R6-M4 Professional Responsibilities and TR Preparer Penalties

Question 1

who is considered a tax return preparer?

Answer 1

A TR preparer is any person who prepares for compensation or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return required under the internal revenue code or any claim for refund of tax imposed by the internal revenue code.

ex: a staff accountant prepared all of the tax refund claim, so he or she is a tax return preparer, even though the tax return is signed by another member of the firm.

Question 2

what is reportable transaction?

Answer 2

is any transaction that the Secretary of the US treasury department has determined as having a potential for either tax avoidance or tax evasion

Question 3

what is unreasonable position?

Answer 3

a position is deemed unreasonable unless:
- reasonable basis for a disclosed position exists (>20%), or
- substantial authority for the position, regardless of disclosure, exists(40-50%); or
- it is reasonable to believe that a tax shelter or reportable transaction position would meet the more-likely-than-not standard (>50%)

Question 4

what is considered fraud?

Answer 4

• understatement due to willful or reckless conduct
• intentionally or knowingly
• lack of good faith
• Negligence is unreasonable or lack of ordinary care or failure to make unreasonable attempt to comply with the provisions of the internal revenue laws. It is NOT fraud.

Question 5

what are rules of supporting documentation?

Answer 5

• general rule: a preparer is NOT REQUIRED to obtain supporting documentation UNLESS the preparer has reason to suspect the accuracy of the information provided by the taxpayer (client)
• the preparer MUST make REASONABLE INQUIRIES if the information provided by the taxpayer appears incorrect or incomplete

Question 6

what are the 3 understatement penalties?

Answer 6

1. reasonable basis standard (> 20% tax position upheld):
2. substantial authority standard (> 40%-50%): objective standard involving an analysis of the law and application of the law to relevant facts
3. more-lily-than-not standard (> 50%): when there is a greater than 50% likelihood of a tax position being upheld by the courts

Question 7

what are failures that lead to tax preparer penalties?

Answer 7

• fail to provide copy to taxpayer: $60 each failure
• fail to furnish identification number of preparer: $60 each failure
• fail to properly retain records: $60 each failure. require to keep for 3 years
• fail to file correct information returns: $60 each failure
• negotiation of IRS refund check: $600 each check
• fail to de diligent in determining a client’s eligibility for earned income credit: $600 each failure
• aiding and abetting understatement of tax liability: applies to any person, not to just tax preparers. worse penalty $1000 for all except $10k for corps

Question 8

what are rules about client confidential information disclosure?

Answer 8

• generally tax preparers are not allowed to disclose client’s confidential info unless client’s consent
• however, disclosure without client’s consent is acceptable in the following circumstances:
  + preparation of state and local tax returns
  + quality and peer reviews
  + court order or administrative order

Question 9

what are disciplinary power of state boards?

Answer 9

• 3 broad categories of misconduct:
  + misconduct while performing accounting services (negligence, fraud, dishonesty
  + misconduct outside the scope of accounting services (intoxication from alcohol or drugs that impair account’s ability and insanity)
  + criminal conviction (commission of a felony, failure to file tax returns, crimes relating to the practice of accounting)
• After investigation, the board can conduct a FORMAL HEARING for possible disciplinary action
• 5 penalties:
  + suspension or revocation of license (only state board)
  + a monetary fine
  + a reprimand or censure
  + probation (no jail)
  + requirement for continuing professional education (CPE) courses