REG 5.1 Flashcards
What is the Substantial Authority Standard?
Greater than 33% but less than 50% chance that a tax position will be upheld in court.
What is the “More Likely than Not” Standard?
Greater than 50% chance that a tax position will be upheld in court.
What is a listed transaction?
A reportable transaction that is substantially similar to a tax avoidance transaction.
What is disregard?
To recklessly, carelessly, or intentionally disregard regulations.
What are the primary sources of tax authority?
Internal Revenue Code, revenue rulings/procedures/tax treaties/US Treasury dept, court cases, and proposed/temp/final regulations. ***IRS Publications are NOT a primary source of authority.
What is the “Reasonable Basis” Standard?
Greather than 20% change that a tax position will be upheld in court.
Negligence (ordinary) is a failure to?
Make a reasonable attempt to comply with regulation, exercise ordinary & reasonable care in preparing taxes, of the tax payer to keep good books or records.
Who can be considered to be a “person”?
Individual, trust, estate, partnership, association, company, or corporation.
What is a reportable transaction?
Information required to be submitted with a return because of the potential for tax avoidance (legal) or tax evasion (illegal).
What is a tax return preparer?
A person who prepares tax returns for compensation. They must register with the IRS and obtain a PTIN. It is NOT a data entry/processor, employee of the company, or a fiduciary (trustee executor).
What is a tax practitioner?
A person who practices before the IRS (attorney, CPA, enrolled agent, enrolled actuary, or enrolled retirement plan agent)
What is a tax shelter?
A vehicle used for avoidance or evasion of federal income tax.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Unreasonable Position
It is an unreasonable position unless: 1)There is substantial authority, doesn’t involve tax shelter or reportable transaction, and it does not have to be disclosed; 2) If the position is disclosed and there is reasonable basis and doesn’t involve tax shelter or reportable transaction; 3) if a tax shelter or reportable transaction must be more likely than not. Penalty is greater of $1000 or 50% of income received, but if reasonable basis exists and acted in good faith, pentaly does not apply.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Willful or Reckless Conduct
Not considered an error if calculation was made in good faith. Preparer not required to obtain supporting docs from client unless they suspect info to be wrong, in which case they must make reasonable inquiries. Penalty is greater of $5000 or 50% of income received.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Provide Copy of Completed Tax Return to Client
Penalty: $50/failure, max of $25K/yr. If reasonable cause then no penalty.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Failure to Sign Tax Return
Penalty: $50/failure, max of $25K/yr. If reasonable cause then no penalty.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Failure to Include TIN on Return
Penalty: $50/failure, max of $25K/yr. If reasonable cause then no penalty.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Retain Records Properly
Must keep records for 3 years after last day of return period (12 mos period beg. July 1), keep copy of the return or name&ID of the tax payer, penalty: $50/failure, max of $25K/yr. If reasonable cause then no penalty.
Understatement of Taxpayer’s Liability by Tax Preparer Due to Lack of Diligence in Determining Eligibility for “Earned Income Credit”
Need to have eligibility checklist, computation worksheets, make reasonable inquiries of the client, record retention, penalty: $500/failure, if it is isolated/inadvertent event then no penalty
Aiding/Abetting Understatement
Rule applies to ANY person, IRS has the burden of proof, civil penalty: $1000 for the tax payer/preparer or $10,000 for corporations
Wrongful Disclosure
Owes the client duty of confidentiality, civil penalty of $250/disclosure, max of 10K/yr, guilty of misdemeanor, additional fines of $1k and or up to 1yr in prison including costs of prosecution, client can also sue the preparer
What are the exceptions to wrongful disclosure?
court order or subpoena, allowable uses (prepare state returns), permitted disculures by US Treasury (peer reviews, admin orders, computer processing, SEC audit, GAAP/GAAS), or the consent of the client
What is the penalty for endorsing or cashing a client refund check?
$500/check
What is the Treasury Department Circular 230
General rules of practice for “Practitioners”
Former government employee who participated substatially in a matter may?
NEVER represent or assist those parties in respect to the matter.
Former government employee who had “official reponsibility” in a matter must?
Wait 2 years after leaving government employement before they can represent the parties in respect to the matter.
Former government employee who participated in the development of a rule or had “official responsibility” regarding the rule must within 1 year before departure must?
Must not appear before IRS one year after departure.
What fees can a practitioner charge?
A contingent fee if: IRS examination/audit, the refund claim is only for refund of interest and/or penalties, or a judicial proceeding arising under the IRS. The may NOT charge an “unconscounable fee”.
Practitioner solicitations must?
Not be misleading or false advertisement, must keep a record of the ad and who it was sent to (if printed) for 36 months, and if it is a written fee schedule they may not charge more for 30 days.
Practitioner Best Practices:
Communicate terms of engagement, use for advice, client’s purpose, establish facts and clude based on laws/facts (not probability of getting caught), tell the client the importance of conclusion (can they avoid penalties).
Practioners cannot:
endorse/cash client refund check, practive law if non-law member, notarize if have an interest, and must disclose referral agreements, must use standard email disclaimer.
Standards with Respect to Tax Returns and Documents, Affidavits, and Other Papers
1) Cannot advise client to take a frivolous position, 2) Must inform client of “reasonably likely” penalties that may apply, 3) May rely on unverified client info but must make reasonable inquiries if appears erroneous or incomplete, 4) Must tell client of noncompliance errors or omissions & consequences, but does not have to notify the IRS, consider withdrawing if error not fixed, 5) Must exercise due diligence in preparing returns and documents, 6) Generaly must return client record at their request, except in state law for dispute of fees.
Requirements for Written Advice (4): Email
Email & written ok, must be reasonable, based on factual/legal assumptions, all facts/circumstances considered, identify ascertain relevant facts (solicit info), may not consider possibility of being audited.
Requirements for Written Advice (4): Advice of Others
May rely on advice of others if: they are competent, there are no conflicts of interest, it is done in good faith, and the advice is reasonable.
Requirements for Written Advice (4): Competence
1) A mixture of knowledge, skills, thoroughness, and preparation, 2) Can become competent via consulting with other or studying relevant law.
Requirements for Written Advice (4): Compliance
1) Individual who oversees tax firm must: make sure procedures comply with Circular 230, that there are internal controls, and dessiminate educate test them. 2) Failure to comply: if there are no adequate procedures, if they fail to ensure procedures are followed, or when they know or should know about the noncompliance and no action is taken.
Incompetence and Disreputable Conduct
Secretary of the Treasury may santion for the following: (not acting in good faith) 1) conviction of any federal tax law crime of any criminal office involving dishonesty, 2) false of misleading info, 3) solicitation of business, 4) willfully evading federal tax, 5) willfully assisting others to evade federal tax, 6) timely remittance of client funds to IRS, 7)threats of favors to IRS employees, 8) knowingly helping disbarred/suspended person to practice, 9) being disbarred/suspended as CPA, attorney, actuary, 10) being abusive, false accusations, malicious or libelous, 11) knowingly, recklessly, or grossly incompetence giving false opinions, 12) willfully fail to sign tax return, 13) willfully disclosing client information, 14) willfully neglect to file e-return, 15) willfully prepare/sign return w/o TIN, 16) willfull representation w/o client permission
Sanctions (for)
1) Willful violation of Circular 230, 2) Reckless or incompetently violates “standards with respect to tax returns and documents, affidavits, and other papers”. Penalties include: censure, suspension/disbarment, monetary penalties (not exceeding gross income derived from situation to get penalty) Can petition for reinstatement after 5 years.
Disciplinary Power of the State: 3 Types of Misconduct
1) While performing accounting services (negligence, fraud, dishonestly), 2) Outside of accounting services (intoxication, drugs, insanity), 3) Criminal conviction of a felony.
Disciplinary Power of the State: Formal Hearing
Done after investigation, must find actions to be “more likely than not” (but not beyond a reasonable doubt), accountant is entitled to due process, and the decisions are subject to judicial review (appeals)
Disciplinary Power of the State: Penalties the State Board can Impose
1) Suspend or revoke license, 2) Monetary fine, 3) Censure, 4) Probation, 5) CPE Courses
AICPA & State CPA Soceities (not board) must have
A Professional Code of Conduct
JEEP
Joint Ethics Enforcement Program (JEEP), enforces code of conduct, single means of investigation and action, AICPA & 49 states
AICPA/State CPA Societies Disciplinary Actions
1) Sanction members, 2) Cannot suspends/revoke license, 3) Suspend or terminate memberships without hearing
AICPA & State CPA Societies can suspend or terminate membership without hearing for the following:
1) conviction resulting in >1year in jail, 2) conviction for not filing any tax return, 3) conviction for filing or aiding in false/fraudulent return, 4) suspension/revocation of license
AICPA/State CPA Societies Possible Sanctions
(no monetary or criminal), expulsion, suspension, or CPE courses
IRS Disciplinary Actions
1) Criminal penalties (ANY person), 2) Maximum of 3 years in prison/100K fine (500K for corp), 3) Civil penalties - prohibit practice before IRS, impose fines
SEC Disciplinary Actions
Civil penalties: censure, suspend, permanently revoke practice, right to sign, fines of up to 100K (500K for corp), cease & desist orders
SEC Disciplinary Actions Occurs if:
1) Lack of qualifications to represent others, 2) Lacks character or integrity, 3) Acts unethically, 4) Willfull violation of laws, 5) Convicted of a felony or moral terpitude (misdemeanor), 6) License was revoked/suspended by other government agency
