Remember and Understanding - Professional Responsibilities

Question 1

Who is a tax return preparer

Answer 1

i. A person who prepares for compensation or who employs one or more persons to prepare for compensation, any tax return required under the IRC, or any claim for refund of tax imposed by the IRC
ii. A license is not required

Question 2

Who is not a tax return preparer

Answer 2

1. Merely furnishes typing, reproducing or other mechanical assistance
2. Prepares a return or claim for refund of the employer (or of an officer or employee of the employer)
3. Prepares as a fiduciary (trustee, executor, etc.) a return or claim for refund for any person

Question 3

What are the 3 courts related to the judicial process

Answer 3

1. US Tax Court
2. US District Court
3. US Court of Federal Claims

Question 4

What is the US court of appeals

Answer 4

1. Specialized trial court that hears only federal tax cases
2. No payment required to petition /trial by judge (not jury) – this is the only court where the taxpayer may litigate without having paid the disputed tax in full.
3. Trials are conducted before one judge who is a tax expert
4. Issue two types of decisions
   a. Regular – involves a new or unusual point of law
   b. Memorandum decision – concerns only the application of existing law or an interpretation of facts

Question 5

What is US District Court

Answer 5

1. General trial courts of the US federal court system
   a. Both civil and criminal cases (not just tax cases) are filed in district courts
   b. There is at least one district court for each state
   c. Typically the taxpayer will request a hearing before the district court that has jurisdiction over the location in which the taxpayer lives or conducts business
2. Must first pay disputed tax liability and Sue IRS for refund
3. One judge and jury trial is optional – jury can be requested

Question 6

What is US court of federal claims

Answer 6

1. No jury and pay bill first
2. This court is a nationwide court that has jurisdiction over most claims for money damages again the US, one type of which is tax refunds
3. The court has concurrent jurisdiction with US District Courts when the claim is less than 10,000 and there is a statute of limitation of iz years from the time the claim arose
4. Does not allow jury trials on any matte r- there are 16 judges

Question 7

What are the requirements for appropriate disclosures of federal tax return

Answer 7

1) Disclosure statement (Forms 8275)
2) Regulation disclosure statement (form 8275-R)
3) Reportable transactions disclosure statement (Form 886)

Question 8

What is the disclosure statement (Form 8275)

Answer 8

1. Form is used to avoid the understatement penalty
2. It is a statement used to disclose positions on a tax return that are contrary to revenue rulings, revenue procedures, or other statutory provisions (exception regulations).

Question 9

What is the regulation disclosure statement (form 8275-R)

Answer 9

1. This form is almost identical to 8275 but is used to disclose positions taken on a tax return that are contrary to Treasury Regulations

Question 10

What is the reportable transactions disclosure statement?

Answer 10

1. Any taxpayer that participate in a reportable transaction and is required to file a federal tax return or information return must file Form 8886 disclosing the transaction
2. The filing requirement applies whether or not another party, related or otherwise, has filed a disclosure for that transaction
3. The categories of reportable transactions include the following:
   a. Listed transactions
   b. Confidential transactions
   c. Transactions with contractual protection
   d. Loss transactions

Question 11

What are the appropriate hierarchy of authority for federal tax purposes?

Answer 11

Statutory authority 
1.	US Constitution (highest) 
2.	IRC 
3.	Foreign tax treaties 
Administrative authority 
1.	Regulations (highest)
2.	Revenue rulings 
3.	Private letter rulings
Judicial Authority 
1.	Level of the court where the ruling was made (supreme court holds the highest) 
2.	Date the ruling was made

Question 12

What are the rules regarding privileged communications as they relate to the tax practices?

Answer 12

1. The rules of evidence protect information exchange in certain confidential relationships (i.e., attorney client, doctor – patient) by granting an evidentiary privilege – information exchanged within the scope of the relationship may not be disclosed as evidence in court without the consent of the privilege holder

Question 13

What are the various penalties the IRS can impose on a tax return preparer who understates the taxpayer’s income tax liability?

Answer 13

• penalty for understatement of taxpayer’s liability due to an unreasonable position by the tax return preparer
• penalty for understatement of taxpayer’s liability due ot willful or reckless conduct of the tax return preparer
• penalty for aiding and abetting understatement of tax

Question 14

List the paid income tax preparer’s responsibilities to the client and to the IRS

Answer 14

1. Providing to the client a completed copy of the tax return
2. signing the tax return or refund claim
3. indicating on the return or refund claim the tax identification number of the tax return preparer
4. Retaining tax return records properly and for at least three years
5. Filing with the IRS the yearly information returns regarding other tax return preparers employed by the tax return preparer
6. Not negotiating the client’s IRS refund check
7. Diligently determining the client’s eligibility for the earned income credit
8. Not disclosing except as permitted by law, client tax return information
9. Not using, except as permitted by law, client tax return information for any purpose other than to prepare a tax return

Question 15

In what three ways can CPA legal liability arise?

Answer 15

1) Breach of contract
2) commission of a tort (negligence, fraud, or constructive fraud)
3) Violation of a statue (e.g., section 11, rule 10b-5, or tax law liability

Question 16

To whom may a CPA be liable for negligently performing an engagement?

Answer 16

• Under the majority rule, a CPA is liable to the client and any person or limited foreseeable class of persons whom the cpa knows will be relying on teh CPAs work.
• Under the minority (ultramares) decision, a cpa can be liable to the client and intended third parties show to be a privity of contract with the CPA

Question 17

Who is a CPA liable to for fraudulently performing an engagement or performing an engagement with gross negligence?

Answer 17

Anyone who relied on the CPAs work and incurred damages as a result

Question 18

What are the defenses available to a CPA against a charge of negligence?

Answer 18

1) no duty
2) no breach
3) no injury or damages

Question 19

What privileges are available to the CPA for communication?

Answer 19

1) Attorney client privilege - when the CPA has been engaged by an attorney
2) work product privilege - protects tangible work product requested by an attorney for litigation
3) tax practitioner taxpayer privilege - certain tax advice for federally authorized tax practitioners

Question 20

What are the exceptions to the rule that prohibit accountants from showing workpapers to a third party without permission?

Answer 20

1. in response to a subpoena
2. a prospective purchaser of the practice
3. to a state CPA society for quality control review
4. in defense of a lawsuit brought by a client
5. in defense of an official investigation by the AICPA state trial board
6. When GAAP requires the disclosure of the information

Question 21

To what extent may the tax practitioner rely upon client provided information?

Answer 21

General Rule: the practitioner may rely “in good faith without verification” upon client furnished information

• However, the practitioner cannot ignore contradictory information known to the practitioner
• the practitioner must make reasonable inquiries if client-furnished information appears questionable or incomplete

Question 22

What is the state board of accountancy and what are their responsibilities

Answer 22

Boards of each state that govern the practice of CPAs within their jurisdiction

• The are group that issue and revoke licenses
• The AICPA and PCAOB cannot directly revoke

Question 23

What is the main source for tax authoritative literature

Answer 23

IRS internal revenue code

Question 24

What are the 4 types of taxpayer penalties imposed by the IRS?

Answer 24

1) non-filing penalties
2) non-payment or late payment penalties
3) underpayment penalties
4) accuracy penalties

Question 25

What is the non-filing penalties

Answer 25

The penalty for filing late is 5% a month of the tax due, up to 25% of the tax due. If the return is filed more than 60 days late, then the penalty is the lesser of $205 or 100% of the unpaid tax. If the taxpayer doesn’t owe any taxes or is due a refund, no penalties will apply.

Question 26

What is the non-payment or late payment penalties

Answer 26

Taxes are due by the filing date. If they are not paid by the filing date, interest on late payments starts to accrue immediately.

The late payment penalty is 0.5% (1/2 a percent) per month, up to a max of 25% of the taxes owed. However, if the non-filing penalty is also applicable, then that 5% per month accrues and the 0.5% penalty is not applicable.

Question 27

What is the underpayment penalty?

Answer 27

For individuals: Taxes are paid through withholding, or through estimated tax payments. If the amount of tax owed total will be more than $1,000, then the taxpayer must make estimated tax payments on the 15th of April, June, September, and January. (Again, this is if taxes aren’t being paid through withholding) No penalty will be imposed if the tax payments during the year were at least 90% of the current year’s taxes or 100% of last year’s taxes. If the taxpayer’s AGI exceeds $150,000, then the tax payments during the year must be 110% of last year’s taxes.

Question 28

What is the accuracy penalties?

Answer 28

A 20% of the tax due penalty for an inaccurate tax position due to negligence. This is waived if there is a reasonable basis for the position

A 20% of the tax due penalty for substantially understating the tax due. This is waived if there is substantial authority for taking the position, OR if the position was appropriately disclosed on the return.

A 20% of the tax due penalty if there is a substantial overstatement or 40% for a gross overstatement of the value or basis of any property. Substantial is 150% or more of the actual value, gross is 400% or more of the actual value.

If fraud is involved in the underpayment, then there is a 75% of the tax due penalty.

Question 29

What are the requirements to file an amended return?

Answer 29

3 years after the filing date of the original reutrn or 2 years after the payment of tax related to the return - whichever is later

Question 30

What is a CPAs obligation under common law

Answer 30

To exercise due professional care

Question 31

What must the client prove under common law

Answer 31

• duty of care
• breach of duty
• losses
• causation

Question 32

What must a third-party prove if they bring a suit against a CPA

Answer 32

1) They must prove that the CPA had a duty to exercise due care 2) They must prove that the CPA knowingly breached that duty 3) They must prove that the CPA’s breach was the direct cause of the loss 4) They must prove that they suffered an actual loss