Lesson 2-IRC Code and Regulations Related to Tax Return Preparers

Question 1

Who is a tax return preparer (TRP)?

Answer 1

People are TRPs if they:
Are paid to prepare, or retain employees to prepare,
A substantial portion of any federal tax return or refund claim.

Question 2

When are non-signing TRP’s not responsible for a “substantial portion” of a tax return?

Answer 2

Non signing TRP’s are not liable for a substantial portion of the return when the deduction they are advising on is:

• Less than $10,000, or
• Less than $400,000, which is also less than 20% of the gross income indicated on the return.

Question 3

Section 6695 punishes TRPs for?

Answer 3

1. Failure to furnish copy of return to taxpayer
2. Failure to sign return and show own identity
3. Failure to furnish identifying number to the IRS
4. Failure to keep a copy of the return
5. Failure to file correct information returns
6. Negotiation of check made out to the taxpayer
7. Failure to be diligent in determining eligibility for the earned income tax credit and the child tax credit

Question 4

What are the two types of TRP’s?

Answer 4

1. Signing TRPs are individual TRPs who bear “primary responsibility” for the overall accuracy of the return
2. Nonsigning TRPs are those other than the signing TRP who prepare all or a substantial portion of a return or claim for refund

Question 5

When does Section 6694 (A) of the IRC imposes civil penalties on TRPs?

Answer 5

It punishes understatement due to “unreasonable” positions

Question 6

When is a undisclosed position “unreasonable”?

Answer 6

-If there is no substantial authority (<40% chance of being sustained if challenged)

Question 7

When is a disclosed position “unreasonable”?

Answer 7

-If there is no reasonable basis for the position (<20% chance of it being sustained if challenged.)

Question 8

If a tax position relates to a tax shelter when is it deemed unreasonable?

Answer 8

-it is “unreasonable” unless it is more likely than not (MLTN) (>50% chance) that the position will be sustained.

Question 9

What is the penalty for violating 6695B, (willful or reckless understatements)?

Answer 9

-the greater of $5,000 or 75% of the income derived by the TRP with respect to the claim (per violation).

Question 10

Section 6700 punishes?

Answer 10

TRPs and others who promote abusive tax shelters when they:
Organize or participate in the sale of a shelter; and
Either: Knowingly or recklessly make a materially false statement that affects tax liability, or Engage in a gross overvaluation

Question 11

Section 7201 punishes tax evasion, what types of activities are included?

Answer 11

1. Failure to file a return
2. Falsifying income
3. Falsifying amounts that reduce taxable income

Question 12

To secure a 7201 Tax evasion charge the government must prove?

Answer 12

An affirmative act constituting an attempt to evade or defeat payment of a tax;
Willfulness; and Existence of a tax deficiency.

Question 13

7206 punishes fraud and false statements by TRPs, what are some acts that are deemed fraud?

Answer 13

1. Willfully making and subscribing to any document that the CPA does not believe to be true in every material aspect
2. Willfully aiding the preparation of any tax-related matter that is fraudulent
3. Removing or concealing a client’s property with intent to defeat taxes