R6 Flashcards
What’s a requirement of a simple trust?
to not have a charitable beneficiary (cannot make distributions to charitable organizations)
they would only make contributions from current income
What are attributes of a complex trust?
accumulate current income, distribute corpus (principal), and provide for charitable contributions
What deductions would help determine the amount of taxable gifts?
-charitable contribution deduction
-gift tax annual exclusion
-marital deduction
What are examples of items that would be included as gifts?
college books, supplies, and dorm fees
cash
room and board
rule: anything in excess of $17k is a taxable gift
T/F: Marital transfers are excluded from gift tax.
true
-if spouses give each other money or gifts, these are deductions (not taxable)
T/F: Gifts to trusts with beneficiaries under age 21 can be excluded if the beneficiary receives accumulated interest and assets at age 21.
true
T/F: Amounts paid on behalf of a donee for tuition are only excluded from the gift tax if the payment is made directly to the educational institution.
true
What types of business are eligible for exemption from federal income taxes?
-corporations
-foundations
-community chests
-funds
NOT partnerships
What items would be included and excluded from unrelated business income?
included:
-rent from real property where substantial personal services are provided (ex. hotel room)
excluded:
-interest, dividends, and other investment income
-gains from the sale of property that is not held for sale to customers in the ordinary course of business
-income from research activities performed by a college, university, or hospital
-rent from real property
What is unrelated business income?
-must be derived from an activity that constitutes a trade or business
-regularly carried on
-NOT substantially part of the organization’s tax-exempt purpose
What happens when a CPA prepares a tax return for a client and notices an error they made when it’s signed and returned?
-notify the client and advise them of reasonably-likely penalties
you’re not allowed to prepare an amended tax return without the client’s permission
When can a CPA charge a contingency fee to a client?
a claim for refund of interest and/or penalties (late or underpayment)
T/F: A tax preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided (inaccurate or incomplete).
true
T/F: The term “reportable transaction” is any transaction that the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance or tax evasion.
true
T/F: For each tax return prepared, a tax preparer must retain either the taxpayer’s name and ID number, or a copy of the return.
true
What are the penalty fines if a tax preparer doesn’t sign the tax return?
$60 for each instance (up to $30k per calendar year)
The CPA must retain a copy of each return for ______ years after the close of the return period.
three
T/F: A client is prohibited from negotiating a client’s refund check.
true
T/F: If a tax preparer feels justified by a client’s or third party’s response in an understatement or overstatement in a tax return, they don’t need to request support.
true; as long as the tax preparer asks the client if they have (sufficient) documentation
What are the different burdens of proof?
- civil – preponderance of the evidence (burden of proof is on the IRS)
- criminal – beyond a reasonable doubt (burden of proof is on the government)
What are the due diligence requirements for the earned income credit?
-eligibility checklists
-computation worksheets
-record retention
-reasonable inquiries to the taxpayer
T/F: Disclosure of confidential client data may be made to any party on consent of the client.
true
exception: a tax return preparer can disclose confidential client info without the client’s consent if it’s to be evaluated for a quality or peer review
What are the fines if a tax preparer wrongfully discloses client information?
civil penalty of $250 per disclosure; up to $10k per year
criminal penalty of up to $1,000 or imprisonment of up to 1 year
T/F: Membership in the AICPA can be suspended or terminated without a hearing.
true
A __________ audit is the most common type of IRS audit which is conducted by mail and typically arises from information errors, mathematical errors, or matching issues.
correspondence
What happens if the taxpayer rejects one of the IRS’s findings in the audit?
the IRS will issue the taxpayer a 30-day letter as a notice for the right to appeal
What are the original jurisdiction, or trial, courts?
the Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims
For non-mathematical or clerical errors, how long does the taxpayer have to file a petition with the Tax Court?
90 days from the mailing of the notice of the deficiency if the notice is not addressed to a taxpayer outside the U.S. to either pay the deficiency (interest and penalties) or file a petition with the Tax Court for a redetermination of the deficiency
T/F: A decision of the Small Cases Division of the U.S. Tax Court cannot be relied on as precedent in any other court.
true; these decisions from the Small Cases Division are also not appealable
T/F: U.S. District Court cases are heard before one judge, not a panel of judges.
true
T/F: An individual taxpayer must pay taxes throughout the tax year, through tax liabilities minus withholdings and/or quarterly estimated tax payments of the lesser of 1) 90% of the current year AGI or 2) 100% of the prior year AGI.
true
T/F: A civil fraud requires conduct that transcends negligence or stupidity.
true; there needs to be malicious intent to report fictitious transactions or evade taxes
T/F: The taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, AND if the taxpayer did not have willful neglect.
true
The ______ holds the most authoritative value.
IRC (Internal Revenue Code) - regulations (even if temporary)
When a taxpayer needs guidance on a specific tax issue related to a specific transaction, the taxpayer can ask the IRS for _________.
a private letter ruling (the IRS’s interpretation of the federal tax law)
When a CPA breaches a contract for professional services, what kind of damages are the client and any third party entitled to?
money damages
What are the four elements of a gross negligence claim?
- the defendant owed a duty of care to the plaintiff
- the defendant breached that duty of care
- the breach of duty was the actual and proximate (main) cause of the plaintiff’s losses
- the plaintiff suffered damages (injury)
What are the five elements of a common law fraud claim?
- a misrepresentation of material fact
- intent to deceive (scienter)
*this is the best defense if you can prove it - actual and justifiable reliance by the plaintiff on the misrepresentation
- an intent by the defendant to induce the plaintiff’s reliance on the misrepresentation
- damages
T/F: A CPA is liable for negligence only to third parties whom the CPA knows or should foresee will be relying on the CPA’s report.
true
T/F: Constructive fraud requires intent.
false - it doesn’t require intent; it only requires reckless disregard of truth
note: actual fraud requires intent
T/F: An action for gross negligence requires both reliance (by a client or third party such as a bank) on a misstatement and negligence.
true
T/F: Working papers, owned by the CPA, cannot be turned over to another accountant without the client’s permission.
true
Who are the entities that a CPA would be able to share client confidential information without the client’s consent?
- lawful subpoena
- prospective purchasers (as long as they don’t disclose the info)
- quality control panel
- AICPA/State Trial Board
- Court proceedings
- When GAAP requires disclosure of such information in the F/S
What is the fine for failure to give tax return preparers the info they need in time?
$60 for each failure
$30k maximum for each return period
What is Circular 230?
it prohibits a practitioner from endorsing or negotiating refund checks issued to the client
T/F: The U.S. Tax Court is a specialized trial court that hears only Federal tax cases, and the trials are by a judge and not by a jury.
true
What is the limit for 100% exclusion of gifts for medical or educational institutions?
$17,000
T/F: IRS publications are not considered a primary authoritative source when one is conducting tax research.
true; tax court cases, treasury regulations, and the Internal Revenue Code are all primary authoritative sources
