Ethics, Professional Responsibilities and Federal Tax Procedures

Question 1

List the general requirements of Internal Revenue Service (IRS) practitioners as highlighted in Circular 230.

Answer 1

Furnishing requested information promptly

Exercising due diligence

Not unreasonably delaying IRS matters

Not providing assistance in practicing to persons disbarred or suspended by IRS

Question 2

Identify the elements of an impermissible fee as described in Circular 230.

Answer 2

Unconscionable

(With some exceptions) Contingent

Question 3

List the components of the Internal Revenue Service best practices as outlined in Circular 230.

Answer 3

Communicate clearly with client.

Establish facts.

Relate applicable law.

Advise client regarding consequences.

Question 4

What is Circular 230?

Answer 4

The Department of Treasury’s rules of practice that cover CPAs and others who practice before the Internal Revenue Service

Question 5

Define “tax return preparer (TRP).”

Answer 5

A person who is paid to prepare or retain employees to prepare a substantial portion of any federal tax return or refund claim

Question 6

True or false: A tax return preparer (TRP) can prepare tax forms as a fiduciary.

Answer 6

False. An individual who furnishes typing or other mechanical assistance, prepares forms for his or her employer, or prepares a form as a fiduciary is not classified as a tax preparer.

Question 7

List “unreasonable positions.”

Answer 7

No “substantial authority” (<40% chance) for position

No “reasonable basis” (<20% chance) for disclosed position

Not “more likely than not” (<50% chance) for tax shelter position

Question 8

What is a Signing TRP?

Answer 8

Individual TRPs who bear “primary responsibility” for the overall accuracy of the return or claim for refund.

Question 9

Who is a Nonsigning TRP?

Answer 9

Those other than the signing TRP who prepare all or a substantial portion of a return or claim for refund.

Question 10

What does the acronym JEEP stand for?

Answer 10

The AICPA’s Joint Ethics Enforcement Program.

Question 11

What are the requirements for obtaining a CPA license in most states?

Answer 11

Education (Bachelors + 30 hours of college credit) and CPE

Pass CPA Exam

Experience (2,000 hours)

Question 12

Who grants CPA licenses?

Answer 12

State boards of accountancy

Question 13

List the activities for which a CPA license is needed

Answer 13

Audit or other SAS engagement

SSARS review of F/S

SSAE examination of prospective F/S

Any engagement meeting PCAOB standards

Question 14

List the items that can cause an automatic expulsion from the AICPA.

Answer 14

Adverse judgment for:
Felony

Failure to file tax return

Filing fraudulent tax return

Aiding fraudulent tax return

Question 15

What is reasonable basis?

Answer 15

Standard for disclosed positions (≥ 20%)

Question 16

Form on which tax positions are disclosed

Answer 16

Form 8275 or 8275-R

Question 17

What is substantial authority?

Answer 17

Standard for undisclosed positions (≥ 40%)

Question 18

Two types of expenses that should be well documented

Answer 18

Charitable contributions

Business use of a car

Question 19

How long should old tax returns be kept?

Answer 19

Seven years

Question 20

A “substantial understatement” for a C corporation’s tax return exceeds:

Answer 20

The lesser of 10% of the tax (or, if greater, $10,000), or $10 million.

Question 21

A “substantial understatement” on an individual return exceeds:

Answer 21

The greater of 10% of the tax, or $5,000.

Question 22

Form used to disclose a tax position

Answer 22

Form 8275 or 8275-R.

Question 23

Penalty for late paying.

Answer 23

0.5% of net tax due per month (capped at 25%)

Question 24

What is the penalty for fraudulent understatement?

Answer 24

75% of understatement

Question 25

Penalty for late filing.

Answer 25

5% of net tax due per month (capped at 25%).

Question 26

What court of original jurisdiction does not require prepayment of the disputed tax?

Answer 26

U.S. Tax Court

Question 27

What types of regulations are specifically authorized by Congress?

Answer 27

Legislative regulations

Question 28

Which committee must tax bills begin with?

Answer 28

House Ways and Means Committee

Question 29

What types of regulations have the weight of law for only three years?

Answer 29

Temporary regulations

Question 30

What is the purpose of a 90-day letter?

Answer 30

The time that the taxpayer has to file a petition with the Tax Court once this letter is received

Question 31

What document describes the rules that one must meet to be eligible to practice before the Internal Revenue Service (IRS)?

Answer 31

Circular 230

Question 32

What is the purpose of tax Form 870-AD?

Answer 32

Provides the settlement of the appellate conference related to a tax dispute

Question 33

Describe the concept of offer in compromise.

Answer 33

Allows a taxpayer to settle a tax liability for less than the actual amount owed

Question 34

List the various nonfiling penalties a taxpayer may face.

Answer 34

5% per month of the tax due with the return

The maximum penalty is 25% of the tax due. The minimum penalty for returns not filed within 60 days of the due date is the lesser of $215 or the amount of the tax due.

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.

Question 35

List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed for individuals.

Answer 35

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. (Watch over $150,000 adjusted gross income exception.)

Question 36

Define “breach of contract.”

Answer 36

Failure to perform substantially as agreed under contract

Question 37

Define implied agreement.

Answer 37

To perform in a non-negligent manner, consistent with the standards of the profession.

Question 38

List the elements of recovery.

Answer 38

Duty, Breach, Damages, Proximate Cause.

Question 39

List the sources for which standards should be followed by a tax professional.

Answer 39

State and Federal statutes

Court decisions

Contract with client

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Auditing Standards (GAAS)

Customs of the Profession.

Question 40

Define “standard”.

Answer 40

That degree of judgment and skill possessed by a reasonable accountant under all the circumstances.

Question 41

Define “negligence”.

Answer 41

The performance of a contract in a careless manner. Negligence does not lead to punitive damages.

Question 42

Define “constructive fraud.”

Answer 42

Reckless disregard or gross negligence

Question 43

Define “actual fraud.”

Answer 43

Fraud is an intentional tort that is made with scienter or a knowledge to deceive.

Question 44

List the three primary approaches to accountant liability.

Answer 44

The Privity Approach of Ultramares v. Touche.

The Restatement “Limited Class” Approach.

The Reasonable Foreseeability Approach.

Question 45

Describe the Privity Approach of Ultra mares v. Touche to accountant liability.

Answer 45

The Accountant is liable only to those with whom s/he is in privity of contract.

Question 46

Describe the Reasonable Foreseeability Approach to accountant liability.

Answer 46

The Accountant is liable to whomever s/he can reasonably foresee may use the financial statements s/he certifies or prepares.

Question 47

What occurs when the breach of a contract is minor?

Answer 47

In common law, if a breach is only minor, the non-breaching party is not discharged from the terms and conditions of the contract, but is entitled to damages.

Question 48

List the two types of agreements.

Answer 48

Express or Implied.

Question 49

What types of damages can a tax client recover?

Answer 49

Compensatory damages, but not punitive

Question 50

What must be proven by a contracting party to establish the defense of fraud?

Answer 50

Misrepresentation or omission of fact

Materiality

Scienter

Reasonable reliance

Damages.

Question 51

Describe the Restatement “Limited Class” approach to accountant liability.

Answer 51

The accountant has third-party liability to a limited class of known or intended users of financial statements whose specific identity need not be known by the CPA.

Question 52

List the six conditions under which disclosure of client information is acceptable.

Answer 52

Client consents

GAAP calls for disclosure

Enforceable summons

Ethical examination

Peer review

To others in firm on “need to know” basis

Question 53

What does the acronym GAPP stand for?

Answer 53

Generally Accepted Privacy Principles.

Question 54

List some examples of when evidentiary privilege is not recognized.

Answer 54

State common law
Federal common law
Most states’ statutes

Question 55

List the two actions that are punishable conditions under §7216 of the Internal Revenue Code.

Answer 55

Disclosing any information obtained in preparation of a tax return.

Using information for any purpose other than to prepare a return.

Question 56

What does the Bank Secrecy Act require of taxpayers?

Answer 56

This act requires taxpayers to report foreign bank accounts.

Question 57

To what items do accountant-client privilege apply?

Answer 57

An accountant is prohibited from sharing work papers with anyone without the client’s permission (except in certain situations) and may not disclose information obtained during work performed in testimonials unless subpoenaed and relevant to a court case.

Question 58

List the exceptions to a practitioner’s privilege as outlined in the Internal Revenue Code §7525.

Answer 58

Criminal matters;

U.S. matters not before IRS or federal courts;

State or local tax matters;

Written tax shelter advice.