IRS Circular 230

Question 1

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

Answer 1

Unconscionable. With some exceptions- Contingent.

Question 2

List the types of covered opinions outlined in Circular 230.

Answer 2

Tax avoidance transactions
Transactions with principal purpose of avoiding tax
Four categories of transactions with significant purpose of avoiding tax.

Question 3

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

Answer 3

Furnishing requested information promptly
Exercising due diligence
Not unreasonably delaying IRS matters.

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

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

Answer 5

Communicate clearly with client
Establish facts
Relate applicable law
Advise client regarding consequences.

Question 6

What is the rationale for the American Institute of Certified Public Accountants’ Statements on Standards for Tax Services No. 2?

Answer 6

Omission tends to detract from the quality of the return; and
Member must sign the preparer’s declaration stating that the return is true, correct, and complete.

Question 7

List the grounds on which a CPA can omit an answer on a tax return.

Answer 7

Information not readily available and answer is not significant in terms of liability;
Genuine uncertainty as to meaning of the question in relation to particular return;
Answer is voluminous and return states that data will be supplied upon examination.

Question 8

What is the responsibility of a CPA regarding errors contained in a previously filed tax return?

Answer 8

Advise a client of errors contained in a previously filed tax return.

Question 9

Under what circumstances can a CPA recommend a tax position to a tax client?

Answer 9

There’s arealistic possibilityit will be sustained, or

A reasonable basis and it is disclosed.

Question 10

What is the tax preparer’s responsibility to inform the Internal Revenue Service (IRS) of an error in a prepared tax return?

Answer 10

Member need not, and may not, do so without client’s permission, except where required by law

Question 11

What does the American Institute of Certified Public Accountants’ Statements on Standards for Tax Services No. 2 state?

Answer 11

A member should make a reasonable effort to obtain from the taxpayer the information necessary to provide appropriate answers to all questions on a tax return before signing as preparer.

Question 12

When are use of estimates permitted on a tax return?

Answer 12

Obtaining exact figures would be excessively expensive or impractical;
The estimate is reasonable given known facts;
The estimates do not imply greater accuracy than exists.

Question 13

What things should a CPA never tell a tax client?

Answer 13

This isn’t right, but the IRS never checks.

This isn’t right, but we’ll use it to bargain the IRS down

Question 14

List the circumstances in which use of estimates on a tax return must be disclosed.

Answer 14

Taxpayer has died/is ill at time of filing;
Taxpayer has not received a K-1 for a flow-through entity at time of filing;
Litigation bearing on return is pending
Relevant records have been destroyed.

Question 15

What is a preparer’s obligation regarding verifying information provided by the tax payer?

Answer 15

A preparer should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the tax preparer. Further, a member should refer to the taxpayer’s returns for one or more prior years whenever feasible.

Question 16

In what situation are inquiries by the tax preparer appropriate?

Answer 16

Inquiries should be made if there is a need to determine that a specifically required condition by the Internal Revenue Code or other legislation, such as maintaining books and records or substantiating documentation, has been satisfied and to obtain information when the material furnished appears to be incorrect, incomplete, or inconsistent.

Question 17

In what situations is it impractical for a tax payer to obtain exact data for the preparation of their tax returns?

Answer 17

Numerous transactions involving very small amounts;

Records are missing/precise information unavailable.

Question 18

Reasonable basis =

Answer 18

> 20% chance.

Question 19

What does the American Institute of Certified Public Accountants’ Statements on Standards for Tax Services No. 3 state?

Answer 19

A member may in good faith relywithout verificationupon information furnished by client or third parties provided members’ obligations are met.

Question 20

Realistic possibility =

Answer 20

> 33% chance.

Question 21

When are written communications with the client preferable?

Answer 21

Preferable for complicated or important matters

Question 22

What format should a tax preparer’s advice to a client be given in?

Answer 22

No standard format required.

Question 23

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

Answer 23

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 24

Define “tax return preparer (TRP).”

Answer 24

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

Question 25

List “unreasonable positions.”

Answer 25

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 26

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

Answer 26

Education (Bachelors + 30 hours of college credit) and CPE
Pass CPA Exam
Experience (2,000 hours).

Question 27

Who grants CPA licenses?

Answer 27

State boards of accountancy.

Question 28

What does the acronym JEEP stand for?

Answer 28

The AICPA’s Joint Ethics Enforcement Program.

Question 29

List the activities for which a CPA license is needed.

Answer 29

Audit or other SAS engagement.
SSARS review of F/S.
SSAE examination of prospective F/S.
Any engagement meeting PCAOB standards.

Question 30

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

Answer 30

Adverse judgment for: 
Felony
Failure to file tax return
Filing fraudulent tax return
Aiding fraudulent tax return.

Question 31

Define “actual fraud.”

Answer 31

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

Question 32

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

Answer 32

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 33

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

Answer 33

Misrepresentation or omission of fact
Materiality
Scienter
Reasonable reliance
Damages.

Question 34

Define implied agreement.

Answer 34

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

Question 35

What types of damages can a tax client recover?

Answer 35

Compensatory damages, but not punitive.

Question 36

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

Answer 36

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

Question 37

Define “constructive fraud”.

Answer 37

Reckless disregard or gross negligence.

Question 38

Define “negligence”.

Answer 38

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

Question 39

Describe the Reasonable Foreseeability Approach to accountant liability.

Answer 39

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

Question 40

What occurs when the breach of a contract is minor?

Answer 40

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 41

List the three primary approaches to accountant liability.

Answer 41

The Privity Approach of Ultramares v. Touche.
The Restatement “Limited Class” Approach.
The Reasonable Foreseeability Approach.

Question 42

True or False: The Racketeer Influenced Corrupt Organizations Act provides for only criminal penalties.

Answer 42

False. The Act provides for extended criminal penalties and a civil cause of action for organized crime.

Question 43

What actions are considered a crime under the Sarbanes-Oxley Act with regard to the destruction of evidence?

Answer 43

Destruction of records
Willful failure to retain audit review work papers
Corrupt tampering with documents to be used in an official proceeding.

Question 44

True or false: Sarbanes-Oxley Section 404: Assessment of internal control supplements the Foreign Corrupt Practices Act’s internal accounting controls with internal financial controls.

Answer 44

True - it supplements FCPA’s Internal Accounting Controls with Internal Financial Controls.

Question 45

What is the purpose of the Racketeer Influenced Corrupt Organizations Act?

Answer 45

To prevent organized crime’s infiltration into legitimate business.

Question 46

Describe the condition that must exist for the attachment of mail or wire fraud liability

Answer 46

Use of mail or wires must be an essential part of the fraudulent scheme for liability to attach.

Question 47

List the activities that are punishable under the Sarbanes-Oxley Act

Answer 47

Failure to retain audit records for seven years.
Destruction of records in federal matter.
Corrupt tampering with documents.

Question 48

Describe the Foreign Corrupt Practices Act.

Answer 48

A United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials.

Question 49

What is the focus of Internal Accounting Controls?

Answer 49

These controls focus on Asset Accountability.

Question 50

List the two federal fraud provisions under which accountants can be held criminally liable.

Answer 50

Mail fraud and wire fraud.

Question 51

Describe the Sarbanes-Oxley federal securities crime provision.

Answer 51

Whoever knowingly executes, or attempts to execute, a scheme or artifice–(1) to defraud any person in connection with any security [of a public company]; or (2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security of an issuer [of a public company]…shall be fined under this title, or imprisoned not more than 25 years, or both.

Question 52

Describe the Racketeer Influenced Corrupt Organizations Act.

Answer 52

Commonly referred to as the RICO Act, the Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering, and it allows for the leaders of a syndicate to be tried for the crimes which they ordered others to do or assisted them, closing a perceived loophole that allowed someone who told a man to, for example, murder, to be exempt from the trial because they did not actually do it.

Question 53

List the four elements of a violation of the Racketeer Influenced Corrupt Organizations Act as outlined in Section 1962(c) of the Act.

Answer 53

A violation of Section 1962(c), requires

(1) conduct
(2) of an enterprise
(3) through a pattern
(4) of racketeering activity.

Question 54

Describe the whistleblower protection under the Sarbanes-Oxley Act.

Answer 54

The act punishes those who retaliate against whistleblowers that lawfully provided information to their supervisors or the federal government regarding conduct believed to be in violation of the securities law.

Question 55

To what items do accountant-client privilege apply?

Answer 55

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 56

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

Answer 56

Disclosing any information obtained in preparation of a tax return.
Using information for any purpose other than to prepare a return.

Question 57

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

Answer 57

Client consents;
GAAP calls for disclosure;
Enforceable summons;
Ethical examination;
Peer review;
To others in firm on "need to know" basis.

Question 58

List some examples of when evidentiary privilege is not recognized

Answer 58

State common law;
Federal common law;
Most states’ statutes.

Question 59

What does the Bank Secrecy Act require of taxpayers?

Answer 59

This Act requires taxpayers to report foreign bank accounts.

Question 60

What does the acronym GAPP stand for?

Answer 60

Generally Accepted Privacy Principles.

Question 61

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

Answer 61

Criminal matters;
U.S. matters not before IRS or federal courts;
State or local tax matters;
Written tax shelter advice.