Professional Responsibilities & Federal Tax Procedures Flashcards
Can tax practitioner charge contingent fees?
Circular 230 provides that practitioners are prohibited from charging an unconscionable fee and are only allowed to charge a contingent fee in certain circumstances. One situation in which a contingent fee is allowed is for a claim solely for a refund of interest and/or penalties assessed by the IRS but not for a claim for any refund of income tax paid to the IRS.
When will a CPA result in incurring an IRS penalty?
CPA will result in incurring an IRS penalty in the following:
- CPA did not sign the client’s tax return as preparer.
- CPA failing, without reasonable cause, to provide the client with a copy of an income tax return
- CPA negotiating a client’s tax refund check when CPA prepared the tax return
- CPA’s failure to furnish the tax preparer’s tax identification number with a tax return prepared for a taxpayer-client
- CPA’s failure to keep a copy of the taxpayer’s client tax return for the period ending three years after the close of the return period
What is the penalty fee if the tax preparer failed to sign the tax return?
Failure to sign the tax return is penalized for:
-$60 for each failure of a preparer to sign a tax return;
- maximum penalty of $31,500 per calendar year (2024)
Does the CPA need to examine the supporting documents to verify the information provided by the taxpayer?
In preparing or signing a return, a CPA may in good faith rely without verification upon information furnished by the client or by third parties.
A tax preparer need not examine all underlying documents to assure that the client is properly representing expenses.
What are the due diligence requirements for the earned income credit?
The due diligence requirements for the earned income credit address eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer.
The penalty for failure to comply with the IRS’ “due diligence” requirements with respect to determining a client’s eligibility for the earned income credit is a penalty of $635 (2024) for each such failure.
The penalty for failure to be diligent will not apply if the tax return preparer can demonstrate that the preparer’s normal office procedures were reasonably designed and routinely followed to ensure due diligence compliance and the failure to meet the due diligence requirements was isolated and inadvertent. Both aspects are necessary.
What are the powers of the State Boards of Accountancy?
State boards of accountancy - have the sole power to:
- license CPAs
- sole responsibility for determining the CPE requirements for CPA practicing in their states
- has authority to suspend or revoke a CPA’s license to practice public accounting
What does AICPA determine?
AICPA determines the following:
- technical content of the Uniform CPA examination
- passing score of the Uniform CPA exemption
- structure of the Uniform CPA exam
What are the scenarios that the membership in the AICPA can be suspended or terminated without a hearing for certain offenses?
Membership in the AICPA can be suspended or terminated without a hearing for certain offenses. These offenses include but are not limited to:
(1) proof of conviction of a crime punishable by imprisonment for more than one year,
(2) proof of conviction for willful failure to file any income tax return,
(3) proof of conviction for filing a false or fraudulent income tax return or aiding in the preparation of a false or fraudulent income tax return of a client.
How do you determine if there would be a penalty for underpayment of estimated taxes for corporations?
For a NOT large corporation (taxable income is less than $1,000,000 in any of the three preceding tax years), the required annual payment is the lesser of:
(1) 100% of the current year tax, or
(2) 100% of the prior year tax (as long as the prior year tax is not zero)
For a large corporation (taxable income is $1,000,000 or more in any of the three preceding tax years), the required annual payment is:
(1) 100% of the current year tax.
What is failure-to-file penalty?
- The extension was filed TIMELY and the return was filed during the extension period. It was not filed late, so there is NO failure-to-file penalty.
- Penalty Rate - The penalty is 5% of the amount of tax due for each month (or partial month) the return is late, up to a maximum of 25% of unpaid taxes
- Minimum Penalty - if the return is more than 60 days late, the minimum penalty increases to the lesser of $510 (2024) or 100% of the tax due
- if no tax is due, then there is no failure-to-file penalty
- Combined Penalty - if both he failure-to-file penalty and the failure-to-pay penalty are due, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty
- The penalty for failure to file a partnership or S corporation tax return is $245 (2024) for each month or partial month (up to a maximum of 12 months) the return is late
(or required information is missing) times the number of persons who are partners in the partnership at any time during the year
What is failure-to pay penalty?
Any payment made after the initial due date of the return is subject to the failure-to-pay penalty.
Failure-to-pay penalty is 0.5% of each month or fraction of a month up to a maximum aggregate failure-to-file and failure-to-pay penalties of 25% of unpaid tax.
- there is NO penalty if at least 90% of the tax is paid in by the unextended due date, and the balance is paid by the extended due date.
What is negligence penalty with respect to an understatement of tax (Accuracy-Related Penalty when Understatement is NOT substantial)?
Negligence Penalty with Respect to an Understatement of Tax
- Penalty Rate - The penalty is equal to 20% of the understatement of tax
What is penalty for substantial understatement of tax (accuracy-related penalties)?
Penalty for Substantial Understatement of Tax (Accuracy-Related Penalty)
- Penalty Rate - the penalty is 20% of the understatement tax
*An understatement is SUBSTANTIAL if it EXCEEDS the greater of 10% of the correct tax (5% of the correct tax if the understatement is due to the taxpayer overstating the QBI deduction) or $5,000.
*For C corporation other than personal holding corporations, an understatement is substantial if the amount of the understatement exceeds the lesser of (a) $10,000,000; or (b) the greater of $10,000 or
10% of the correct tax.
What is interest in relation to unpaid taxes?
Interest
All amounts paid after the initial due date are subject to interest.
How does accuracy-related penalties apply?
Accuracy-related penalties apply to the portion of tax underpayments attributable to negligence or disregard of tax rules and regulations as well as to any substantial understatement of income tax.
What is a negligence penalty?
The negligence penalty with respect to understatement of tax is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
The negligence penalty with respect to understatement is computed as 20% of the understatement of tax.
A penalty of 20 percent of the understatement is assessed for a substantial understatement of tax. This penalty can be avoided if the taxpayer has a reasonable basis for taking the position, the taxpayer has disclosed the position on the tax return, and the position does not pertain to a tax shelter.
