REG 1 Flashcards
Tory researched a position that her tax client wished to take and concluded in good faith that there was a 25% chance that the IRS would sustain the position if it reviewed it. Which of the following is true?
Because the position meets the “reasonable basis” test, but not the “substantial authority” test, Tory may sign a return taking this position only if she discloses it.
CPA Monrew induced several rich tax clients to invest in a domesticated beaver tax shelter device. When the IRS sought to audit one of Monrew’s clients, he realized that among other difficulties, he had not had the client sign proper documentation. While an IRS agent sat in the waiting room of one of his clients, Monrew slipped in a back door and had the client sign a backdated document. When the government discovered all this, Monrew was indicted for tax fraud in violation of Section 7206. Which of the following is true?
Monrew clearly willfully aided in the preparation of a tax-related document that was fraudulently backdated.
Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:
People are TRPs if (a) they are paid, (b) to prepare or retain employees to prepare, (c) a substantial portion, (d) of any federal tax return. Because Louis was not paid specifically to prepare the return, he does not satisfy the first requirement to be a TRP.
Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?
The majority view is the Restatement “limited class” approach, which generally allows recovery by third parties where the CPA had prior knowledge of the existence of a limited class of potential users (but not necessarily of their individual identities) and of the general purpose of their use of the audit. Prior knowledge is the key, so mere foresee ability is not enough, although this answer implies the contrary.
The intent, or scienter, element necessary to establish a cause of action for fraud will be met if the plaintiff can show that the
Intent can be established in one of two ways: A plaintiff may show that the defendant actually knew of the misrepresentation, OR may prove that the defendant acted recklessly. Both amount to intent and may be used to prove that element of a fraud action.
Which of the following statements is generally correct regarding the liability of a CPA who negligently gives an opinion on an audit of a client’s financial statements?
The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
There are three general viewpoints regarding an accountant's liability to third parties. One view requires privity of contract for a third party to recover. Another view allows all reasonably foreseeable users of an accountant's report to sue. But the majority view, known as the Restatement view, limits an accountant's liability to a limited class of actually foreseen users. This question obviously asks the student to apply the majority (Restatement) view.
Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA?
Gross negligence in applying generally accepted auditing standards.
Fraud usually involves intentional deception. This question, however, asks about a close cousin of fraud – constructive fraud. In a constructive fraud case, gross negligence (sometimes referred to as recklessness) acts as a substitute for intentional deception. Ordinary negligence or carelessness is not serious enough to act as a substitute for intent.
Under the “Ultramares” rule, to which of the following parties will an accountant be liable for negligence?
The “Ultramares” rule, established in a 1931 case of the same name, requires privity before an accountant is liable for negligence. Other rules, such as the Restatement rule, allow foreseeable users who rely on a negligently false statement to sue.
Hark CPA, failed to follow generally accepted auditing standards in auditing Long Corp.’s financial statements. Long’s management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan.
Long defaulted on the loan.
In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will
Win because there was no privity of contract between Hark and Third.
The Ultramares rule is applied in only a few jurisdictions. It normally allows recovery by a third party only if there was privity of contract between the accountant and third party.
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements?
Scienter involves whether or not a person or company has a “guilty mind.” One of the requirements of fraud is an intent to deceive. Therefore, if a firm did not intentionally make a misrepresentation and has no “guilty mind,” no fraud has occurred.
In a RICO 1962(c) case brought by a major university, an accounting firm (D) had provided audit, accounting, and consulting services for a company that became insolvent. The plaintiff claimed that D firm had issued false audit reports, provided other accounting services, and attended board meetings of the insurer. Which of the following is true?
Defendants are liable under 1962(c) only if they “conduct or participate in the conduct” of the racketeering enterprise. Even if all of the other elements of a 1962(c) violation are present here, D did not become involved in managing the firm. It stuck to accounting activities. Even if it did them wrongfully, or even fraudulently, it cannot be liable under RICO.
Plaintiff (P) came into a huge sum of money. An accounting firm (D) advised P on two tax-planning strategies, opining that they were “more likely than not” to be upheld by the IRS, and helped him implement them. They were known as FLIPs and BLIPs, and involved buying and exchanging warrants, options, and shares of various Swiss and Cayman Islands companies. Ultimately, the IRS audited three years worth of P’s tax returns because these were aggressive tax shelters that the IRS had targeted for prosecution. P sued D and others under RICO for a violation of Sec. 1962(c). Which of the following is true?
When a RICO claim is predicated upon claims of securities fraud, as here (since these bogus strategies involved options, warrants, and shares of stock), no RICO civil suit can be brought until defendant has been criminally convicted. That is not true of any of the other RICO “predicate acts,” but it is true of securities fraud. This case was dismissed.
Jetmore was surprised to learn how much income his tax client, Quantilco, Inc., was making. He thought that Quantilco’s competitors might be interested in the information, so he sold it to one of them. When Quantilco found this out, it started investigating what consequences it might visit upon Jetmore. Which of the following is true?
Both of the first two choices are potential consequences of breach of the duty of confidentiality when it involves taxpayer information.
Susan Worth has a lease for two years at the Bedford Arms apartment complex. Susan has the opportunity to study at Oxford for one year and has agreed to sublease her apartment to Karen Knight. Karen is to take over the lease on August 1, 2010, and finish the term of the lease, which ends May 31, 2011. Susan and Karen execute an agreement for the lease takeover. In January 2011, Karen misses her rent payment and then moves out of the apartment. The Bedford Arms owner wants to recover from Susan. This contract:
Real property interests, including leases, are under common law.
Kay, an art collector, promised Hammer, an art student, that if Hammer could obtain certain rare artifacts within two weeks, Kay would pay for Hammer’s post-graduate education. At considerable effort and expense, Hammer obtained the specified artifacts within the two-week period. When Hammer requested payment, Kay refused. Kay claimed there was no consideration for the promise. Hammer would prevail against Kay based on
This is a unilateral contract because it can only be accepted by performing an act. By the terms of the offer, Hammer cannot accept with a promise. Instead, Hammer has to do an act, which results in total performance of the contract. A unilateral contract is formed if the required action is completed. Here, by presenting Kay with the artifacts, Hammer has accepted the offer and formed a valid contract.
