Ethics, Responsibilities, Procedures (10-20%)

Question 1

What is the regulations governing an accountant practicing before the IRS?

Answer 1

Treasury Department’s Circular 230

Question 2

Who can practice before the IRS?

Answer 2

• Attorneys
• CPAs
• Enrolled Agents (EA’s)

Question 3

What are the 3 circumstances a contingent fee can be charged by CPA?

Answer 3

1) Services rendered dealing with IRS examination/challenge to an original/amended return or claim of refund
2) When claiming a refund solely for statutory interest/penalties previously assessed by IRS
3) If CPA is representing client in judicial proceedings dealing with IRS

Question 4

What is definition or Tax Return Preparer (TRP)?

Answer 4

• prepares for compensation (federal income tax, estate, gift)
• all or substantial portion of return of tax/claim for refund under IRC

Question 5

What is penalty for unreasonably understating taxpayer’s tax liability?

Answer 5

greater of $1,000 or 50% of the income derived by the TRP

Question 6

What is penalty for understatement due to willful/reckless conduct?

Answer 6

greater of $5,000 or 75% of the income derived by the TRP

Question 7

What types of penalties include a $50 penalty for each instance?

Answer 7

• failing to provide client with a copy of the tax return
• failing to sign a tax return
• failing to provide PTIN on tax return
• failing to retain a copy of tax return
• failing to file correct information tax return

Question 8

What is penalty for failing to be diligent in determining eligibility for earned income credit?

Answer 8

$545 penalty for each instance

Question 9

What is penalty for promoting abusive tax shelters?

Answer 9

$1,000 for each case in which such a shelter was planned/arranged

Question 10

What is penalty for aiding/abetting understatement of tax liability?

Answer 10

$1,000 penalty for each instance, or a $10,000 penalty if related to a Corporation

Question 11

What is penalty for unauthorized disclosure of information by a TRP?

Answer 11

$250 penalty for each instance, up to a maximum of $10,000/calendar year. This is also a misdemeanor , and upon conviction a penalty of $1,000 and imprisonment up to 1 year.

If made in connection with a crime relating to another’s TP’s identity, penalty increases to $1,000 for each instance, up to maximum of $50,000/calendar year.

Question 12

What are the exemptions to disclosing tax return information?

Answer 12

• related to court order (subpoena/summons)
• part of quality/peer review
• to another party with the client’s express consent
• GAAP requires disclosure
• ethics review
• disclosure to another firm member if pertinent to the engagement

Question 13

What is penalty for fraud/false statements?

Answer 13

This is a felony, and upon conviction a penalty of not more than $100,000 and possibly imprisonment for not more than 3 years, or both.

Question 14

What is penalty for fraudulent returns/statements?

Answer 14

This is a misdemeanor, and upon conviction a fine of not more than $10,000 and possibly imprisonment of not more than 1 year.

Question 15

What are requirements to becoming a CPA?

Answer 15

• 150 hours college education (most states require master’s degree)
• state specific ethics course
• ongoing CPE
• passing CPA exams
• 2,000 hours of professional experience

Question 16

What are ways one’s CPA license can be revoked?

Answer 16

• fraud in obtaining license
• failing to properly renew licenses
• right to practice is revoked before a federal/state agency
• violation of professional standards
• conviction of a felony/crime involving dishonesty
• dishonesty, fraud, gross negligence while performing services for clients
• failing to file own tax returns

Question 17

How long does the IRS have after a tax return is filed to impose additional taxes?

Answer 17

3 years from later of,

1) date return was filed,
2) date return was due

If gross income omitted was more than 25% of gross income claimed on tax return, statute of limitations is 6 years.

If there was fraud involved in the tax return, no time limitation on the IRS assessing additional taxes/penalties.

Question 18

How does an IRS agent report their audit findings once an audit is complete?

Answer 18

Income Tax Examination Changes Report

Question 19

What does the IRS agent issue when an agreement was reached on an audit negotiation process?

Answer 19

Revenue Agent’s Report

taxpayer will sign, taxpayer cannot pursue relief through appeals process, IRS cannot come back later w/additional judgements regarding items in this report

Question 20

What happens if the IRS agent and taxpayer cannot come to an agreement on an audit negotiation process?

Answer 20

• will receive 30-day notice, with copy of Revenue Agent’s Report (has 30 days to appeal decision, not required to respond)
• will receive 90-day notice
• if taxpayer wants to appeal, file a petition to request an appellate conference w/the US Tax Court (IRS does not have to grant)
• if agreement is reached during appeals process, audit process is over
• if not petition filed after 90 days, findings of audit are binding, IRS will move to collect amounts owed (only recourse after this is through US District Court or US Claims Court, but payment must be paid first)

Question 21

What are the different levels of what a reasonable position means according to Statements on Standards for Tax Services (SSTS’s)?

Answer 21

• REASONABLE BASIS - CPA did their research and concluded there is a 20-33% chance IRS would support their position. Needs to include disclosure of position.
• REALISTIC POSSIBILITY - position would be 33%+
• SUBSTANTIAL AUTHORITY - at least 40% chance (Congress is overriding authority if a Federal tax issue)

Question 22

What are non-filing penalties to a taxpayer?

Answer 22

5%/month of tax due, up to 25% of tax due. Minimum penalty if return is filed more than 60 days late: lesser of $435 or 100% of unpaid tax (if no taxes due, no penalties apply).

If deemed fraudulent, penalty increases to 15%, up to maximum of 75% of unpaid taxes.

Question 23

What are non-payment or late-payment penalties to a taxpayer?

Answer 23

interest starts to accrue immediately.

late payment penalty is 0.5% per month, up to maximum of 25% of taxes owed.

Question 24

What are estimated tax payments and when should they be applied?

Answer 24

taxes are paid through withholding taxes and/or estimated tax payments.

if amount of tax owed will be more than $1,000, then taxpayer must make estimated tax payments.

no penalty imposed if tax payment during the year were at least 90% of CY’s taxes or 100% of LY’s taxes. If AGI > $150,000, tax payments during the year must be 110% of LY’s taxes.

Question 25

What types of penalties include a 20% of tax due?

Answer 25

• inaccurate tax position due to negligence (waived if reasonable basis for position)
• substantially understating tax due (waived if substantial authority for taking position, or if was appropriately disclosed on tax return)

if fraud involved, 75% of tax due penalty

Question 26

What is considered a substantial understatement?

Answer 26

individuals - larger of,

1) 10% of correct tax amount,
2) $5,000

corporations - lesser of,

1) 10% of correct tax amount (or a flat $10,000 if 10% is larger),
2) $10 million

Question 27

How long do you have to file an amended tax return?

Answer 27

3 years after filing date of original return, or 2 years after payment of tax related to the return, whichever is later.

Question 28

What are the penalties for filing a frivolous tax return?

Answer 28

$5,000, if MFJ, $5,000 each.

Question 29

What is the hierarchy of authority for determining tax positions/tax planning?

Answer 29

1) US Constitution (Congress)
2) IRS’s Internal Revenue Code (IRC) Statutes
3) US Treasury Regulations
4) Judicial Authority (US Supreme Court, US Circuit Court of Appeals, US District Court, US Tax Court, US Court of Federal Claims)
5) IRS Positions (Revenue Rulings, Revenue Procedures, Private Letter Rulings/Determination Letters, IRS Forms/Publications/FAQs)

*Main Source = IRC

Question 30

What is considered a tort action?

Answer 30

Client claims negligence against CPA if work was performed, but contained errors/not done professionally.

Client must prove:

• duty of care
• breach of duty
• losses
• causation (direct cause of loss)

If CPA defends and proves otherwise, client may be accused of contributory negligence.

Question 31

When does constructive fraud occur?

Answer 31

• false misrepresentation of material fact
• reckless disregard for the truth
• reasonable reliance by the injured party
• injury
• fiduciary relationship between the parties

intent (scienter) does not need to be proven as with actual fraud