R5-1

Question 1

Vee Corp. retained Walter, CPA, to prepare its Year 6 income tax return. During the engagement, Walter discovered that Vee had failed to file its Year 2 income tax return. What is Walter’s professional responsibility regarding Vee’s unfiled Year 2 income tax return?

a.

Consider withdrawing from preparation of Vee’s Year 6 income tax return until the error is corrected.

b.

Advise the IRS that Vee’s Year 2 income tax return has not been filed.

c.

Prepare Vee’s Year 2 income tax return and submit it to the IRS.

d.

Advise Vee that the Year 2 income tax return has not been filed and recommend that Vee ignore filing its Year 2 return since the statute of limitations has passed.

Answer 1

Choice “a” is correct. The CPA should consider withdrawing from the preparation of Vee’s Year 6 income tax return until the error (i.e., the non-filing of the Year 2 tax return) has been corrected.

Rule: Upon discovery of an error in a previously filed return or the client’s failure to file a required return, the CPA should promptly notify the client (either orally or in writing) of the error, noncompliance, or omission and advise the client of the appropriate measures to be taken (e.g., advise the client to file the tax return). If the client does not rectify the error, the CPA should consider withdrawing from the engagement.

Choice “c” is incorrect, as the CPA has no responsibility (without a formal client engagement) or the authority to prepare and file a client’s tax return.

Choice “d” is incorrect, as a CPA cannot advise a client to disobey the law because it violates a CPA’s ethical responsibilities.

Choice “b” is incorrect, as a CPA has no responsibility to advise the IRS of any client wrongdoing.

Question 2

A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate return information, if the disclosure is made:

a.

To enable the tax processor to electronically compute the taxpayer’s liability.

b.

To enable a third party to solicit business from the taxpayer.

c.

For peer review.

d.

Under an administrative order by a state agency that registers tax return preparers

Answer 2

Choice “b” is correct. Use of a taxpayer’s return information to assist a third party to solicit business subjects a return preparer to penalty.

Choice “a” is incorrect. Disclosure can properly be made in this case by a return preparer without penalty.

Choice “c” is incorrect. Disclosure can properly be made in this case by a return preparer without penalty.

Choice “d” is incorrect. Disclosure can properly be made in this case by a return preparer without penalty.

Question 3

A tax return preparer may disclose or use tax return information without the taxpayer’s consent to:

a.

Be evaluated by a quality or peer review.

b.

Accommodate the request of a financial institution that needs to determine the amount of taxpayer’s debt to it, to be forgiven.

c.

Facilitate a supplier’s or lender’s credit evaluation of the taxpayer.

d.

Solicit additional nontax business.

Answer 3

Choice “a” is correct. A tax return preparer may disclose or use tax return information without the taxpayer’s consent to be evaluated by a quality or peer review.

Choices “c”, “b”, and “d” are incorrect. They would all require the taxpayer’s consent.

Question 4

Which, if any, of the following could result in penalties against an income tax return preparer?

I.

Knowing or reckless disclosure or use of tax information obtained in preparing a return.

II.

A willful attempt to understate any client’s tax liability on a return or claim for refund.

a.

Both I and II.

b.

Neither I nor II.

c.

I only.

d.

II only.

Answer 4

Choice “a” is correct. Both I and II. Knowing or reckless disclosure or use of tax information obtained in preparing a return and a willful attempt to understate any client’s tax liability on a return or claim for refund could both result in penalties against an income tax return preparer.

Question 5

A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to:

a.

Audit the corporate records.

b.

Examine business operations.

c.

Copy all underlying documents.

d.

Make reasonable inquiries when taxpayer information appears incorrect.

Answer 5

Choice “d” is correct. A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to make reasonable inquiries when taxpayer information appears incorrect.

Choices “a”, “b”, and “c” are incorrect. A tax return preparer is not required to:

Audit the corporate records

Examine the business operations

Copy all underlying documents

Question 6

In preparing a client’s current-year individual income tax return, a tax practitioner discovers an error in the prior year’s return. Under the rules of practice, the tax practitioner:

a.

Must advise the client of the error.

b.

Is barred from preparing the current year’s return until the prior-year error is rectified.

c.

Must file an amended return to correct the error.

d.

Is required to notify the IRS of the error.

Answer 6

Choice “a” is correct. Upon discovery of an error in a previously-filed return or the client’s failure to file a required return, the tax practitioner should promptly notify the client (either orally or in writing) of the error, noncompliance, or omission and advise the client of the appropriate measures to be taken (e.g., advise the client to file the tax return). If the client does not rectify the error, the tax practitioner should consider withdrawing from the engagement.

Choice “b” is incorrect. The tax practitioner is not barred from preparing the current year’s return.

Choice “d” is incorrect. The tax practitioner is not required to notify the IRS of the error.

Choice “c” is incorrect. The tax practitioner is not required to file an amended return but should consider withdrawing from the engagement is the client refuses to do so.

Question 7

Which of the following acts by a CPA will not result in a CPA incurring an IRS penalty?

a.

Understating a client’s tax liability as a result of an error in calculation.

b.

Failing, without reasonable cause, to provide the client with a copy of an income tax return.

c.

Negotiating a client’s tax refund check when the CPA prepared the tax return.

d.

Failing, without reasonable cause, to sign a client’s tax return as preparer.

Answer 7

Choice “a” is correct. The IRS does not impose a penalty on a CPA for making an error in calculating a tax return.

Choice “b” is incorrect. A CPA must give his or her client a copy of the client’s tax return or face imposition of a penalty.

Choice “d” is incorrect. A CPA must sign tax returns that the CPA prepares. Willful violation of this rule can result in imposition of a penalty.

Choice “c” is incorrect. A CPA is prohibited from negotiating a client’s refund check.

Question 8

Clark, a professional tax return preparer, prepared and signed a client’s federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check?

a.

Clark may not endorse and cash the check, without penalty, because the check is for more than $500.

b.

Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service.

c.

Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark’s fee for preparation of the return.

d.

Clark will be subject to the penalty if Clark endorses and cashes the check.

Answer 8

Choice “d” is correct. A tax preparer may not endorse and cash a client’s tax refund check.

Question 9

Which of the following professional bodies has the authority to revoke a CPA’s license to practice public accounting?

a.

Professional Ethics Division of AICPA.

b.

State board of accountancy.

c.

State CPA Society Ethics Committee.

d.

National Association of State Boards of Accountancy.

Answer 9

Choice “b” is correct. The state board of accountancy is the only body listed that can grant a CPA license and the only body that may revoke such a license.

Choices “d”, “c”, and “a” are incorrect, per the above.

Question 10

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA’s license to practice public accounting?

a.

The AICPA.

b.

A state board of accountancy.

c.

A state CPA society.

d.

The SEC.

Answer 10

Choice “b” is correct. Only a state board of accountancy has the authority to suspend or revoke a CPA’S license to practice public accounting.

Choice “d” is incorrect. The SEC may only suspend or revoke a CPA’S authority to practice before the SEC with respect to public companies.

Choices “a” and “c” are incorrect. The AICPA and a state society may only suspend or revoke a CPA’S membership in the AICPA or the state society, respectively.

Question 11

Which of the following statements concerning an accountant’s disclosure of confidential client data is generally correct?

a.

Disclosure may be made to comply with Generally Accepted Accounting Principles.

b.

Disclosure may be made to any party on consent of the client.

c.

Disclosure may be made to comply with an SEC audit request.

d.

Disclosure may be made to any state agency without subpoena.

Answer 11

Choice “b” is correct. An accountant may disclose confidential client information to any party if the client specifically consents to the release of information.

Choice “d” is incorrect. Generally, confidential client information should not be disclosed to a court unless it is subpoenaed or the client consents.

Choice “c” is incorrect. Generally, confidential client information should not be disclosed to the SEC unless it is subpoenaed or the client consents.

Choice “a” is incorrect. Compliance with GAAP does not require disclosure of client confidences.

Question 12

A CPA is permitted to disclose confidential client information without the consent of the client to:

I.

Another CPA who has purchased the CPA’s tax practice.

II.

Another CPA firm if the information concerns suspected tax return irregularities.

III.

A state CPA society voluntary quality control review board.

a.

II only.

b.

III only.

c.

I and III only.

d.

II and III only.

Answer 12

Choice “b” is correct. The CPA generally cannot give out a client’s confidential information to anyone without the client’s consent. However, exceptions are generally made for court subpoenas and state CPA society quality control panels.

Question 13

A CPA who prepares clients’ federal income tax returns for a fee must:

a.

Keep a completed copy of each return for a specified period of time.

b.

Receive client documentation supporting all travel and entertainment expenses deducted on the return.

c.

Indicate the CPA’s federal identification number on a tax return only if the return reflects tax due from the taxpayer.

d.

File certain required notices and powers of attorney with the IRS before preparing any returns.

Answer 13

Choice “a” is correct. The CPA must retain a completed copy of each return for three years after the close of the return period (IRC Section 6107).

Choice “d” is incorrect. A tax return preparer is not required to file any notices and powers of attorney with the IRS before preparing any returns.

Choice “b” is incorrect. No such rule. A tax return preparer can take a client at his word.

Choice “c” is incorrect. A tax return preparer is required to indicate her federal identification number on all returns even if they claim a refund.

Question 14

Which of the following acts constitute(s) grounds for a tax preparer penalty?

I.

Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.

II.

At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.

a.

II only.

b.

I only.

c.

Both I and II.

d.

Neither I nor II.

Answer 14

Choice “a” is correct. Tax preparer penalties may be assessed for improper use or disclosure of information. Acceptable circumstances for disclosure include:

1. Computer processing
2. Peer review
3. Administrative order (court order)

A tax preparer penalty may be assessed for fraud and accuracy related acts. Intentional disregard of the regulations would be deducting of personal help as a business expense.

Question 15

Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?

a.

Taxpayer’s name and identification number or a copy of the tax return.

b.

A power of attorney.

c.

Workpapers associated with the preparation of each tax return.

d.

An unrelated party compliance statement.

Choice “a” 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 “d” is incorrect. This is not an item that a tax preparer is required to retain.

Choice “c” 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.

Choice “b” is incorrect. This is not an item that a tax preparer is required to retain.

Choice “a” 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 “d” is incorrect. This is not an item that a tax preparer is required to retain.

Choice “c” 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.

Choice “b” is incorrect. This is not an item that a tax preparer is required to retain.

Answer 15

Choice “a” 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 “d” is incorrect. This is not an item that a tax preparer is required to retain.

Choice “c” 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.

Choice “b” is incorrect. This is not an item that a tax preparer is required to retain.

Question 16

Which of the following statements is correct for penalties and fines with respect to exercising due diligence for the earned income credit?

a.

The due diligence requirements address eligibility checklists, computation worksheets, and record retention.

b.

The penalty for each failure to be diligent in determining a client’s eligibility for the earned income credit is a minimum of 2 years imprisonment in a designated Federal Correctional Institution.

c.

The penalty for failure to be diligent will not apply if the tax return preparer can demonstrate that the preparer’s normal office procedures were reasonably designed and routinely followed to ensure due diligence compliance.

d.

The penalty for each failure to be diligent in determining the amount of the earned income credit is $1,000 for each such failure.

Answer 16

Choice “a” is correct. The due diligence requirements for the earned income credit address eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer.

Choice “b” is incorrect. The penalty for failure to comply with the IRS’ “due diligence” requirements with respect to determining a client’s eligibility for the earned income credit is a penalty of $100 for each such failure, not a minimum of 2 years imprisonment in a designated Federal Correctional Institution.

Choice “d” is incorrect. The penalty for failure to comply with the IRS’ “due diligence” requirements with respect to determining the amount of the earned income credit is a penalty of $100 for each such failure, not $1,000 for each such failure. This is the same penalty as that for failure to comply with the “due diligence” requirements with respect to determining a client’s eligibility for the earned income credit.

Choice “c” is incorrect. The statement is necessary but not sufficient. The penalty for failure to be diligent will not apply if the tax return preparer can demonstrate that the preparer’s normal office procedures were reasonably designed and routinely followed to ensure due diligence compliance and the failure to meet the due diligence requirements was isolated and inadvertent. Both aspects are necessary.

Question 17

With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:

a.

The penalty applies to tax return preparers only.

b.

Applies only when the understatement is with the knowledge and consent of the persons authorized or required to file the return.

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.

Answer 17

Explanation

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 to any person, not just to tax return preparers.

Choice “b” 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 “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.

Question 18

Circular 230:

a.

Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.

b.

Prohibits a practitioner from charging a contingent fee.

c.

Prohibits referral or compensation agreements.

d.

Addresses the practice before the IRS of “practitioners”, which includes only Attorneys, Certified Public Accountants, and Enrolled Agents.

Answer 18

Choice “a” is correct. Circular 230 does prohibit a practitioner from endorsing or negotiating refund checks which the IRS has issued to the practitioner’s client.

Choice “d” is incorrect. Circular 230 addresses the practice before the IRS of “practitioners.” However, practitioners do not include just Attorneys, Certified Public Accountants, and Enrolled Agents. Practitioners can also be Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers.

Choice “b” is incorrect. Circular 230 prohibits a practitioner from charging an “unconscionable” fee but does allow contingent fees in the following situations: (1) an IRS examination or audit, (2) a claim solely for a refund of interest and/or penalties, or (3) a judicial proceeding arising under the Internal Revenue Code. An IRS examination or audit is in connection with the IRS’s examination of, or challenge to, an original tax return or an amended return or claim for refund (with certain additional conditions, of course).

Choice “c” is incorrect. Circular 230 does not prohibit referral or compensation agreements. It merely requires that any compensation agreement or referral agreement between the practitioner and a promoter be disclosed.

Question 19

Under Circular 230, for tax returns:

a.

A practitioner can advise a client to take a tax return position that is frivolous only if the taxpayer is a member of an officially recognized tax protest organization.

b.

A practitioner may rely on client-furnished information under any circumstances. The client is always right.

c.

A practitioner must return all client records at the request of the client.

d.

A practitioner must exercise due diligence in preparing tax returns and other documents, unless such due diligence is waived in writing by the client.

Answer 19

Choice “c” is correct. A practitioner must return all client records at the request of the client.

Choice “a” is incorrect. A practitioner cannot advise a client to take a tax return position that is frivolous under any circumstances. There is no such thing as an “officially recognized” tax protest organization.

Choice “d” is incorrect. A practitioner must exercise due diligence in preparing tax returns and other documents (and in determining the correctness of any representations to the IRS). There is no waiver of such due diligence, either orally or in writing.

Choice “b” is incorrect. A practitioner may normally rely “in good faith without verification” upon client-furnished information. However, that does not mean “under any circumstances.” The practitioner cannot ignore contradictory information known to the practitioner and must make reasonable inquiries if client-furnished information appears to be questionable or incomplete. The client is not always right.

Question 20

Under Circular 230, a covered opinion:

a.

Arises from a partnership, and not any other kind of organization, the principal purpose of which is federal tax avoidance or evasion.

b.

Arises from a partnership or other entity, having as a significant purpose tax evasion, but not tax avoidance, if that written advice takes certain specified forms.

c.

Arises from a transaction that, at the time the tax advice is rendered, the IRS has determined to be a tax avoidance transaction and identified as such in IRS-published guidance.

d.

Includes, in general, any written, but not electronic, advice by a practitioner concerning one or more specified federal tax issues.

Answer 20

Choice “c” is correct. A covered opinion (formerly known as a tax shelter opinion) arises from a transaction that, at the time the tax advice is rendered, the IRS has determined to be a tax avoidance transaction and identified as such in IRS-published guidance as a “listed transaction.” In general, the covered opinion provides an opinion on whether it is more likely than not that an investor will prevail on material federal tax issues (federal tax issues that provide tax benefit) that involve a realistic possibility of challenge by the IRS. Covered opinions are not just “everyday” written tax advice. Circular 230 provides detailed guidelines for these opinions (along with everything else that it does) that includes “best practices” and disclosure requirements. A tax shelter is any partnership, investment plan, or arrangement that has as a principal purpose the avoidance or evasion of federal income tax.

Choice “d” is incorrect. A covered opinion includes in general any written or electronic advice by a practitioner concerning one or more specified federal tax issues.

Choice “a” is incorrect. A covered opinion may arise from a partnership or other entity, any investment plan, or any other plan or arrangement the principal purpose of which is federal tax avoidance or evasion. This part of the definition is not limited to partnerships.

Choice “b” is incorrect. A covered opinion may arise from a partnership or other entity, an investment plan, or any other plan or arrangement having as a significant purpose tax avoidance or evasion if the written advice is (1) a reliance opinion, (2) a marketed opinion, (3) subject to conditions of confidentiality, or (4) subject to contractual protection.

Question 21

For an opinion to be a covered opinion:

a.

The opinion can be based on reasonable or unreasonable factual assumptions, depending on the circumstances.

b.

The opinion’s evaluation of significant tax issues cannot take into account the possibility that (1) a tax return will not be audited, (2) an issue will not be raised on audit, or (3) an issue, if raised, will be resolved through settlement.

c.

The opinion must set forth the likelihood that the taxpayer will prevail on the merits for each significant federal tax issue. If the likelihood for each issue cannot be determined, no opinion can be issued.

d.

The opinion must reach an overall conclusion as to the likelihood of the tax treatment for each significant federal tax issue and provide the reasons for this conclusion.

Answer 21

hoice “b” is correct. For an opinion to be a covered opinion, the opinion’s evaluation of significant federal tax issues cannot take into account the possibility that (1) a tax return will not be audited, (2) an issue will not be raised on audit, or (3) an issue, if raised, will be resolved through settlement. The evaluation must be based on the chances of success on the merits, not on these other factors.

Choice “d” is incorrect. For an opinion to be a covered opinion, the opinion must reach an overall conclusion as to the likelihood of the tax treatment for each significant tax issue and provide the reasons for this conclusion or state that the practitioner is unable to reach an overall conclusion (and provide the reasons for the inability to reach a conclusion).

Choice “c” is incorrect. For an opinion to be a covered opinion, the opinion must set forth the likelihood that the taxpayer will prevail on the merits for each significant federal tax issue. If the likelihood cannot be determined for a particular tax issue, the opinion can still be issued but must state that fact.

Choice “a” is incorrect. For an opinion to be a covered opinion, the opinion cannot be based on unreasonable factual assumptions, factual representations, or statements or findings of the taxpayer or any other person. An unreasonable factual representation is a factual representation that the practitioner knows or should have known is incorrect or incomplete.

Question 22

For an opinion to be a covered opinion:

a.

The opinion can be limited to just some of the significant federal tax issues if the significant federal tax issues that the opinion does consider are at least 50% of all of the significant federal tax issues.

b.

If the opinion is a limited opinion, the opinion must be limited to only one of the significant federal tax issues so that the significant tax issue may be sufficiently and clearly covered.

c.

The opinion must consider all significant federal tax issues.

d.

The opinion can be limited to just some of the significant federal tax issues if the practitioner and the taxpayer agree that the opinion will be limited and that the taxpayer’s reliance on the opinion for the purpose of avoiding penalties will be similarly limited.

Answer 22

Choice “d” is correct. For an opinion to be a covered opinion, the opinion can be limited to just some of the significant federal tax issues if the practitioner and the taxpayer agree that the opinion will be limited and that the taxpayer’s reliance on the opinion for the purpose of avoiding penalties will be similarly limited.

Choice “c” is incorrect. For an opinion to be a covered opinion, the opinion need not consider all significant federal tax issues (e.g., those raised in the item and transaction, property, partnership, plan, or arrangement issues). The opinion can be limited.

Choice “a” is incorrect. For an opinion to be a covered opinion, the opinion can be limited to just some of the significant federal tax issues, but there is no requirement that the opinion consider at least 50% of all of the significant federal tax issues.

Choice “b” is incorrect. For an opinion to be a limited opinion, it need not be limited to only one of the significant tax issues. Significant tax issues must be sufficiently and clearly covered, but it is not necessary to cover only one significant tax issue at a time to do that.

Question 23

For an opinion to be a covered opinion:

a.

A written advice subject to contractual protection is one where the practitioner has a written contract to issue the written advice.

b.

The practitioner issuing the covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may rely on the opinion of other practitioners for part(s) of the opinion, with identification of the other practitioner’s opinion and conclusion.

c.

The practitioner issuing the covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may reasonably rely on the opinion of other practitioners for part(s) of the opinion. No identification should be made of the other practitioner or the other practitioner’s opinion since the original practitioner is responsible for the entire opinion.

d.

The practitioner issuing the covered opinion must be knowledgeable in all aspects of federal tax law and may not rely on the opinion of any other practitioner for parts of the opinion.

Answer 23

Choice “b” is correct. The practitioner issuing a covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may rely on the opinion of other practitioners for part(s) of the opinion, with identification of the other practitioner’s opinion and conclusion.

Choice “d” is incorrect. The practitioner issuing a covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered, not all aspects of federal tax law, and may rely on the opinion of other practitioners for parts of the opinion.

Choice “c” is incorrect. The practitioner issuing a covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may rely on the opinion of other practitioners for part(s) of the opinion. Identification should be made of the other practitioner’s opinion and conclusion.

Choice “a” is incorrect. A written advice subject to contractual protection is not one where the practitioner has a written (or oral) contract to issue the written advice. It is a written advice where (1) the fee is either fully or partially refundable if all or a part of the intended tax consequences from the matters addressed in the written advice are not sustained or (2) the fee is contingent on the taxpayer’s realization of tax benefits from the transaction.

Question 24

Green & Ishade, CPAs are issuing a marketed opinion for a particular investment plan. Which of the following statements is correct for this opinion or other types of covered opinions?

a.

A marketed opinion does not include advice which is about any arrangement the principal purpose of which is federal tax avoidance or evasion.

b.

A marketed opinion is advice that will be used to promote, market, or sell an investment plan in a corporate form.

c.

A listed transaction is a tax avoidance transaction.

d.

A reportable transaction is a transaction which must be included on a separate line of a federal tax return.

Answer 24

Choice “c” is correct. A listed transaction is a tax avoidance transaction. It is a reportable transaction (a transaction that is required to be reported on a return or statement attached to that return which is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the Treasury as a tax avoidance transaction). Listed transactions include sale-in/lease-out transactions, certain offsetting currency transactions solely used for losses but not gains, and loss transactions resulting in a taxpayer claiming a tax loss exceeding certain specified amounts.

Choice “b” is incorrect. A marketed opinion is advice that will be used to promote, market, or sell a partnership, investment plan, or arrangement. The form is certainly not limited to a corporate form.

Choice “a” is incorrect. A marketed opinion does not include advice which is about any arrangement the principal purpose of which is not federal tax avoidance or evasion (essentially, a marketed opinion cannot cover advice on other non-related topics).

Choice “d” is incorrect. A reportable transaction is any transaction that is required to be reported on a return or statement attached to a return because the transaction is taken into account to determine taxable income and the transaction has the potential for tax avoidance or tax evasion. A listed transaction is a transaction that is substantially the same as a tax avoidance transaction; it is one of the types of reportable transactions. There is no requirement to report a reportable transaction on a separate line of a federal tax return, but the transaction must be disclosed.

Question 25

A civil fraud penalty can be imposed on a corporation that underpays tax by:

a.

Maintaining false records and reporting fictitious transactions to minimize corporate tax liability.

b.

Failing to report income it erroneously considered not to be part of corporate profits.

c.

Filing an incomplete return with an appended statement, making clear that the return is incomplete.

d.

Omitting income as a result of inadequate recordkeeping.

Answer 25

Choice “a” is correct. Imposition of the 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.

Choice “d” is incorrect. Negligence such as omitting income as a result of inadequate recordkeeping will support a penalty, but not the civil fraud penalty.

Choice “b” is incorrect. Failing to report income erroneously considered not to be part of corporate profits will support a penalty, but not the civil fraud penalty.

Choice “c” is incorrect. Filing an incomplete tax return will support a penalty, but not the civil fraud penalty.

Question 26

Which of the following statements is correct for the disciplinary power of the state boards of accountancy?

a.

The failure to file a tax return is an example of misconduct outside the scope of performing accounting services.

b.

The state boards of accountancy have no disciplinary power other than the power to reprimand licensees and refer the situation to the state’s Attorney General for civil prosecution.

c.

Negligence, fraud, and dishonesty are types of misconduct outside the scope of performing accounting services.

d.

The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.

Answer 26

Choice “d” is correct. The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.

Choice “b” is incorrect. The state boards of accountancy have considerable disciplinary power other than the power to reprimand licensees. The Attorney General of the various states will not be interested in civil prosecution.

Choice “c” is incorrect. Negligence, fraud, and dishonesty are types of misconduct while performing accounting services, not types of misconduct outside the scope of performing accounting services.

Choice “a” is incorrect. The failure to file a tax return is an example of a criminal conviction (assuming that a conviction actually occurred), not misconduct outside the scope of performing accounting services.

Question 27

Which of the following statements is correct for penalties that can be imposed by the SEC?

a.

The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.

b.

The SEC can impose fines of up to $1,000,000 for an individual and $2,000,000 if the accountant is a repeat, or serial, offender.

c.

The SEC can suspend or permanently revoke an accountant’s license to practice public accounting.

d.

The SEC can suspend or permanently revoke a CPA’s right to practice before the SEC only if the accountant has willfully violated the federal securities laws or regulations.

Answer 27

Explanation

Choice “a” is correct. The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.

Choice “c” is incorrect. The SEC cannot suspend or permanently revoke an accountant’s license to practice public accounting. Only a state board of public accountancy can do that.

Choice “b” is incorrect. The SEC can impose fines of up to $100,000, not $1,000,000, for an individual (and $500,000 for a firm). There is no “repeat offender” or “serial offender” provision.

Choice “d” is incorrect. The SEC can suspend or permanently revoke a CPA’s right to practice before the SEC for a host of reasons, not only if the accountant has willfully violated the federal securities laws or regulations. Other reasons include (1) the accountant lacks the qualifications to represent others, (2) the accountant lacks character or integrity, (3) the accountant acted unethically or unprofessionally, and (4) the accountant was convicted of a felony or a misdemeanor involving moral turpitude, or (5) the accountant’s license to practice public accountancy was suspended or revoked.

Question 28

Which of the following statements is correct for the disciplinary power of the state boards of accountancy?

a.

Adverse state board decisions cannot be reviewed by the courts. The state board’s decision is final.

b.

The state board of accountancy must find, by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.

c.

The state board of accountancy does not have to provide due process of law.

d.

The state board of accountancy can conduct a formal hearing for possible disciplinary action.

Answer 28

Choice “d” is correct. The state board of accountancy can conduct a formal hearing for possible disciplinary action.

Choice “b” 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.

Choice “c” is incorrect. The state board of accountancy does have to provide due process of law.

Choice “a” is incorrect. Adverse state board decisions can be reviewed by the courts. The state board’s decision is not final.

Question 29

Which of the following statements is correct for disciplinary action by the AICPA and state CPA societies?

a.

The AICPA cannot suspend or terminate membership for failure to pay dues but can suspend or terminate membership for failure to meet CPE requirements.

b.

Membership in the AICPA can be suspended or terminated without a hearing.

c.

The AICPA and state CPA societies can sanction their members and, in addition, can suspend or permanently revoke a CPA’s license.

d.

The Joint Trial Board of the AICPA can expel a member by majority vote.

Answer 29

Choice “b” is correct. Membership in the AICPA can be suspended or terminated without a hearing for certain offenses. These offenses include but are not limited to (1) proof of conviction of a crime punishable by imprisonment for more than one year, (2) proof of conviction for willful failure to file any income tax return, (3) proof of conviction for filing a false or fraudulent income tax return or aiding in the preparation of a false or fraudulent income tax return of a client.

Choice “c” is incorrect. The AICPA and state CPA societies can sanction their members but cannot suspend or permanently revoke a CPA’s license.

Choice “a” is incorrect. The AICPA cannot suspend or terminate membership for failure to pay dues and for failure to meet CPE and other membership retention requirements (such as practice-monitoring).

Choice “d” is incorrect. The Joint Trial Board of the AICPA can expel a member by a two-thirds vote, not a majority vote.

Question 30

Leslie Ponzi has just received written tax advice from her attorney, Dewey H. Cheatem. Which of the following statements is not a requirement of written advice under Circular 230 of the Internal Revenue Service?

a.

The practitioner may not provide written advice in the form of electronic communications.

b.

The practitioner must not rely on representations, statements, findings, or agreements of the taxpayer if reliance on them would be unreasonable.

c.

The practitioner must base written advice on reasonable factual and legal assumptions, including assumptions as to future events.

d.

The practitioner may not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited.

Answer 30

Choice “a” is correct. Written advice does include electronic communications.

Choices “c”, “b”, and “d” are incorrect. Each one of these statements is a requirement for written advice under Circular 230.

Question 31

Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?

a.

The practitioner may retain copies of the client’s records.

b.

The practitioner does not need to return any client records that are necessary for the client to comply with the client’s federal tax obligations.

c.

The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.

d.

The client’s records are to be destroyed upon submission of a tax return.

Answer 31

hoice “a” is correct. A tax preparer may retain copies of records returned to the taxpayer.

Choice “d” is incorrect. There is no requirement for the tax preparer to destroy client records upon submission of a tax return.

Choice “c” is incorrect. Generally, at the request of the client, the practitioner must return all client records. An exception is if state law allows the practitioner to retain the records in the case of a fee dispute, the practitioner may do so. However, the practitioner must (1) return to the client those records which must be attached to the tax return, and (2) allow the client to review and copy the practitioner-retained client records related to the client’s federal tax obligation.

Choice “b” is incorrect. The general rule is to return all requested records.

Question 32

Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:

a.

He is not compensated.

b.

The return does not contain a claim for a tax refund.

c.

Returns for nonprofit organizations are exempt from the preparer rules.

d.

He is a member of the board of directors.

Answer 32

Choice “a” is correct. The term “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any tax return required under the IRC or any claim for refund of tax imposed by the IRC.

Choice “d” is incorrect. Board status alone does not determine tax preparer status.

Choice “b” is incorrect. Claim for a refund or underpayment is not a factor in determining tax preparer status.

Choice “c” is incorrect. There is no such exception that exists.

Question 33

To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

a.

Make reasonable inquiries if the taxpayer’s information is incomplete.

b.

Review the accuracy of the taxpayer’s books and records.

c.

Examine the taxpayer’s supporting documents.

d.

Audit the taxpayer’s corresponding business operations.

Answer 33

Choice “a” is correct. A tax preparer must make reasonable inquiries if the taxpayer’s information is incomplete.

Rule: A compensated preparer is liable for a penalty if his understatement of taxpayer liability on a return or claim for refund is due to negligent or intentional disregard of rules and regulations. A preparer is not required to obtain supporting documentation unless he has reason to suspect the accuracy of the taxpayer’s figures; however, the preparer must make reasonable inquiries if the taxpayer’s information appears incorrect or incomplete.

Choices “d”, “b”, and “c” are incorrect, per the above rule.

Question 34

Which of the following is not considered a primary authoritative source when conducting tax research?

a.

IRS publications.

b.

Tax Court cases.

c.

Internal Revenue Code.

d.

Treasury regulations.

Answer 34

Choice “a” is correct. IRS publications are not considered a primary authoritative source when one is conducting tax research

Choices “c”, “b”, and “d” are incorrect. The Internal Revenue Code, tax court cases, and Treasury regulations, respectively, are considered primary authoritative sources when one is conducting tax research; hence they are incorrect choices (the question asks which item is notconsidered a primary authoritative source).

Question 35

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

a.

Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.

b.

Requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.

c.

Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum.

d.

Recommending to the client that the advisor’s tax advice be made orally instead of in a written memorandum.

Answer 35

Choice “c” is correct. Characteristic of a best practice in rendering tax advice is establishing in a tax memorandum relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts.

Choice “a” is incorrect. Circular 230’s “Best Practices” do not include the tax advisor’s requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.

Choice “d” is incorrect. Circular 230’s “Best Practices” do not include the tax advisor’s recommending to the client that the advisor’s tax advice be made orally instead of in a written memorandum.

Choice “b” is incorrect. Circular 230’s “Best Practices” do not include the tax advisor’s requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.

Question 36

A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except:

a.

Holding the check until the client is billed, then endorsing and depositing the check into the CPA’s account as payment for the bill.

b.

Endorsing the check and depositing it into an escrow account for the client’s benefit.

c.

Endorsing the check and depositing it into the client’s bank account.

d.

Holding the check for safe keeping and awaiting the client’s return.

Answer 36

Choice “d” is correct. Circular 230 does not prohibit a practitioner’s holding the check for safe keeping and awaiting the client’s return.

Choice “c” is incorrect. Circular 230 prohibits a practitioner’s endorsing the check. So, endorsing the check and depositing it into the client’s bank account is a violation of Circular 230.

Choice “a” is incorrect. Circular 230 prohibits a practitioner’s endorsing the check. So, holding the check until the client is billed, then endorsing and depositing the check into the CPA’s account as payment for the bill is a violation of Circular 230.

Choice “b” is incorrect. Circular 230 prohibits a practitioner’s endorsing the check. So, endorsing the check and depositing it into an escrow account for the client’s benefit is a violation of Circular 230.

Question 37

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except:

a.

Keep a record of returns prepared.

b.

Disclose a conflict of interest.

c.

Sign a tax return as a preparer.

d.

Provide a client with a copy of the tax return.

Answer 37

Choice “b” is correct. With respect to a tax return preparer’s failure to disclose a conflict of interest, the Internal Revenue Code does not set forth any penalty.

Choice “c” is incorrect. With respect to a tax return preparer’s failure to sign a tax return as a preparer, the Internal Revenue Code sets forth a penalty of $50 for each failure (maximum $25,000 per calendar year).

Choice “d” is incorrect. With respect to a tax return preparer’s failure to provide a client with a copy of the tax return, the Internal Revenue Code sets forth a penalty of $50 for each failure (maximum $25,000 per calendar year).

Choice “a” is incorrect. With respect to a tax return preparer’s failure to keep a record of returns prepared, the Internal Revenue Code sets forth a penalty of $50 for each failure (maximum $25,000 per calendar year).

Question 38

A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry?

a.

The CPA may be assessed a tax return preparer penalty.

b.

The client will not owe an understatement penalty if the return is audited and the expenses disallowed.

c.

The client will not be subject to a fraud penalty.

d.

The CPA may be charged with preparing a fraudulent return.

Answer 38

Choice “a” is correct. A preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided. However, the preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.

Choice “d” is incorrect. Merely failing to inquire about documentation does not constitute the preparation of a fraudulent return by the tax preparer.

Choice “b” is incorrect. If the expenses are disallowed in an audit, the taxpayer may owe an understatement penalty.

Choice “c” is incorrect. If the expenses are found to be fraudulent, the taxpayer may be subject to a fraud penalty.

Question 39

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?

a.

The CPA reasonably relies upon representations of the client.

b.

The CPA takes into account the possibility that a tax return will not be audited.

c.

The CPA takes into consideration assumptions about future events related to the relevant facts.

d.

The CPA considers all relevant facts that are known.

Answer 39

Choice “b” is correct. A CPA should not give written federal tax advice if the CPA takes into account the possibility that a tax return will not be audited.

Choice “a” is incorrect. A CPA may give written federal tax advice if the CPA reasonably relies upon representations of the client.

Choice “d” is incorrect. A CPA should consider all relevant facts when giving written federal tax advice.

Choice “c” is incorrect. A CPA should consider assumptions about future events related to the relevant facts when giving written federal tax advice.

Question 40

A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable?

a.

It is reasonable to believe that the position would more likely than not be upheld.

b.

There was a reasonable basis for the position.

c.

There was substantial authority for the position.

d.

There was a reasonable possibility of success for the position.

Answer 40

Choice “a” is correct. With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of success for the position, and substantial authority for the position.

Choices “c”, “d”, and “b” are incorrect per the above explanation.

Question 41

Which of the following bodies has the authority to suspend or revoke a CPA’s license for acts discreditable to the profession?

a.

The state society of certified public accountants.

b.

The state board of accountancy.

c.

The American Institute of Certified Public Accountants.

d.

The Public Company Accountancy Oversight Board.

Answer 41

Choice “b” is correct. A suspension or revocation of a CPA’s license may only be imposed by a state board of accountancy.

Choices “a”, “d”, and “c” are incorrect, per the above rule.