R6 - Ethics Flashcards
What is Circular 230?
“Regulations Governing Practice before the Internal Revenue Service. Addresses practice before the IRS with regard to:
- ) authority to practice before IRS
- ) duties and restrictions of practicing
- ) sanctions & violations
- ) disciplinary proceedings
*only for tax practitioners (licensed)
If the IRS requests information or records, what is the one exception where the tax practitioner does not have to provide it?
The practitioner may withhold information or records he believes in “good faith” and on reasonable grounds to be privileged.
RECALL:
recall the three restrictions that former gov. employees have regarding their conflicts of interest:
- ) “Personally and Substantially participated”: can NEVER represent or assist those parties with respect to that particular matter
- ) “Official responsibility”: two years cooling off period for that specific party/matter
- ) “Participated in the development”: one year cooling off period
What are the three situations in which charging a contingent fee would be ok?
- ) IRS audit
- ) Claim solely for a refund
- ) Judicial proceeding
A tax practitioner is allowed to accept client info if it appears reasonable without verification. What if the information looks unreasonable?
Must make reasonable inquiries if the client info appears questionable or incomplete.
What if a tax practitioner knows a client is withholding or omitting some information?
- ) Do NOT notify the IRS
- ) Consider withdrawing if the client will not rectify
- ) advise client promptly of omission AND consequences
What do practitioners have to do with regard to circular 230 to ensure compliance?
- ) have adequate procedures to comply
- ) ensure procedures are followed
- ) test and fix along the way
What is a key distinction of a tax preparer?
Any person who prepares for COMPENSATION of who employs one or more persons to prepare for compensation
*this does not include persons in a firm doing clerical work (typing, entering info into tax returns, etc). Person must offer TAX ADVICE
What does PTIN stand for?
Preparer tax identification number
Who should ultimately sign a tax return?
The preparer with the primary responsibility for the overall substantive accuracy of the return (could be other nonsigning preparers who assisted)
What are the primary authoritative sources that determine the treatment of tax positions?
1.) IRC
2.) Regulations construing statutes
3.) Revenue rulings - US Treasury Dpt
4,) Court cases
What are not primary authoritative sources that determine the treatment of tax positions?
- ) Press releases
2. ) Admin pronouncements by Internal Rev. Bulletin
What is a listed transaction?
A transaction specifically identified by the Secretary of the US Treasury Dept as a tax avoidance transaction
What is a reportable transaction?
A transaction that requires information to be included with a return or statement because such transaction is of a type that the Secretary of the U.S Treasury Dept has determined as having a potential for either tax avoidance (legal), or tax evasion (illegal)
*this refers to tax shelters as well
What is the difference between a listed transaction and a reportable transaction?
Listed = Flagged by US Treasury, for tax avoidance strategies
Reportable = Flagged by US Treasury, for tax avoidance/tax evasion strategies
*if a transaction is reportable, it is inherently listed
Any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in preparation is:
Negligence (ordinary)
To have a reasonable basis on a tax position, a preparer/taxpayer must have what % likelihood of the position being upheld?
> 20%
To have a substantial authority on a tax position, a preparer/taxpayer must have what % likelihood of the position being upheld?
> 33% - 50%
To have a more-likely-than-not on a tax position, a preparer/taxpayer must have what % likelihood of the position being upheld?
> 50%
How can a penalty for an unreasonable tax position be avoided?
- ) Reasonable basis disclosed (>20%)
- ) Substantial authority disclosed or not (>33%-50%)
- ) More-likely-than-not disclosed or not (>50%) (applies to tax shelters and reportable transactions)
If found liable for a penalty for understatement due to an unreasonable position taken on a tax return, what would be the penalty amount if for ordinary negligence (not willful or reckless)?
Greater of $1,000 or 50% of the income the preparer got for the return
If found liable for a penalty for understatement due to an unreasonable position taken on a tax return, what would be the penalty amount if for willful or reckless conduct (fraud)?
Greater of $5,000 or 50% of the income the preparer got for the return
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for not providing a taxpayer with a copy of their return?
$50 for each instance (maximum $25,500 per year)
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for failing to sign a tax return as a preparer?
$50 for each instance (maximum $25,500 per year)
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for not providing a PTIN on a return you prepared?
$50 each (maximum $25,500 per year)
How long is a preparer required to keep copies of clients records for?
Three years (tax)
Seven years (audit)
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for not maintaining copies of clients records for 3 years?
$50 each (maximum $25,500 per year)
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for endorsing or otherwise negotiating an IRS refund check?
$510 per check
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for failure to be diligent in determining a client’s eligibility for the earned income credit?
$510 for each failure
What is the penalty for aiding and abetting understatement of a tax liability?
- Applies to any person, not just tax preparers.
- IRS has the burden of proof (only time they do, usually is the taxpayer/preparer for civil cases)
- Civil penalty imposed by IRS of $1,000 for all taxpayers, and $10,000 for corps
In a criminal case regarding taxes, who has the burden of proof? (IRS or taxpayer)
IRS.
Taxpayer has burden of proof in civil cases (unless for aiding and abetting and understatement of a tax liability)
Tax preparers are subject to certain penalties for unethical behavior from the IRS.
What is the penalty for wrongful disclosure and or use of tax return information?
$250 for each disclosure
What are exceptions to the penalty and/or fine for wrongful disclosure and or use of tax return info?
If disclosure was for:
- ) Court order (subpoena)
- ) For state & local returns
- ) For quality and peer reviews
Who has the sole power to license and revoke CPAs?
The State Boards of Accountancy
What are the 5 penalties that a state board of accountancy may impose for professional misconduct?
- ) Suspension, revocation of license (sole power)
- ) Monetary fines
- ) Reprimand or censure
- ) Probation
- ) Requirement for CPE
*notice how they can’t throw you in jail
Can the AICPA or state CPA societies suspend / revoke CPA licenses?
No, the state board of accountancy have the sole power to do so
*notice how state board of accountancy is not the same as state society
Can the AICPA or state CPA societies sanction their members?
Yes, can suspend their state society membership but not their CPA license
When do most IRS audits occur in regard to the returns that are being audited?
Generally within two years from the date of filing the return
What is a correspondence audit?
Review for mathematical errors (least serious audit)
What form is signed by a taxpayer at the conclusion of an IRS audit that does not need to be appealed?
Form 870 (normally closes the case)
If a field agent comes to audit you and you cannot resolve the matter with that agent, what is the next step in the audit process?
Taxpayer is issued a 30 day letter for right to appeal. Agreement is then tried to be reached at the office of appeals (WITHOUT LITIGATION). If resolved there, a Form 870-AD is signed by the taxpayer (indicating matter was resolved at appeals division)
If resolution can not happen at the appeals division, what is the next step in the audit process?
90-day letter issued to taxpayer (notice of deficiency).
Taxpayer has 90 days to pay, or 90 days to file a petition with the U.S Tax court/US District court/US Court of Federal Claims
Who has the burden of proof in any court proceedings on income, gift, and estate tax issues?
IRS (usually the party bringing the case has the burden of proof)
What is the advantage of using the US tax court for your hearing after your 90 day letter is issued? what is the disadvantage?
Don’t have to pay first, but no jury (trial by tax expert judge)
The US tax court issues two types of decisions, what is a “regular” decision?
Involves new or unusual point of law
The US tax court issues two types of decisions, what is a “memorandum” decision?
Application of an existing law
What is the advantage of using the US District Court for your hearing after your 90 day letter is issued? what is the disadvantage?
Can have a jury trial and the judges are not tax experts, disadvantage is you have to pay the tax bill first and then if you win sue to get a refund later
What is the advantage of using the US Federal Claims Court for your hearing after your 90 day letter is issued? what is the disadvantage?
Not really much advantages. You have to pay the bill first, and no jury is available. Generally handles tax claims for high net worth individuals and for national/multinational companies
If you appeal the ruling at the US Tax Court, who hears the appeal?
Court of Appeals
If you appeal the ruling at the US District Court, who hears the appeal?
Court of Appeals
If you appeal the ruling at the US Court of Federal Claims, who hears the appeal?
US Court of Appeals for the Federal Circuit
How can you avoid penalties for failure to make sufficient estimated income tax payments?
- ) If the liability is less than or equal to $1,000
- ) If you make pmts of at least 90% of current years tax
- ) If you make pmts of at least 100% of last years tax (110% if AGI over $150k)
What is the failure to file penalty for individuals?
5% per month of amount of tax due
What is the failure to pay penalty for individuals?
Half of 1% per month of amount of tax due
(if taxpayer hasn’t filed also, they are only subject to 5% each month from failure to file penalty and this penalty is ignored - no doubling up)
What is the penalty for an individual for negligence with respect to an understatement of tax? (not substantial understatement)
20% of understatement of tax
What is the penalty for an individual for negligence with respect to an understatement of tax? (substantial understatement)
20% of understatement of tax
*note here this is the same as if it were not substantial. Difference is that this is much harder to avoid
What is the penalty for fraud cases of the understatement of tax due?
At least 75% of the understatement of tax due to fraud and criminal penalties ($100k for indiv, $500k for corps)
What is the difference between constructive fraud and fraud?
Constructive fraud = reckless (gross negligence)
Fraud = intent, willful
What is the best defense for a CPA being sued for breach of contract?
Failure to cooperate
What is a tort?
Wrongful act (either unintentional or intentional)
Who can generally sue a CPA for breach of contract?
Generally, only the client and and named third party beneficiaries (generally requires privity)
What is a CPAs best defense to ordinary negligence?
Due diligence (workpapers)
To whom is the duty of due diligence owed?
Generally runs only to clients and to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPAs work (creditors, investors, etc)
What is the ultramares decision?
Limits a CPAs liability more narrowly to persons in privity of contract with the CPA (named)
What are the five elements of fraud?
MAIDS:
Misrepresentations of material fact
Actual and justifiable reliance by a plaintiff on misrepresentations
Induce plaintiffs reliance
Scienter
What is a major difference between constructive and regular fraud?
Constructive = reckless, but not intentional (gross negligence)
Fraud = intent, willful
What is a CPAs best defense for fraud?
Lack of scienter - acted in good faith
Is privity a defense for fraud? (persons weren’t named in contract with CPA)
No, privity is not a defense for fraud. Fraud is a much broader liability than negligence. Liability is not limited to persons in privity
What damages can a CPA be liable for if guilty of malpractice?
- ) Taxes (if client paid to much and can’t get a refund)
- ) Penalties
- ) Interest
- ) Costs incurred to correct returns
- ) Consequential damages (lost investment or income opportunities)
Does a taxpayer have privileged communications with a CPA?
Yes but only to the extent of the tax advice discussed (criminal)
If noncriminal (civil), the tax practitioner privilege is just as good as the attorney-client privilege
