R4 Flashcards
CPA is entitled to rely on the Client’s Representations that adequate documentation exists to support the expenses that the client claims
As long as the CPA asks the client that they have the documentation, the CPA will NOT be liable for either a penalty or interest bc of the client’s misrepresentations.
5 Elements to be present for Common Law Fraud
- Misrepresentation of material fact
- Scienter (intent to deceive)
- Actual & Justifiable Reliance
- Intent to Induce Reliance
- Damages
When a CPA breaches a contract for Professional Services
The Client & any 3rd party beneficiary of the contract are entitled to compensatory money damages
Penalty for “Willful or Reckless” Conduct
- Willful attempt to understate the tax liability
- Reckless or intentional disregard of tax rules & regulations
Penalty:
Greater of $5k or 75% of income derived of refund claim
Gross Negligence
Reckless departure from standards of due care
CPA who negligently gives an opinion on an audit
IS liable to anyone in a class of 3rd parties whom the CPA knows will rely on the opinion of the Financial Stmts
IRC
Holds the most authoritative value
4 Elements to Make a Case for Negligence
- SHOW Owed Duty of Care
- Breach the Duty of Care
- Breach caused damages or injury
- Client suffered actual damages
Treasury Regulations have the highest authoritative weight of the admin sources of tax law.
Private Letter ruling that is inconsistent with Treasury Regulation cannot be relied upon for a tax position
Corporations are required to pay 4 installments
Each installment must be 25% of the Required Annual Payment
Required Annual Payment
The lesser of:
100% of Current Year Tax
OR
100% of Prior Year Tax
FAILURE-TO-PAY Penalty
0.5% per month up to Max of 25% of the Unpaid Tax
More than 1 person can be deemed to be a preparer of a tax return
BC anyone who prepares a substantial portion of a return will be treated as a preparer
Private Letter Ruling (PLR)
Taxpayer’s request for guidance on the tax treatment of a proposed transaction, usually with 1 significant tax consequence
Can be relied on by the taxpayer who requested it BUT
NOT by other taxpayers
Neither Party can appeal a decision of the
Small Cases Division of the US Tax Court
Constructive Fraud
Reckless disregard for truth or falsity
Actual Fraud
Intent in making a material misstatement
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 audit.
Courts of Original Jurisdiction for tax cases
Tax Court
US District Court
US Court of Federal Claims
90-Day Letter is sent to Taxpayer after 30-Day Letter if the taxpayer doesn’t respond to the 30-Day Letter
The 90-Day Letter gives the taxpayer 90 Days to either pay the tax deficiency or file a petition with the US Tax Court
30-Day Letter gives the taxpayer a certain amount of time to either request an administrative appeals conference or
Agree to the IRS proposed adjustments is the 30-Day Letter
Negligence Penalty w/Respect to Understatement of Tax
Is an accuracy-based penalty for negligence or for disregard of tax rules and regulations
US TAX COURT Small Claims Division
Cannot be relied on as precedent and cannot be appealed
Tax Preparer Penalties
May be assessed for improper use or disclosure of information.
Acceptable circumstances for disclosure include:
- Preparation of state and local tax returns
- Quality and peer reviews
- Court order or admin order
Penalty may assessed for fraud and accuracy related acts.
Intentional disregard of the regulations would be deducting of personal help as a business expense
ULTRAMARES RULE
Accountant will be held liable to:
Parties in Privity: Hold a direct contract with the accountant
3rd Party Beneficiaries: Accountant specifically intended to benefit from their work
If a taxpayer commits fraud
Both civil penalties (at least 75% of the understatement of tax due to fraud) and criminal penalties can apply.
Scienter
Part of the 5 Elements of Fraud
Intent to deceive
Privity
Only the parties involved in the contract have the rights and obligations under that contract
Have the right to take legal actions against one another
When a CPA breaches a contract of Professional Services
The Client and any 3rd party beneficiary of the contract are entitled to compensatory money damages
If a taxpayer agrees with the conclusions reached by the IRS agent in an audit
The Taxpayer will sign Form 870 and pay any additional tax assessed (plus interest and penalties)
Prompt Disposition of Matter before the IRS
Circular 230 duties and restrictions
A practitioner may not unreasonably delay the prompt disposition of any matter
Majority Rule
More restrictive than Restatement Rule
Limits liability to those 3rd parties whom the CPA actually KNOWS will rely on the audit
IT DOES NOT EXTEND TO ALL FORESEEABLE USERS, ONLY THOSE SPECIFICALLY KNOWN TO THE CPA
Substantial Understatement of Income Tax
Referring to Penalties for Individuals
Greater of:
10% of the tax required to be shown on the return for year
OR
$5,000 Minimum for an individual’s understatement to be considered substantial
Substantial Understatement of Income Tax
Referring to Penalties for C-Corps
Applies to Corps, but not S-Corps or PHC
(i) First select GREATER OF 105 OF CORRECT TAX LIABILITY OR $10,000
OR
(ii) $10,000,000
Then select the lesser of the (i) or (ii)
If it is NOT SUBSTANTIAL then it is considered “Negligence or a Disregard of tax rules”
Penalty for both unsubstantial & substantial understatement is
20% of the portion of the underpayment
Substantial understatements are harder to get dismissed
