Ethics, Professional Responsibilities and Federal Tax Procedures Flashcards
What contains the IRS’s rules of practice governing CPAs and others who practice before the agency?
Circular 230
A violation of Circular 230 results in what…
Censure, Fine, Suspension, and/or Disbarment from practice before the IRS
Who may practice before the IRS?
Attorneys, CPAs, Enrolled Agents, Enrolled Actuaries, and Enrolled Retirement Plan Agents
Define “practice” before the IRS?
Matters connected with a presentation to the IRS or matters related to a taxpayer’s rights, privileges, or liabilities under laws or regulations under the IRS
What are “presentations” before the IRS?
- Preparing documents
- Filing documents
- Corresponding and communicating with the IRS
- Rendering written advice with regard to transactions
having a potential for tax avoidance or evasion - Representing a client at conferences, hearings, and
meetings
True or False:
A CPA can charge a contingent fee
False, CPAs can’t charge contingent fees.
What are the exceptions for a contingent fee to be charged to a client by the CPA?
- Services rendered in connection with an IRS
examination or challenge to either (i) an original tax
return or (ii) an amended or claim for a refund - Where a claim for refund is filed solely in connection
with determination of statutory interest or penalties - When the accountant is representing the client in
judicial proceedings
True or False:
Can a CPA hold a client’s records?
False if the client needs the records to comply with federal tax obligations.
When can a CPA represent a client if there is a conflict of interests?
- Reasonably believe that they can provide competent
and diligent representation to the client; - The representation is not prohibited by law; and
- The affected client gives informed consent in writing.
Consent must be held in record for 3 years.
What are the Tax Return Standards on a tax position?
- Lacks a reasonable basis
- Unreasonable position defined by IRC
- Willful attempt to understate tax liability or reckless
/intentional disregard of the IRC rules
Define a “Tax Return Preparer”?
“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”
What are the licensing requirements to be a CPA?
- Education: BA + 30 units, Profession ethics course,
and CPE - Examination: pass the Uniform CPA exam
- Experience: 1 yr of experience/2,000 work hours in
accounting, attest, financial advisory, tax, or
consulting areas
True or False:
A accountant must have a CPA to do attest related engagements.
True
When does an accountant not need a CPA to do certain engagements?
- Preparation of tax returns
- Management advisory services (consulting)
- Preparing financial statements without issuing a
report thereon
When does the IRC impose a 20% penalty (Section 6662) for various types of underpayments?
- Underpayments due to negligence or disregard of
rules - Any substantial understatement of income tax
When is an item of “substantial understatement” reduced?
- Disclosure of relevant facts
- Reasonable basis of tax position (≥20% chance of
being sustained)
How much of a % must an undisclosed position must be supported?
40%, Must have substantial authority
What is the Reasonable Cause and Good Faith Defense (Section 6664)?
No Section 6662 penalty is imposed if (a) there was “reasonable cause” for the underpayment and (b) the taxpayer acted with “good faith.”
What are the IRC Section 6651 penalties for late filing or failure to file?
- Penalty for late filing is 5% of the net tax due per
month (up to 25% of unpaid taxes).
2. Penalty for failure to file is fraudulent, then it a is 15%
per month (up to 75% of unpaid taxes).
What is the penalty for late payment of tax?
Penalty is 0.5% of the net tax due per month (up to 25%).
What is the penalty for Understatement Penalties as a result of negligence or disregard of rules/regulations?
20%
What is the a Substantial Understatement of Income Tax?
- For individuals, a “substantial understatement” is
one that exceeds the greater of: 10% of tax or $5,000 - For non–Subchapter S corporations, a “substantial
understatement” is one that exceeds the lesser of:
10% of the tax (or, if greater, $10,000) or $10 million
Tax Positions
- Undisclosed position—“Substantial authority” (≥40%
chance) - Disclosed position—“Reasonable basis” (≥ 20%
chance) - Tax shelter position—“More likely than not” (>50%
chance)
When must a taxpayer file an income tax return?
All taxpayers who have income in excess of a predetermined limit must file an income tax return.
True or False:
Taxpayers must also file a return if net self-employment income exceeds $400 during the tax year.
True
Penalties are imposed on taxpayers under four circumstances. What are they?
- Failure to file a required tax return
- Underpayment of tax
- Failure to pay tax (delinquency)
- Files an inaccurate tax return
What is the nonfiling penalty?
- Penalty for late filing is 5% per month of the tax due
with the return - The maximum penalty is 25% of the tax due, and the
minimum penalty (due if tax is not paid within 60
days of the due date) is the lesser of $210 (2017) or
the amount of the tax due. If the minimum tax
applies and is greater than the maximum tax, then
the minimum tax must be paid. - If the failure to file is fraudulent (intentional), the
penalty is increased to 15% per month up to a
maximum of 75% of the tax due with the return.
When are the required tax payments for an individual?
Taxpayers must make estimated payments (on the 15th of April, June, September, and January) if the amount of tax owed is at least $1,000 after subtracting withholding and credits.
When is there no penalty for an underpayment of taxes for an individual taxpayer?
- No penalty is imposed if the tax due with the return
is less than $1,000. - No penalty is imposed if the tax payments during
the year were:
At least 90% of current year taxes, or
100% of last year’s taxes. If the taxpayer’s AGI
exceeds $150,000, then tax payments during the
year must be at least 110% of last year’s taxes. - The penalty can also be avoided if the annualization
exception is met. For this exception the actual
income for each quarter is computed, and then each
estimated tax payment is based on that income
computation.
When is there no penalty for an underpayment of taxes for a corporation?
- There is no estimated tax underpayment penalty if
the payments are at least equal to the lower of:
100% of current year’s tax, or
100% of the preceding year’s tax.
The penalty can also be avoided if the annualization
exception is met. - A corporation with $1 million or more of taxable
income in any of its three preceding tax years can
use the preceding year’s tax exception only for its
first installment. The other installments must be
based on the current year’s tax to avoid penalty. - If a taxpayer had a net operating loss in the previous
tax year, the previous year’s tax liability exception
cannot be used to avoid any underpayment penalty.
What is the penalty for nonpayment of taxes?
Any tax due must be paid at the time of filing, or else a penalty of 0.5% of the underpayment is imposed per month or portion thereof (up to 25% in total).
If both the nonpayment penalty and the non-filing penalty are imposed, what happens?
the maximum penalty is limited to 5% of the tax due per month.
True or False:
Neither the nonfiling nor the nonpayment penalties are imposed if the taxpayer has a reasonable cause for failing to file or failing to pay.
True
What is the penalty for an inaccurate tax return as a result of negligence?
A penalty of 20% of the tax due to the inaccuracy is imposed if the inaccurate position is due to negligence. The penalty is waived if the taxpayer had a reasonable basis for the position taken.
What is the penalty for inaccurate tax return as a result of taxpayer substantially understating the tax?
A penalty of 20% of the tax due to the inaccuracy is imposed if the taxpayer substantially understates the tax. This penalty is waived if there was substantial authority for the position taken, or if the position was adequately disclosed on the tax return.
Define substantial undestatement
For individuals, a substantial understatement results when the additional tax due exceeds the greater of $5,000 or 10% of the total tax on the return.
For corporations, a substantial understatement results when the understatement exceeds the lesser of 10% of the tax required to be shown on the return (or $10,000 if that is greater) or $10 million.
A penalty is imposed if there is a substantial or gross overstatement of the value or basis of any property. What are they?
The penalty is 20% of the tax understatement for a substantial misvaluation (amount is 150% more of correct amount) and 40% (amount is 400% more of correct amount) for a gross misvaluation.
For an inaccurate tax return, what is the penalty for fraud?
The penalty for fraud is 75% of underpayment and an addition of 50% of the interest due on the underpayment.
What is the tax prepare penalty for an unreasonable position?
must pay a penalty of the greater of $1,000 or 50% of the income derived by the preparer for preparing the return.
What is the tax prepare penalty for an unreasonable position and willful attempt to understate tax liability?
the penalty is the greater of $5,000 or 75% of the income earned by the tax preparer for preparing the return or claim.
What is the distinction between breach of contract and negligence?
A breach of contract (BOK) theory often has a longer statute of limitations (four or even six years) than does a negligence cause of action (two years, typically).
To win a breach of contract lawsuit, a plaintiff must prove the following four elements:
- Existence of enforceable contract
- Plaintiff client complied with contractual obligations
- Defendant accountant breached the contract
- Damages were caused by the breach.
In a civil case regarding breach of contract and negligence cases, burden of proof is…
the “preponderance of the evidence” standard, meaning that plaintiff need only establish that alleged facts are more likely true than not true (>50%).
What are the defenses to a breach of contract claims?
- Statute of Limitations
Oral contract, 2 yrs from breach
Written contract, 4 yrs from breach - Justifiable breach
- Substantial performance
What are the 4 elements to win a negligence malpractice case?
- Defendant accountant owed a duty of care to the
client plaintiff. - Defendant breached standard of care
- The breach proximately causes an injury.
- Plaintiff client suffers damages.
What are the defenses to a negligence malpractice case?
- Statute of Limitations, 2 yrs from knowing or should
have known the right to sue - Comparative negligence
The basic elements of fraud that the plaintiff must prove are….
1. Defendant accountant made a false representation of fact (or omitted to state a fact in the face of a duty to do so).
- The misrepresented (or omitted) fact was material.
- The defendant accountant knew or recklessly
disregarded the falsity. - Plaintiff’s reasonable reliance on the misstatement or
omission - The false statement (or omission) proximately caused
damages to the plaintiff.
Plaintiffs who can prove fraud can recover both:
- Compensatory damages
2. Punitive damages
In a fraud case, the burden of proof is on….
In most states, the burden of proof is raised slightly, requiring plaintiffs to prove their claims by “clear and convincing evidence,” often defined as evidence that is substantially more probable to be true than not and that gives rise to a firm belief as to its factuality in the mind of the trier of fact.”
What are the defenses to a fraud case?
Statute of Limitations, it is common to require plaintiffs to sue within four years of when they did or should have discovered the fraud.
True or False:
third parties sometimes may sue if they were intended beneficiaries of the contract.
True
Who are the intended beneficiaries that can sue for breach of contract?
- Creditor beneficiaries
2. Donee beneficiaries
True or False:
Incidental beneficiaries can sue for breach of contract
False
True or False:
In general, unless the engagement letter specifically states that a particular creditor or investor is to receive a copy of the audit report (or there is some other written acknowledgment by the auditor of the third party’s legitimate reliance on the report), such third parties will not be allowed to sue as third-party beneficiaries.
True
When is a CPA liable to a class of nonclients?
- The information being supplied to the client will be
given to, or is for the benefit and guidance of, this
limited class of third persons, and - The information will influence those third parties in a
specific transaction or type of transaction.
True or False:
A CPA who commits fraud is liable to all plaintiffs whom the CPA could reasonably foresee would be injured by the fraud.
True
True or False:
The federal courts have refused to recognize an accountant-client testimonial privilege.
True
True or False:
The state courts have refused to recognize a common law accountant-client testimonial privilege.
True
How does accountant-client privilege work?
- The privilege belongs to the client, not to the
accountant; - The privilege can be waived by the client, either
expressly or through voluntary and knowing
disclosure of the relevant information; - Waiver of the privilege as to part of the
communication is waiver as to all; and - The privilege applies only in state court, where state
procedural rules apply.
A CPA shall not disclose confidential information disclosed by clients, but they are 5 exceptions…
- GAAP calls for disclosure
- Enforceable subpoena has been issued
- Ethical examination
- Peer review
- Disclosure is to other firm members on a “need-to-
know” basis
