R4 - Pro Resp & Fed Tax Procedures Flashcards
Ultramares Rules
Limits the accountant’s liability for negligence to:
- Parties in PRIVITY
- Intended 3rd party bene’s
Parties who are merely “foreseen” cannot recover
Restatement (Second) of Torts (Foreseen User) Approach
Expands (Accountant Liability) beyond those in privity
Holds accountants liable to 3rd parties whose reliance on the accountant’s work is foreseen,
EVEN IF THE ACCOUNTANT DOESN’T KNOW THE SPECIFIC 3rd PARTY
GROSS NEGLIGENCE
If an accountant recklessly departs from the standards of due care
Constitutes gross negligence or constructive fraud
Accountant can be liable to all parties
FRAUD
Accountants can be held liable to any party injured by the fraud, regardless of privity or foreseeability
A decision of the Small Cases Division of the US Tax Court
Cannot be relied on as precedent in any other court
The decision only applies to that particular taxpayer in that particular case
Neither party can appeal a decision of the
Small Cases Division of the US TAX COURT
BC It is designed to handle small cases (smaller amounts) in a more informal and expedited manner
When a CPA breaches a contract for professional services
The client and any 3rd party beneficiary of the contract are entitled to compensatory MONEY DAMAGES
CASE FOR NEGLIGENCE
the client must prove at least that the CPA failed to exercise due care
Majority Position
An accountant is liable for negligence ONLY to 3rd parties whom the accountant knows or should foresee will be relying on the accountant’s work
If an agreement cannot be reached between the taxpayer and the revenue agent following an audit,
The taxpayer receives a copy of the revenue agent’s report and a 30-day letter notifying the taxpayer of the right to appeal
The taxpayer has 30 days to either request an admin appeals conference or agree to the IRS proposed adjustments
MAJORITY RULE
Is that accountants are liable to anyone in a class (such as potential lenders or investors) of 3rd parties whom the CPA knows will rely on the opinion of the financial stmts
The IRS does not impose a penalty on a CPA
For making an error in calculating a tax return
To a Impose a Civil Fraud Penalty
Requires conduct that transcends negligence or stupidity.
Maintaining false records and reporting fictitious transactions is adequate to demonstrate civil fraud, a willful and deliberate attempt to evade taxes
A CPA who commits fraud is
Liable to anyone who is injured by the fraud
A Penalty of 20% of the understatement of tax is assessed
For A substantial understatement of tax
How to avoid:
If the taxpayer has a reasonable basis for taking the position,
The taxpayer has disclosed the position on the tax return, and the position does NOT pertain to a Tax Shelter
Corporations are REQUIRED to pay estimated taxes in 4 installments
EACH Installment must be 25% of the required annual payment
UNLESS
The taxpayer uses the Annualized Income Method
Required Annual Payment is the LESSER of:
1) 100% of the Current Year Tax
OR
2) 100% of the Prior Year Tx (as long as the prior year tax is NOT zero)
Failure-to-pay Penalty
0.5% per month up to a maximum of 25% of the unpaid tax
When calculating the penalties you round-up
In Regards to Penalties
All amounts paid AFTER the initial due date are subject to interest
The interest is 1% per month
Amount sub to Penalty/Int x months x 1% = Penalty/Interest Amount
Contingent Fees are allowed ONLY in 3 Scenario
A contingent fee includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the event that a position taken on a tax return is challenged by the IRS.
1) IRS Examination or Audit
2) Claim for credit or refund of interest and/or penalties
3) Judicial proceeding arising under the Internal Revenue Code
Tax Preparer is liable for the penalty for “willful or reckless” conduct
( Which is greater of $5,000 or 75% of the income derived with respect to the tax return or refund claim on which the “willful or reckless” conduct exercised)
For Conduct that is either
1) a willful attempt to understate the tax liability
2) reckless or intentional disregard of tax rules and regulations.
Privity Defense
Lack of Privity
Privity is a viable defense to an action against the accountant by a client’s creditor and owes the creditor no duty
