REPRESENTATION - PREPARING RETURNS

Question 1

Record Retention Rules

Answer 1

For three years after the close of the return year either:

1. A copy of the Tax Return or,
2. A list that includes:

a. The taxpayer’s name
b. The taxpayer’s identification numbers
c. The tax year

Question 2

Where does the Burden Of Proof rest?

Answer 2

In the United States, the burden of proof in a tax case often rests with the IRS.

Question 3

5 Requirements for Burden of Proof to rest with the IRS?

Answer 3

For the Burden of Proof to rest with the IRS, the TP needs to:

1. Introduce credible evidence.
2. Substantiate (prove) the items that they are claiming.
3. Maintain adequate records.
4. Comply with reasonable requests for information and submission of documents.
5. Have a net worth of less than $7 million.

Generally it requires HONESTY and OPENESS

Question 4

What are the consequences of an INTENT TO EVADE in regards to the Burden Of Proof?

Answer 4

The Burden of Proof switches to the TP.

A civil fraud penalty can be imposed on a taxpayer if the IRS is able to show by a preponderance of evidence that the taxpayer had specific intent to evade a tax.

After the IRS first shows that fraudulent actions by the taxpayer have occurred, the burden of proof shifts to the taxpayer who must then prove that any tax underpayment was not attributable to fraudulent behavior.

Question 5

Understatement of Liability

Answer 5

Circular 230 Section 10.34 outlines standards with respect to tax returns and documents, affidavits and other papers.

A practitioner must not sign a tax return or claim for refund that the practitioner knows or reasonably should know contains an unreasonable position. Preparer penalties under Section 6694 apply to the following circumstances: ??NEED MORE INFO??

Question 6

Preparer penalties under Section 6694 apply to the following circumstances:

Answer 6

Unreasonable positions – A penalty of $1,000 or 50% of preparer’s fee, whichever is greater.

A position lacking substantial authority is unreasonable if the preparer knew (or should have known) of the position.

The position does not have substantial authority – for undisclosed positions

The position does not have a reasonable basis – for disclosed positions

There was not a reasonable belief that the position would more likely than not be sustained on its merits – for tax shelters

Willful or reckless conduct – A penalty of UPDATE: $5,000 or 75% of preparer’s fee, whichever is greater.

Question 7

Willful or Reckless Conduct Defined:

Answer 7

Conduct by the Tax Return Preparer that is a WILLFUL attempt in any manner to understate the liability for a tax on the return or a claim, or a reckless or intentional disregard for rules and regulations.

The amount of any penalty payable for willful misconduct is reduced by any penalty for an Unreasonable Position. You don’t get penalties twice.

Question 8

Penalties for failures under Section 6695 are:

Answer 8

In the case of any failure relating to a return or claim for refund filed in 2020 (generally 2019 tax returns filed in 2020), the penalty amounts under §6695 are:

Penalty of $50 for each occurrence up to a maximum of UPDATE: $26,500 a year unless it is shown that such failure is due to reasonable cause and not willful neglect:

Each of these have a $50 penalty:

1. Failure to furnish copy of return to taxpayer
2. Failure to sign return
3. Failure to furnish identifying number
4. Failure to retain copy or list
5. Failure to file correct information returns

Question 9

Section 6695 - Penalty for the Negotiation of Check?

Answer 9

Negotiation of check – Any tax return preparer who endorses or otherwise negotiates (directly or through an agent) a refund check (including an electronic version of a check) issued to the taxpayer, shall pay a penalty of $530 with respect to each check.

We are NOT allowed to take a check that are not ours!

Question 10

Section 6695 - Penalty for Failure to be Diligent

Answer 10

Failure to be diligent in determining eligibility for earned income credit – Any return preparer who fails to comply with due diligence requirements imposed to determine eligibility for, or the amount of, the credit allowable shall pay a penalty of UPDATE: $530 for EACH failure.

Example: When we’re preparing EIC we must ask the required questions, and then additional questions when the info received seems incorrect, incomplete, or inconsistent.

Including:
EIC
AOTC
CTC
ACTC
ODC
HOH

Question 11

Safe Guarding Tax Payer Info

Answer 11

Internal Revenue Code Section 6713 imposes a civil penalty of $250 on any person who is engaged in the business of preparing, or providing services in connection with the preparation of returns of tax, or any person who for compensation prepares a return for another person, and who:

Discloses any information furnished for, or in connection with, the preparation of any such return, or

Uses any such information for any purpose other than to prepare, or assist in preparing, any such return.

Keep it CONFIDENTIAL!

The max penalty shall not exceed $10,000 in a calendar year.

Question 12

Taxpayer Supporting Documentation

Answer 12

A taxpayer must keep records as long as needed for the administration of any provision of the IRC.

Generally, this means keeping records that support items shown on the return until the period of limitations for that return expires.

Question 13

Period of Limitations for a Tax Return

Answer 13

Generally this is the later of 3 years from the due date of the Tax Return or the date the TP filed the return. There are exceptions.

Keeping records of items shown on the return, to allow for an amendment to claim a Credit or a Refund, or for the IRS to assess additional tax.

Question 14

What is the extended Period of Limitations for NOT reporting income that is MORE THAN 25% of the gross income shown on a return

Answer 14

6 years

Question 15

What is the extended Period of Limitations for a Fraudulent Tax Return?

Answer 15

No Limit

Question 16

What is the extended Period of Limitations for not filing a Tax Return?

Answer 16

No Limit

Question 17

What is the extended Period of Limitations to file a claim for a loss from worthless securities?

Answer 17

7 years

Question 18

What defines Reasonable Position?

Answer 18

There must be Substantial Authority for the position,

or in the case of a disclosed position, a Reasonable Basis for the treatment of such items on the return.

The return CANNOT contain frivolous positions.

Reasonable Basis is NOT satisfied by a return position that is merely arguable.

If based on §1.6662-4(d)(3)(iii), taking into account the relevance and persuasiveness of the authorities, and subsequent developments, the return should satisfy reasonable basis.

Question 19

What defines Reasonable Position on a Tax Return in regards to the Substantiation and Disclosure of a Tax Position

Answer 19

There must be Substantial Authority for the position,

or in the case of a disclosed position, a Reasonable Basis for the treatment of such items on the return.

The return CANNOT contain frivolous positions.

Question 20

Substantial Authority standard realted to a Tax Return Position Defined:

Answer 20

The substantial Authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts.

It is MORE stringent than Reasonable Basis,

but LESS strict than “More Likely Than Not.”

There is Substantial Authority for the tax treatment of an item ONLY if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.

Basically, there is more weight of support, than there is contrary to the treatment.

Question 21

Reasonable Basis

Answer 21

Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper.

The reasonable basis standard is NOT satisfied by a return position that is merely arguable.

If a Return Position is reasonably based on 1 or more of the of the authorities that sets for in section 1 of the code, the Return Position will generally satisfy the Reasonable Basis standard, even though it may not satisfy the Substantial Authority Standard.

Question 22

Tax Shelter Requirements

Answer 22

A tax shelter, for purposes of the substantial understatement portion of the accuracy-related penalty, is a partnership or other entity, plan, or arrangement with the intent of avoiding or evading federal income tax.

Tax shelters have a HIGHER STANDARD and must have a confidence level of at least MORE LIKELY THAN NOT (greater than 50% likelihood) that one or more significant tax issues would be resolved in the taxpayer’s favor.

Question 23

What Form is used to disclose items or positions that are not otherwise adequately disclosed on a tax return.

Answer 23

Form 8275, 8275-R, or Rev. Proc. 2008-14 are used by TPs and Tax Preparers to avoid certain penalties.

It is telling the IRS we aren’t certain about what we’ve done, and that they should have a look.

Question 24

When are Penalties Unavoidable (6 items), even when filling out Form 8275.

Answer 24

1. Negligence
2. Disregard of regulations
3. Any substantial understatement of income tax on a tax shelter item
4. Any substantial valuation misstatement under chapter one of the Internal Revenue Code
5. Any substantial overstatement of pension liabilities
6. Any substantial estate or gift tax valuation understatements

Question 25

Tax Return Preparer

Answer 25

Any person who prepares for compensation, or who employs one or more persons to prepare for compensation, and return of tax or claim for a refund of tax.

They just need to prepare a substantial portion of the return; not the entire return.

Question 26

People NOT considered a Tax Preparer

Answer 26

A person who:

• furnishes typing, reproducing, or other mechanical assistance
• provides tax assistance under a VOLUNTEER Income Tax Assistance (VITA) program established by the IRS.
• prepares a return for an employer by whom he is regularly and continuously employed.
• prepares as a fiduciary a return or claim for refund for any person
• prepares a claim for a refund for a taxpayer in response to any notice of deficiency or in response to any waiver of restriction after the commencement of an audit.

Question 27

Duties for Handling a Return

Answer 27

• Sign the Return
• Add PTIN to return
• Provide copy of return to TP (No later than the time the Original Return is presented for signature to the TP.)
• Keep records for a period of 3 years including:
  1. Completed copy of the Return or Claim for Refund

OR

2. Retain TP name, TP ID #, the taxable year, and the type of return, or claim for refund prepared. That and the name of the Return Preparer.

NOTE:
It is for 3 years after the Close of the Return period for the particular Return.

Question 28

Indicators (Badges) of Fraud in terms of INCOME

Answer 28

FRAUD related to INCOME

1. Omitting specific items where similar items are included
2. Omitting entire sources of income.
3. Failing to report or explain substantial amounts of income identified as received.
4. Inability to explain substantial increases in net worth, especially over a period of years.
5. Substantial personal expenditures exceeding reported resources.
6. Inability to explain sources of bank deposits substantially exceeding reported income.
7. Concealing bank accounts, brokerage accounts, and other property.
8. Inadequately explaining dealings in large sums of currency or the unexplained expenditure of currency.
9. Consistent concealment of unexplained currency, especially in a business not routinely requiring large cash transactions.
10. Failing to deposit receipts in a business account, contrary to established practices.
11. Failing to file a tax return, especially for a period of several years, despite evidence of receipt of substantial amounts of taxable income.
12. Cashing checks, representing income at check-cashing services and at banks where the TP does not maintain an account.
13. Concealing sources of receipts by false description of the source of disclosed income, and/or taxable receipts.

Question 29

Indicators (Badges) of Fraud in terms of EXPENSES and DEDUCTIONS

Answer 29

FRAUD related to EXPENSES and DEDUCTIONS

1. Claiming fictitious or substantially overstated deductions
2. Claiming substantial business expense deductions for personal expenditures.
3. Claiming dependency exemptions for nonexistent, deceased, or self-supporting persons. Providing false or altered documents, such as birth certificates, lease documents, school/medical records, for the purpose of claiming the education credit, additional child tax credit, earned income tax credit (EITC), or other refundable credits.
4. Disguising trust fund loans as expenses or deductions.

Question 30

Indicators (Badges) of Fraud in terms of BOOKS and RECORDS

Answer 30

FRAUD related to BOOKS and RECORDS

1. Multiple sets of books or no records.
2. Failure to keep adequate records, concealment of records, or refusal to make records available.
3. False entries, or alterations made on the books and records; back-dated or post-dated documents; false invoices; false applications; false statements, or other false documents or applications.
4. Invoices are irregularly numbered, unnumbered or altered.
5. Checks made payable to third parties that are endorsed back to the TP. Checks made payable to vendors and other business payees that are cashed by the TP.
6. Variances between the treatment of questionable items as reflected on the tax return, and representations within the books.
7. Intentional under- or over-footing of columns in journal or ledger.
8. Amounts on tax return not in agreement with amounts in books.
9. Amounts posted to ledger accounts not in agreement with source books or records.
10. Journalizing questionable items out of correct account.
11. Recording income items in suspense or asset accounts.
12. False receipts to donors by exempt organizations.

Question 31

Indicators (Badges) of Fraud in terms of ALLOCATIONS OF INCOME

Answer 31

FRAUD related to ALLOCATIONS OF INCOME

1. Distribution of profits to fictitious partners.
2. Inclusion of income or deductions in the tax return of a related taxpayer, when tax rate differences are a factor.

Question 32

What is the Rule for Record Retention in §6695(d)

Answer 32

§6695(d) Failure to Retain Copy or List

A tax return preparer must keep a copy of the tax return, or retain, on a list, the name and taxpayer identification number of the taxpayer for whom the return was prepared. The records must be available for inspection for the 3-year period following the close of the return period during which the return or claim for refund was presented for signature to the taxpayer. A “return period” is the 12-month period beginning on July 1 of each year and ending on June 30.

Question 33

When is E-Filing NOT available for an Individual Tax Return?

Answer 33

You are not able to E-File:

• Returns for years before two prior tax years
• Tax returns with fiscal year tax periods
• Amended tax returns
• Returns containing forms or schedules that cannot be processed by IRS e-file other than those forms and schedules that are required to be submitted with Form 8453

NOTE:
Modernized E-File (MeF) accepts form 1040 tax returns for the current year and two prior years. Note: MeF does not accept prior year extensions (Form 4868).

Question 34

Rejected Returns are considered:

Answer 34

Not filed.

They have failed to meet the processing criteria.

Question 35

Why is it important for TP’s to maintain records?

Answer 35

Good records will help:

(i) identify sources of money or property received from a variety of sources,
(ii) identify expenses for which a deduction can be claimed,
(iii) establish the basis of property (e.g., cost basis and improvements made),
(iv) prepare tax returns quickly and accurately, and
(v) support items reported on the return if the IRS should examine the return.

PENALTIES NOTE:
If the taxpayer cannot produce the correct documents, he or she may have to pay additional tax and be subject to penalties. IRS Pub. 552.

Question 36

FTC Financial Privacy Rule require what action related to clients?

Answer 36

Tax Return Prepares are required to give the clients PRIVACY NOTICES, which explain the financial institution’s information and sharing practices.

Question 37

What does The Gramm-Leach Bliley (Financial Modernization) Act enforce?

Answer 37

The Gramm-Leach Bliley (Financial Modernization) Act provides for the protection of client information.

Tax Return Preparers are included in the scope of the Act as they are under the jurisdiction of the Federal Trade Commission (FTC).

FTC regulations require the development of a plan to safeguard client information. Moreover, a financial institution maintains responsibility for the confidentiality of client information when services are outsourced.

Question 38

If you find an error on a previous Tax Return completed by another Tax Preparer, what is your correct course of action?

Answer 38

Talk with the taxpayers and urge them to file an amended return.

You CANNOT contact any outside party (the previous CPA or the IRS) and cannot file an amended return without the consent of the taxpayer. You should discuss the issue with the taxpayer and provide clear advice as the appropriate action that should be taken to rectify the problem.

Question 39

Chad receives his enrollment in the last year of an enrollment cycle in the month of November. Which of the following satisfies Chad’s continuing education requirement for his initial year of enrollment?

A. 4 credits on any federal tax topic

B. 2 credits of federal tax and 2 credits Ethics

C. 2 credits Ethics or professional conduct

D. 3 credits federal tax update

Answer 39

B. 2 credits of federal tax and 2 credits Ethics

EXPLANATION:
If you enroll in the middle of an enrollment cycle you are required to complete 2 hours of CPE credits for each month. A minimum of 2 hours must be in ethics.

Chad is required to complete a total of four (4) CPE credits for November and December of the 3rd year; of which two (2) must be completed in Ethics courses.

ADDITIONAL NOTES:
Regardless of where you are in the cycle, in your first year of enrollment (whether it’s actually the first, second or third year of a cycle)… you will take 2 hours of CE per month (or part of a month) of enrollment.

So, if you are enrolled as of May 2020, the first year you should take 16 hours of CE (2 hrs x 8 months). Of those 16 hours, 2 of them must be ethics.

Question 40

Indicators (Badges) of Fraud in terms of CONDUCT of TAXPAYER

Answer 40

Fraud in terms of CONDUCT of TAXPAYER

1. False statement about a material fact pertaining to the examination.
2. Attempt to hinder or obstruct the examination. For example, failure to answer questions, repeated canceled or rescheduled appointments, refusal to provide records, threatening potential witnesses (including the examiner) or assaulting the examiner.
3. Failure to follow the advice of accountant, attorney, or return preparer.
4. Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer.
5. The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the tax returns.
6. Testimony of employees concerning irregular business practices by the taxpayer.
7. Destruction of books and records, especially if just after an examination was started.
8. Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.
9. Pattern of consistent failure over several years to report income fully.
10. Proof that the tax return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.
11. Payment of improper expenses by or for officials or trustees.
12. Willful and intentional failure to execute pension plan amendments.
13. Backdated applications and related documents.
14. Fales statements on Tax Exempt/Government Entity (TE/GE) determination letters applications.
15. Use of false social security numbers.
16. Submissions of false Form W-4.
17. Submission of a false affidavit.
18. Attempt to bribe the examiner.
19. Submission of tax returns with false claims of withholding (Form 1099-OID, Form W-2) or refundable credits (Form 4136, Form 2439) resulting in a substantial refund.
20. Intentional submission of bad check resulting in erroneous refunds and releases of liens.
21. Submission of false Form W-7 information to secure Individual Taxpayer Identification Number (ITIN) for self and dependents.

Question 41

Indicators (Badges) of Fraud in terms of METHODS of CONCEALMENT

Answer 41

Fraud in terms of METHODS of CONCEALMENT

1. The inadequacy of consideration
2. insolvency of the transferor
3. Asset ownership placed in other names
4. Transfer of all or nearly all of the debtor’s property.
5. Close relationship between parties to the transfer.
6. Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.
7. Reservation of any interest in the property transferred.
8. transaction not in the usual course business.
9. Retention of possession or continued use of an asset.
10. Transactions surrounded by secrecy.
11. False entries in books of transferor or transferee.
12. Unusual disposition of the consideration received for the property.
13. Use of secret bank accounts for income.
14. Deposits into bank accounts under nominee names.
15. Conduct of business transactions in false names.

Question 42

IRC §7206

Answer 42

Fraud and False Statements

1. Makes a Return he believes is NOT true and correct.
2. Aids or assists in the preparation of a return which is fraudulent.
3. Conceals property in intent to defraud
4. Withholding, falsifying, or destroying records relating to the estate or financial condition of the taxpayer.

if convicted there’s a fine of not more than $250,000 ($500K for Corps), imprisonment of not more than 3 years, or BOTH.

Question 43

IRC 6701

Answer 43

IRC 6701 is the penalty for aiding and abetting understatement of tax liability.

Tax counselors who advise clients to take unsupported filing positions or to file false or fraudulent returns are subject to the penalty.

It’s not necessary to actually prepare the tax return or document that leads to the understatement.

The burden of proof lies with the government. Most courts hold that the gov’t need only establish its proof by a preponderance of evidence, rather than the “clear and convincing evidence standard.”

The penalty is $1,000, however, if the return, affidavit, claim or other document relates to a corporation, the penalty is $10,000.

Question 44

IRC §7216

Answer 44

§7216 is a criminal provision that prohibits Tax Preparers from knowingly or recklessly disclosing or using tax return information.

Penalty:
not more than $1,000
not more than 1 year imprisonment, or both for each violation.

Question 45

Payment on Penalties by the Tax Preparer

Answer 45

The Tax Preparer has 30 days to pay penalties upon receipt of a demand for payment from the IRS.

The preparer may elect to pay at lease 15% of the amount of the penalty and file a claim for refund.

If the claim for refund is denied (or 6 months have passed), the preparer has 30 more days to begin a proceeding in the appropriate U.S district court for the determination of liability.

Question 46

Steps for a Tax Preparer to register for e-services.

Answer 46

1. Choose Provider Options
2. Complete and submit the IRS E-File Application
3. Pass a Suitability Check