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Regulation - CPA Excel > Ethics > Flashcards

Ethics Flashcards

1
Q

Circular 230

A
  • IRS’s rules of practice governing CPA’s

- government may fine, suspend, or disbar advisors from practice before IRS for violations

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2
Q

Subpart A - Circular 230

A

sets forth rules governing authority to practice before the IRS, where any CPA who is not under suspension or disbarment from practice before the IRS may practice before the IRS by filing with the IRS a written declaration that he or she is currently qualified as a CPA and is authorized to represent the party or parties

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3
Q

Subpart B - Circular 230

A

Substantive rules that govern tax practitioners

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4
Q

Subpart C - Circular 230

A

Sanctions for violations

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5
Q

Practice before the IRS

A
  • Preparing documents
  • Filing documents
  • Corresponding and Communicating with the IRS
  • Rendering written advice with tax avoidance/evasion
  • Representing a client at conference, meetings, and hearings
  • Power of attorney required for an individual to represent a tax payer in front of IRS
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6
Q

Subpart D - Circular 230

A

Procedural rules for disciplinary proceedings

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7
Q

Substantive provisions - Subpart B

A
  • Promptly submit info by law unless it is privileged
  • Promptly let client know mistakes; no direct contact with IRS
  • Due Diligence
  • No unreasonable delay
  • Cannot knowingly accept work from a disbarred or suspended individual
  • Practice by former IRS agents (2 year rule)
  • No notaries
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8
Q

Substantive provisions

A
  • Promptly submit info by law unless it is privileged
  • Promptly let client know mistakes; no direct contact with IRS
  • Due Diligence
  • No unreasonable delay
  • Cannot knowingly accept work from a disbarred or suspended individual
  • Practice by former IRS agents (2 year rule)
  • No notaries
  • No unconscionable fee, contingent fee allowed in some cases
  • Return client records (everything attached to the taxpayer) and practitioner can keep record
  • No conflicts of interest (3 year written consent retained for records)
  • No solicitation
  • No Check negotiation
  • Don’t have to practice law
  • Tax Return Standards
  • Best Practice
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9
Q

When are contingent fees allowed?

A

“audit lottery” (stance) chance is small

  1. IRS examination or challenge to original tax return or amended return or refund within 120 days of receiving written notice
  2. Claim or refund is filed in connection with statutory interest or penalties
  3. Accountant is representing client in judiciary proceedings

PCAOB considers auditor not independent if he/she offers contingent fee

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10
Q

What are the tax return standards?

A

Cannot sign tax return or refund that the practitioner knows

  1. lacks reasonable basis
  2. unreasonable position
  3. willful attempt to understate tax liability or reckless intentional disregard

Practitioners cannot advise client to:

  1. take frivolous positions
  2. must inform clients of penalities
  3. may not ignore inconsistent info but may rely on reasonable good faith of the client
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11
Q

Tax Return Payer

A

any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claims for refund of tax

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12
Q

What is an insubstantial portion to not be considered a non signing TRP?

A
  1. less than $10K

2. less than $400K, which is also less than 20% of the gross income

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13
Q

When are you NOT considered a TRP?

A
  1. Furnish typing, reproducing (mechanical assistance)
  2. Prepare as a fiduciary a return or claim for refund for any person
  3. VITA or LITC (low income tax clinic)
  4. No agreement for compensation
  5. Prepare by company where regularly employed
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14
Q

Undisclosed position is unreasonable if…

A

No substantial authority

Less than 40% chance of being sustained

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15
Q

Disclosed position is unreasonable if…

A

No reasonable basis for the position

Less than 20% chance being sustained

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16
Q

Tax Shelter

A

unreasonable unless more likely than not (>50%) position will be sustained

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17
Q

What is the maximum civil penalty fine for subsection a?

civil penalties

A

greater than $1K or 50% of the income derived by TRP

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18
Q

What is the maximum civil penalty fine for subsection b?

criminal penalties

A

greater of $5K or 75% of the income derived by TRIP

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19
Q

What are some items the TRP can be punished for?

A
  1. failure to provide copy
  2. failure to sign and show identity
  3. failure to furnish number to IRS
  4. failure to keep a copy of return
  5. failure to file correct returns
  6. negotiation of check
  7. failure of diligent in determining eligibility of earned income tax credit and child tax credit
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20
Q

State Board of Accountancy

A

can prohibit non CPA’s from performing attest functions
punish and license CPA firms
- collect fees for CPA license

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21
Q

AICPA

A
  • investigates violation of AICPA code and sanctions minor cases
  • grant membership, take away membership, and punish by suspension
  • ethical complaints and national implications
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22
Q

CPA requirements

A

BA + 30 (150 college education + bachelors degree)
Ethics course
CPE credits
One year professional experience

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23
Q

Joint Trial Board

A
  • hears more serious cases
  • power to acquit, admonish, expel, or suspend
  • initial decisions by panel that are conclusive
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24
Q

Joint Ethics Enforcement Program (JEEP)

A
  • single investigation across state lines

- matters of national concern, matters involving more than one state, matters in litigation

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25
Q

Disclosed petition - Form 8275 or 8275R

A

Reasonable basis more than 20% of being sustained

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26
Q

Undisclosed petition

A

Substantial authority, more than 40% chance of being sustained

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27
Q

Reasonable cause

A

ordinary care
judged objectively
substantial undisclosed / reasonable basis
reliance on advice

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28
Q

Good Faith

A

honesty of purpose
judged subjectively
adequately disclosed if invalid
not based on unreasonable assumptions

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29
Q

Records that should be retained

A
  • records for 3 years

- tax for 7 years

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30
Q

Charitable deductions

A

must document for larger than $250

must have receipt for larger than $5K

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31
Q

Substantiation

A

Failure to maintain adequate records

Failure to substantiate items that give rise to understatment

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32
Q

Late Filing or failure to file Penalty

A

5% per month; upto 25% of unpaid taxes

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33
Q

Fraudulent late Filing or failure to file Penalty

A

15% per month; upto 75% of unpaid taxes

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34
Q

Late payment for tax

A

.5% per month; upto 25% of unpaid taxes

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35
Q

For returns filed more than 60 days after the due date (taking into account extensions granted), the minimum penalty for returns filed after 12/31/19 is the lesser of $330 or 100% of the unpaid tax. This amount is frequently inflation-adjusted upwards.(T/T)

A

True

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36
Q

Taxpayers who have asked for extension by due date and paid 50% of taxes will not have penalty (t/F)

A

Fasle, must pay 90%

37
Q

Individual Substantial Understatement

A

exceeds the greater of:
10% of correct tax or $5K
then penalty is 20% of the understatement

38
Q

Nonsubchapter S Corp substantial understatement

A

exceeds the lesser of:
10% of correct tax or $10M
then penalty is 20% of the understatement

39
Q

Tax Shelter

A
  • partnership or other entity
  • investment plan or arrangement
  • good faith to believe >50% sustained
40
Q

Negligence underpayment is how much

A

20%

41
Q

Primary Authority

A

Legislative
Administrative
Judicial

42
Q

Legislative authority

A
  1. Constitution
  2. Internal Revenue Code Statutes
  3. Treaties
  4. Committee Reports of the House Ways and Mean Committees, Senate Finance Committee, and Joint Conference Committee
43
Q

What are the steps in order for tax laws to be passed by Congress?

A
  1. Tax bills must be passed by House of Ways and Means Committee
  2. House of Representatives
  3. Senate Finance Committee - debates bill and passes own version
  4. Joint Conference Committee determines decision between house and senate
  5. Returned to House and Senate for another vote
  6. President signs or vetoes the bill
  7. If vetoed, Congress can override by 2/3 of vote
44
Q

Administrative Authority

A

Treasury dpt or IRS

  • treasury regulations
  • revenue rulings
  • private letter rulings
  • revenue procedures
  • technical advice memoranda
45
Q

Treasury Regulations

A
  • organized in sequential terms w/ numbers before decimal (tax law or type of reg) after the decimal (IRC section)
  • classified as legislative, interpretive, or procedural
46
Q

Proposed Regulations

A

must be issues at least 30 days before going final, provide an IRS view on tax issue but have no effect on law

47
Q

Temporary Regulations

A

effect for law for 3 years and made for immediate guidance on tax issue

48
Q

Final Regulations

A

effect of law until revoked

49
Q

Private Letter Rulings

A

request for taxpayer to reveal consequences based on specific facts
used by taxpayers to establish substantial authority for penalty
IRS does not have to provide a ruling on the request

50
Q

US Tax Court

A
  • hears only tax cases
  • 19 judges travel
  • no deficiency
  • no jury trial
  • acquiescence policy (follow decision in future)
  • appealed to U.S court of appeals

Small court - $50K or less and no appeal

51
Q

U.S District courts

A
  • jury trial
  • pay deficiency first then sue for refund
  • many different district courts
  • judges are not tax specialists
52
Q

US court of federal claims

A
  • one court in DC
  • pay deficiency first then sue for refund
  • 16 judges
  • no jury trial
53
Q

Appellate courts

A

US court of appeals -
hears appeals from tax and district
11 circuits + District of columbia circuit

US Court of Appeals for Federal Circuit- only hears federal claims

54
Q

Supreme court

A

hears few tax cases and highest court in US

55
Q

Discriminate Function System (DIF)

A

determine which audits should be reviewed

56
Q

Tax Audit Process

A
  • if taxpayer agrees for changes in Revenue Agent Report (RAR), he or she cannot pursue tax relief through appeals process or through the tax court
  • once deficiency is paid taxpayer can obtain a refund district or claims
  • if agreement not reached, taxpayer will receive a RAR and 30 day audit letter, not required to respond but encouraged to accept RAR or do an appellate
  • if no change report issued by IRS after audit, cannot reopen unless fraud
57
Q

Tax Appeals Process

A
  • If taxpayer doesn’t respond to 30 day then 90 day is issued where taxpayer has to file petition in tax court
  • If the petition is not filed in a timely manner, the taxpayer’s only judicial recourse is through a U.S. District Court or a U.S. Claims Court, both of which require the deficiency to be paid before the judicial process can begin
58
Q

Penalty for signing return or provide PIN

A

$50 for each tax preparer

59
Q

Who must file a tax return?

A
  • if your gross exceeds standard deduction
  • 65 + additional standard deduction (not for blind)
  • net self employment income exceeds $400
60
Q

What are the four major type of penalties?

A
  1. Nonfiling penalty
  2. Underpayment penalty
  3. Nonpayment penalties
  4. Accuracy penalties
61
Q

Non-filing penalty

A

5% per month (25% max)
* if not due within 60 days it is the lesser of $215 or the tax owed
15% per month fraud ( 75% max)

62
Q

Underpayment penality

A
  • no penalty if less than $1k in tax

Individuals: lower of payment was at least 90% of current year or 100% of last years taxes but if AGI exceeds $150K, must be 110% * or if annualization is met

Corporations: lower of 100% of CY or 100% of PY

  • if corporation has $1M or more in taxable income can only use exception in preceding tax year exemption for first year installment * or if annualization is met
  • no NOL in prior year

Annualization Method: amount due within an installment is the tax due for months ending before the due date of installment less amount required for previous installments

63
Q

Nonpayment Penalties

A
  • calculated using federal short term interst rate
    .5% upto 25%
  • if both non filing and non payment then max is 5% unless there is a reasonable cause
64
Q

Accuracy Penalties

A

20% due to inaccuracy unless reasonable basis
Individual exceeds the greater of:
10% of correct tax or $5K
then penalty is 20% of the understatement

greater of:
Fraud is 75% or 5k

substantial misevaluation: 150% more than corrected amount
gross misevaluation: 400% more than corrected amount

65
Q

Tax Preparer Penalties

A

greater of $1K or 50% of income for unreasonable basis

greater of $5K or 75% for willful attempt

66
Q

Form 1045

A

individuals/corps to claim refunds based on credits or capital losses

67
Q

Form 1040x

A

refund for erroneous tax refund

68
Q

Form 1120x

A

corps must file to amend a return

69
Q

Elements of a contract breach

A
  1. existence of enforceable contract
  2. plaintiff complied with contractual obligations
  3. defendant breached the contract
  4. damages caused by breach
70
Q

Negligence

A
  1. accountant owed duty of care to plaintiff
  2. defendant breached standard of care
  3. breach proximately causes an injury
  4. plaintiff suffers damages (compensatory are recoverable but punitive are not)
71
Q

Defenses to Contract breach

A

statute of limitations
oral - 2 years from breach
written - 4 years from breach

72
Q

Defenses for Negligence

A

Statute of limitations - 2 years from when the plaintiff should have known

if plaintiff was also careless then recovery will be reduced

73
Q

Defenses for Negligence

A

Statute of limitations - 2 years from when the plaintiff should have known

if plaintiff was also careless then recovery will be reduced

74
Q

Elements of Fraud

A
  1. Defendant made false representation of fact
  2. Material fact
  3. Knew or recklessly disregarded the falsity
    a. scienter - actual fraud
    b. reckless disregard or gross negligence - constructive fraud
  4. defendant intended to induce reasonable reliance from the plaintiff
  5. false statement caused damages to plaintiff
75
Q

Defenses for Fraud

A

Statute of Limitations - 4 years

76
Q

Intended beneficiaries

A

creditor - tulsi asks pk to paint house but pay dad since she owes dad $1K. dad can sue pk

donee-same as above except dad receives $1k as a gift

77
Q

Intended beneficiaries (can sue)

A

creditor - tulsi asks pk to paint house but pay dad since she owes dad $1K. dad can sue pk

donee-same as above except dad receives $1k as a gift

78
Q

Incidental Beneficiaries (cannot sue)

A

someone who is not a party in the contract the benefits cannot sue

79
Q

Testimonial Privilege

A

Classic privileged communications include attorney-client, doctor-patient, and priest-penitent. Where applicable, the protected party (client, patient, penitent) can prevent the party who received the protected communications (attorney, doctor, priest) from testifying.

80
Q

Work Product Privilege

A

Prevents one party from learning the other sides for litigation

81
Q

Accountant client privilege

A

-federal and state courts recognize this
- state courts refuse common law
only 15 states
-testimonial belongs to client
- can be waived by client (applies to all)
- applies only to state court

82
Q

Exceptions to Confidential Communications

A
  1. GAAP calls for disclosure
  2. subpoena or summons
  3. ethical examination
  4. peer review requires disclosure

Disclosure is to other firm members on a “need-to-know” basis such as financial difficulties or bankruptcy

83
Q

Generally Accepted Privacy Principles (10)

A
  1. Management
  2. Notice
  3. Choice and consent
  4. Collection
  5. Use, retention, disposal
  6. Access
  7. Disclosure to third parties
  8. Security for privacy
  9. Quality
  10. Monitoring and enforcement
84
Q

When will there be no penalty

A

For 2019, there will be no penalty if the total tax shown on the return less the amount paid through withholding (including excess social security tax withholding) is less than $1,000., individuals will incur no penalty if the amount of tax withheld plus estimated payments are at least equal to the lesser of (1) 90% (85% just for the 2018 tax year) of the current year’s tax (determined on the basis of actual income or annualized income), or (2) 100% of the prior year’s tax. In this case, since the tax shown on Krete’s return ($16,500) less the tax paid through withholding ($16,000) was less than $1,000, there will be no penalty for the underpayment of estimated taxes.

85
Q

Fraud req

A

This answer is correct because under common law, a third party (e.g., a stockholder) attempting to sue a CPA for fraud must prove that damages were incurred, there was a material misstatement or omission of a material fact in the financial statements, and that there was justifiable reliance on the financial statements which led to the damages. Of the defenses listed, the CPA’s best defense is that the false statements were immaterial because it relates directly to the second requirement needed to successfully sue the CPA for fraud.

The following elements are needed to establish fraud against an accountant: (1) misrepresentation of the accountant’s expert opinion, (2) scienter shown by either the accountant’s knowledge of falsity or reckless disregard of the truth, (3) reasonable reliance by injured party, and (4) actual damages.

86
Q

Computing corporations income tax

A

A corporation must make estimated tax payments unless its tax liability can reasonably be expected to be less than $500. A corporation’s estimated tax is its expected tax liability (including the accumulated earnings tax) less its allowable tax credits.

87
Q

Self employment threshold

A

A self-employed individual must file an income tax return if net earnings from self-employment are $400 or more.

88
Q

accuracy related penalty

A

An accuracy-related penalty equal to 20% of the underpayment of tax may be imposed if the underpayment of tax is attributable to one or more of the following: (1) negligence or disregard of the tax rules and regulations; (2) any substantial understatement of income tax; (3) any substantial valuation overstatement; (4) any substantial overstatement of pension liabilities; or (5) any substantial gift or estate tax valuation understatement. The penalty for gift or estate tax valuation understatement may apply if the value of property on a gift or estate tax return is 50% or less of the amount determined to be correct. The penalty for a substantial income tax valuation overstatement may apply if the value (or adjusted basis) of property is 150% or more of the amount determined to be correct.

89
Q

requirement to avoid underpayment of federal taxes

A

This answer is correct. The requirement is to determine which methods of estimated tax payment can be used by Jarovsky Corp. to avoid the penalty for underpayment of federal estimated taxes. Generally, to avoid a penalty for the underpayment of estimated taxes, a corporation’s quarterly estimated payments must be at least equal to the least of (1) 100% of the tax shown on the current year’s tax return, (2) 100% of the tax that would be due by placing income for specified monthly periods on an annualized basis, or (3) 100% of the tax shown on the corporation’s return for the preceding year, provided the preceding year showed a positive tax liability and consisted of 12 months. In this case, Jarovsky cannot base its estimated payments on its preceding year because Jarovsky had a net operating loss for 2019.

Regulation - CPA Excel (7 decks)

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