Missed MCQ's Subunits 1 - 4 Aug 2023 Flashcards
A CPA must sign the preparer’s declaration on a federal income tax return
A. Only when the CPA can declare that a tax is based on information of which the CPA has personal knowledge.
B. Whenever the CPA prepares a tax return for others.
C. Only when the return is for an individual or corporation.
D. Only when the CPA prepares a tax return for compensation.
D. Only when the CPA prepares a tax return for compensation.
Treasury Regulations require preparers to sign all the returns they prepare and to include their identification numbers. However, a preparer is defined as a person who prepares (or employs persons to prepare) for compensation any tax return, amended return, or claim for refund of tax imposed by Subtitle A of the Internal Revenue Code (which covers income taxes on all entities).
Which of the following situations describes a disclosure of tax return information by a tax return preparer that would subject the preparer to a penalty?
A. After a client files for bankruptcy, the tax return preparer provides a copy of the last return filed to the court-appointed fiduciary without written permission.
B. A grandfather’s tax information is made available to his granddaughter to inform her that she will be claimed as a dependent on the grandfather’s return.
C. None of the answers are correct.
D. An employee of the tax return preparer makes corporate return information available to shareholders.
C. None of the answers are correct.
Disclosing tax information to a granddaughter is permissible provided there has not been a specific prohibition by the grandfather. This rule also applies to a corporation and its shareholders, and to a client who has filed for bankruptcy and a trustee.
To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?
A. Make reasonable inquiries if the taxpayer’s information is incomplete.
B. Review the accuracy of the taxpayer’s books and records.
C. Examine the taxpayer’s supporting documents.
D. Audit the taxpayer’s corresponding business operations.
A. Make reasonable inquiries if the taxpayer’s information is incomplete.
Which of the following is a tax return preparer according to the tax return preparer rules?
A. Person A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.
B. Person D, an attorney, regularly advises clients in arranging future business transactions to minimize income tax.
C. Person B, controller of Corporation X, prepares and files X’s corporate tax return.
D. Person C is a fiduciary and files returns for the trust.
A. Person A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.
A tax return preparer is any person who prepares for compensation, or employs one or more persons to prepare for compensation, any income tax return or claim for refund under Subtitle A.
Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?
A. The client’s records are to be destroyed upon submission of a tax return.
B. The practitioner does not need to return any client records that are necessary for the client to comply with the client’s federal tax obligations.
C. The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.
D. The practitioner may retain copies of the client’s records.
D. The practitioner may retain copies of the client’s records.
A practitioner must return client records on request, regardless of any fee dispute. However, the practitioner may retain copies of client records. In fact, a return preparer is required to retain a completed copy of each return or claim prepared for 3 years after the close of the return period.
Arnie is a Certified Public Accountant who prepares income tax returns for his clients. One of his clients submitted a list of expenses to be claimed on Schedule C of the tax return. Arnie qualifies as a return preparer and, as such, is required to comply with which one of the following conditions?
A. Arnie is required to independently verify the client’s information.
B. Arnie can ignore implications of information known by him.
C. Inquiry is not required if the information appears to be incorrect or incomplete.
D. Appropriate inquiries are required to determine whether the client has substantiation for travel and entertainment expenses.
D. Appropriate inquiries are required to determine whether the client has substantiation for travel and entertainment expenses.
A practitioner (i.e., a CPA) may rely on information provided by a client without further inquiry or verification. However, if the information so provided appears incorrect, incomplete, or inconsistent, the practitioner must make reasonable inquiries about the information. This requirement includes inquiry about unsubstantiated travel and entertainment expenses (Circular 230).
Which of the following acts, if any, constitute grounds for a tax preparer penalty?
A. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.
B. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.
C. Without the taxpayer expressly prohibiting it, the tax preparer used information from the taxpayer’s return in a related taxpayer’s return.
D. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information to a CPA firm conducting a peer review.
B. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.
A penalty is imposed on a tax return preparer if any part of an understatement of tax liability resulted from a willful attempt to understate the liability or from an intentional disregard of rules or regulations. A penalty for disclosure will not be imposed if client information is disclosed under a court order.
Which of the following is not a tax return preparer?
A. Someone who does not physically prepare a tax return but offers enough advice that completion of the return is largely a mechanical matter.
B. Someone who prepares a substantial portion of a return or claim for refund under Title 26.
C. Someone who prepares a return or claim for refund for his or her employer.
D. A firm who offers computer tax preparation services if the program makes substantive tax determinations.
C. Someone who prepares a return or claim for refund for his or her employer.
Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any tax return or claim for refund under Title 26. However, a person who prepares a return for his or her regular employer is disqualified as a tax return preparer.
Penalties may be imposed on a tax return preparer for an understatement of tax liability because of a position for which there is not a reasonable belief that there is substantial authority that the position will be sustained on its merits. But the penalties may be excused if
A. The preparer knew or should have known of the position.
B. There is reasonable cause and good faith.
C. The position was disclosed.
D. The understatement was unintentional.
B. There is reasonable cause and good faith.
Taking an undisclosed position without a reasonable belief that there is substantial authority that the position will be sustained on its merits results in a penalty. If the position is disclosed, its tax treatment must have a reasonable basis. The penalty does not apply if the preparer proves that (1) (s)he acted in good faith and (2) there is a reasonable cause for the understatement.
Which one of the following is considered disreputable conduct under Circular 230?
A. Being indicted of any felony under federal or state law which renders the practitioner unfit to practice before the Internal Revenue Service.
B. Having your motor vehicle license suspended as a result of numerous traffic violations.
C. Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.
D. Being indicted for any criminal offense under the revenue laws of the United States.
C. Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.
Which of the following situations could result in a preparer penalty assessed by the IRS?
A. Taxpayer tells the preparer that the taxpayer’s income is $40,000, whereas it is actually $60,000.
B. Preparer does not sign the tax return.
C. Preparer takes an aggressive but realistic tax position that results in a decrease of tax.
D. Preparer inadvertently transposes two digits on a return, and the error results in an understatement of income by $90.
B. Preparer does not sign the tax return.
A tax return preparer is required to sign the return or claim for refund after it has been completed and before it is presented to the taxpayer. A preparer penalty is generally assessed by the IRS when the preparer does not sign the tax return.
Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt From Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because
A. Returns for nonprofit organizations are exempt from the preparer rules.
B. The return does not contain a claim for a tax refund.
C. He is a member of the board of directors.
D. He is not compensated.
D. He is not compensated.
A tax return preparer is anyone who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or claim for refund under the IRC. If Louis is not compensated, he will not be considered a tax return preparer.
You are a CPA retained by the manager of a cooperative retirement village to prepare its tax returns. In performing the work, you discover that there are no invoices to support $25,000 of the manager’s claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?
A. Submit the expected tax return but omit the $25,000 of unsupported disbursements.
B. Obtain from the manager a written statement that you informed him or her of the missing invoices and his or her assurance that the disbursements are proper.
C. Include the unsupported disbursements in the tax return because you are not expected to obtain third-party verification.
D. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.
D. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.
Although the CPA need not audit the information, (s)he is responsible to take further action regarding information that is incorrect, incomplete, or otherwise unsatisfactory. Such action includes communication with the owners.
Which of the following individuals is acting as a tax return preparer under IRS regulations?
A. A CPA who prepares a substantial portion of a claim for refund of tax for a client.
B. A CPA who prepares a tax return for a taxpayer under the Volunteer Income Tax Assistance program.
C. An employee of the tax department of a corporation who prepares a tax return on behalf of the corporation’s wholly owned subsidiary.
D. An employee of the tax department of a corporation who prepares a claim for refund on behalf of the corporation’s parent company, which owns 100% of the corporation.
A. A CPA who prepares a substantial portion of a claim for refund of tax for a client.
A tax return preparer is anyone who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or claim for refund under the Internal Revenue Service Code.
If a CPA is engaged by an attorney to assist in the defense of a criminal tax fraud case involving the attorney’s client, information obtained by the CPA from the client after being engaged
A. Is not privileged because the matter involves a federal issue.
B. Will be deemed privileged communications provided that the CPA prepared the client’s tax return.
C. Will be deemed privileged communications under certain circumstances.
D. Is not privileged in jurisdictions that do not recognize an accountant-client privilege.
C. Will be deemed privileged communications under certain circumstances.
The attorney-client privilege protects the information. The defendant is the client of the attorney, and the CPA is the agent of the attorney. Thus, communications between the CPA and the defendant are, in effect, between the attorney and the defendant. However, if the defendant is the CPA’s client, their communications will not be privileged unless the case involves a state tax matter in a jurisdiction that has enacted a statute protecting accountant-client communications. The limited federal accountant-client privilege does not apply in criminal tax matters.
A CPA firm’s working papers related to its tax practice are least likely to be protected from disclosure
A. To a state CPA society peer review team.
B. Pursuant to a state court subpoena.
C. Pursuant to an IRS administrative subpoena seeking information about tax advice rendered by the CPA.
D. To the trial board of the AICPA.
B. Pursuant to a state court subpoena.
Most states do not recognize a privilege for accountant-client communications, including those documented in the accountant’s working papers. Thus, a properly issued state court subpoena must be complied with.
Which of the following elements, if present, would support a finding of common law constructive fraud on the part of a CPA who prepared a tax return?
A. Gross negligence.
B. Identified third-party users.
C. Ordinary negligence.
D. Scienter.
A. Gross negligence.
Scienter is a prerequisite to liability for fraud. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. For constructive fraud, the scienter requirement is met by proof of gross negligence (reckless disregard for the truth).
To which of the following parties may a CPA partnership provide working papers related to its tax practice, without being lawfully subpoenaed, without the client’s consent, or without taking precautions, such as obtaining a confidentiality agreement, to prevent inappropriate disclosure of client information?
A. The FASB.
B. A CPA conducting a review of the practice before purchasing a partnership interest in the firm.
C. The IRS.
D. Any surviving CPA partner(s) on the death of a partner.
D. Any surviving CPA partner(s) on the death of a partner.
Working papers may be disclosed to another CPA partner of the accounting firm without the client’s consent because such information has not been communicated to outsiders. A CPA partner of the accountant has a fiduciary obligation, as well as an obligation under the Code of Professional Conduct, to the client not to disclose confidential information without consent.
If a shareholder sues a CPA in state court for nonstatutory fraud based on false information contained in a tax return prepared by the CPA, which of the following, if present, would be the CPA’s best defense?
A. The contributory negligence of the client releases the CPA from liability.
B. The false information is immaterial.
C. The shareholder lacks privity to sue.
D. The CPA did not financially benefit from the alleged fraud.
B. The false information is immaterial.
The CPA’s best defense would be that the false information is immaterial.
The firm Meek & Co., CPAs, was engaged by Reed, the president of Sulk Corp, to prepare its federal and state tax returns by March 15, Year 2, for the fiscal year ended December 31, Year 1. Meek’s engagement and its fee of $20,000 were approved by Sulk’s board of directors. Meek did not deliver the returns until April 15, Year 2, because Sulk did not provide Meek with the necessary information to complete the service. Sulk refuses to pay Meek. If Meek sues Sulk, Meek will
A. Prevail based on the contract.
B. Lose, because it breached the contract.
C. Lose, because the March 15 deadline was a condition precedent to Sulk’s performance.
D. Prevail based on quasi-contract.
A. Prevail based on the contract.
Meek’s failure to meet the deadline did not result in a breach of contract. Rather, the failure of performance was caused by Sulk’s failure to supply Meek with the necessary information to complete the service. Every contract contains an implied promise each party will not interfere with the other party’s performance. Consequently, Meek can enforce the contract because Meek was not in breach.
An accountant engaged in tax practice before the IRS has a confidentiality privilege regarding communications with a client. This privilege applies
A. Only to advice on legal issues.
B. In state and federal courts.
C. Only if the IRS adjudicates the case.
D. In criminal tax matters.
A. Only to advice on legal issues.
A federal confidentiality privilege covers most tax advice provided to a current or prospective client by any individual (CPA, attorney, enrolled agent, or enrolled actuary) qualified under federal law to practice before the IRS. But the privilege applies only to advice on legal issues.
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?
A. Lack of scienter.
B. A disclaimer contained in the engagement letter.
C. Lack of privity.
D. Contributory negligence on the part of the client.
A. Lack of scienter.
Fraud consists of a material misrepresentation made with scienter and an intent to induce reliance. The misrepresentation also must have caused damage to a defendant who reasonably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. The CPA firm’s best defense is that the plaintiff failed to prove an element of the fraud claim, i.e., scienter.
A client suing a CPA for negligent preparation of a tax return in a state court must prove each of the following factors except
A. Breach of duty of care.
B. Proximate cause.
C. Reliance.
D. Injury.
C. Reliance.
A client suing an accountant for the unintentional tort of negligence must establish the following elements: (1) The accountant owed the client a duty, (2) the accountant breached this duty, (3) the accountant’s breach actually and proximately caused the client’s injury, and (4) the client suffered damages. Reasonable reliance on a misrepresentation is an element of fraud or of negligent misrepresentation.
Which of the following statements is true with respect to ownership, possession, or access to a CPA firm’s working papers related to its tax practice?
A. Working papers may never be obtained by third parties unless the client consents.
B. Working papers are not transferable to a purchaser of a CPA practice unless the client consents.
C. Working papers are subject to the privileged communication rule, which, in most jurisdictions, prevents any third-party access to the working papers.
D. Working papers are the client’s exclusive property.
B. Working papers are not transferable to a purchaser of a CPA practice unless the client consents.
Transferring working papers to a purchaser of a practice is communication of the information they contain and violates the AICPA’s Confidential Client Information Rule. However, this rule does not prohibit review of the CPA’s practice, including a review in conjunction with the purchase, sale, or merger of the practice, if appropriate precautions are taken. One means of protecting the client’s information is to enter into a written confidentiality agreement with the prospective purchaser.
A company engaged a CPA to perform an audit of the company’s financial statements for Year 2 in order to apply for a bank loan. After the bank made the loan, it was discovered that the company’s assets had been materially overstated. The overstatement was not discovered as part of the CPA’s audit procedures. If the company defaulted on the loan and the case occurred in a jurisdiction that follows the Restatement rule, then the CPA could have liability to which of the following?
A. The bank, but not the company.
B. The company, but not the bank.
C. Both the bank and the company.
D. Neither the bank nor the company.
C. Both the bank and the company.
Sumner is an accountant accused of negligence by a client. Which of the following defenses should Sumner argue?
A. Actual fraud was lacking.
B. Contributory negligence negates liability for a client’s losses.
C. The negligence was not the proximate cause of the client’s losses.
D. Scienter was lacking.
C. The negligence was not the proximate cause of the client’s losses.
Negligence includes any failure to make a reasonable attempt to either comply with the provisions of the Internal Revenue laws or exercise ordinary and reasonable care in the preparation of a return. A client must prove all four of the elements of negligence:
- The accountant owed the plaintiff a duty.
- The accountant breached this duty.
- The accountant’s breach actually and proximately caused harm to the plaintiff.
- The plaintiff incurred damages.
Therefore, Sumner should take the position that negligence was not the proximate cause of the client’s losses.
Ritz Corp. wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale and to prepare its state and federal income tax returns. Based on these documents, Ritz acquired Stale. Within 6 months, it was discovered that Stale’s revenues and taxable income had been grossly overstated. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that revenues and taxable income were overstated. Which of the following two common law causes of action provide Ritz with proper bases upon which Ritz will most likely prevail?
A. Negligence and fraud.
B. Negligence and breach of contract.
C. Gross negligence and breach of contract.
D. Negligence and gross negligence.
B. Negligence and breach of contract.
A CPA’s nonstatutory liability to a client can be based upon breach of contract, negligence, or fraud. A breach of contract occurs when an accountant fails to perform duties required under a contract. These duties can either be express or implied. All contracts carry the implied duty to perform in a nonnegligent manner. To prevail in an action for negligence, the client must prove that the CPA did not act with the same degree of skill and judgment possessed by accountants in the locality. In an action for fraud, the client must prove scienter (intent to deceive or a reckless disregard for the truth). Ritz most likely prevails in an action brought for negligence or breach of contract if Fein failed to perform with the knowledge, skill, and judgment commonly possessed by CPAs in the area.
Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Hark also took several tax return positions that were not likely to be sustained on the merits because they were not supported by substantial authority. Long’s management had told Hark that the audited statements and tax returns would be submitted to several banks to obtain financing. Relying on these documents, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the traditional common law doctrine, if Third sues Hark, Hark will
A. Win because Hark and Third were not in privity of contract.
B. Lose because Hark was negligent in performing the audit.
C. Win because Third was contributorily negligent in granting the loan.
D. Lose because Hark knew that banks would be relying on the financial statements.
A. Win because Hark and Third were not in privity of contract.
An accountant is not liable to all persons who are damaged by his or her negligence. Lack of privity is still a defense in some states. For example, under the holding in the Ultramares case, an accountant is liable for negligence only if the plaintiff was in privity of contract with the accountant or a primary beneficiary of the engagement. Under the primary benefit test, the accountant must have been aware that (s)he was hired to produce a work product to be used and relied upon by a particular third party. Because Long’s management did not specifically name Third Bank to Hark, Hark will not be liable. However, most courts now extend a CPA’s liability to anyone in a class of foreseen (but not necessarily individually identified) third parties who the CPA knows will use the information.
William, a taxpayer, refuses to pay Sara, CPA, for the preparation of his tax return unless Sara changes the return to reduce William’s tax liability. The CPA
A. May withhold the documents she prepared from the client.
B. May not retain copies of client records necessary for compliance with tax obligations.
C. Is allowed to change the return.
D. Must return the documents she prepared regardless of payment of the fee.
A. May withhold the documents she prepared from the client.
A practitioner ordinarily must return client records on request, regardless of any fee dispute. However, if state law permits retention of records in a fee dispute, the practitioner may withhold documents (e.g., a tax return) prepared by the practitioner, pending payment of a fee with respect to the documents.
Mary Martinson is a CPA. One of her clients is suing her for common law negligence, alleging that she failed to follow federal tax law when preparing the current year’s tax return. Which of the following statements is true?
A. Martinson cannot incur tort liability if she has committed criminal tax fraud.
B. If Martinson failed to follow federal tax law, she would undoubtedly be found to have committed the tort of fraud.
C. Martinson is not bound by federal tax law unless she is a member of the AICPA.
D. Martinson’s failure to follow federal law results in tort liability.
D. Martinson’s failure to follow federal law results in tort liability.
A CPA is a professional who must adhere to professional standards of care in the performance of his or her work. A CPA must perform in accordance with that degree of accounting knowledge and skill expected of an ordinary reasonable person who is a CPA. Whether the CPA has met the required standard is partly determined by compliance with (1) generally accepted auditing standards (GAAS), (2) PCAOB standards in a public-company audit, (3) other applicable auditing standards, or (4) statutes that establish the standard of conduct for a reasonable person. Failure to follow such standards results in liability for damages proximately caused by his or her negligence.
A CPA qualified to practice before the IRS is assisting in the defense of a client in a proceeding in federal court. The plaintiff is the U.S. government. The federal accountant-client privilege
A. Applies to related state tax matters.
B. Does not apply if the testimony relates to a private civil matter.
C. Does not apply because the matter is not before the IRS.
D. Applies if the testimony relates to disclosures to another federal regulator.
B. Does not apply if the testimony relates to a private civil matter.
The privilege does not apply to (1) criminal tax matters, (2) private civil matters, (3) disclosures to other federal regulatory bodies, or (4) state and local tax matters.
A CPA quickly prepares the financial statements for WSA Co. without noticing that an asset was inadvertently overstated on the balance sheet by 10%. An investor who had purchased stock in WSA based on the financial statements, lost $10,000 as a result of the investment. The investor claims that WSA committed fraud. Which of the following is true concerning whether fraud was committed?
A. Fraud was not committed because the misstatement was due to negligence.
B. Fraud was committed because the reliance was placed on the statements by the investor.
C. Fraud was committed because the balance sheet is misstated.
D. Fraud was not committed because the investor’s damages are not material.
A. Fraud was not committed because the misstatement was due to negligence.
Common law fraud requires (1) a false representation of a material fact, (2) made with scienter, (3) upon which another person was intended to and reasonably did rely, (4) resulting in a detriment to the other person. Scienter is a state of mind that implies intentional wrongdoing. Because the misstatement was inadvertent, the scienter element is not satisfied and fraud was not committed.
Which of the following statements is correct regarding the liability of a CPA for services performed?
A. A CPA’s liability for fraud extends only to the client and no further.
B. A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances.
C. A CPA’s work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.
D. A CPA’s liability for negligence extends only to the client and no further.
C. A CPA’s work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.
A CPA has a duty to exercise reasonable care and diligence. This does not guarantee that the CPA’s work will be accurate.
The traditional nonstatutory rules regarding accountant’s liability to third parties for negligence
A. Have been substantially changed at both the federal and state levels.
B. Remain substantially unchanged since their inception.
C. Are of relatively minor importance to the accountant.
D. Were more stringent than the rules currently applicable.
A. Have been substantially changed at both the federal and state levels.
The traditional rules have been changed with the result that CPAs’ liability to third parties for negligence has been greatly increased. For example, under federal securities regulation, a CPA may be liable to any third party who purchases an initial issue of securities. At the state level, CPAs’ potential liability also has been increased. It now extends to (1) unknown third parties when the CPAs have been grossly negligent (have shown a reckless disregard for the truth) and (2) (in a majority of states) foreseen third parties (foreseen users and a foreseen class of users) when the CPAs have been ordinarily negligent.
The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant’s right to practice before it. What is a basis for suspension?
A. Being subject to a temporary restraining order regarding securities practice.
B. Conviction of any misdemeanor.
C. Intentional or unintentional violation of SEC regulations.
D. Conviction of a felony.
D. Conviction of a felony.
The SEC may suspend or permanently revoke the right to practice before the SEC, including the right to sign any document filed by a registrant, if the accountant (1) does not have the qualifications to represent others; (2) lacks character or integrity; (3) has engaged in unethical or unprofessional conduct; or (4) has willfully violated, or willfully aided and abetted the violation of, the federal securities laws or their rules and regulations. Suspension by the SEC also may result from (1) conviction of a felony, or a misdemeanor involving moral turpitude; (2) revocation or suspension of a license to practice; or (3) being permanently enjoined from violation of the federal securities acts.
A CPA qualified to practice before the IRS is assisting in the defense of a client in a proceeding in federal court. The plaintiff is the U.S. government. The federal accountant-client privilege
A. Does not apply because the matter is not before the IRS.
B Does not apply if the testimony relates to a private civil matter.
C. Applies to related state tax matters.
D/. Applies if the testimony relates to disclosures to another federal regulator.
B Does not apply if the testimony relates to a private civil matter.
The privilege does not apply to (1) criminal tax matters, (2) private civil matters, (3) disclosures to other federal regulatory bodies, or (4) state and local tax matters.
Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation’s head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent in their annual preparation of tax returns. The information provided by Davis for this purpose was incorrect on its face, but the CPAs made no inquiries. Under the circumstances, Walters & Whitlow will normally not be liable in a common law action for
A. Punitive damages.
B. Losses occurring prior to the time the fraudulent scheme should have been detected that could have been recovered had it been so detected.
C. Losses occurring after the time the fraudulent scheme should have been detected.
D. The fees charged for the years in question.
A. Punitive damages.
If the CPAs have merely been negligent, they will not be liable for punitive damages. Punitive damages are awarded only when the circumstances are extreme or aggravated.
A CPA firm acts with scienter in all the following circumstances except when the firm
A. Has actual knowledge of fraud.
B. Intentionally disregards the truth.
C. Negligently performs a professional service.
D. Intends to gain monetarily by concealing fraud.
C. Negligently performs a professional service.
Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. Negligence, however, requires no wrongful intent.
A married couple can file a joint return even if
A. The spouses have different accounting methods.
B. They were divorced before the end of the tax year.
C. Either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election.
D. The spouses have different tax years, provided that both spouses are alive at the end of the year.
A. The spouses have different accounting methods.
There is no provision disallowing spouses from filing a joint return because they have different accounting methods.
Emil Gow’s wife died in Year 1. Emil did not remarry and continued to maintain a home for himself and his dependent infant child during Year 2 and Year 3, providing full support for himself and his child. For Year 1, Emil properly filed a joint return. For Year 3, Emil’s filing status is
A. Single.
B. Qualifying surviving spouse.
C. Head of household.
D. Married filing joint return.
B. Qualifying surviving spouse.
Emil qualifies as a qualifying surviving spouse whose spouse died in either of the 2 preceding tax years, who has not remarried, and who maintains a household that constitutes a principal place of abode of a dependent who is a child or stepchild of the taxpayer.
Sam’s Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of Year 3 estimated tax payments that Sam can make?
A. $33,000
B. $50,000
C. $45,000
D. $30,000
A. $33,000
To avoid penalties, a taxpayer must pay the lesser of 100% (110% for taxpayers whose prior year’s AGI exceeds $150,000) of the prior year’s tax or 90% of the current year’s tax. Sam’s prior year’s AGI exceeds $150,000 (because Sam’s prior year’s taxable income was $175,000). Sam must pay 110% of the prior year’s tax, or $33,000.
Chris Baker’s adjusted gross income on her 2022 tax return was $160,000, which covered a 12-month period. For the 2023 tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of
A. Neither I nor II.
B. I only.
C. II only.
D. Either I or II.
D. Either I or II.
In general, a taxpayer can avoid underpayment penalties if (s)he pays estimated taxes equal to either 90% of the tax on the return for the current year or 100% of the tax liability of the prior year. However, since Baker’s AGI exceeded $150,000 on the prior year’s return, she must pay 110%, instead of 100%, of the prior year’s tax liability if she wants to qualify for the prior year safe harbor.
Which of the following, if any, are among the requirements to enable a taxpayer to be classified as a “qualifying surviving spouse”?
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
D. Neither I nor II.
Filing as a qualifying surviving spouse requires the individual’s spouse to have died during one of the previous 2 tax years. In addition, the survivor must maintain a household that is the principal place of residence for a dependent child. “Maintain” means the spouse furnishes over 50% of the costs of the household for the entire year.
For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
Food Consumed in the Home = Yes
Value of Services Rendered in the Home by the Taxpayer = No
The cost of maintaining a household for head of household status includes expenditures for the mutual benefit of the occupants, e.g., food consumed in the home, rent, or real estate taxes. Not included is the value of services rendered in the home by the taxpayer or the rental value of a home owned by the taxpayer.
Harold Thompson, a self-employed individual, had income transactions for Year 1 (duly reported on his return filed in April Year 2) as follows:
In March Year 5, Thompson discovers that he had inadvertently omitted some income on his Year 1 return. He retains Mann, CPA, to determine his position under the statute of limitations. Mann should advise Thompson that the 6-year statute of limitations would apply to his Year 1 return only if he omitted from gross income an amount in excess of
A. $20,000
B. $109,000
C. $29,000
D. $100,000
B. $109,000
The normal statute of limitations is 3 years after the return was filed. A 6-year statute of limitations applies if gross income omitted from the return exceeds 25% of gross income reported on the return. For a trade or business, gross income means the total of the amounts received from the sale of goods before deductions and cost of goods sold + Capital gains. (NOTE: There are other provisions in the tax laws where gross income includes a reduction for cost of goods sold.) The 6-year statute of limitations will apply if Thompson omitted from gross income an amount in excess of $109,000 [($400,000 + $36,000) × 25%].
To which of the following parties will a CPA be liable if the CPA fraudulently issues an unqualified opinion on a corporation’s materially misstated financial statements?
B. Corporate shareholders = Yes
Corporate bondholders = Yes
In some states, if the CPA has not contracted to perform for the third party, (s)he is not liable to that third party for negligence. Lack of privity is a defense. However, reckless departure from the standards of due care is treated as a form of constructive fraud and results in liability to foreseeable third parties that may be unknown to the CPA. Thus, corporate shareholders and corporate bondholders are foreseen and reasonably foreseeable third parties.
Roberta Warner and Sally Roger formed the Acme Corporation on October 1, 2023. On the same date Warner paid $75,000 cash to Acme for 750 shares of its common stock. Simultaneously, Roger received 100 shares of Acme’s common stock for services rendered. How much should Roger include as taxable income for 2023, and what will be the basis of her stock?
Taxable Income = $10,000
Basis of Stock = $10,000
The IRC provides that if property is received in exchange for the performance of services, the excess of the fair market value of such property over the amount paid for such property is included in gross income. Since Roger did not pay anything for the stock, the fair market value of the stock ($10,000) is included in her gross income as payment (revenue) for her services. The basis of property is its “tax cost basis,” the amount paid for the property ($0) increased by the amount which was included in income ($10,000). Therefore, Roger’s basis in the stock is her tax cost of $10,000.
During 2023, Adler had the following cash receipts:
What is the total amount that must be included in gross income on Adler’s 2023 income tax return?
A. $18,000
B. $19,900
C. $19,500
D. $18,400
C. $19,500
The IRC specifically includes wages and unemployment compensation as gross income. Furthermore, the IRC excludes from gross income interest on most obligations of states or political subdivisions of a state (e.g., municipal bonds).
Interest on state and local government obligations is specifically excluded from gross income.
Cassidy, an individual, reported the following items of income and expense during the current year (2023):
What is the amount of Cassidy’s adjusted gross income?
A. $50,000
B. $125,000
C. $115,000
D. $40,000
D. $40,000
The inheritance and proceeds for physical injury are excluded from gross income.
Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used by Barkley for 3 months and left vacant for the rest of the year. Expenses for the cabin were as follows.
How much real income (loss) is included in Barkley’s adjusted gross income?
A. $0
B. $(1,500)
C. $500
D. $(500)
A. $0
The IRC states that income from rental of a personal dwelling is excluded from income if rented for less than 15 days during the year. In addition, no deductions are allowed for rental use if rented for less than 15 days during the year.
Which payment(s) is(are) included in a recipient’s gross income?
A. Neither I nor II.
B. I only.
C. Both I and II.
D. II only.
C. Both I and II.
Payments made to graduate students in return for services performed, including teaching and research, must be included in gross income. Only payments that are used for required tuition, fees, books, supplies, or equipment are excluded from gross income.
Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year:
What is Randolph’s gross income?
A. $22,000
B. $32,000
C. $28,425
D. $32,425
B. $32,000
Wages, unemployment compensation, and fully taxable pension distributions are all included in gross income. Since Randolph always claims the standard deduction, he would not take the deduction for state taxes paid and would not have to include the refund in this year’s gross income.
Charles and Marcia are married cash-basis taxpayers. In 2023, they had interest income as follows:
What amount of interest income is taxable on Charles and Marcia’s 2023 joint income tax return?
A. $500
B. $1,100
C. $1,900
D. $2,900
C. $1,900
Interest income on most obligations of states or political subdivisions of a state (e.g., municipal bonds) is excluded from gross income.
Willie Smith was injured during the year and was not able to work due to his injury and the associated emotional distress. Willie received the following payments during the year:
Willie has paid the premiums for all of his policies and has not taken any deductions for the medical expenses. The total amount of compensation for injury that Willie may exclude from gross income is
A. $3,500
B. $17,500
C. $5,500
D. $12,500
D. $12,500
Gross income does not include benefits specified that might be received in the form of disability pay, health or accident insurance proceeds (even if the benefits are a substitute for lost income), workers’ compensation awards, or other damages for personal physical injury or physical sickness. Also excluded are damages received for emotional distress if an injury has its origin in a physical injury or physical sickness (regardless of whether the damages are received by a lawsuit or an agreement). However, punitive damages received are includible in gross income even if in connection with a physical injury or physical sickness. Thus, Willie may exclude $12,500 from gross income ($3,500 + $7,000 + $2,000).
During the current year, Hal Leff sustained a serious injury in the course of his employment. As a result of this injury, Hal received the following payments during the year:
The amount to be included in Hal’s gross income for the current year should be
A. $1,800
B. $0
C. $12,200
D. $8,000
D. $8,000
The IRC excludes from gross income compensation for personal physical injuries and physical sickness whether received as workers’ compensation benefits, accident or health insurance benefits, or as damages received by suit or agreement. The IRC exclusion does not apply to any punitive damages received by suit or agreement, even if in connection with a physical injury or physical sickness. Therefore, the $8,000 punitive damages should be included in Hal’s gross income.
Which of the following conditions must be present in a post-1984 but pre-2019 divorce agreement for a payment to qualify as deductible alimony?
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
C. Both I and II.
In order for payments to qualify as deductible alimony, they must meet all of the following requirements:
- Paid in cash
- Paid pursuant to a written divorce or separation instrument
- Not designated as other than alimony
- Terminated at death of recipient
- Not paid to a member of the same household
- Not paid to a spouse with whom the taxpayer is filing a joint return
George Black is single and files Form 1040 for 2023. He received the following income in 2023:
George also received Social Security benefits during 2023. Form SSA-1099 shows $5,980 in box 5, Net Benefits for 2023. How much of George’s Social Security is taxable?
A. $5,980
B. $4,700
C. $2,990
D. $6,980
C. $2,990
If the sum of the “modified” adjusted gross income plus one-half of Social Security benefits exceeds $25,000 but does not exceed $34,000, part of the Social Security benefits will be included in gross income. Modified adjusted gross income equals adjusted gross income plus tax-exempt interest. The includible portion of Social Security benefits is the lesser of one-half of the Social Security benefits or one-half of the excess as noted above. George would include $2,990 since it is less than one-half of the excess.
