R5-1 Flashcards
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.
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.
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
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
Choice “d” is correct. A tax preparer may not endorse and cash a client’s tax refund check.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Choice “a” is correct. Tax preparer penalties may be assessed for improper use or disclosure of information. Acceptable circumstances for disclosure include:
- Computer processing
- Peer review
- 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.
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.
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.
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.
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.