’ court

Question 65

Girard gave tax advice to frontenac corporation. The department of Justice and IRS are now investigating certain tax shelter transactions that Frontenac Corp entered into. Girard is resisting their requests for information by citing the tax practitioner’s privilege of AS7525 of the I.R.C to which of the following would that privilege be inapplicable?

Answer 65

A and B
Criminal proceedings
Written advice in connection with the promotion of a tax shelter

Question 66

Lakin is a CPA whose client, Sublette, is being sued by a state government in state court for evasion of state income taxes. Sublette does not want Lakin to testify against him regarding information that Sublette communicated to Lakin. Which of the following is true in a state with statutory version of the accountant-cleint testimonial privilege?

Answer 66

If the suit was in federal court, the state privilege would not apply even though the communication took place

Question 67

Which of the following are recognized exceptions that allow disclosure of confidential information?

Answer 67

All of the above (An enforceable subpoena has been served on the CPA, an ethical examination is being conducted regarding the CPA’s conduct, A peer review is occurring)

Question 68

Powhattan was surpised to learn how much income his client, Absurdco Inc. was making. He thought that Absurdco’s competitors might be interested in the information, so he sold it to one of them. When Absurdco found this out, it started investigating what consequences it might visit upon Powhattan. Which of the following is true?

Answer 68

All of the above (Powhattan may lose his CPA license, may be sued civilly by the IRs, may be prosecuted criminally)

Question 69

Colby is managing partner of a small accounting firm. He has heard of GAAP and wants to know what his responsibilities are regarding client information. Among others, Colby’s firm must

Answer 69

All of the above (Provide clients notice of its privacy procedures, collect information only in compliance with its policies and procedures, provide clients with access to their personal information for review and update)

Question 70

Jetmore was surprised to learn how much income tax his client, Quantilco, Inc, was making. He thought that Quantilco’s competitors might be interested in the information, so he sold it to one of them. When Quantilco found this out, it started investigating what consequences it might visit upon Jetmore. Which of the following is true?

Answer 70

A and B ( He may be sued civilly by the IRS, he may be prosecuted criminally by the Department of Justice)

Question 71

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?

Answer 71

A member whose practice is primarily bankruptcy discloses a client’s name

Question 72

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients’ express permission?

Answer 72

A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties