R4 M2- Professional Responsibilties Flashcards
A reportable transaction is one with respect to which additional information is required to be included with a federal income tax return because the transaction is of a type, according to an IRS determination, that has:
A. A potential impact on more than one taxpayer.
B. A significant tax impact in the return year.
C. A significant tax impact on future years’ returns.
D. The potential for tax avoidance or evasion.
Choice “D” is correct. The term “reportable transaction” is any transaction that the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance or tax evasion.
Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?
A. Workpapers associated with the preparation of each tax return.
B. An unrelated party compliance statement.
C. A power of attorney.
D. Taxpayer’s name and identification number or a copy of the tax return.
Choice “D” is correct. For each tax return prepared, a tax preparer must retain either the taxpayer’s name and identification number, or a copy of the return.
Choice “A” is incorrect. A tax preparer is not required to retain workpapers used in preparing a tax return, although doing so is often a sound business practice. Among other reasons, the workpapers could be beneficial in the event of an audit, or in the preparation of the following year’s tax return for the client.
With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:
A. Applies only when the understatement is with the knowledge and consent of the persons authorized or required to file the return.
B. The penalty applies to tax return preparers only.
C. The burden of proof shifts to the IRS from the taxpayer.
D. The civil penalty is $10,000 for all taxpayers except corporations and $100,000 for corporations.
Choice “C” is correct. With respect to the penalty for aiding and abetting an understatement of tax liability on a tax return, the burden of proof shifts to the IRS from the taxpayer. Unless the law expressly states otherwise, the taxpayer has the burden of proof to establish by the preponderance of the evidence that the law and the evidence do not support the position of the IRS. With respect to any criminal action, the government has the burden of proof to establish by evidence beyond a reasonable doubt that the taxpayer is guilty of the charges. Note that these burdens of proof are different; criminal (beyond a reasonable doubt) is considerably higher than civil (preponderance of the evidence).
Choice “A” is incorrect. The penalty for aiding and abetting an understatement of tax liability on a tax return applies whether or not the understatement is with the knowledge or consent of the person authorized or required to file the return.
Choice “B” is incorrect. The penalty for aiding and abetting an understatement of tax liability on a tax return applies to any person, not just to tax return preparers.
Choice “D” is incorrect. The civil penalty for aiding and abetting an understatement of tax liability on a tax return is $1,000 for all taxpayers except corporations and $10,000 for corporations, not $10,000 and $100,000.
In order to avoid a tax return preparer penalty when determining earned income credit eligibility, a tax return preparer must do each of the following, except:
A. Make reasonable inquiries if the information furnished to the preparer appears incorrect.
B. Dispose of earned income credit documentation after return preparation.
C. Complete and submit a Paid Preparer’s Due Diligence Checklist.
D. Document the earned income credit calculation, including the method and information used to make the computation.
Choice “B” is correct. A tax return preparer is required to retain earned income credit documentation for three years from the latest of the date the return was filed or the due date of the return, not dispose of the documentation after return preparation.
Choice “A” is incorrect. A tax return preparer is required to make reasonable inquiries if the information furnished to the preparer appears to be incorrect, inconsistent, or incomplete.
Choice “C” is incorrect. A tax return preparer is required to complete Form 8867, Paid Preparer’s Due Diligence Checklist, and submit the completed form with the tax return.
Choice “D” is incorrect. A tax return preparer is required to document the calculation of the earned income credit, including the method and information used to make the calculations.
Which of the following statements is correct for the disciplinary power of the state boards of accountancy?
A. The state board of accountancy does not have to provide due process of law.
B. Adverse state board decisions cannot be reviewed by the courts. The state board’s decision is final.
C. The state board of accountancy must find, by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.
D. The state board of accountancy can conduct a formal hearing for possible disciplinary action.
Choice “D” is correct. The state board of accountancy can conduct a formal hearing for possible disciplinary action.
Choice “A” is incorrect. The state board of accountancy does have to provide due process of law.
Choice “B” is incorrect. Adverse state board decisions can be reviewed by the courts. The state board’s decision is not final.
Choice “C” is incorrect. The state board of accountancy must find, by the preponderance of the evidence, not by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.
