R4 - M2 - Professional Responsibilities and Tax Return Preparer Penalties

Question 1

Who is a tax return preparer? What things qualify them to be a preparer?

Answer 1

This is any person who prepares or employs someone who prepares tax returns for compensation.

These are people with EA’s, CPA’s, attorneys, annual filing season program participants, and PTIN holders.

Question 2

Who is a not tax return preparer?

Answer 2

Someone who does data entry, makes copies, mailing, these are not tax return prepares. Think of the admin team at work.

Someone who prepares a return for an employer. Like I work at Nelnet and do their return.

Someone who prepares a return as a trustee or executor.

Question 3

What is the advantage of having a license when preparing tax returns?

Answer 3

Tax return prepares with a license can represent clients on ANY matters, including audits, payment issues, and appeals, even if they did not prepare the return. They have unlimited rights.

Question 4

What is the disadvantage of having a PTIN with no license?

Answer 4

Generally you can’t represent the client and are only limited to preparing the tax return.

Question 5

What is the difference between a signing tax return preparer, and a non signing tax return preparer?

Answer 5

Signing tax return preparer - This is the person who has primary responsibility of the overall accuracy of the return.

Nonsigning tax return preparer - Anyone who does not sign, but prepares the majority of the return and mabye offers tax advice.

Question 6

What is authority, and what are the primary authoritative sources?

Answer 6

Authority is when a tax return preparer uses their authority for the tax treatment of an item (ex: whether to include an item in income or allow as a deduction).

Here are the primary authorize sources (what the preparer can look at to determine the tax treatment of an item):

• Internal Revenue Code and other statutory provisions
• Revenue rulings, tax treaties, U.S. Treasury Department and other official explanations.
• Court cases

Question 7

What is listed transactions?

Answer 7

A reportable transactions identified by the secretary of the U.S. treasury department as a tax avoidance transaction (legal). These go with reportable transactions. This is a branch of reportable transactions.

Question 8

What is a reportable transaction?

Answer 8

This is any transaction where infomration is required to be included in the return because the secretary of the U.S. treasury department sees this as having potential for tax avoidance (legal) or tax evasion (illegal). Also sometimes known as tax shelters.

Question 9

What is ordinary negligence?

Answer 9

This is when a tax preparer does not commit fraud, but fails to exercise ordinary and reasonable care. Failed to ask a client about a suspicious transaction or account. Does not keep good books and records. This is not fraud, different penalties for fraud and negligence.

Question 10

What is the reasonable basis standard (lowest standard)?

Answer 10

This is the reasonable basis standard where you have greater than 20% chance of your position being upheld by the courts. This is normally when whatever you did in tax was disclosed to the IRS, so you will probably have a good chance of not paying any fines.

I think of it as, you have an 80% chance of no fees, but 20% they might charge you a fee.

Question 11

What is the substantial authority standard?

Answer 11

This is when you don’t disclose your position to the IRS and now you have a 40-50% chance of your position being upheld by the courts. Less than reasonable standard, since you did not disclose something you did on a return.

Question 12

What is the more likely than not standard?

Answer 12

This is where you have a greater than 50% chance of your position being upheld by the courts. This goes back to those listed/reportable transactions (includes tax shelters). These are transactions for tax avoidance or possibly tax evasion.

Question 13

What is disclosure?

Answer 13

This is when you disclose to the IRS a tax position that you are taking. Form 8275 if complies with U.S. Treasury obligations, and form 8275-R if does not comply. This will give you the reasonable basis standard, so you have a hire chance of your position being upheld by the courts.

Question 14

What is the penalty for negligence if upheld by the courts?

Answer 14

No intent, greater of 1000 or 50% of the income the tax preparer got for tax preparation services.

Question 15

What is the penalty for fraud?

Answer 15

Higher penaltiy 5000 or 75% of the income the preparer got.

Question 16

Do you need to request supporting documentation?

Answer 16

You are not supposed to audit your clients, but if something looks off, you need to ask about it and get documentation. This could end up being negligence, or just fraud if there was intent.

Question 17

What are some of the tax return prepares penalties, and what are the penalty amounts?

Answer 17

• Failure to provide the taxpayer a copy of the return
• Failure to sign a return
• Failure to properly retain records (need to keep a copy of the return for at least three years).
• Failure to file correct information returns (if you own the firm, need to know the employees, etc. )

Penalty is 60 dollars per failure, or 31,500 per return period/calendar year.

Question 18

What are the penalties for negotiation of a refund check, or failure to determine clients eligibility for the earned income credit?

Answer 18

Both are 635 for each failure.

Question 19

In what cases does the IRS have the burden of proof?

Answer 19

For the understatement of a tax liability, the IRS usually has the burden of proof, except if the taxpayer has burden of proof against the IRS in a civil case. Preponderance of the evidence.

In aiding and abetting case - IRS has the burden or proof beyond a preponderance of the evidence. Anyone can get in trouble for this, not just the tax return preparer.

Criminals case - IRS has burden of proof beyond a reasonable doubt.

Civil penalty is 1000 for all taxpayers and 10000 corporations.

Question 20

Can you disclose clients information? What are the exceptions?

Answer 20

No you cannot, and you get 250 fine for wrongful disclosure, and even less than a year of jail time.

If it is a court order, allowable use, peer review, or client consents, then you can disclose.

Question 21

What is the role of the state board of accountancy? What are the penalties?

Answer 21

They can grant, suspend, or revoke your CPA license.

Revoke licenses, monetary fine, reprimand, probation, CPE.

Question 22

What is the disciplinary power of the state boards?

Answer 22

This is when the state board of accountancy can discipline you, in three scenarios.

Misconduct while performing accounting services - Negligence, fraud, dishonesty.

Misconduct outside the scope of accounting services - Drugs, alcohol, insanity.

Criminal conviction - Commission of a felony, failure to file tax returns, crimes in accounting.

Question 23

What happens after the investigation of professional misconduct?

Answer 23

Board must find the accountant more likely than not they conducted professional misconduct.

Accountant is entitled to due process of law, and decisions are subject to judicial review.

Question 24

Can State Society/ AICPA revoke you license?

Answer 24

NO, but they can revoke your membership.

Question 25

What is the AICPA?

Answer 25

You can join them voluntarly, but not required, and they have their own professional code of conduct you have to ahear to.

Question 26

What is the joint ethics enforcement program (JEEP)?

Answer 26

AICPA and 49 states, invesigatvie action is shared between the two.

Question 27

What can the AICPA and State CPA societies terminate without a hearing for?

Answer 27

Proof of conviction, a crime for jail time of more than one year.

Proof of failure to file a tax return.

Proof of conviction of fraudulent tax return.

Suspension of membership.

Question 28

Is the a court hearing for IRS disciplinary actions?

Answer 28

Yes.

Can be imposed on any person including the tax return preparer.

They can stop you from doing tax returns, or practicing before the IRS.

For civil and criminal cases.

Question 29

What penalties can the SEC impose?

Answer 29

SEC only investigates criminal activity, and they may only suspend or revoke an accountants right to practice before the SEC. Fines no more than 100,000 per person or 500,000 for a frim.