REG - R5 Flashcards
Origination of Tax Legislation
Steps of Approval
1) House Ways and Means Committee
2) Voted On and Approved by the full House
3) Senate “Finance” Committee
4) Voted On and Approved by the full Senate (usually modified by Finance committee)
5) Joint Conference Committee (resolves differences)
6) Compromise bill then approved by BOTH the House and the Senate
7) President signs or vetoes
8) Veto can be overridden by a vote of two-thirds of both the House and the Senate
Discriminant Inventory Function System (DIF)
statistical model used to select tax returns that are most likely to contain errors and yield significant amounts of additional tax revenue upon audit
(Audit Appeals) If there is no agreement after the appeals conference, the taxpayer is entitled to take the case to…
The taxpayer is entitled to take the case to:
1) the U.S. Tax Court
2) the U.S. Court of Federal Claims
- or-
3) a U.S. District Court
U.S. Tax Court
U.S. Tax Court ONLY hears federal tax cases.
U.S. Tax Court is the ONLY forum in which taxpayers may litigate without first having paid the disputed tax in full
There are 19 regular judges who hear Tax Court cases.
The judges travel nationwide to hear cases at various sites.
No Jury
Cases CANNOT be taken to Tax Court until the IRS sends 90-day notice.
U.S. District Courts
Jury Trial (makes District Courts trials unique)!
Only 1 judge.
District Courts are “trial courts” of the federal court system (not just tax cases)
Typically, a taxpayer will request a hearing before teh district court that has jurisdiction over the location in which the taxpayer lives or conducts business.
TP must pay tax liability in full and sue the IRS for refund.
U.S Court of Federal Claims
Nationwide Court
Federal Claims
Jurisdiction over most claims for money damages against the U.S., one of which is tax refunds.
Must pay the disputed tax then sue the government for a refund.
No jury trial!
There are 16 judges
Federal Claims courts follow the decisions of the Federal Court of Appeals, NOT the geographic courts of appeals (tax court or district court)
U.S. Court of Appeals
3-Judge Panel
No Jury!
Geographic courts of appeals handle tax and nontax issues brought from the tax court or a district court for a specific geographic area.
U.S. Supreme Court
The highest court in the nation, and is the last level of appeal.
Rarely hears tax cases.
Panel of 9 judges; heard in D.C.
9 judges have to agree to hear the case by issuing a WRIT OF CERTIORI.
Failure-to-File Penalty
5% per month
The penalty cannot exceed 25% of the amount of tax due.
Failure-to-Pay Penalty
1/2 of 1% per month
The penalty cannot exceed 25% of the unpaid tax.
Negligence Penalty
20% of the understatement of tax
Penalty for Substantial Understatement of Tax
20% of the understatement of tax
It becomes more difficult to avoid this penalty unless TP has SUBSTANTIAL AUTHORITY.
Fraud Penalties
Willfull, Intentional, Reckless…
Civil: 75% of understatement (as high as $100,000; $500,000 for corporations); IRS must prove by a preponderance of the evidence.
Criminal: the IRS must prove beyond a reasonable doubt (prison up to 5 years)
Not Frivolous
Not patently improper, but arguable (less than 20% chance of succeeding)
Reasonable Basis
a position that has at least a 20% chance of succeeding.
“DISCLOSED”
Substantial Authority
greater than 33% but less than 50% chance of succeeding
“UNDISCLOSED”
More Likely Than Not
a position that has more than a 50% chance of succeeding
- Tax Shelters
- Covered Opinions
- Reliance
A CPA can be sued for any of the following…
A CPA can be sued for:
1) Breach of contract
2) Commission of tort (wrongful act: negligence, fraud, or constructive fraud)
3) Violation of a statute
Ultramares Decision
Ultramares decision limits CPA liability more narrowly to persons in privity of contract with the CPA (clients) and intended third party beneficiaries.
“MAIDS” Mnemonic
M - Misrepersentation of Material fact
A - Actual and justifiable reliance
I - Induce plaintiff’s reliance
D - Damages
S - Scienter (intentional)
Section 11 of the 1933 Act
“LAM” Mnemonic
(CPA Statutory Liability)
L - Loss, client suffered a loss
A - Acquired, client acquired stock
M - Material Misstatement or misrepresentation of fact
*NO NEED TO PROVE RELIANCE
Rule 10b-5 of the 1934 Act
FRAUD - “LAM” with scienter and justifiable reliance.
“MAIDS” Mnemonic
An accountant is prohibited form showing the workpapers to anyone without the client’s permission, EXCEPT…
An accountant is prohibited form showing the workpapers to anyone without the client’s permission, EXCEPT…
- Lawful subpoena
- Surviving member of the firm
- Quality control panel
- AICPA/State Trial Board
- Court proceedings
Securities Act of 1933
Regulates original issuances of securities
Purpose: Provide investors with sufficient information to make an informed investment decision (to buy or not to buy)
The SEC does not assure the accuracy of the information filed or evaluate the financial merits of securities being offered; the SEC merely assures the presence of information necessary for investors to make informed decisions
Securities Exchange Act of 1934
Regulates purchases and sales after initial issuance
Regulates reporting requirements
Has antifraud provisions
Securities
Stocks Bonds Debentures Oil Well Interests Stock Options Collateral Trust Certificates Warrants Limited Partnership Interests (NOT General Partnership)
NOT Deemed to be Securities:
General Partnership Interests
Certificates of Deposit
Shelf Registration (part of Securities Act of 1933)
Shelf Registration: the preparation of just one registration statement for all securities that the issuer will offer in the future.
**Information must be continuously updated for accuracy
Securities Exemptions (not every sale of securities is covered by the 1933 Act)
“BRINGS” Mnemonic
B - Securities issued by Banks
R - Securities of regulated common carriers (Railroads)
I - Insurance Policies
N - Securities issued by Non-for-profit organizations
G - Securities issued by the Government
S - Short-term commercial paper (notes, bonds, etc) with a maturity date of 9 months or less
Regulation A (Partial Exemption)
Regulation A sales may not exceed $5 million dollars in a 12-month period.
Regulation D Rules
Rule 504: $1M Limit within a 12-month period
Rule 505: $5M Limit within a 12-month period; 35 or fewer unaccredited investors.
Rule 506: Unlimited dollar amount of stock that may be sold; 35 or fewer unaccredited but sophisticated investors (Sophisticated investors ONLY)
Accredited Investor
An Accredited Investor is:
An institutional investor, a bank, a natural person with at least $1M in net worth or $200K in annual income
Liability Under 1933 Act
Section 11 - Imposes civil liability (“LAM”); no need to prove reliance or scienter (privity not required)
Section 12 - Civil antifraud
Section 17 - Criminal antifraud
Antifraud applies even to unregistered or exempt securities
1934 Act Registration Requirements (two types of companies)
1) Companies whose shares are traded on a national exchange; OR
2) Companies that have more than (i) $10M in assets; and (ii) at least 2,000 shareholders; OR 500 shareholders who are not accredited as defined in II.D.2.h, in any outstanding class
1934 Act Reporting Requirements
ALL companies required to register under the 1934 Act must report.
Form 10-K (10-KSB for small businesses): filed annually within 60 days (for large, 90 days for small); statements concerning the value of company securities and financial statements CERTIFIED by independent accountants.
Form 10-Q (10-QSB for small businesses): a quarterly report filed within 40 days (for large, 45 days for small ones); contains reviews of interim financial information by independent CPAs.
Form 8-K: must be filed within 4 days after a major change in the company (e.g. change in control, disposition of major assets, change in officers or directors, resignation of directors, etc…)
5% TIP
“5%”
5% or More Owners Must Report to SEC, Issuer, and Exchange
Any person acquiring 5% or more beneficial ownership in any equity security registered under the 1934 Act must file a report with the SEC, the issuer and the exchange on which the security is traded
“TIP”
T - Tender Offer (of 5% or more of stock, we want background information)
I - Insiders (own more than 10% of stock)
P - Proxy Solicitations (written request for permission to vote a shareholder’s shares at a shareholder meeting)
