REG Chapter 5

Question 1

More likely than not %

Reasonable basis %

Substantial authority %

Answer 1

> 50 %

> 20 %

> 33 % but < than 50 %

Question 2

What is tax shelter?

Answer 2

A position taken in order to avoid federal income tax

Question 3

Preparer penalty for understatement of tax liability

Answer 3

Greater of $1,000 or 50% of the income the preparer received if:

• Understatement caused by unreasonable position
• Preparer had or should’ve had knowledge
• Lacks reasonable basis

No penalty for error in math calculation

Question 4

Preparer’s penalty for willful or reckless conduct

Answer 4

Greater of $5,000 or 50% of the income the preparer received

Question 5

Penalty for not giving your client a copy of their tax return

For not putting your information (as a preparer) on the tax return

For not retaining 3 year’s records of your returns prepared

Answer 5

$50 each, up to $25,000 per calendar year

Question 6

Sanctions by the Board vs. the AICPA and State CPA society

Answer 6

The board can fine you, put you on probation, criminal conviction, and revoke license

AICPA and CPA state society can assign CPE, suspend or revoke membership but no fees and no criminal sanction

Question 7

Name all 3 state board categories of misconduct

Answer 7

1) Misconduct while performing accounting services
2) Misconduct outside the scope of accounting services (alcohol, drugs)
3) Criminal conviction (felony, accounting crime)

Question 8

PCAOB

Who created it?
Who supervises it?
How many members?
What is their duty?

Answer 8

Created by SOX
Supervised by SEC
5 members (2 CPAs)

Duty to register public accounting firms, to set rules related to preparing audit reports, and conduct inspection. Inspection every year or every 3 if auditing less than 100

Sanctions: temporary or permanent suspension, registration revoked, assign CPE, or civil monetary penalty (no criminal)

Question 9

Federal legislative process - List 8 steps

Answer 9

1) House of representatives
2) Ways and means committee and full house
3) Senate finance committee
4) Full senate
5) Joint conference committee
6) House and senate approval
7) President
8) 2/3 can override veto

Question 10

What happens if you get audited and resolve the case?

What happens if you can’t resolve the issue?

Answer 10

May receive a no change report or
agree to changes on form 870 and close the case

Receive revenue agent report notifying right to appeal
Request and receive notice of deficiency
Appeal division and sign form 870D or take it to
1) US tax court - 19 traveling judges, 1 judge, no jury
2) US court of federal claims - pay before
3) US district court - pay before, 1 judge

Question 11

Failure to file penalty

Failure to pay penalty

Negligence penalty for understatement of tax

Fraud penalty

Answer 11

Failure to file is 5% per month

Failure to pay is 0.5% per month

Negligence penalty is 20% of tax understatement

Fraud penalty is 75%

Question 12

What does a plaintiff need to show to accuse a CPA of negligence?

Who does the CPA owe a duty to?

What is the CPA defense?

Answer 12

Plaintiff must show:

1) CPA owned a duty
2) CPA failed to act with care
3) Breach caused injury
4) Plaintiff suffered damages

CPA owns a duty to client and limited foreseeable users
CPA defense: plaintiff is not a client and CPA did not know about this person

Question 13

Fraud vs constructive fraud

Who is the CPA liable to?

Answer 13

Fraud 5 INTENTONAL elements:

1) misrepresentation of material fact
2) intent (scienter)
3) actual reliance
4) intent to induce plaintiff’s reliance
5) damages

Constructive fraud (gross negligence) elements:
- same as actual fraud but RECKLESSLY (no scienter)

Liable to ANYONE!

Question 14

How is a CPA liable under Section 11 of 1933 act? (initial issuance)

How is a CPA liable under Rule 10b-5 of 1934 act? (sales after initial issuance)

Answer 14

Section 11 (1933) CPA is liable to plaintiff who:
L - loss suffered
A- acquired the stock
M- material misrepresentation

Rule 10b-5 (1934) CPA is liable to plaintiff who:
LAM and
- scienter
- plaintiff relied on CPA

Question 15

What are securities?

Include examples and exceptions

Answer 15

Investment is most likely a security if investor relies on the management of others in order to make money, if it is passive

Ex: stocks, bonds, debentures, oil well interests, stock options, collateral trust certificates, warrants, and limited partnership interests

Exceptions: certificates of deposit and general partnership interests

Question 16

Securities that do not have to be registered under 1933 Act (initial issuance)

BRINGS

Answer 16

B - banks
R - railroads
I - insurance policies
N - not for profit organizations issued securities
G - government issued securities
S - short term commercial paper

Question 17

Private offering exemption - regulation D

Except from 1933

Answer 17

504 505 506

General advertising allowed? S N S
Notice to SEC? in days 15 15 15
Dollar limit 1M 5M None
Unaccredited buyers No limit 35 35 S
Accredited buyers No limit NL NL

Question 18

Who must register under 1934 Act?

Answer 18

Companies whose shares are traded on national exchange or

that have over $10M in assets and at least 2,000 shareholders or

500 shareholders who are not accredited

Question 19

Section 12 - 1933 Act

Sectio 18 - 1934 Act

Answer 19

Section 12: Civil liability if a required registration was not made, if a prospectus was not given to all investors, or if materially false statements were made or omitted

Section 18: Person is liable if intentionally making false or misleading statements in a registration statement or any report required under 1934 Act