REVIEW R3, R4 Flashcards
According to Treasury Circular 230, a CPA may receive a contingent fee for which of the following services?
contingent fee = is a type of payment for legal services where a lawyer receives a percentage of the client’s monetary award instead of an hourly rate.
Successfully concluding an Internal Revenue Service examination of an original tax return.
A practitioner is only allowed to charge a contingency fee for services provided in connection with a claim for credit or refund filed solely in connection with determination of interest and/or penalties assessed by the IRS.
Which of the following statements is correct with respect to fraud penalties?
For the IRS to prevail in a case with a criminal penalty, the IRS must prove beyond a reasonable doubt that the taxpayer willfully and deliberately attempted to evade tax.
Which of the following types of IRS audit most commonly arises from matching issues, where income reported on the taxpayer’s tax return does not match the taxpayer’s Form W-2 or Form 1099?
Correspondence audit
A correspondence audit is the most common type of IRS audit. It is conducted by mail and typically arises from information errors, mathematical errors, or matching issues.
Office audits are less common than correspondence audits. They are conducted by an IRS agent at a local IRS office. These are more complex and are broader in scope than correspondence audits. An office audit would not be used for a matching issue that could readily be resolved with a correspondence audit.
Field audits are the least common type of IRS audit. They are the most complex and broadest in scope of the different types of IRS audits. A field audit, either conducted at the taxpayer’s home or the taxpayer’s place of business, would not be used for a matching issue that could readily be resolved with a correspondence audit.
A CPA firm issues an unqualified opinion on financial statements not prepared in accordance with GAAP. The CPA firm will have acted with scienter in all of the following circumstances except where the firm:
scienter = intent to deceive
Negligently performs auditing procedures.
Acting with scienter (an intent to deceive) is an element of fraud. There are five elements of fraud: a misrepresentation of a material fact, scienter, intent to induce reliance, actual and justifiable reliance, and damages.
Under Circular 230, a covered opinion would include:
Electronic advice on a listed tax transaction.
A covered opinion includes any written or electronic advice concerning transactions specified by the IRS as listed transactions.
Covered opinions include advice on any entity whose principal purpose is tax avoidance. This includes corporations, and is not limited merely to partnerships.
Which, if any, of the following could result in penalties against an income tax return preparer?
I.
Disclosure of information to enable a third party to solicit business.
II.
Knowing or reckless disclosure or use of tax information.
I and II.
A preparer shall be subject to penalties for BOTH disclosure of information to enable a third party to solicit business and knowing or reckless disclosure or use of tax information.
Which of the following types of income is not considered personal holding company income?
Bonuses
Bonuses are not considered personal holding company income.
Dividends, interest, and royalties are considered personal holding company income.
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
Is the client’s creditor who sues the accountant for negligence.
A CPA’s duty to act with reasonable care generally runs only to clients and, under the majority rule, to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work. It does not extend to other parties. This is the so-called “privity defense.” Thus, privity is a viable defense to an action against the accountant by a client’s creditor. The CPA would not be in privity of contract with the creditor and owes the creditor no duty.
A joint venture is a(an):
Association of persons engaged as co-owners in a single undertaking for profit.
A joint venture is an association of persons engaged as co-owners in a single (special transaction) undertaking for profit. A joint venture is treated as a partnership for most important legal respects and not as a corporate enterprise.
With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:
The burden of proof shifts to the IRS from the taxpayer.
With respect to the penalty for aiding and abetting an understatement of tax liability on a tax return, the burden of proof shifts to the IRS from the taxpayer. Unless the law expressly states otherwise, the taxpayer has the burden of proof to establish by the preponderance of the evidence that the law and the evidence do not support the position of the IRS. With respect to any criminal action, the government has the burden of proof to establish by evidence beyond a reasonable doubt that the taxpayer is guilty of the charges. Note that these burdens of proof are different; criminal (beyond a reasonable doubt) is considerably higher than civil (preponderance of the evidence).
The selection of an accounting method for tax purposes by a newly incorporated C corporation:
Is made on the initial tax return by using the chosen method.
Which of the following statements best states the purpose of cumulative voting?
To allow minority shareholders to gain representation on the board of directors.
Which of the following statements is correct concerning an IRS Field Audit examination?
The audit is conducted by an IRS representative, at the taxpayer’s home or office, or at the taxpayer’s representative’s place of business.
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
Is the client’s creditor who sues the accountant for negligence.
