r4 Flashcards
Treasury Department Circular 230
IRS publication, entitled “Regulations Governing Practice before the Internal Revenue Service”
What does Treasury Department Circular 230 address?
Practice before the IRS with regard to
-rules governing the authority to practice before the IRS
-the duties and restrictions relating to practice before the IRS
-the sanctions for violations of the regulations
-the rules applicable to disciplinary proceedings
What does it mean to practice before the IRS?
-communicating with the IRS for a taxpayer
-representing a taxpayer
-preparing and filing necessary filings
Who must register with the IRS?
Anyone who prepares or assists in preparing a federal tax return for compensation
Information to be furnished includes
any IRS requested info or records:
-the practitioner may withhold information or records they believe in good faith and on reasonable grounds to be priviledged
-If they do not possess the info but know who does, they must inform the IRS
What do you do if you become aware of an omission or error?
Notify client and the consequences under the law for the noncompliance
A practitioner may not represent a client before the IRS if it involves a conflict of interest unless:
-practitioner believes he or she can competently represent each of the clients
-No state or federal law prohibits the representation
-each client waives the conflict of interest
A practitioner must inform the client on:
any penalties that are reasonably likely to apply with respect to:
-a position taken on a tax return
-any document submitted
Definition of federal tax matters
any matter concerning the application or interpretation of:
- a revenue provision of the internal revenue code
-any provision of law impacting a persons obligations under the internal revenue laws and regs
-any other law or regulation administered by the IRS
Rules for disciplinary hearings (ADS)
Authority to practice
Duties as a tax practitioner
Sanctions for violations
What are some potential failures to comply with Circular 230?
-pattern or practice of noncompliance through willfulness, recklessness, or gross incompetence
The secretary of the TREASURY may publicly reprimand, suspend, or disbar any practitioner form practice before the IRS if practitioner:
-is shown to be incompetent
-fails to comply with regulations in Circular 230
-willfully and knowingly misleads or threatens a client or prospective client with intent to defraud
Incompetence and disreputable conduct for which a practitioner may be sancationed includes:
-being convicted of any federal tax law crime, any criminal offense involving dishonesty or breach of conduct, or any felony under federal or state law
-giving false or misleading inform
-carrying out any solicititiaion of business prohibited
-willfully failing to make a tax return
What is the time of reinstatement after suspension
5 years
Signing Tax Return Preparer
the individual tax return preparer who has the primary responsibility for the overall substantive accuracy of the preparation of such return or claim for refund
Nonsigning Tax Return Preparer
Any tax return preparer who is not a signing tax return preparer but who prepares all or substantial portion of a return or claim for refund
-they assist
What are the primary authoritative sources to determine tax treatment?
-Provisions of the Internal Revenue Code
-Revenue rulings and revenue procedures, tax treaties and US treasury department
-Court cases
What does the verb disregard include
any careless, reckless, or intentional disregard of rules or regulations
What is a listed transaction?
means a reportable transaction which is the same as, or similar to, a transaction specifically identified by the Secretary of the US treasury Department
What is a reportable transaction?
any transaction with respect to which information is required to be included with a return or statement because such transaction is of a type of having a potential for either tax avoidance or tax evasion. Greater than 50%
What does negligence mean?
Includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in preparation of a tax return.
What is reasonable basis?
Met when there is a greater than 20% likelihood of a tax position being upheld by courts. A high standard of tax reporting
What is Substantial authority standard?
Met when there is a greater than 40% but less than 50% likelihood of a tax position being upheld by the courts
-objective
A position is deemed unreasonable unless:
-reasonable basis for a disclosed position exists > 20%
-substantial authority for the position, regardless of disclosure exists >40%
-it is reasonable to believe that a tax shelter or reportable transaction position would meet the morel likely than not standard >50%
What is the penalty for ordinary negligence (no intent)
Equal to the greater of $1,000 or 50% of income the preparer received for tax return services
What is the penalty due to willful or reckless conduct?
$5,000 or 75% of the income preparer received
Penalties under IRC Sec 6695
Intended to protect the taxpayer from unethical behavior
-$40 for each failure max $31,500
-failure to provide copy of to taxpayer
-failure to sign return
-failure to furnish ID number
-failure to properly retain records (3 years)
What is the penalty for failure to comply with IRS due diligence?
$635
What is the penalty for wrongful disclosure and or Use of Tax return information?
A tax preparer who discloses or uses information for any purpose other than to prepare a tax return shall pay a civil penalty of $250 for each disclosure max $10,000
What is the role of the state boards of accountancy?
Sole authority to grant, suspend, revoke license
What are the 5 penalties that state board can impose?
suspension/ revocation, monetary fine, reprimand or censure, probation, requirement
A person found guilty of a felony may be imposed
imprisonment for not more than 3 years and or fined not more than $100,000 ($500,000 corporation)
IRS civil penalties
-may prohibit the accountant from practicing before the IRS
-monetary fines
-can be civil or criminal case
SEC civil penalties
-may prohibit the accountant from practicing before the SEC
-monetary fines
SEC only investigates criminal activity and does not prosecute criminal cases
How are returns selected for an audit?
-statistical models; selects returns that are most likely to contain errors
-random selection
-prior year audit
-information return discrepancy
-deductions that exceed the established norm
How long can a return be audited?
returns may be audited at any point prior to the expiration of the statute of limitations
What is a correspondence audit?
Arises from information errors, mathematical errors, matching issues
-no need for formal meeting
What is an office audit?
Conducted by an IRS revenue agent, either in an IRS office or by correspondence, and is used for individual returns with few or not items of business income.
What is a field audit?
Conducted by an IRS representative, either at the taxpayers office or home or at the place of business.
What form is signed for a resolved issue?
Form 870
How do unresolved issues work?
The taxpayer receivers a copy of the revenue agents report and a 30 day letter for the right to appeal
Office of appeals
Goal to resolve the tax controversies without litigation
-if no agreement reached, a 90 day letter will be issued
What is the 90 day letter
Notice of Deficiency
-90 days to pay the deficiency or file petition with the US tax court; No jury trial, do not have to pay deficiency first
-can elect to case be heard in US District Court or federal claims; must pay tax deficiency first and then sue; jury trial
US Tax Court
do not have to pay first. no jury
US District Court
pay first and sue for a refund, jury optional
US court of federal claims
Pay first and sue for a refund, no jury option
What a regular decision?
US Tax Court
Normally involves a new or unusal point of law
What a memorandum decision?
US Tax Court
Concerns the application of exisitng law or interpretation of facts
If you loose your case where do you appeal for each court?
For US Tax court and US District Court: Court of Appeals
For US Court of Federal Claims: US Circuit Court of Appeals
Earned Income Credit Penalty
-statutory restriction on claiming the credit, rather than a penalty
-may not claim credit for two subsequent years or up to 10 years
What are the penalty EXCEPTIONS for failure to make sufficient estimated income tax payments
-less than or equal to $1,000 of current year tax
-at least 90% of current year tax
-at least 100% of last years tax (110% if agi > 150k)
-equal estimated current year tax based upon annualized income
Failure to file penalty
The penalty is 5% of the amount of tax due for each month the return is late, up to a maximum of 25%
What is the failure to pay penalty?
1/2 of 1% per month up to a maximum of 25%
Penalty for substantial understatement of tax
20% of the understatement of tax
-substantial if it exceeds greater of 10% of the correct tax or $5k
Fraud Penalties
-civil 75% of the understatement
-criminal $100k $500k for corps
What is a frivolous tax return?
< 20% of succeeding
Have no basis in law or authority
What is the reasonable basis standard?
> 20% chance of succeeding
What is the substantial authority standard?
> 40% chance of succeeding
- only analyses and reports issued by the US congress, IRS regulations, rules, and releases
Disclosure statement (form 8275)
-used to avoid the understatement of penalty
-used to disclose positions taken on tax return that are contrary to revenue rulings
Reportable transaction disclosure statement (form 8886)
any taxpayer that participates in a reportable transaction is required to file a federal tax return or info return must file form 8886
A taxpayer can avoid penalty by showing that the taxpayer:
- Had reasonable cause to support the tax return position
- acted in good faith
- did not have willful neglect
*> 20%
-do not apply for shelters 50%
Who must file the FBAR?
- they have financial interest in, or signature or other authority over, any financial account maintained with a finance institution outside the US
- maximum aggregate value exceeds $10,000 at any time
What are accuracy related penalties?
-negligence penalties
-penalty for substantial understatement of tax
What is a private letter ruling?
is the IRS’s interpretation of the federal tax law as it applies to a specific taxpayer situation. A PLR is issued by the IRS in response to a taxpayers request for guidance as to the federal tax consequences of a proposed transaction
For tax law who holds the most authoritative value
IRC
What is a commission of tort?
A tort is a wrongful act
-unintentional torts
-intentional torts (fraud)
Fraud types
Constructive: also called gross negligence (reckless)
Fraud: CPA acts in bad faith, with intent
To make out a case for negligence, the plaintiff must show:
-the defendant owed a duty of care to the plaintiff
-the defendant breached that duty by failing to act with due care
-the breach caused plaintiffs injury
-damages
What are the 5 elements of fraud (MAIDS)
Misrepresentation of material fact
Actual and justifiable reliance by plaintiff
Intent to INDUCE plaintiffs reliance on the misrepresentation
Damages
Scienter -intent to deceive ( acted in bad faith)
Who can sue you for negligence?
-clients
-any person relying on CPAs work
Ultramares decision
Limits CPA liability more narrowly to persons in privity of contract with the CPA and intended third party beneficiaries
Is privity a fraud defense?
No
Reasonable Care (due care is taken) =
No negligence = not liable
Lack of reasonable care =
Ordinary negligence
-cpa is liable to anyone he or she knows or reasonably should expect will rely on his or her work
Lack of even slight care =
gross negligence or constructive fraud
Actual fraud =
actual intent to deceive
-civil
Attorney-client privilege
This privilege is potentially available when the CPA has been engaged by the attorney prior to aid the attorney in providing legal services because the expertise of a CPA is needed
Work product privilege
Can protect tangible materials produced in preparation for litigation as requested by an attorney but not to the communication between the attorney and accountant about the product
Tax practitioner - Taxpayer privilege’s
applies to tax advice from a tax practitioner that would qualify under the attorney client privilege’s. Only applies to federally authorized tax practitioners
Does the tax practitioner privilege apply to areas in connection to tax shelters?
No
What is the restatement rule?
If a cpa performs an audit negligently, the cpa is liable to the client and to any foreseeable class of persons whom the CPA knows will be relying on the audi
In what cases can a accountant show the Workpapers without client permission?
- lawful subpoena
- prospective purchasers
- quality control panel
- AICPA/ State Trial board
- Court proceedings
- When gaap requires disclosure
