R6 - Other Entities, Professional Responsibility

Question 1

Taxation of Estates (2 taxes)

Answer 1

Estates are subject to 2 separate taxes:

1. Income tax: due annually based on income earned during the year while estate is in existence
2. Estate tax: a one-time transfer tax based on the value of the decedent’s estate

Question 2

Tax Return Preparer Penalties - Unethical behavior

Answer 2

1. Failure to provide copy to TP - $50 each failure
2. Failure to sign return • $50 each failure
3. Failure to furnishID# • $50 each failure
4. Failure to retain records • $50 each failure
   - Max penalty for each 1-4 is $25,500 per year
5. Negotiation of IRS check - $510 each failure
6. Failure of diligence of El credit - $510 each failure
7. Wrongful disclosure- $250 each disclosure
8. Aiding & abetting understatement • $1,000

Question 3

IRS Disciplinary Action

Answer 3

IRS Disciplinary Actions
-Criminal penalities: beyond reasonable doubt, burden on government to prove. May be imprisoned for up to 3 years &/or fined$100,000 {500,000 corp)
-Civil penalties: preponderance of evidence, burden
is on the TP. Can prohibit from practicing or fines.

Question 4

What does the SEC enforce

Answer 4

-Civil penalties only, no jail. Only investigates criminal action & then turns over to police. May
censure, suspend, or revoke right to practice before
the SEC. Fines of up to $100,000 {500,000 firm)

Question 5

Gift exclusion

Answer 5

• To be eligible for gift exclusion, must be complete & present. Gift is considered incomplete if its either
  1) conditional or 2) revocable.

Question 6

Distributable Net Income DNI

Answer 6

• limit on amt the T/E can deduct w respect to distr to beneficiaries:
  Estate (trust) gross income (includes all cap gains)
  (estate (trust) deductions)
  =Adjusted total income
  + Adjusted tax-exempt interest
  (capital gains) (attributable to corpus or principal)
  = Distributable Net Income {DNI)
  -Income distribution deduction equals the lesser of:
  1. Actual distribution to beneficiary
  2. DNI (Iess adjusted tax-exempt interest)

Question 7

Estate Transfer Tax

Answer 7

Gross Estate (at date of death or alt val date)
(Nondiscretionary deductions)
=Adjusted Gross Estate
(Discretionary deductions)
=Taxable Estate 
x Tax rate
=Tentative Estate Tax
(unified credit)
=Federal Estate Tax

Question 8

Tax due on current gifts:

Answer 8

Gross Gifts in a Calendar Year (at FMV)
(exclusion of 15,000 per donne/per year)
(unlimited marital deduction of gift to donor's spouse)
(charitable gifts)
= taxable gifts this year
\+ taxable gifts of prior years
= Cumulative Lifetime Gifts

Tax on cumulative lifetime gifts (calculate)
(gift tax paid on prior gifts)
(applicable credit)
= tax due on current gifts

Question 9

Understatement due to unreasonable position

Answer 9

A position is deemed to be unreasonable, unless:
1. substantial authority for the position, regardless of disclosure
exists {>33% but <50%}
2. reasonable basis for a disclosed position exists {>20%}
3. it’ s reasonable to believe that a tax shelter or reportable transaction position would meet the more-likely- than -not standard {>50%}
-Penalty for understatement for ord neg: equal to the greater of
1. $1,000, or
2. 50% of the income the preparer received for tax prep services
-Penalty due to will full or reckless conduct: greater of
1. $5,000, or
2. 50% of the income the preparer derived w respect to return

Question 10

After IRS Audit

Answer 10

1. If agreement is reached, TP signs Form 870. Interest stops accumulating on deficiency 30 days after form is filed.
2. If agreement is not reached at rev-agent level, TP receives
   copy of report & 30 day letter notifying TP of right to appeal. TP has 30 days to request an admin appeal w appeals officer.
3. If agreement is reached with the Appeals Division, TP signs
   Form 870- AD. Interest stops accumulating when IRS gets form.
4. If agreement not reached, 90 day letter is issued. TP has 90 days to pay or file a petition with the U.S. Tax Court . If TP wants
   U.S. District or U.S. Court of Fed Cl aims they must pay tax first.

Question 11

Taxpayer Penalties

Answer 11

1. El credit penalty: if negligently claimed, cannot claim for 2 subsequent years, 10 if fraud.
2. Penalty for failure to make sufficient estimated income tax pmts
3. Failure to file: 5% of amount of tax due for each month return is late, up to 25%. (if no tax due, no penalty)
4. Failure to pay: 1/2 of 1% {.005} per month on unpaid tax, up to 25%
5. Negligence penalty understatement not substantial: pay what you owe+ 20% penalty on understatement
6. Penally for substantial understatement: 20% + what you owe.
7. Fraud penaltv