Ethics & Professional Responsibility

Question 1

More Likely Than Not Standard

Answer 1

> 50% Likelihood of a Tax Position Being Upheld by the Courts.

Question 2

Substantial Authority Standard

Answer 2

> 33% but < 50% Likelihood of a Tax Position Being Upheld by the Courts.

Question 3

Reasonable Basis Standard

Answer 3

> 20% Likelihood (Significantly higher than not frivolous or not patently improper).

Question 4

Tax Return Preparer (definition)

Answer 4

Any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any tax return required under the IRC or any claim of refund of tax imposed by the IRC. (Doesn’t have to be a CPA).

Question 5

Tax Practitioner

Answer 5

Attorneys, CPAs, Enrolled Agents, Enrolled Actuaries and Enrolled Retirement Plan Agents who practice before the IRS.

Question 6

The Tax Preparer Must do:

Answer 6

1) Provide a copy of the return to the client
2) Sign the tax return as the preparer
3) Furnish the preparer’s tax ID #
4) Retain records (IRC) 3 years following last day of return-Copy of the Return or listing of the name & ID of each taxpayer
5) File correct information returns
6) NEVER negotiate (endorse) a IRS refund check
7) Due diligence for Earned Inc Credit ($500 penalty!!!)
a) eligibility checklist
b) computation worksheet
c) make reasonable inquiries to taxpayer
d) record retention

Question 7

Exceptions to Duty of Confidentiality

Answer 7

1) Court Order = Subpoena have no choice
2) Allowable Uses = state & local tax returns, declaration of estimated tax.
3) Quality & Peer Reviews, Computer Processing, Administrative Orders, SEC Audit, GAAP/GAAS required disclosures.

Question 8

Preparing returns that understate tax liability

Answer 8

Although a tax preparer cannot willfully aid in understating tax liability, the preparer has no affirmative duty to check the veracity of the facts presented by the client, except for facts that appear implausible.

Question 9

Best Practices for Tax Practioners

Answer 9

1) Communicate the “Terms of Engagement”
2) Establish Facts & Arrive at Conclusions supported by the law and facts.
3) Advise client of importance of conclusions reached (ex-whether client will be able to avoid penalties).
4) Make sure all members, associates & employees of the firm follow procedures that that are consistent with the above.

Question 10

Covered Opinion (NOTE: MEMORIZE THESE-SO YOU KNOW WHAT IS EXCLUDED ADVICE, WHICH IS ANYTHING OTHER THAN A COVERED OPINION)

Answer 10

Can be written or electronic:

1) A Listed Transaction (Something the IRS has determined to be a tax avoidance transaction)
2) A Tax Shelter
3) A Reliance Opinion OR a Marketed Opinion, subject to conditions of confidentiality or subject to contractual protection. (A partnership, plan or other entity having as a significant purpose federal tax avoidance or evasion).

Question 11

Excluded Advice

Answer 11

Anything that is not a Covered Opinion (Above)

Question 12

PCAOB (Peek-A-Boo) & Sarbanes-Oxley Act of 2002

Answer 12

Public Company Accounting Oversight Board

It Has 5 members (2 CPA’s, 3 Non), Subject to oversight by the SEC and has the DUTY to:

1) register public accounting firms that audit SEC companies
2) establish rules relating to the prep. of audit reports
3) conduct inspections, investigations & disciplinary proceedings of public accounting firms

Question 13

Code of Ethics for Senior Financial Officers:

Answer 13

Issuers must disclose whether or not they have adopted a code of conduct for senior officers, and if not, why not.

Code Of Ethics standards promote:

1) Honest & Ethical Conduct
2) Full, Fair, Accurate & Timely Disclosures
3) Compliance with Laws & Regulations

Question 14

Earned Income Credit Requirmenets

Answer 14

1) Eligibility Checklist
2) Computation Worksheets
3) Make reasonable inquiries to client
4) Record retention

Question 15

State Board of Accountancy Unique Power

Answer 15

ONLY one who can give & revoke your license!!!

Question 16

State Board of Accountancy 3 Categories of Misconduct

Answer 16

1) Misconduct while performing accounting services
2) Misconduct outside the scope of accounting (intoxication drugs or alcohol that significantly impairs ability to perform accounting, insanity, etc.)
3) Criminal CONVICTION (commission of a felony, failure to file tax returns, crimes relating to the practice of accounting) Could even be a misdemeanor.

Question 17

Under SOX, Public Co’s must have an Audit Committee.

Audit Committee’s responsibilities are:

Answer 17

Directly responsible for public accounting firm employed
for the audit as it relates to:

1) Appointment
2) Compensation
3) Oversight of the work performed

Question 18

Audit Committee Members

Answer 18

Are to be members of the issuer’s Board of Directors but are otherwise independent (no officers, employees or consultants who are paid). Can be paid only in their capacity as a board member.

Question 19

At least 1 Audit Committee Member must be a “Financial Expert”

Answer 19

Financial Expert qualifies through education and past experience as a public accountant or past experience as a principal financial officer, comptroller or principal accounting officer OF THE ISSUER..

Knowledge of the financial expert should include:

1) understanding of GAAP
2) experience in preparation of or auditing of financial statements for comparable issuers
3) application of GAAP
4) experience with internal controls, and
5) understanding of audit committee functions.

Question 20

Financial Expert on Audit Committee is important because

Answer 20

They are the key resource for AC to resolve disputes - very important role.

Question 21

Financial reports of the issuers should disclose but not name the existence of

Answer 21

a financial expert on the audit committee OR the reason why the committee does not have a member that is a financial expert.

Question 22

SOX - Code of Ethics for Sr. Financial Officers

Answer 22

Issuers must disclose whether or not the issuer has adopted a code of conduct for Sr. officers. If no code - why??

Code:

1) Honest & ethical conduct (including handling conflicts of interest)
2) Full, fair, accurate & timely disclosures in periodic financial reports
3) Compliance with laws, rules & regulations.

Question 23

SOX Enhanced Financial Disclosures Include:

Answer 23

1)Disclosures in Periodic Reports
2)Conflict of Interest Provisions-No personal loans to the directors or executive officers (Unless it is a financial institution that is in the business of making loans)
3)Disclose all related party transactions (owners >= 10%
report how many shares they own, within 10 days after becoming an officer, director or more than 10% owner.
4)Management’s assessment of Internal Controls
5)Code of Ethics for Sr. Financial Officers
6)Disclose the existence of a Financial Expert on the audit committee
7)Enhanced review by SEC on a regular & systematic basis.

Question 24

Under SOX Auditors must retain audit documents (work papers) for how long?

Answer 24

7 years.

Question 25

Under SOX how often does Peek-A-Boo have to inspect registered public accounting firms?

Answer 25

If they do OVER 100 audits = annually

If they do 100 audits or les = once every 3 years.

Question 26

Under SOX, a registered public accounting firm can’t do anything else for an audit (issuer) except for:

Answer 26

Tax services are permissible IF pre-approved by the audit committee.

Question 27

Under SOX, the lead audit or coordinating partner and the reviewing partner must rotate off the audit how often?

Answer 27

Every 5 years.

Question 28

To avoid conflicts of interest, a registered company public accounting firm cannot perform an audit for a public company if one of the indicated officers of the company worked at the auditing firm within

Answer 28

a year before the audit.

Question 29

Order of Standards for probability you will prevail in court

Answer 29

1) More Likely Than Not: > 50% chance
2) Substantial Authority: > 33% but < 50% chance
3) Reasonable Basis: > 20% chance

Question 30

Audits - who is selected typically

Answer 30

IRS Uses Statistical Models (Discriminant Inventory function System or DIF) Criteria IS NOT disclosed but it appears to be:

1) Individuals with Gross Income > $100,000
2) Self-employed individuals with substantial business income and deductions
3) Cash businesses

Also:

1) Small # manually selected randomly
2) Prior Yr audit with substantial deficiency
3) Information return discrepancy (W-2s and 1099’s don’t match what’s reported on the return)
4) Itemized deductions exceed the established norms for their income level

Question 31

Tax Legislation Path

Answer 31

1) Begins in the House (House Ways & Means Committee)
2) Voted on & approved by the full House
3) Goes to the Senate Finance Committee.
4) Upon approval by the committee, it is voted on by the full Senate.(Normally not the same bill as the House)
5) Differences resolved by the Joint Conference Committee (Ways & Means Comm & Sen Fin Comm.)
6) Compromise bill is then produced & approved by BOTH House & Senate.
7) Goes to the President to Sign or Veto
8) If vetoed, can be overridden by a vote of 2/3 of both the House and the Senate.

Question 32

General Avoidance of Penalties IF:

Answer 32

1) Had reasonable cause to support the tax return position
2) Acted in good faith; and
3) did not have willful neglect.

Question 33

Requirements for a Covered Opinion

Answer 33

Can Reach or Not Reach a Conclusion but must state WHY in both cases.