REG 1 - Ethics and Responsibility in Tax Practice 1 Flashcards
Teo has a private company audit client. He also provides it with tax services. For which of the following services may he charge a contingent fee and still be in compliance with Circular 230?
A. Preparation of an original income tax return.
B. A claim for refund filed in connection with a determination of statutory interest or penalties.
C. Representing the client in judicial proceedings.
D. B and C only.
D. is the best answer as both B and C are true.
A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Services, except
A. Endorsing the check and depositing it into the client’s bank account.
B. Holding the check for safe keeping and awaiting the client’s return.
C. Holding the check until the client is billed, then endorsing and depositing the check in to the CPA’s account as payment for the bill.
D. Endorsing the check and depositing it into an escrow account for the client’s benefit.
B. Section 10.31 of Circular 230 absolutely prohibits a practitioner from negotiating a check issued to a federal tax client.
This is the only answer that would not violate the rules of practice.
T/F: Tia, a CPA working for the IRS, was closely involved in the IRS’s investigation of Mastodon. Mastodon just had several of its key internal tax people retire or resign. Given her intimate knowledge of the corporation’s tax situation, Mastodon wishes to hire Tia right away to take over its tax unit. This would be permissible under Circular 230.
False.
Section 10.25 contains extensive rules meant to prevent conflicts of interest, such as IRS employees going into private practice and working on cases they had knowledge of when they worked for the government.
Because Tia has worked on the investigation of Mastodon, she could not be employed within two years of leaving the Service by Mastodon.
Kamp, a local CPA firm, is preparing a personal income tax return for Tolliver, who has learned of a tax deduction he feels he should be able to use. He tells Kamp that he wants to take this deduction. What would be an appropriate response from Kamp to Mr. Tolliver according to the SSTS?
“After researching your position, we believe
A. The claim is not frivolous, but it may not have a realistic possibility of being sustained, so we can take the deduction without disclosing it to the IRS.
B. The claim is frivolous, but we can take the deduction as long as we disclose it to the IRS.
C. The claim has a realistic possibility of being sustained, so it would be permitted to take the deduction without disclosing it to the IRS.
D. The claim may not have a realistic possibility of being sustained, but if we take a larger deduction than you want, when the IRS fights us on it, we can negotiate down to the deduction you originally wanted.
C. Positions with a realistic possibility of being sustained (essentially between 33% and 50%) need not be disclosed.
CPA Nickerson is preparing a tax return for client Bonnie. Which of the following is true regarding SSTS No. 2?
A. It is appropriate for Nickerson to remove an item on grounds that the answer would be disadvantageous to Bonnie.
B. If Nickerson does have reasonable grounds for omitting an answer, he need not disclose them.
B. If reasonable grounds exist to omit an answer, they need not be disclosed, says SSTS No. 2.
CPA Sharon annually prepares MBC’s tax returns. Which of the following actions or inactions would violate the SSTSs?
A. Sharon signs a tax return containing a position that she believes to have a realistic possibility of being sustained without disclosing it.
B. Sharon relies upon the representations of MBC’s officers without independently verifying their accuracy.
C. Sharon uncovers a material misstatement made in last year’s return but fails to promptly inform the taxing authority of the error.
D. None of the above.
D.
CPA Rago has for many years prepared the individual income tax returns for client Luka. In preparing this year’s return, Rago discovered an error in last year’s return that caused Luka to substantially underpay her taxes. Which of the following is true?
A. Rago must promptly tell Luka of the error.
B. Rago must promptly tell the IRS of the error.
C. Rago should seriously consider not doing Luka’s tax returns in the future, if Luka refuses to bring the error to the IRS’s attention.
D. A and C.
D.
According to the AICPA Statement on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client?
A. Whether the client will seek a second opinion.
B. The tax sophistication of the client.
C. The likelihood that current tax litigation will impact the advice.
D. The client’s business acumen.
B. The AICPA recommends that the sophistication of the client be taken into account in considering whether or not to put tax advice in writing. This is only one of several factors to be taken into account. The full list includes: a. The importance of the transaction and amounts involved; b. The specific or general nature of the taxpayer’s inquiry; c. The time available for development and submission of the advice; d. The technical complexity involved; e. The existence of authorities and precedents; f. The tax sophistication of the taxpayer; g. The need to seek other professional advice; h. The type of transaction and whether it is subject to heightened reporting or disclosure requirements; i. The potential penalty consequences of the tax return position for which the advice is rendered; j. Whether any potential applicable penalties can be avoided through disclosure; and k. Whether the member intends for the taxpayer to rely upon the advice to avoid potential penalties.
CPA Alden prepared the individual income tax returns for Sterling for many years. When preparing 2009’s return, Alden discovered a material error in the 2008 return that had caused Sterling to substantially underpay his taxes for 2008. Alden informed Sterling of the error and urged him to inform the IRS. Sterling refused, and threatened to fire Alden if he went to the IRS. Which of the following is true?
A. Alden must refuse to prepare Sterling’s 2009 return.
B. Alden should consider refusing to prepare Sterling’s 2009 return.
C. If Alden does prepare Sterling’s 2009 return, he must ensure that 2008’s error is not repeated.
D. B and C.
D.
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged? A. More likely than not. B. Not frivolous. C. Realistic possibility. D. Substantial authority.
A. SSTS No. 1 advises that “[w]hen recommending a tax return position or when preparing or signing a tax return on which a position is taken, a member should, when relevant, advise the taxpayer regarding potential penalty consequences of such tax return position and the opportunity, if any, to avoid such penalties through disclosure.” Those penalty consequences generally arise when the CPA is unable to advise the client that the tax position taken has a “more likely than not” chance of being sustained.
Melba is a tax client of CPA Buck. Melba is not a great record keeper, and Buck would like to save Melba some money by using estimates, rather than by incurring great expense in recovering or reconstructing original records. Which of the following is not true?
A. Buck will violate SSTS No. 4 if he fails to disclose that he has used estimates.
B. Buck will violate SSTS No. 4 if he lists Melba’s estimated business expenses as $987.32.
C. Buck will violate SSTS No. 4 if he uses estimates in situations where a simple phone call to a bank could give him exact numbers.
D. Buck will violate SSTS No. 4 if he uses estimates provided by Melba that appear on their face to be materially inaccurate.
A. This choice is best, because use of estimates need not be disclosed in most circumstances, including this one.
In May 2009, CPA Loveland gave tax advice to client Pingleton regarding a tax-free transfer to her children. Pingleton executed the transfer in October 2009 in the form suggested by Loveland. In 2010, the IRS changed its interpretation of the applicable law, rendering this form of transaction ineffective for its intended purpose. In December 2011, without consulting Loveland again, Pingleton repeated the transaction. This time, the IRS challenged the tax consequences and Pingleton lost the challenge. Pingleton sued Loveland for failing to tell her of the change in tax law. Assuming state malpractice laws would be roughly consonant with SSTS rules, which of the following is true?
A. Loveland is liable, because he should have updated Pingleton regarding the change in the law.
B. Loveland is not liable because no duty to update applied.
C. A and B.
D. None of the above.
B. The grounds for imposing a duty to update do not apply here.
T/F: Sam is preparing the tax return for Otto, whose records were destroyed when fireworks he shot off during a New Year’s Eve celebration burned down his house. Otto has estimated the numbers Sam needs to complete the return, and Sam is confident that the numbers are relatively accurate. Sam should disclose to the IRS that estimates are being used.
True
T/F: Sally is preparing tax returns in a state jurisdiction that has standards for recommending or taking tax positions. The state’s standards are lower than the AICPA’s standards in SSTS No. 1. Nonetheless, Sally should follow the state’s standards.
False.
If the state’s standards are lower, then Sally should follow the SSTS standards. a national level.
A member should not recommend a tax return position or prepare or sign a tax return taking a position unless the member has a good-faith belief that the position has at least a _________ of being sustained administratively or judicially on its merits if challenged.
realistic possibility (generally regarded as 33% likelihood)
