REG 5 ETHICS BK Flashcards
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How long must audit records be kept for?
Seven years
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Disciplinary powers of AICPA?
They can impose sanctions, but they cannot suspend or revoke a CPA’s license. They can suspend or revoke a CPA’s membership. They cannot impose monetary or criminal sanctions.
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For how long must an accountant maintain taxpayer records?
3 years.
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Are Treasury regulations an authoritative source?
Yes.
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Are IRS publications an authoritative source?
No.
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What % owners must report to the SEC?
5 % + owners
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Rule 504 dollar limit? Rule 505 dollar limit? Rule 506 dollar limit?
$1 million, $5 million, unlimited
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Standard required if tax position is disclosed for a substantial understatement of tax?
Reasonable basis.
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Standard required if tax position is not disclosed for substantial understatement of tax?
Substantial authority.
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Standard that must be met for an accountant to be punished by the board?
More likely than not.
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What is the nature of the Ultramares decision?
Limits CPA liability to those in privity of contract and named 3rd party beneficiaries.
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What is the standard for greater than 33% but less than 50% chance of a tax position being upheld by the courts?
Substantial authority.
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What is a listed transaction?
A tax avoidance transaction
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Define the reasonable basis standard.
Greater than 20% chance of a tax position being upheld.
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What is the difference between a “tax practicioner” and a “tax preparer?”
Tax practicioner– individuals who practice before the IRS: attorneys, enrolled agents, CPA’s. A tax return preparer prepares returns for compensation.
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When can a preparer be fined for a negligent understatement of tax liability? How much is the fine?
When the understatement is due to an unreasonable position that lacks reasonable basis. Penalty is 20% of the understatement of the tax liability.
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How much is the fine for fraud on the preparer’s part?
$5,000
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Who has the burden of proof when a third party aids and abets understatement of tax liability?
In this case alone, the burden of proof shifts from the taxpayer to the IRS.
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Who may not negotiate or endorse a tax refund issued to a taxpayer?
The tax return preparer.
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What is a “reportable transaction?”
Any transaction with respect to which information is required to be included with a return because the transaction has potential for tax avoidance or tax evasion.
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What may a tax return preparer maintain for 3 years instead of a copy of the return?
A listing of the name and ID of each taxpayer.
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Who may endorse or otherwise negotiate an IRS refund check?
Only the taxpayer.
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What are the due diligence requirements for the earned income credit?
- eligibility checklists 2. computation worksheets 3. reasonable inquiries to the taxpayer 4. record retention
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May the tax return preparer disclose information to 3rd parties?
No, not without consent of client, unless the disclosure meets one of the allowed exceptions.
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Who can be penalized for aiding and abetting understatement of tax liability?
Anybody.
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What is Circular 230?
Contains the rules for practice before the IRS of tax practicioners
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If you worked for government and were substantially involved in a matter with respect to specific parties, when can you represent those parties in private practice regarding said matter?
Never.
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If an individual, while a gov’t employee, had official responsibility for a matter involving specific parties, when can the individual represent those parties in said matter?
2 years after leaving government employment.
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When may a practicioner charge a contingent fee?
- w/ IRS examination or audit 2. w/ a claim solely for refund of interest and/or penalties 3. In a judicial proceeding arising under Internal Revenue Code
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Best practices for tax advisors?
- Communicating with the client regarding the “terms of the engagement” 2. Establishing the facts and arriving at a conclusion supported by the law and the facts 3. Advising the client about the importance of the conclusions reached (ie whether or not client can avoid penalties)
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3 types of covered opinions?
Any written or electronic advice by a practicioner concerning federal tax issues arising from: 1. a listed transaction 2. any arrangement having as the prinicipal purpose federal tax avoidance or evasion (tax shelter) 3. a) a reliance opinion or b) a marketed opinion that pertains to a tax shelter. Covered opinions are tax advice that is part of Circular 230.
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What is a reliance opinion?
Concludes at confidence level of at least more likely than not that the tax issue will be resolved in the favor of the taxpayer.
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What is a marketed opinion?
Advice that will be used to “promote, market, or sell” a partnership, investment plan, or arrangement.
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What must a marketed opinion relate to?
Can relate only to listed transactions and arrangements the principal purpose of which is federal tax evasion or avoidance.
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What are the requirements for a covered opinion?
- It must reach a conclusion, and if not, state why. 2. Cannot be based on unreasonable factual assumptions 3. Must relate applicable law to the facts 4. Must state the likelihood that the taxpayer will prevail on the merits with respect to each significant federal tax issue.
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What is a limited scope opinion?
An opinion that considers less than all of the significant federal tax issues. Practicioner and taxpayer must agree that the scope of the opinion and the taxpayer’s reliance on it are limited to the issues addressed in the opinion.
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What is the only agency that can suspend or revoke a CPA’s license?
The state board.
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What is the standard that must be met for the state board to prove professional misconduct on the part of a CPA?
More likely than not. Beyond a reasonable doubt is not necessary, because it is not a criminal case.
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What are the five penalties that a state board may impose for professional misconduct?
- suspension or revocation of license 2. monetary fine 3. censure 4. probation 5. continuing professional education courses
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Disciplinary powers of the IRS?
Criminal and civil.
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What are the disciplinary powers of the SEC?
To suspend or permanently revoke an accountant’s right to practice before the SEC
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How many members are on the PCAOB?
5
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Duties of PCAOB?
- to register public accounting firms 2. to establish rules relating to the preparation of audit reports. 3. to conduct inspections and investigations of registered public accounting firms.
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How often must PCAOB audit registered public accounting firms?
Firms that perform 100+ audits per year– annually. Firms that perform < 100 audits per year– once every 3 years.
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What sanctions can PCAOB impose?
Sanction or revocation of PCAOB registration, monetary penalties, censure, and professional education requirements. Similar to powers of state board.
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What services may a public accounting firm provide to its audit client?
Tax services only, if pre-approved by audit committee.
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Can an audit firm employ a big wig (CEO/CFO) of the issuer?
Not in the one-year period preceding the audit.
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What people comprise the audit committee?
Members of the issuer’s board of directors who are otherwise independent.
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What are the responsibilities of the CEO and CFO with regards to the audit report?
They must review it, assert that it does not contain untrue statements or omit material information, and that the financial statements fairly present the financial condition and results of operations of the issuer. They also assert that internal controls are sound.
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Who must file a report indicating how many shares they own? When must they file it?
An officer, director, or 10% + owner must file the report within 10 days of becoming an officer, director, or 10% + owner.
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What must be included in 10K and 10Q reports regarding internal controls?
A statement that management is responsible for setting up internal controls and an assessment of the effectiveness of the internal control structure.
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What standards are covered by the code of ethics?
Honest and ethical conduct, full, fair and timely disclosures and compliance with laws, rules and regulations.
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What knowledge should an audit committee expert have?
Understanding of GAAP, application of GAAP, experience with internal controls
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What does the SOX Act establish?
PCAOB, the audit committee, internal control monitoring, SEC review of issuer documents (including Form 10-K), Criminal Penalties for altering documents and securities fraud, and whistle-blower protection.
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How can a presidential veto be overriden?
By a vote of 2/3 of both the House and the Senate.
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What 3 groups of taxpayers are more likely to be selected for an audit?
individuals with gross income over $100,000, self-employed individuals and cash businesses
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What is a Form 870?
The taxpayer signs this if he is in agreement after an IRS audit. By signing Form 870, the taxpayer waives the right to receive certain statutory notices and to petition the US Tax Court and waives the right to the appeal process.
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If the taxpayer is not in agreement with an IRS audit, how long does he have to appeal?
Up to 30 days
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If the taxpayer does not agree with an IRS audit after an appeal, what are his further rights of appeal?
He may take the case to the US Tax Court, the US Court of Federal Claims, or a US District Court.
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General rule for who has the burden of proof with litigation? Who has the burden of proof with most civil tax cases?
The party bringing the suit. Accordingly, the taxpayer has the burden of proof for most civil cases.
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What is required of the taxpayer in cases where the IRS has the burden of proof?
The taxpayer must introduce credible evidence and maintain books and records.
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What is the one court where taxpayers may litigate without first having paid the disputed tax in full?
The US tax court
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What must happen in all cases before a tax case will be heard?
IRS must send out a Notice of Deficiency. Taxpayer must pay the amount and then sue the IRS for a refund.
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What kinds of cases will the US tax court hear?
Federal only.
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When are you exempt from a penalty for failure to make estimated income tax payments?
When current year’s tax minus the sum of withholdings and timely payment of estimated tax is no more than $1,000. When withholdings and timely payment of est tax are at least 90% of current year’s tax or at least 100% of previous year’s tax.
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How much is the failure-to-file penalty? How much is the failure-to-pay penalty?
Failure to file is 5% per month and failure to pay is 1/2% per month.
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What is the negligence penalty for a taxpayer with respect to an “understatement of tax”? What is the taxpayer’s best defense to this?
Penalty is 20%. Best defense is that the taxpayer had a reasonable basis for the opinion.
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When does the IRS issue a civil penalty?
When there is a 75% + understatement of tax.
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What is the standard of proof for the IRS for a civil penalty? For a criminal penalty?
Civil– preponderance of the evidence Criminal– beyond a reasonable doubt
What are the limitations to an individual within one year after leaving IRS employment?
They can’t appear before the IRS to influence any US Treasury Department employee regarding any rule if they ever a) participated in the development of the rule or b) within the one year period prior to leaving government employment, had “official responsibility” with regard to the rule.
