Ethics, Professional, Legal Flashcards
Circular 230 “Best Practices” (7)
- Communicate clearly terms of engagement
- Est. Relevant Facts
- Evaluate reasonableness of assumptions/representations
- Arrive at conclusion supported by the law/facts in a tax memo
- Advise client about import of the conclusion reached (including any penalties)
- Act fairly/with integrity
- Use supervisory powers to ensure employees abide by best practices.
Circular 230: When is a supervisor in trouble for a supervised employee’s mistakes? (2)
- Did not use reasonable care supervising.
- Employee mistake involves aggressive tax shelters and supervisor willfully, recklessly or through gross incompetence failed to take prompt corrective action.
Circular 230: Contingent Fees may be charged for providing services before the IRS for: (3)
- Services rendered in connection with an IRS examination or challenge of original or amended tax return/clam for refund.
- Where claim/refund is filed solely in connection with determination of statutory interest/penalties.
- When accountant is representing client in judicial proceedings.
What is SSTS?
Statements of Standards for Tax Services
Do business travel expenses require documentation?
YES! Failure to inquire about the existence of proper documentation may get a CPA punished.
When do estimates need to be disclosed? (4)
- Taxpayer ILL when return must be filed.
- Taxpayer hasn’t received K-1 from partnership where general partner.
- Taxpayer is major shareholder in corp tied up in BANKRUPTCY.
- fire, computer failure or NATURAL DISASTER destroyed records
According to AICPA Statement on Standards for Tax Services, what should a CPA think about when deciding whether to provide oral or written advice? (10)
- importance of transaction/amounts involved
- specific/general nature of taxpayer’s inquiry
- time available for development/submission of advice
- technical complexity involved
- existence of authorities/precedents
- tax sophistication of tax payer
- the need to seek other professional advice
- type of transaction (is it subject to higher disclosure/reporting reqs?)
- can potential penalties be avoided w/ disclosure?
- does cpa intend for the taxpayer to rely on advice to avoid penalties?
SSTS No. 1: Tax Return Positions (5)
- must not take an “unreasonable position” (must have realisitic possibility - at least 33% likelihood - of being sustained OR must disclose a reasonable basis - 20-33% - to the IRS)
- must advise taxpayer of potential penalties
- NEVER recommend a position that either exploits audit selection process or overstate deductions in order to see if a client can get a lesser deduction through negotiation (which they think they deserve)
- have right and responsibility to advocate for taxpayer clients if claimed positions meet the standards.
- Authority that can be considered includes: well-reasoned construction of the applicable statute, well-reasoned articles/treatises, pronouncements issued by applicable taxing authority
SSTS No. 2: Questions on Returns
Should make “reasonable efforts” to obtain info from clients to provide “appropriate answers” to questions on a tax return.
SSTS No. 3: Procedural Aspects of Preparing a Return (5)
- May rely in good faith on info provided by taxpayer
- should not ignore red flags
- should look at previous returns - check for problems
- should make “appropriate inquiries” to determine if taxpayer has substantiating documentation, if required
- should consider info known from other taxpayers’ returns
SSTS No. 4: Use of Estimates (3)
- May use if it is not practical to obtain exact data, and if it is believed that estimates are reasonable
- should not imply greater accuracy than actually exists
- Must only be disclosed if needed to avoid misleading taxing authority as to accuracy
SSTS No. 5: Departure from Previous Position (3)
May assert a position that was previously rejected, again, if:
- Position lacked documentation last year that is available this year
- Taxpayer simply wanted to settle last year even though they did not have to
- New court decisions, rulings or other authorities have developed
SSTS No. 6: Knowledge of Error
Must notify taxpayer promptly, but may not notify anyone else without permission.
SSTS No. 7: Form/Content of Advice to taxpayers
No standard format is required, but members are urged to consider putting advice in writing.
Duty to Update (2)
No general duty, but exceptions include:
- changes occur while member is assisting taxpayer in implementing procedure or plans associated with advice provided
- member specifically agrees to provide updates
Tax Return Preparer (TRP) (4)
- must be paid
- to prepare or retain employees to prepare
- a substantial proportion
- of any federal tax return
To which third parties will an accountant who negligently prepares a client’s financial report be liable?
Third parties where CPA had prior knowledge of the existence of a limited class of potential users and of the general purpose of their use of the audit. *prior knowledge is key
“Ultramares” rule of 1931
Requires privity before an accountant is liable for negligence
A CPA who fraudulently performs an audit will be liable to
Any person who suffered loss as a result of the fraud… plaintiffs just need to prove reliance and loss and that they be foreseeable users
To be convicted of common law fraud, a CPA must: (2)
- make misstatements with knowledge or recklessly make them
2. act recklessly w/ constructive knowledge or when should have known statements were false
What must a plaintiff show in a negligence case?
the CPA did not use reasonable care or did not act as a reasonable CPA in the circumstances.
Restatement View
Majority view of an accountant’s liability to third parties: limits an accountant’s liability to a “limited class” of actually foreseen users
When performing an audit, a CPA must
exercise “due care”… a level of care, skill and judgment expected of a reasonably prudent CPA under the circumstances
What is scienter?
Knowingly. Guilty knowledge sufficient to charge a person with consequences of his/her acts. Does a person have a “guilty mind”?
What is privity?
a relation between two parties that is recognized by law, such as that of blood, lease, or service.
Are punitive damages allowed in a negligence action?
No
Are punitive damages allowed in a fraud action?
Yes
Foreign Corrupt Practices Act (FCPA)
post-Watergate respone to illegal foreign bribes paid by U.S. companies.
Two major FCPA provisions (2)
- anti-bribery = prevent domestic companies from gaining or retaining foreign business by bribing foreign govt. officials
- accounting provisions = all companies registered with SEC must keep “reasonably detailed” records which “accurately and fairly” reflect company’s financial activities
FCPA Criminal Penalties (3)
- Individual = max of $100,000 fine and/or 5 years in prison
- Corporation = max of $1,000,000 fine
- no criminal prosecutions for inadvertent or insignificant errors
FCPA Civil Penalties
Max of $10,000 fine
Racketeer Influenced and Corrupt Organizations Act (RICO)
Created to prevent organized crime’s infiltration into legit business
RICO Section 1962(c) (4)
- defendant conducted or participated in the conduct
- of an enterprise
- through a pattern (2 racketeering acts in 10 years)
- of racketeering activity
SOX Criminal Liability Provisions (3)
- Record Retention, Destruction, Tampering Statutes. Must not willfully fail to retain audit and review work papers. Must not knowingly alter, destroy, mutilate, conceal, cover up or falsify a record.
- Securities Fraud Statutes. Knowingly defrauding or conspiring to defraud a person regarding any security or class of stock of a public company.
- Whistleblower Protection. Rewards for whistleblowers, civil cause of action to sue, federal crime to retaliate against them.
Two broad types of privileged communications? (2)
- Testimonial privileges - protected party can prevent from testifying (i.e. attorney-client)
- Work product privilege - typically prevents one party in a lawsuit from learning the other side’s attorney’s strategies for litigation
Accountant-client testimonial privilege (3)
- not recognized by federal courts
- state courts do not recognize a common law accountant-client testimonial privilege
- approx. 15 states have recognized it statutorily
Work product privilege and “Lawyer’s Umbrella”
Work product privilege is protected if an accountant is working with a lawyer, because of the lawyer’s protection
Tax Practitioners’ Privilege (Section 7525 of IRC) (4)
Modest testimonial privilege to clients of all tax advisers. Exceptions:
- criminal matters
- matters not before IRS/fed courts
- tax advice on state/local matters
- written advice in connection with promotion of a tax shelter
Confidential Communications (5)
CPA may not disclose confidential info except when:
- GAAP calls for disclosure
- an enforceable subpoena or summons has been issued
- an ethical examination is being conducted
- a peer review requires disclosure
- disclosure to other firm members on a “need to know” basis
Violation of Confidentiality
grounds for a civil malpractice lawsuit by a client
Generally Accepted Privacy Principles (10)
- Management - assign accountability for privacy policy and procedure
- Notice - provide notice to clients
- Choice/Consent - describe choices and obtain consent
- Collection - collect info only for purposes identified above
- Use, retention, disposal
- Access for review/update by client
- Disclosure to 3rd parties only for purposes identified in notice and only with consent
- Security - protect info against unauthorized access
- Quality - maintain accurate, complete, relevant personal info
- Monitor/Enforce - must have procedures to address privacy-related inquiries, complaints, disputes
