R4, M1-M4 Flashcards
What acronym tells you what Circular 230 addresses?
ADS Rules
What does Circular 230 address?
A - Rules governing authority to practice before the IRS
D - Duties and restrictions relating to practice before the IRS
S - Sanctions for violations of the regulations
Rules - Rules applicable to disciplinary hearings
What does “practice” in front of the IRS entail (3 OR)?
- communicating with the IRS for a taxpayer
- representing a taxpayer, or
- preparing and filing necessary documents with the IRS for a taxpayer
Who has authority to practice in front of the IRS?
- attorneys
- CPAs
- enrolled agents
- enrolled actuaries
- enrolled retirement plan agents
- registered tax return preparers
- other persons
Which people with the authority to practice before the IRS have unlimited representation rights?
attorneys, CPAs, enrolled agents
What does it mean to have unlimited representation rights?
need not have prepared and signed your return to represent you
If the IRS asks you for information about the taxpayer, when do you have to disclose it and when do you not have to disclose it?
No disclosure if information is priveleged.
Otherwise, must disclose.
What if you do not have the information that the IRS is asking for?
You must tell if the IRS if you know of someone else that possessing the information they are requesting.
What must the practitioner do if they become aware of a client’s noncompliance or error with the federal tax law?
(1) Notify the client orally or in writing.
(2) Advise the client of the consequences of the error/omission/non-compliance.
T/F: If a practitioner becomes aware of a client’s noncompliance or error, they must withdraw from the client until the error is corrected.
False, they do not need to immediately withdraw.
T/F: If a practitioner becomes aware of a client’s noncompliance or error, they must notify the IRS.
False, they do not notify the IRS.
How does a practitioner show that they exercised due diligence when relying on the work product of another person?
if they used reasonable care with respect to their reliance (check work, ask questions, etc.)
Can you accept help from someone who is under disbarment or suspended from practice before the IRS?
No!
If you employ an ex-IRS employee and there are conflicts of interest, what must the employer do in order to still represent the client?
isolate the former government employee from the representation
If the government employee (ex-IRS) personally and substantially participated in a particular matter, what restrictions must be placed on the ex-IRS employee?
can never represent or assist those parties
If the government employee (ex-IRS) had “official responsibility” for a particular matter, what restrictions must be placed on the ex-IRS employee?
cannot represent those parties for two years
If the government employee (ex-IRS) participated in the development of a rule, what restrictions must be placed on the ex-IRS employee?
cannot appeal before the IRS regarding that rule for 1 year
Can a practitioner also be a notary for a client?
No.
What is an unconscionable fee?
a fee that is grossly unfair relative to industry standard
A contingent fee is allowed in what three situations before the IRS?
- IRS examination (audit) of original tax return
- claim for a refund of interest and/or penalties
- judicial proceeding
In regards to client information, the practioner owes the client a dury of ____.
confidentiality
If there is a fee dispute between the practitioner and client, is this a valid reason to not return client records?
No.
Can a practitioner keep the originals of client records? Can they keep copies?
They can keep copies, but not originals.
Client records include what two things?
- materials prepared by the client or a third party that you rely upon to do the job, and
- any return, claim for refund, or document prepared by the practitioner
What types of documents must be returned to the client?
Documents that are necessary to comply with federal tax obligations.
If state law allows a practitioner to retain client records in case of fee dispute, what records must still be returned? What other privilege must the practitioner provide to the client for the other records?
- must return any documents that must be attached to the tax return (anything filed with the return)
- provide the client with reasonable access to review and copy records, if they are necessary to comply with federal tax obligations
You cannot represent a client before the IRS if there is a conflict of interest (between the clients, spouses, partners represented) unless three things are met?
- believes they can competently represent each of the clients, AND
- not precluded by state or federal law, AND
- each client waices the conflict of interest and gives their written consent to this agreement
What is the essential thing to understand about advertising and solicitation of business?
no false or misleading information
If a practitioner advertises a fee schedule, the fees need to be honored for how many days?
at least 30 days after the last date the fees were publicized
Copies of your advertisements (fee schedule) and the mailing list must be retained for how long?
3 years
Can a practitioner endorse or negotiate a refund check issued to a client?
No!
What does it mean to endorse or negotiate a refund check?
handling the check in any way (cashing, depositing, signing)
Is there anything a practitioner can do with a client’s refund check?
hold it for safekeeping only
A practitioner cannot advise a client to take a position unless that position is ___ ______.
not frivolous
Can you advise a client to submit a document to the IRS that intentionally disregards a rule or regulation?
Only if the practitioner believes in good faith that he or she can challenge the rule or regulation.
What responsibility does a practitioner have in order to rely on information furnished by the client?
They can rely, unless there are any red flags (incorrect, inconsistent, incomplete).
For written advice, what three things must be done?
- consider all relevant facts and circumstances
- not rely on representations unless they are reasonable
- not take into consideration the fact that the return may not be audited
Federal tax matters include what two things?
IRC laws and regulations
What standard is used to determine whether someone is acting in good faith?
reasonable practitioner standard (What would a reasonable practitioner in a similar situation do?)
What three things must an employer do to ensure that procedures are followed to ensure compliance with Circular 230?
disseminate, educate, and test employees
A practitioner that is disbarred or suspended may petition for reinstatment after how many years?
5 years
Reinstatement will not be granted unless what two criteria are met?
- IRS believes that they will not engage in conduct contrary to Circular 230 again, and
- reinstatement is not contrary to public interest
What is a tax return preparer?
any person who prepares or employs others to prepare for compensation any required federal tax return or claim for federal tax refund
A tax return preparer needs to have what?
a PTIN (identification number)
What four types of people are NOT tax return preparers?
- only does clerical work, like data entry, soliciting information, etc.
- prepares are return for their employer
- prepares a return for free (volunteer)
- prepares a return as a fiduciary (trustee, executor of estate)
Do PTIN holders with no other credentials have the ability to represent clients before the IRS?
No.
Who is a signing tax return preparer?
has primary responsibility for the overall accuracy of the return/claim for refund
Who is a non-signing tax return preparer?
not the signing tax preparer, but prepares a substantial portion of the return or offers advice to a taxpayer
Which authoritative sources can be used for determining whether there is substantial authority for tax treatment of an item?
primary sources only
What is included in primary authoritative sources?
- IRC
- Treasury regulations
- revenue rulings
- revenue procedures
- court cases
What is the relationship between the terms “listed transaction” and “reportable transaction”?
A reportable transaction is a type of listed transaction.
What is a listed transaction?
reportable transaction that is similar to a transaction identified by the Secretary of the Treasury as a tax avoidance transaction
Is tax avoidance legal? Is tax evasion legal?
Tax avoidance is legal, tax evasion is not legal.
What is a reportable transaction?
required to be included with a return or statement because it has potential for tax avoidance or tax evasion
What is ordinary negligence in the context of tax preparer compliance penalties?
failure to make a reasonable attempt to comply with provisions of the IRC
A taxpayer fails to keep adequate books and records is a common example of what?
ordinary neglience
Name the four standards (% likelihood that court will uphold position) from highest to lowest.
- Frivolous
- Reasonable Basis
- Substantial Authority
- More Likely Than Not
What is the reasonable basis standard (%)?
20% - 40%
likelihood that a tax position will be upheld by the courts
What is the substantial authority standard (%)?
40% - 50% likelihood that a tax position will be upheld by the courts
What is the more likely than not standard (%)?
greater than 50% likelihood that a tax position will be upheld by the courts
An undisclosed position must at least meet what standard to NOT be deemed unreasonable?
substantial authority
A disclosed position must at least meet what standard to NOT be deemed unreasonable?
reasonable basis
A tax shelter/reportable transaction must at least meet what standard to NOT be deemed unreasonable?
more likely than not
If a disclosed position you take is contrary to U.S. Treasury regulations, what form are they reported on?
Form 8275-R (contRaRy)
If a disclosed position you take is NOT contrary to U.S. Treasury regulations, what form are they reported on?
Form 8275
Does the tax preparer penalty for understatement due to unreasonable position apply if you understated intentionally?
No, this is only for ordinary negligence (no intent).
What is the amount of the penalty for understatement due to unreasonable position?
Greater of:
- $1,000, or
- 50% of income received for tax preparation services
Does the tax preparer penalty for understatement due to willful or reckless conduct apply if you understated intentionally?
Yes, this is for fraud.
The penalty for understatement due to willful or reckless conduct is reduced by …
the penalty for understatement due to unreasonable position
What is the penalty amount for understatement due to willful or reckless conduct?
The greater of:
$5,000, or
75% of income that preparer received
When does the Failure to Provide Copy of Return to Taxpayer not apply to the tax preparer?
failure is due to reasonable cause, not willfully neglect
What is the maxium penalty allowed from the $60 category (tax preparer penalties for unethical behavior)?
$31,500
What documents is the tax preparer required to retain and for how long?
copy of return or client list, for three years
What is the penalty for negotiation or endorsing a refund check?
$635 per check endorsed
What is the penalty for Failure to be Diligent in Determining Client’s Eligibility for the Earned Income Credit?
$635 per failure
What is unique about the parties that the penalty for Aiding and Abetting Understatement of Tax Liability applies to?
applies to anyone, not just the tax return preparer
What is unique about the burden of proof for the penalty for Aiding and Abetting Understatement of Tax Liability?
IRS has the burden of proof.
What is the general rule for who has burden of proof in a civil tax case (not fraud)?
the taxpayer
Who has burden of proof in a civil fraud tax case?
the IRS
What level of evidence is needed in a civil tax case (not fraud)?
preponderance of the evidence
What level of evidence is needed in a civil or criminal tax case (fraud)?
beyond a reasonable doubt
What level of evidence is needed in a civil tax case for aiding and abetting?
preponderance of the evidence
What types of penalties are there for a civil case (monetary, jail time, etc.)?
monetary only
What types of penalties are there for a civil fraud or criminal case (monetary, jail time, etc.)?
monetary and jail time
What is the penalty for aiding and abetting understatement of tax liability for individuals? For corporations?
Individuals: $1,000
Corporations: $10,000
What are the three broad categories of misconduct sufficient to induce disciplinary action?
- while performing accounting services
- outside of the scope of accounting services
- criminal conviction
What is the penalty per violation of Wrongful Disclosure and/or Use of Tax Return Information and the maximum annual penalty?
$250 for each violation, maximum annual penalty of $10,000
State boards of accountancy have the sole power to ___, ___, or ____ your ______.
grant, suspend, or revoke
license
In what six situations is it okay to disclose client information?
- IRC says
- disclosure for enforceable subpoena (court order)
- allowable uses (state and local returns, declaration of estimated tax)
- peer and quality reviews
- administrative orders
- client consents to disclosure
Negligence, fraud, dishonesty, etc. - this falls into which of the three categories of misconduct?
misconduct while performing accounting services
Intoxication that impairs ability to perform accounting services, insanity, etc. - this falls into which of the three categories of misconduct?
misconduct outside the scope of acctg services
Commission of a felony, failure to file tax returns, crimes related to practice of accounting - this falls into which of the three categories of misconduct?
criminal conviction
What level of proof is required to prove that an accountant’s actions constituted professional misconduct in a state board hearing?
more likely than not
Do you get judicial review for an adverse state board decision?
Yes.
Due process is generally required when the penalty includes what three things?
- loss of license,
- monetary fine, and/or
- jail time
Is due process or judicial review required for a state board review?
Yes.
Is due process or judicial review required for a state society or AICPA review?
No, because they cannot take your license.
What five penalties may a state board of accountancy impose for professional misconduct?
- suspension or revocation of license
- monetary fine
- reprimand or censure
- probation
- CPE courses
Membership is (voluntary/involuntary) for the AICPA.
voluntary
What does the JEEP (joint ethics enforcement program) do?
AICPA and state societies have come together to enforce codes of conduct by means of a single investigation and action (share investigative information)
Can the AICPA or state CPA society revoke your CPA license?
No.
Can the AICPA or state CPA society terminate your membership?
Yes.
Can the AICPA or state CPA society fine you?
Yes.
What three things can the AICPA or state CPA society do to sanction you?
- expulsion from AICPA or state CPA society
- suspension of membership
- require CPE courses as a remedial measure
- censure you in a membership periodical (notice of disciplinary action)
What is the maximum criminal penalty that can be imposed by the IRS on an individual? (fines and jail time)
3 years, $100K
What is the maximum criminal penalty that can be imposed by the IRS on a corporation? (fines and jail time)
$500K, no jail time for a corporation
What two civil penalties can the IRS impose?
- fines
- prohibit from practicing before the IRS
Does the SEC prosecute criminal cases?
No, they can only investigate them.
What two civil penalties can the SEC impose?
- fines (100K for individual, 500K for company)
- suspend or revoke right to practice before the SEC
(same as for IRS)
If the IRS examines your return, this is the same thing as saying that the IRS is doing an ____.
audit
What mnemonic can you use to remember the five ways returns are selected for an audit?
Some Really Persistent IRS Detectives
What does each item in the mnemonic “Some Really Persistent IRS Detectives” stand for (selection of returns for audit)?
S - Statistical Models
R - Random Selection
P - Prior Audit
I - Information Return Discrepancy
D - Deductions that Exceed Established Norms
Most individual returns are audited within ___ years from the filing of the return.
2
What is the statute of limitations for an IRS audit of your return if you committed fraud?
No expiration of the SoL.
What are the three types of audits performed by the IRS?
- correspondence
- office
- field
What is a correspondence audit? Is there a formal meeting with the IRS?
Audit that finds information or math errors (not complex). There is no formal meeting with the IRS.
Are penalties or interest owed as a result of a correspondence audit?
No.
Who conducts an office audit? Is there a formal meeting with the IRS?
- an IRS Revenue agent
- not really a formal meeting (in office or via correspondence)
Who conducts a field audit?
IRS representative
Where does a field audit take place?
the taxpayer’s office, home, or place of business of the taxpayer’s representative
If there are unresolved issues in an IRS audit, what is the next step?
Taxpayer receives 30-day letter.
What options does a taxpayer have after receiving a 30-day letter (3)?
- accept the IRS’s position, or
- request an administrative appeal with an appeals officer, or
- ignore and receive a 90-day letter
What is one good thing about going to the U.S. Tax Court? What is one downside?
Good: No need to pay deficiency before going to court
Bad: No jury trial
If you cannot come to an agreement in the administrative appeals process, what is the next step?
issuance of a 90-day letter
If an agreement is reached in the administrative appeals process, what form is signed? What does this do?
870-AD, waives right to appeal
Fast-track remediation (appeals process) is available for what two types of taxpayers?
small business owners and self-employed individuals
What options do you have once you receive a 90-day letter?
- pay the deficiency, or
- file a petition with the U.S. tax court
What is required in order for a case to be heard in U.S. District Courts or U.S. Court of Federal Claims?
pay the tax deficiency first
What are the three trial courts?
- U.S. Tax Court
- U.S. District Courts
- U.S. Court of Federal Claims
Is the judge in a U.S. Tax Court a tax expert or not?
tax expert
Jury trial is an option in which of the three trial courts?
U.S. District Court only
What does an appellate court do exactly? What do they explicitly not do?
Review the lower court decision to see if they applied the law properly.
They do NOT hear the case all over again.
The Small Cases Division of the U.S. Tax Court can be used for disputes not exceeding $_____.
$50,000
Can you appeal a decision of the Small Cases Division?
No.
Can you use the decision of the Small Cases Division as precedent?
No.
How many judges hear your case in U.S. Tax Court?
only 1
What are the two types of U.S. Tax Court decisions?
- Regular Decision
- Memorandum Decision
When is a regular decision issued?
involves a new or unusual point of law
When is a memorandum decision issued?
concerns application of exisiting law or interpretation of facts
How many judges hear a U.S. district court case?
only 1
Is the judge in a U.S. district court case a tax expert?
No.
How many judges are in the Court of Federal Claims?
16
U.S. Tax Court decisions get appealed to what court?
District Court of Appeals
U.S. District Court decisions get appealed to what court?
District Court of Appeals
U.S. Court of Federal Claims decisions get appealed to what court?
U.S. Circuit Court of Appeals
What court is at the highest level of appeal?
Supreme Court
How many judges are on the Supreme Court?
nine judges
What is the Earned Income Credit Penalty for a taxpayer?
restricts them from claiming the credit from 2 to 10 years (if fraudulent)
From what date to what date does the penalty for failure to make sufficient estimated income tax payments accrue?
date that estimated income tax should have been paid (quarterly dates) until the tax return due date
If you have an extension to file to October 15, does the penalty for estimated payments accrue to this date?
No, it stops at April 15.
If you make estimated current year tax payments based on the “annualization of income” method, can you get away with paying less than your tax liability?
Yes, no penalty is assessed.
What is the failure to file penalty amount (%) and maximum?
5% per month or partial month that return is late, for maximum of 25%
If you file on May 28 (without an extension), what is the penalty percentage for failure to file?
April 15 to May 15 = 1 month
May 15 to May 28 = partial month (counts as 1 full month for penalty)
2 months * 5% = 10%
What is the penalty for failure to file if you file more than 60 days late?
lesser of $510 or 100% of tax due
Can you have a failure to file penalty if no tax is due?
No!
If both the failure to file and failure to pay penalty are due, how does this affect the failure to file penalty assessed?
It is reduced by the amount of the failure-to-pay penalty.
What is the failure to file penalty for a partnership or S corp?
($245 for each month or partial month, up to a maximum of 12 months) * number of partners
What is the % penalty (and maximum) for the failure to pay penalty? On what base is it assessed?
- 0.5% per month (or partial month) up to 25%
- on unpaid tax
If you file an extended return, how can you avoid the failure to pay penalty?
- pay at leat 90% by April 15, and
- pay remaining by October 15
When is the Negligence Penalty with Respect to Understatement of Tax assessed?
fail to exercise reasonable care to comply with tax law
What is the % and base of the Negligence Penalty with Respect to Understatement of Tax?
20% of the understatement
How does the Penalty with Respect to Substantial Understatement of Tax compare and differ from the Negligence Penalty with Respect to Understatement of Tax?
The penalty amount is the same at 20%, but the substantial understatement is a lot harder to avoid.
How is a substantial understatement defined for a non-corporation?
Understatement exceeds greater of:
- ___% of correct tax (___% if understatement due to overstated QBI deduction), or
- $____
10%, 5% (QBI), $5,000
How is a substantial understatement defined for a corporation (other than PHC)?
Understatement exceeds lesser of:
- $____
- The greater of: $____ or ___% of the correct tax
Understatement exceeds lesser of:
- $10M
- The greater of: $10K or 10% of the correct tax
What are defenses to the substantial valuation misstatement penalty?
that you made a good faith investigation of value (qualified appraisals, etc.)
The penalty for substantial valuation misstatement is what ___% of _____ if understatement exceeds $__ ($__ for corps)
20% of the understatement, excees $5K or 10K for corps
The penalty for substantial valuation misstatement cannot be imposed in addition to what two other penalties?
negligence penalty, substantial understatement penalty
What is the civil fraud penalty?
75% of understatement due to fraud
What is the criminal fraud penalty (individuals and corporations)?
Individuals: 100K
Corporations: 500K
Does disclosure of a frivolous position help a taxpayer or preparer avoid penalties?
No.
When does a reasonable basis help a taxpayer avoid penalties for a substantial understatement?
when disclosed
Do tax articles and treatises count as substantial authority?
No.
A taxpayer can generally avoid penalties by showing that the taxpayer … (3 AND)
- had reasonable cause to support the tax return position
- acted in good faith, and
- did not have willful neglect
Interest is applied on which three penalties?
- failure to file
- failure to pay
- negligence or fraudulent understatement
Interest begins to accrue from what date?
tax return due date (or extended due date)
Interest for underpaid tax begins to accrue from what date?
the date tax was due (quarterly payment) to April 15
U.S. persons have to report certain financial accounts located outside of the state by filing a …
Report of Foreign Bank and Financial Accounts (FBAR)
If the value of your foreign accounts is $12,000 in July, but $8,000 on December 31, do you still file an FBAR?
Yes, because it exceeded $10K during the year.
When must a U.S. person file an FBAR (2 AND)?
- financial interest (or signature or other authority) over any financial account maintained with a financial institution located outside of the U.S., and
- aggregate value of account(s) exceeds $10,000 at any time during the calendar year
How should you convert the value from foreign to US dollars to see whether it goes over the 10K limit?
(1) Find the highest value of the account during the year, in the foreign currency.
(2) Apply the exchange rate as of the end of the year to this amount.
If a foreign account is jointly owned, does each person report their half of the account?
No, they each report the entire value.
How long should you retain records about information on your foreign accounts?
5 years
To prove that a tax preparer was negligent, what four criteria need to be met?
- tax preparer owed a duty to the taxpayer
- tax preparer breached their duty
- tax payer suffered damages
- breach was the proximate cause of damages to the taxpayer
Who can sue you for breach of contract? What is the term for this?
only the other party to the contract (or a named third-party beneficiary)
This is called privity.
What is your best defense to a lawsuit that says you breached the contract?
“The client did not cooperate with me.”
Ordinary negligence falls into what category of torts?
unintentional torts
Gross negligence falls into what category of torts? What is another name for gross negligence?
intentional torts, constructive fraud
Can punitive damages be assessed for constructive fraud?
Yes.
What is the difference between fraud and constructive fraud?
Constructive fraud lacks scienter (intent to decieve). Instead, they act recklessly or are grossly negligent.
What acronym tells you the elements of fraud?
MAIDS
What does MAIDS stand for (elements of fraud)?
Material misrepresentation
Actual and reasonable reliance on misrepresentation
Intent to induce reliance
Damages
Scienter
What is the best defense if you are being sued for ordinary negligence?
“I did my due diligence (shown through workpapers).”
In a civil case, the burden of proof usually lies with the (defendant/plaintiff)?
plaintiff (the person that brought the lawsuit)
Does privity of contract apply in a negligence case?
No, unless you belong to a minority of states that follow the Ultramares decision.
What does the Ultramares decision say?
CPA is liable to the person in privity of contract and intended (known) third-party beneficiaries.
A CPA generally owes a duty of care to which parties?
- client
- any person or limited foreseeable class of persons who will rely on the CPAs work
In a fraud case, to whom is the CPA liable?
anyone who can prove the elements
What is the best defense if you are charged with constructive fraud?
“I tried to act in good faith. I was not grossly neglient, only ordinarily negligent.”
What are three potential priveleges (priveleged communications) CPAs can be in?
- attorney-client privilege
- work product privilege
- tax practitioner-taxpayer privilege
When does a CPA acquire attorney-client privelege?
when an attorney engages a CPA to help them in a court case
What is work product privelege? What does it protect? What does it not protect?
- protects tangible materials produced when you are preparing for litigation while helping an attorney
- does not protect communication between the attorney and accountant (this must be protected by A-C privilege)
The tax practitioner privelege only applies to what type of tax practitioners?
federally authorized tax practitioners
Who are included in federally authorized tax practitioners?
CPAs, enrolled agents, enrolled actuaries
Does tax practitioner-taxpayer privelege apply in criminal cases? Civil cases?
Civil cases only, not criminal cases and not cases about tax shelters.
Who do workpapers belong to, the accountant or the client?
the accountant, not the client
Can an accountant show (not turnover) workpapers to someone else without violating confidentiality?
Yes, in certain situations. Otherwise, they need client permission
Can the accountant give workpapers to a purchaser of the practice without the client’s permission?
No, but they can show them the workpapers.
What mnenomic can you use to remember the situations where an accountant can show workpapers without the client’s permission?
“Some People Stay Loyal In General.”
What does “some” stand for in the mnemonic for the accountant showing workpapers?
subpoena in court case
What does “people” stand for in the mnemonic for the accountant showing workpapers?
prospective purchaser of practice (do not disclose confidential info)
What does “stay” stand for in the mnemonic for the accountant showing workpapers?
state CPA society quality review
What does “loyal” stand for in the mnemonic for the accountant showing workpapers?
lawsuit brought by the client against you
What does “in” stand for in the mnemonic for the accountant showing workpapers?
investigation by the AICPA/state trial board
What does “general” stand for in the mnemonic for the accountant showing workpapers?
GAAP requires disclosure
