R5

Question 1

Authority for tax treatment of an item

Answer 1

aka primary authoritative sources

• IRC and other statutory provisions
• regulations
• revenue rulings and US Treasury Department
• court cases
• IRS Publications NOT primary

Question 2

Listed Transaction

Answer 2

transaction specifically identified by the Secretary of the US Treasury Department as a tax avoidance transaction

Question 3

More Likely Than Not

Answer 3

> 50% likelihood tax position being upheld by courts

Question 4

Negligence

Answer 4

failure to make a reasonable attempt to comply w provisions of internal revenue law OR to exercise ordinary and reasonable care in preparation of a tax return
- also include failure to keep adequate books and records or substantiate items properly

Question 5

Reasonable Basis

Answer 5

> 20% tax position upheld

- higher than not frivolous or not patently improper

Question 6

Reportable Transaction

Answer 6

transaction where information is required to be included w a return because it’s a type of transaction which the Secretary of the US Treasury Dept has determined has potential for TAX AVOIDANCE or TAX EVASION (illegal)

Question 7

Substantial Authority

Answer 7

> 33% but less than 50%

objective standard involving analysis of the law and application of the law to relevant facts

Question 8

Tax Return Preparer vs Tax Practitioner

Answer 8

• tax return preparer does it for compensation
• tax practitioner practice before the IRS: attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents

Question 9

Tax Shelter

Answer 9

any plan or arrangement w significant purpose of avoidance or evasion of federal income tax

Question 10

Understatement of Taxpayer’s Liability due to “Unreasonable Position” by Tax Return Preparer

Answer 10

position is unreasonable unless:

• substantial authority, undisclosed, no tax shelter or reportable transaction
• reasonable basis, disclosed, no tax shelter or reportable transaction
• more likely than not, tax shelter or reportable transaction

penalty
- greater of 1,000 or 50% of tax preparer compensation for the service
if
- understatement due to unreasonable position
- preparer had knowledge or should have known about the unreasonable position
- position lacks reasonable basis

Question 11

Underpayment of Taxpayer’s Liability due to Willful or Reckless Conduct of Tax Return Preparer

Answer 11

• willful, reckless, intentional disregard
• preparer not required to obtain supporting documentation unless reason to suspect accuracy of info provided by client

penalty

• higher than negligent
• greater of 5000 or 50% of compensation for service

Question 12

Failure to Provide Copy of Tax Return

Answer 12

tax preparer required to provide taxpayer a copy of the tax return or refund claim

Question 13

Failure to Sign Tax Return or Refund Claim

Answer 13

gotta sign it

penalty doesn’t apply if due to reasonable cause and not willful neglect

Question 14

Failure to furnish Tax Identification Number of preparer

Answer 14

penalty doesn’t apply if due to reasonable cause and not willful neglect

Question 15

Failure to Retain Records Propertly

Answer 15

required to keep copy of return or claim or listing of name and ID of each taxpayer for 3 years

Question 16

Negotiation of IRS Refund Check

Answer 16

tax return prepare who endorses or negotiates an IRS refund check issued to taxpayer

Question 17

Failure to be Diligent in determining eligibility for Earned Income Credit

Answer 17

due diligence requirements:

• eligibility checklists
• computation worksheets
• reasonable inquiries to the taxpayer
• record retention

Question 18

Aiding and Abetting Understatement of Tax Liability

Answer 18

• penalty applies to any person
• IRS has burden of proof
• civil penalty
• 1000 for taxpayers 10,000 for corps

Question 19

Wrongful Disclosure and/or Use of Tax Return Info

Answer 19

• civil penalty to tax return preparer and guilty of misdemeanor
• add. penalties for:
  a) disclosure to enable third party to solicit business or
  b) knowing or reckless disclosure of info

exceptions:
- consent of client
- court order/subpoena
- prep of state and local tax returns and declaration of estimated tax
- quality and peer reviews
- administrative orders
- SEC audit, GAAP/GAAS

Question 20

Circular 230

Answer 20

addresses IRS practitioners: attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers

• rules governing authority to practice
• must provide info to IRS or inform IRS of someone who would know

Question 21

Practice by Former Government Employees

Circular 230

Answer 21

potential conflicts of interest

• if personally and substantially participated in a matter involving specific parties, never represent or assist w respect to that particular matter
• if had official responsibility, can’t represent for 2 years
• can’t appear before IRS to influence any US Treasury Dept amployee regarding a rule if participated in development of the rule or within 1 year before leaving government they had official responsibility for that rule

Question 22

Fees

Circular 230

Answer 22

can only charge contingent fees before the IRS:

1. IRS examination or audit
2. claim solely for refund of interest and penalties
3. judicial proceeding arising under IRC
   - never can charge an “unconscionable fee”

Question 23

Solicitations

Circular 230

Answer 23

Advertising

• can’t use false or misleading advertising
• if radio/tv must keep for 36 months a recording
• if direct mail/e commerce, keep for 36 months who they sent it to

Written Fee Schedule
- if published written fee schedule, can’t charge more than published fee for 30 days after publication

Question 24

Best Practices for Tax Advisors

Circular 230

Answer 24

• communicating w client the terms of engagement to determine client purpose and use for the advice
• conclusion supported by law and facts, NOT the probability of getting caught
• advising client about importance of conclusions, like whether client can avoid penalties
• acting fairly and w integrity

Question 25

Return of Client Records

Circular 230

Answer 25

GR at request of client, return all client records
- exception: if state law allows practitioner to retain records in case of fee dispute

extra:
but must return client records for tax return and allow client to review and copy client records related to fed tax obligations

Question 26

Written Advice

Circular 230

Answer 26

• must be reasonable factual and legal assumptions
• consider all relevant facts and circumstances
• identify and ascertain facts relevant
• NOT take into account possibility tax return won’t be audited or matter won’t be raised on audit

Question 27

Competence

Circular 230

Answer 27

practitioner must be competent to practice before IRS

• may become competent through various methods
• like consulting or studying the relevant law

Question 28

Advisory Committees

Circular 230

Answer 28

• established by IRS Director of Office of Professional Responsibility
• 6 individiuals authorized to practice
• balance of attorneys, accounts, and agents
• recs regarding professional standards

Question 29

Procedures to Ensure Compliance w Circular 230

Answer 29

• Internal Controls
• for those overseeing a firm’s federal tax practice
• disseminate, educate, test

failures to comply

• fails to have adequate procedures
• fails to ensure procedures are followed
• knows or should know of noncompliance and doesnt take prompt action to correct

Question 30

Incompetence and Disreputable Conduct/Sanction
(not acting in good faith)

Circular 230

Answer 30

Secretary of Treasury may SANCTION a practitioner for being incompetent or disreputable

• convicted of fed tax law crime or any crime w dishonesty
• giving false or misleading info
• willfully evading payment of fed tax
• willfully assisting others to evade fed tax
• failure to timely remit funds received from client
• using threats, offering gifts, inducement, to influence an official action by IRS employee
• recklessly giving false opinions
• willfully failing to sign a tax return

other SANCTIONS

• willfully or recklessly violating
• possible sanctions include censure and suspension or disbarment before the IRS
• IRS can also impose monetary penalties, not exceeding gross income

Question 31

State Boards of Accountancy

Answer 31

• only ones who can give or revoke CPA licenses
• 3 broad categories of misconduct:
  1. misconduct while performing acct services
  2. misconduct outside scope of acct services, like drugs that impair the acct’s liability to perform
  3. criminal conviction

they investigate misconduct then conduct a formal hearing:

• board must find it was more likely than not
• accountant entitled due process of law
• judicial review

5 penalties they can impose:

• suspension or revocation of license
• monetary fine
• censure
• probation
• CPE course requirements

Question 32

AICPA and State CPA Societies

Answer 32

• Code of Professional Conduct applies to all AICPA and many state CPA societies
• Joint Ethics Enforcement Program (JEEP)
  enforcement of their codes of conduct by means of a single investigation
• Disciplinary Action
  can sanction their members but can’t revoke CPA licenses
  suspend or terminate memberships w/o hearing
• Possible Sanctions (no monetary or criminal)
  expulsion from AICPA or state CPA society
  suspension of membership in ^
  requirement of CPE courses

Question 33

IRS Disciplinary Actions

Answer 33

Criminal Penalties
- for any person who counsels or prepares tax return in a fraudulent or false manner
Civil Penalties
- may prohibit an acct from practicing before IRS
- may impose fines

Question 34

SEC

Answer 34

• civil penalties, investigate criminal

civil: fine limit 100,000 (500,000 for a firm)
- suspend or revoke acct’s right to practice before SEC, including right to sign documents required by Securities Act of 1933 and Securities Exchange Act of 1934 if
- lacks qualifications
- lacks character/integrity
- unethical
- willfully violated fed laws or regs
- convicted of felony or misdemeanor for moral stuff

Question 35

Title I- PCAOB

SOX

Answer 35

Public Company Accounting Oversight Board

• composed of 5 members
• 2 CPAs & 3 non
• board subject to oversight by SEC
• duties: register public acct firms, establish rules for preparation of audit reports, and conduct inspections, investigations, and disciplinary proceedings for public acct firms

Inspections

• firms that audit 100+, inspect annually
• others, inspect every 3 years

Registration w PCAOB
- only registered may prepare audit reports for SEC issuer

Auditing Standards

• audit documentation/workpapers kept for 7 years (criminal penalties will apply)
• provide concurring or second partner review of each audit
• describe scope of testing internal controls in audit report

Sanctions

• suspension or revocation of PCAOB registration
• monetary penalties
• censure
• profesional education requirements

Question 36

Title II - Auditor Independence

SOX

Answer 36

Prohibited services to audit clients:

• everything except tax services are permissible if pre-approved by audit committee
• audit partner rotation every 5 years
• audit firm can’t employ issuer’s CEO, CFO, Controller, or Chief Accounting Officer for 1 year after the audit
• must report to Audit Committees

Question 37

SOX

Answer 37

improve investor confidence in financial reporting

1. auditor
2. audit committee
3. officers
4. internal controls

Question 38

Title III - Corporate Responsibility

SOX

Answer 38

Audit Committees

• address problem of inadequate board oversight
• directly responsible for appointment, compensation, and oversight of work of public acct firm employed
• auditor reports directly to AC
• AC resolves disputes b/w auditor and management
• AC members are members of Board of Directors but otherwise independent

Corporate Responsibility

• CEO and CFO must sign annual and quarterly reports including assertions that:
  a) they reviewed the report
  b) doesn’t contain untrue statements or omit material info
  c) financial statements fairly presented
• they also sign to assume responsibility for Internal Controls
• that ICs have been designed, evaluated, and report includes a conclusion about the effectiveness of the ICs
• signing also asserts they’ve made the following disclosures to AC and auditors:
  a. significant deficiencies of ICs
  b. any fraud involving management or an employee w sig. roll in ICs
• if required to prepare an accounting restatement due to material noncompliance, the CEO and CFO reimburse:
  a. bonuses or equity based compensation and
  b. gains on sale of securities during the 12 months

Question 39

Title IV– Enhanced Financial Disclosures

SOX

Answer 39

Disclosures in Periodic Reports

• all material correcting adjustments identified by auditor
• all material off-balance sheet transactions (contingent obligations and unconsolidated subsidiaries)
• pro forma financial statements
• use of special purpose entities

Conflict of Interest Provisions
- Issues are GR prohibited from making “personal loans” to directors or executive officers unless made in ordinary course of issuer’s consumer credit business

Disclosure of Transactions b/w Management and Principal (10%) Stockholders “related party”
- must file report of how many shares they own

Management Assessment of Internal Controls

• 10K and 10Q must include internal control report stating:
• management responsible for establishing and maintaining ICs
• assessment of effectiveness of ICs
• auditor must attest to management’s assessment of IC

Code of Ethics for Senior Financial Officers

• disclose whether or not issuer has adopted a code and if no code, must disclose why
• promote honest and ethical conduct, full, fair, accurate, and timely disclosures, compliance w laws and rules

Disclosure of AC Financial Expert

• at least 1 member has to be a financial expert
• no name but must disclose existence or reason why they dont have one
• financial expert qualified through mix of education and experience

Enhanced Review of Periodic Disclosures by Issuers

• SEC required to review disclosures on a regular and systematic basis and consider the following
• material restatements
• significant volatility
• largest market capitalization
• disparities in price to earnings ratios
• significantly affect any material sector of the economy

Question 40

Title VIII– Corporate and Criminal Fraud Accountability

SOX

Answer 40

SOX “federal law”

Criminal Penalties for Altering Documents

• 20 years for individuals who alter
• 10 years for auditors who don’t retain workpapers

Criminal Penalties for Securities Fraud
- imprisoned for 25 years

Whistle-Blower Protection

• can’t be discharged, demoted, suspended, threatened, harassed, etc.
• compensatory damages:
• reinstatement w same status
• back pay w interest and
• compensation for any special damages

Nondischargable Debts in Bankruptcy

Statue of Limitations for Fraud- earlier of 2 years after discovery of facts or 5 years after violation

Question 41

Federal Legislative Process

Answer 41

1. begins in House of Reps (specifically House Ways and Means Committee), voted on and approved by House
2. goes to Senate (specifically Senate Finance Committee), voted on and approved by Senate
3. Normally there are difference b/w House and Senate versions so go to Joint Conference Committee
4. Compromised bill then approved by House and Senate
5. President signs or vetoes
6. Veto can be overriden by 2/3 vote of both House and Senate

Question 42

IRS Audit Process

Answer 42

part of the enforcement system to ensure the “voluntary” assessment and payment is actually occurring
- return may be audited for variety of reasons

Discriminant Inventory Function System (DIF) to select tax returns most likely to contain errors and yield sig. amount of add. tax revenue upon audit

• specific criteria not disclosed but clear that certain groups are subject more frequently: individuals w gross income > 100,000, self employed individuals w substantial business income and deductions, and cash businesses
• if information returns like W-2s and 1099s don’t match amounts reported on return
• itemized deductions in excess of norms for certain income levels

Review for Mathematical Errors upon submission + ensure SS #s and signatures are not missing

• if error, sent a revised computation and explanation and amount due or refund check
• “direct correspondence audit” doesn’t require formal meeting w IRS

Formal Examination

• office audit: local
• field audit

After Audit

• may accept or recommend changes
• if accept, taxpayer signs Form 870 that waives right to receive statutory notices and petition US Tax Court and right to appeal process
• form 870 normally closes the case but IRS can assess for Fraud
• if changes, then move on to appeals

Question 43

IRS Appeals Process

Answer 43

• if agreement can’t be reached, taxpayer received copy of Revenue Agent’s report and 30 day letter for right to request an administrative appeal
• or if appeal isn’t requested, request notice of deficiency; taxpayer can’t take case to US Tax Court before IRS sends notice of deficiency
• Appeals Division is authorized to settle all tax disputes based on hazards of litigation
• If agreement met w Appeals Division, taxpayer signs Form 870-AD, normally considered binding on both parties
• if no agreement, entitled to take case to
  1. US Tax Court
  2. US Court of Federal Claims
  3. US District Court

Question 44

Federal Court System

Answer 44

When taxpayer and IRS can’t reach an agreement using administrative appeals process, settled in Federal Court System
- either IRS or taxpayer can initiate the process

Burden of Proof

• most litigation, party bringing case has burden of proof (usually taxpayer)
• certain situations, IRS has burden when taxpayer has introduced credible evidence and has maintained books and records

Question 45

US Tax Court

Answer 45

• only hearts federal tax cases (unlike district court)
• unique: may litigate without first having paid the disputed tax in full
• 1 judge, no jury + judges travel (19 judges)
• can’t be taken to tax court before note of deficiency

Appeals

• US Tax Court is a national court and may be appealed to various US Courts of Appeals
• Tax Court will follow the geographic Court of Appeals that has direct jurisdiction over the taxpayer

Question 46

US District Courts

Answer 46

• general trial courts of US fed court system
• both civil and criminal (not just tax cases)
• district court has jurisdiction over location of taxpayer
• 1 judge, jury trial (unique)

Must First Pay Disputed Tax Liability and Sue IRS for Refund
- 3 days from date filed or 2 years from tax paid, whichever is later

Question 47

US Court of Federal Claims

Answer 47

• nationwide court jurisdiction over most claims for money damages
• taxpayer must pay disputed tax and sue for refund
• 16 judges, no jury
• Court of Fed Claims follows decisions of Federal Court of Appeals not the geographic Court of Appeals

Question 48

US Court of Appeals

Answer 48

(tax court and district)

• 3 judge panel, no jury
• Geographic courts handle issues from tax or district court
• Federal Court of Appeals handles cases that originate in the Court of Federal Claims
• usually has final word on federal tax matters bc the Supreme Court hears very few tax cases

Question 49

US Supreme Court

Answer 49

highest court in the nation

• all 9 justices hear all cases that they agree to consider (granting a “writ of ceriorari”)
• tax cases are rare

Question 50

Penalties Imposed on Taxpayers

Answer 50

both civil and criminal

• Earned Income Credit penalty
• Failure to Make Estimated Income Tax Payments if 1000+ estimated tax and withholdings don’t cover 90% of current year tax or 100% of last year’s (110% for AGI >150,000)
• Failure to File Penalty: 5% per month not filed, can’t exceed 35% of amount of tax due
• doesn’t apply if due to reasonable cause and not due to willful neglect
• Failure to Pay Penalty: 1/2 of 1% per month, can’t exceed 25% of unpaid tax
• exception if 90% paid by due date and remainder paid by extended due date
• Negligence Penalty for Understatement of Tax: 20% of understatement (defense: reasonable basis even if undisclosed)
• Penalty for Substantial Understatement of Tax: 20% but more difficult to avoid (defense: reasonable basis and disclosed, substantial authority and undisclosed but no tax shelter)
• Fraud Penalties: 75% of understatement of tax
• civil penalties: IRS must prove preponderance of evidence
• criminal penalties: IRS must prove beyond a reasonable doubt willfully, intentionally, recklessly