Part 1: 1 Ethics, Professional Responsibilities, and Federal Tax Procedures

Question 1

What are the four elements of fraud?

Answer 1

1. Material misrepresentation of fact/deliberate concealment
2. Reasonable reliance by the injured party (justifiable reliance)
3. Intent to mislead (scienter)
4. Damages or injury result

*MRID
M: Material misrepresentation
R: Reasonable reliance
I: Intent
D: Damages

Question 2

What are the four elements of constructive fraud?

Answer 2

1. Misrepresentation of material fact/deliberate concealment
2. Reckless disregard for the truth (making a statement without knowing if it is true or false)
3. Reasonable reliance by the injured party (justifiable reliance)
4. Damages or injury result

*MRRD 
M: Misrepresentation of material fact
R: Reckless disregard 
R: Reasonable reliance
D: Damages

Question 3

Fraud

Answer 3

Intentional misrepresentation of material fact with resultant harm to another party, intending to result in financial or personal gain

Question 4

Negligence

Answer 4

The failure to do what an ordinary, reasonable, prudent CPA would do in a similar circumstance

-CPA cannot be held liable for an honest error in judgement as long as they exercised reasonable care

Question 5

What must the plaintiff prove in order to establish negligence?

Answer 5

1. The defendant owed a legal duty
2. The defendant breached that duty
3. The action was the proximate cause of the resulting injury
4. The actions caused damage (loss)

"DIBO" 
D: Damage (loss)
I: Injury resulted
B: Breach of duty
O: Owed duty

Question 6

What is the maximum fine (criminal penalty) for an individual taxpayer for willful attempt to evade or defeat tax?

Answer 6

$100,000 and/or 5 years in prison

Question 7

What professional body has the authority to revoke a CPA’s license to practice public accounting?

Answer 7

State board of accountancy

-responsible for issuing or revoking CPA licenses

Question 8

Scienter

Answer 8

KNOWLEDGE of a falsity, KNOWINGLY acting with malice or evil intent

-Essential element of fraud that MUST be proven to impose liability

Question 9

When can a taxpayer’s return information be disclosed without penalty?

Answer 9

1. To file electronically
2. Peer review of the preparer
3. Administrative order by a state agency or state court order

Question 10

What is the penalty for preparers who fail to maintain the required records?

Answer 10

$50 per incident - up to $27,000 in a calendar year 2021

Question 11

What is the civil penalty on a taxpayer who claims withholding allowances that are based on false information?

Answer 11

$500 - civil

$1,000 - criminal “willful”

Question 12

What is the Ultramares court ruling?

Answer 12

Even if a CPA firm knows that the audited financial statements are to be used by a creditor to make lending decisions, the third party LACKS PRIVITY with the CPA firm and can NOT recover for negligence

Question 13

CPA may be held liable to third parties for what?

Answer 13

1. Fraud
2. Gross Negligence
3. Simple Negligence

Question 14

What can a CPA be held liable to clients in an audit, taxation, or consulting service engagement?

Answer 14

1. Fraud
2. Gross Negligence/Constructive Fraud
3. Negligence (Simple or ordinary)
4. Breach of contract