Section 1 MCQ

Question 1

Decisions by which of the levels of courts listed would result in the definitive answer on a tax issue?

When the Tax Court reaches a decision with all the judges agreeing, then the result is a _?

Answer 1

U.S. Supreme Court

strong decision.

Question 2

The only way a Supreme Court decision can be changed is when ?

Answer 2

Congress disagrees and changes the tax law.

Question 3

Gross negligence is the extreme, flagrant, or reckless _____ of due care and competence in performing or reporting upon professional engagements

What is gross negligence also called?

Answer 3

departure from the standards

constructive fraud

Question 4

The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must:

Answer 4

notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.

Question 5

What is the penalty for failure to provide the taxpayer with a copy of her return?

Answer 5

$50 for each failure, but no more than $26,000 in a return period

Question 6

Compensated tax return preparers must furnish the taxpayer with a copy of the prepared return no later than the time the ____

Answer 6

original return is presented for signing

Question 7

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, IRS Form 1041, IS HE CONSIDERED A TAX RETURN PREPARER?

Answer 7

is not considered a tax return preparer.

Question 8

Is privity required if the accountant is guilty of fraud/gross negligence

Answer 8

no

Question 9

On what basis may a client sue a CPA for errors in the tax return that result in penalties or other sanctions due to the CPA’s wrongful action?

Answer 9

Tort of negligence or breach of contract

Question 10

When preparing a client’s Form 1040, U.S. Individual Income Tax Return, a CPA determined that there was documentation supporting only $12,000 of the $20,000 travel expenses claimed by the client. Which of the following courses of action taken by the CPA would be in compliance with Treasury Circular 230?

Answer 10

Make reasonable inquires to obtain the needed documentation

Question 11

An individual taxpayer (whose adjusted gross income is BELOW $150,000 in the previous year) may avoid the penalty for failure to pay estimated tax by:

paying at least ________ of the tax shown on the current year’s return or
________ of the tax shown on the prior year’s return (assuming that the prior year’s return was for a full 12-month period).

Answer 11

90%

100%

Question 12

Complaints can be filed against CPAs in most jurisdictions through online reporting sites or the state site itself. Reporting a violation requires that the person reporting:

has an attorney file the complaint.
lists his or her name for verification of the complaint.
file the appropriate complaint form.
None of the answer choices are correct.

Answer 12

None of the answers are correct - each jurisdiction has its own standards. Nothing is uniform.

Question 13

Negligence is the failure to do what an ordinary, reasonable, prudent CPA would do in similar circumstances. To establish negligence, the plaintiff (client) must establish: (3)

Answer 13

CPA owed legal duty to plaintiff
CPA Breached their legal duty
CPA’s action caused injury to the client/plaintiff

Question 14

Compliance with a court summons, a subpoena, laws, or government regulations would be an exception to the ____

Answer 14

Confidential Client Information Rule

Question 15

The Ultramares decision upheld the ___defense for negligence: the accountant is not liable to an unidentified third party for ___negligence.

Answer 15

privity , simple

Question 16

The ultramares decison states that when the degree of negligence is so gross as to amount to the inference of fraud (constructive fraud/gross negligence), ______

Answer 16

the auditor could then be liable to third parties.

Question 17

According to Treasury Circular 230, can a monetary penalty be imposed on a practitioner in addition to censure, sanction, or disbarment?

Who imposes this?

Answer 17

Yes, monetary penalties are allowed, but the amount shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty.

Secretary of Treasury OR a delegate (note: they don’t determine the monetary amount)

Question 18

What is the definition of a writ of certiorari?

Answer 18

A petition for the Supreme Court to review a lower court’s decision

Question 19

Generally, a corporation must make installment payments equal to the lesser of (1) __% of the tax shown on its return for the current year, or (2) ___% of the tax shown on its return for the preceding year.

Answer 19

100%

Question 20

a corporation cannot base its estimated tax payments for the tax year on the prior tax year if (3)

Answer 20

1. filed return in the PY showing $0 in taxes due to NOL
2. PY was less than 12 months
3. Large corporation ($1M or more in taxable income)

Question 21

ICPA Code of Professional Conduct, the CPA may disclose confidential client information only pursuant to: (4)

Answer 21

Client consent
Subpoena
AICPA/State CPA Society authorization
Inquiry from investigatory/disciplinary body (not IRS/State agency)

Question 22

CONFIDENTIAL CLIENT DATA
Generally accepted accounting principles (GAAP) do not require such disclosure although the prohibition against disclosure does not relieve the CPA of professional obligations under generally accepted auditing standards (GAAS).

Answer 22

This is saying “GAAP Doesn’t require, but GAAS does”

Question 23

American Corp. retained Baker, CPA, to conduct an audit of its financial statements to obtain a bank line of credit. American signed an engagement letter drafted by Baker that included a disclaimer provision. As a result of Baker’s failure to detect a material misstatement in American’s financial statements, the audit report contained an unmodified opinion. Based on American’s audited financial statements, National extended credit to American. American filed a petition in bankruptcy shortly thereafter. National sued Baker for damages based on common-law fraud. What would be Baker’s best defense?

Answer 23

lacked intent to deceive

Question 24

What is the maximum prison sentence for willful attempt to evade or defeat tax? How much is the fine?

Same questions, but for a corporation

Answer 24

5 years - $100,000

No imprisonment for corporations - $500,000

Question 25

Which of the following statements is generally correct regarding the liability of a CPA who negligently gives an opinion on an audit of a client’s financial statements?
The CPA is only liable to those third parties who are in privity of contract with the CPA.

The CPA is only liable to the client.
The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
The CPA is liable to all possible foreseeable users of the CPA’s opinion

Answer 25

Liable to anyone in a class of third parties who the CPA knows will rely on the opinion

Question 26

AICPA professional ethics division’s activities are performed within the ___ (JEEP), in which 48 state CPA societies participate.

T/F: The ethics division is authorized to start an investigation based on information from such sources as written complaints, reports in the media, or referrals from government agencies.

Answer 26

joint ethics enforcement program (JEEP),

Question 27

The penalty for underpayment of estimated taxes is imposed for making inadequate tax payments during the year. There are several exceptions to the penalty:
(below are lists where no penalties for underpayments)
If the amount of unpaid tax is $1,000 or less
If there was no tax liability on the prior-year tax return and the return was for a full year
If at least 90% of the current-year tax is paid
If at least 100% of the tax liability on the prior-year tax return is paid (if AGI is over $150,000—110% of the prior-year tax)
Waiver for various circumstances such as retirement or disability

Answer 27

MEmorize bruh

Question 28

When CPAs fail in their duty to carry out their contracts for services, liability to clients may be based on:

breach of contract.
strict liability.

Answer 28

Only breach of contract

Strict liability

Question 29

Strict liability does not require a finding of ___

Answer 29

fault

Question 30

A CPA firm issues an unmodified opinion on financial statements not prepared in accordance with GAAP. The CPA firm will have acted with scienter in all the following circumstances, except where the firm:

intentionally disregards the truth.
has actual knowledge of fraud.
negligently performs auditing procedures.
intends to gain monetarily by concealing fraud.

Answer 30

Negligently performs auditing procedures

Question 31

What is the first-tier penalty for which a compensated preparer may be liable for each tax return or claim for refund that understates the taxpayer’s liability due to unreasonable positions?

Answer 31

The greater of $1,000 or 50% of income derived by the taxpayer

(Note that there is also a second-tier penalty of $5,000 or 75% penalty of income derived if the preparer willfully or recklessly understated the liability.)

Question 32

The business gift deduction is limited to $___ per donee, per year. Engraving, gift wrapping, mailing, and delivery charges may be deducted in addition to the $__ per donee, per year.

Answer 32

$25

Question 33

Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt From Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:

Where does he sign?

Answer 33

he isn’t compensated

He doesn’t sign b/c he isn’t a tax return preparer

Question 34

Chris Baker’s adjusted gross income on her current-year tax return was $160,000. The amount covered a 12-month period. For the current tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:

90% of the tax on the return for the current year, paid in four equal installments.
110% of prior year’s tax liability, paid in four equal installments.

Answer 34

Either one. Note: This is b/c it exceeds $150K

Question 35

The accountant owns the workpapers and generally may disclose them as the accountant sees fit.

The accountant owns the workpapers but generally may not disclose them without the client’s consent or a court order.

Which sounds better?

Answer 35

Second one

Question 36

A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any tax work. The husband believed that his wife’s tax return was negligently prepared and that he was financially harmed. He hired an attorney, without his wife’s consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the negligence claim. To which party, if any, may the CPA disclose the wife’s tax return information without the wife’s consent?

Answer 36

A. The husband, for the evaluation of the negligence claim
B. The CPA’s attorney, for the evaluation of the negligence claim
C. The husband’s attorney, for the evaluation of the negligence claim
D. No one, because all disclosures must be made with the wife’s consent

B

Question 37

What is a Schedule UTP used for?

What does UTP Stand for?

Multiple tax positions affecting a single line item must be reported ___on the Schedule UTP.

Answer 37

To disclose specific information regarding uncertain tax positions

UTP stands for “uncertain tax position.”

individually

Question 38

According to the standards of the profession, which of the following statements is correct regarding the action to be taken by a CPA who discovers an error in a client’s previously filed tax return?

Advise the client of the error and recommend the measures to be taken.
Withdraw from the professional relationship regardless of whether or not the client corrects the

Answer 38

Only Advise the client of the error.

Not required to withdraw, but should consider.

Question 39

f the financial reports are primarily for the benefit of a third party, the ___may be held liable.

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?

Answer 39

CPA

Any foreseen or known 3rd party who relied on the report

Question 40

Correct

Fraud has four elements: (

Answer 40

1) intentional (2) misrepresentation (lying) of a (3) material fact that (4) harms someone else.

Question 41

Definition of fraud?

Answer 41

Fraud is the intentional misrepresentation of a material fact with resultant harm to someone.

Question 42

Which, if any, of the following could result in penalties against an income tax return preparer?

Knowing or reckless disclosure or use of tax information obtained in preparing a return
A willful attempt to understate any client’s tax liability on a return or claim for refund

Answer 42

Both

Question 43

When must a practitioner exercise due diligence?

In determining the correctness of oral or written representations in any matter administered by the IRS
In preparing, approving, and filing returns
In determining the correctness of oral or written representations by the practitioner to the Department of the Treasury

Answer 43

All are correct

Question 44

A taxpayer makes a noncash contribution to charity; a qualified appraisal regarding the value of the property is also required if the contribution exceeds what amount?

Answer 44

$5000

Question 45

If the taxpayer donates noncash gifts valued at more than $500, THEN ____

Answer 45

additional substantiation must be provided with the taxpayer’s return, including a description of how the property was acquired and the taxpayer’s basis in the property

Question 46

Which of the following courts listens to an appeal from a taxpayer or the government when there is a disagreement with the trial court’s decision?

Answer 46

US Federal Court of Appeals

The Court of Appeals hears both tax and nontax cases.

Question 47

Who cannot represent a taxpayer for a tax appeal
conference?

Can a taxpayer represent a taxpayer for the tax appeal conference?

Answer 47

An unenrolled agent.

Yep

Question 48

According to the standards of the profession, which of the following sources of information should a CPA consider before signing a client’s tax return?

Information actually known to the CPA from the tax return of another client
Information provided by the client that appears to be correct based on the client’s returns from prior years

Answer 48

Both

Question 49

In the U.S. Tax Court, where may cases be heard?

Answer 49

Various Cities across the U.S

Question 50

For tax courts outside of Washington, D.C what form must be submitted to move the court to a different city?

Answer 50

Request for Place of Trial

Question 51

Where are tax courts originally located?

Answer 51

Washington, D.C

Question 52

For a federal tax dispute, there are three trial courts in which the case may be heard

Answer 52

(1) Tax Court, (2) U.S. District Court, and (3) U.S. Court of Federal Claims.

Question 53

In terms of tax matters, courts of original jurisdiction (or trial courts) include (3)

Answer 53

Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.

Question 54

What is a work product doctrine?

Answer 54

A doctrine that protects work product from detection (protects certain work to be admitted into tax case)

Question 55

One of the accuracy-related penalties is for negligence or disregard of rules and regulations. The penalty is a percentage of the underpayment. What is that percentage?

When can the penalty not apply?

Answer 55

20%

Penalty wont apply if the taxpayer can show a reasonable basis for the position taken

Question 56

If the prior year was less than 12 months or there was no tax liability in the prior year, the preceding year method is available. T/F

Answer 56

True

Question 57

A corporation that anticipates a year-end tax bill of $__or more must estimate its income tax liability for the current tax year and pay ____estimated tax installments during that year

Answer 57

$500

4 quarterly

Question 58

If a taxpayer disclosed the tax return position, abd the taxpayer can show a ____ basis for the position that was taken on the return, and the position is not related to a _____, any _____ penalty may be reduced or eliminated.

Answer 58

reasonable

tax shelter

accuracy-related

Question 59

What is the penalty for a taxpayer who fails to timely file a tax return (including extensions)?

Answer 59

A penalty of 5% a month (up to a maximum of 25%) of the deficiency on the tax return (when filed)

Question 60

Working papers are subject to the privileged communication rule which, in most jurisdictions, prevents any third-party access to the working papers.

T/F

Answer 60

False - The AICPA Code of Professional Conduct’s Confidental Relationship Rule protects it.

Question 61

Working papers are not transferable to a purchaser of a CPA practice unless the client consents.

T/F

Answer 61

True

Question 62

What is the extent of the hearing authority of the United States Tax Court? Only _____ tax disputes

Answer 62

Federal Tax Disputes (does not do income tax disputes)

Question 63

To whom must a CPA pay license fees in order to maintain a CPA license?

Answer 63

The state board of accountancy of the CPA’s state of licensure.

Question 64

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer?

Answer 64

It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

Question 65

A practitioner may not persist in attempting to contact a prospective client if the prospective client has made it known to the practitioner that he or she does not desire to be solicited…..t/f

Answer 65

true

Question 66

A CPA’s adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods are available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty?

The annualization method (define)
The seasonal method (Define

Answer 66

Both

Annualization Method - Computed on actual income & expense of the current year. No income limitations

Seasonal Method - doesnt say

Question 67

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs and retaining the documentation?

Answer 67

The board of accountancy for the state in which the licensed CPA practices

Question 68

The state boards will perform a ____to determine if the matter should be pursued.

Answer 68

full investigation

Question 69

A “safe harbor” provision allows that no penalty for ____of estimated taxes will be imposed on a corporation if the estimated tax deposits equal the lesser of __% of the current-year tax or ___% of last year’s tax.

Answer 69

underpayment

100% to both

Question 70

orp., a calendar-year C corporation, made qualifying Year 4 estimated tax deposits equal to its actual Year 3 tax liability. Bass filed a timely automatic extension request for its Year 4 corporate income tax return. Estimated tax deposits totaled $7,600. This amount was 100% of the total tax shown on Bass’s final Year 3 corporate income tax return. Bass paid $400 additional tax on the final Year 4 corporate income tax return filed before the extended due date. Bass was subject to:

interest on the $400 tax payment made with tax return.
a penalty for underpayment of estimated taxes.

Answer 70

Interest on the $400 tax payment accrued from the original due date through the date of payment

Question 71

A client suing a CPA for negligence must prove each of the following factors except:

To establish negligence, a client must show that:

Answer 71

Reliance

Must show: Legal duty, Breached duty, proximate cause, Damges/injuries/losses

Question 72

The ability to transfer licensing credential from one state to another is controlled by state boards and reciprocity is not guaranteed. Individuals seeking a particular state’s licensing credential must present:

Answer 72

authorization for release of score information.

Question 73

State boards are able to dictate what information is available to the general public, but more likely than not, this information is limited in nature. Generally, the available information includes: (5)

Answer 73

Name/address/type of license/license #/Date of expiration

Question 74

A routine review of a received return by the IRS looks for all of the following except:

failure to report a 1099.
failure to calculate the math correctly.
failure of the taxpayer to sign the return.
failure to submit a tax return.

Answer 74

Fail to submit tax return - A routine review cannot be performed on a tax return if one has not been submitted to the IRS.

Question 75

What is the penalty if fraud is the reason for failure to timely file?

Answer 75

A penalty of 15% per month (with a maximum of 75%) of the deficiency on the tax return (when filed)

Question 76

According to the profession’s ethical standards, a CPA preparing a client’s tax return may rely on unsupported information furnished by the client, without examining underlying information, unless the information:

Answer 76

appears to be incomplete on its face.

Question 77

Hark, CPA, failed to follow generally accepted auditing standards in auditing Long Corp.’s financial statements. Long’s management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will:

Answer 77

win because there was no privity of contract between Hark and Third.

(third parties can sue if they receive a benefit from the audit. In this case, they dont)

Question 78

The Ultramares court ruled that even if a CPA firm knows that the audited financial statements are to be used by a creditor to make lending decisions, the third-party user ____with the CPA firm and (can/cant) recover for negligence.

Answer 78

lacks privity

cant

Question 79

A tax communication should include: (4)

Answer 79

Breif Statement of facts
Each tax issue listed
Separate conclusion for each tax issue
Where the conclusions came from (reasonings)

Question 80

Ethical or Unethical?

Purchasing a product from a third party and reselling it to a client

Answer 80

Ethical

Question 81

The ____ carries the greatest authoritative value for tax planning transactions.

Answer 81

Internal Revenue Code

Question 82

Ford & Co., CPAs, issued an unmodified opinion on Owens Corp.’s financial statements. Relying on these financial statements, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common-law fraud action against Ford, Century must prove, in addition to other elements, that Century was:

Answer 82

justified in relying on the financial statements.

Question 83

A corporation’s penalty for underpaying federal estimated taxes is deductible or non-deductible

Answer 83

non-deductible

Note: A fine or a penalty paid to any government for the violation of any law is not a deductible business expense.

Question 84

Which of the following is not an example of a type of IRS examination?

Correspondence examinations
Office examinations
Field examinations
Review examinations

Answer 84

Review examinations

Question 85

What are the three IRS Examinations? Include what these examinations consist of

Answer 85

Correspondence examinations - When items on a return are in question
Office examinations - Few complex issues (they stay home)
Field examinations - Many complex issues (they come to you)

Question 86

A CPA who fraudulently performs an audit of a corporation’s financial statements will probably be liable to any person who ____

Answer 86

suffered a loss as a result of the fraud.

Question 87

A written protest needs to be filed when an appeals conference is requested. The protest must include:

Answer 87

the taxpayer’s name, address, and daytime phone number,
a statement requesting the appeal on the IRS findings,
a copy of the letter showing the findings,
the tax periods or years involved,
a list of the proposed changes the taxpayer does not agree with and why,
the facts to support the taxpayer’s position,
the law or authority supporting the taxpayer’s position, and
a signature from the taxpayer stating that it is true, under the penalties of perjury

Question 88

When may individuals who are not CPAs, attorneys, or enrolled agents engage in limited practice before the IRS?

Answer 88

Taxpayer representing himself if they present necessary identification.

Question 89

PRACTICING BEFORE THE IRS
T/F
An individual may represent a member of her immediate family provided such member is present at any conference or meeting with an agent of the IRS.

A part time employee of an individual employer may represent the employer provided such part time employee works for the employer at least 20 hours per week.

Any partner may represent the partnership of which she is a member before the IRS.

Answer 89

False -They dont have to be there

False - THey have to be full-time

Technically False – Any partner OR employee can represent the partnership

Question 90

To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

Is an audit required?

Answer 90

Make reasonable inquiries to determine if the taxpayer’s information is incomplete.

Audit isn’t required

Question 91

If a practitioner is disbarred from practice before the IRS, when may a practitioner petition for reinstatement?

Answer 91

After 5 years

Question 92

Tax communications to a client should be (detailed or precise) … why?

Answer 92

Less detailed/precise … b/c taxpayers don’t understand the language of tax. Shouldn’t contain too much detail so you don’t confuse them…..LOL

Question 93

An accuracy-related penalty applies to the portion of tax underpayment attributable to both ___

Answer 93

negligence or a disregard of the tax rules or regulations and any substantial understatement of income tax.

Question 94

A practitioner may represent conflicting interests provided that each affected client waives the conflict by:

Notary Needed?

Answer 94

informed, written consent.

No notary needed

Question 95

Under Treasury Circular 230, a practitioner may be (3)

Answer 95

censured, suspended, or disbarred.

Question 96

A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry?

he CPA may be assessed a tax return preparer penalty.
The CPA may be charged with preparing a fraudulent return.
The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
The client will not be subject to a fraud penalty.

Answer 96

The CPA may be assessed a tax return preparer penalty.

The preparer should make reasonable inquiries if the information appears to be incorrect, incomplete, or inconsistent on the basis of known facts. Since documentation is required to deduct automobile expenses, the CPA may receive a tax return preparer penalty.

Question 97

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA’s license to practice public accounting?

The SEC
The AICPA
A state CPA society
A state board of accountancy

Answer 97

State Board of Accountancy

Question 98

A CPA will most likely be negligent when the CPA fails to:

correct errors discovered in the CPA’s previously issued audit reports.
detect all of a client’s fraudulent activities.
include a negligence disclaimer in the CPA’s engagement letter.
warn a client’s customers of embezzlement by the client’s employees.

Answer 98

Correct errors discovered in the CPA previous issued audit report

A CPA has no duty to warn a client’s customers of embezzlement on the part of the client’s employees.

Question 99

T/F

If the client was aware of the fraud and did not rely on the opinion, the client would not be successful in holding the CPA liable, even for fraud.

Answer 99

True

Question 100

The National Association of State Boards of Accountancy (NASBA) is in place to establish standards for providers of _____) units throughout the country. The organization also works to:

Answer 100

require CPE program sponsors to provide program-level content.

Question 101

The CPA does not incur liability for an IRS penalty if the client’s tax liability is understated as a result of a mere error in calculation. However, there may well be liability to the ___for such an error.

Answer 101

client

Question 102

Negotiating a client’s tax refund check when the CPA prepared the tax return

Will this get a tax IRS penalty?

Answer 102

Yes

Question 103

Which of the following is not considered a primary authoritative source when conducting tax research?

Internal Revenue Code
Tax Court cases
IRS publications
Treasury Regulations

Answer 103

IRS Publication

IRS publications are not considered a primary authoritative source when conducting tax research.

Question 104

A CPA will be liable to a tax client for damages from

failing to timely file a client’s return,
failing to advise a client of certain tax deductions, and
neglecting to evaluate the option of preparing joint or separate returns that would have resulted in substantial tax savings for a married client.

Answer 104

Memorize

Question 105

Starr, CPA, prepared and signed Cox’s 20X1 federal income tax return. Cox informed Starr that Cox had paid doctors’ bills of $20,000 although Cox actually had paid only $7,000 in doctors’ bills during 20X1. Based on Cox’s representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox’s figures and Starr did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox’s 20X1 return, Starr is:

Answer 105

Not liable -for any penalty or interest – this is b/c the CPA had no reasons to doubt the accuracy of cox’s figures. If he had reason to doubt, he would make inquiries.

Question 106

In common law, is there any federal privilege that an accountant or client may invoke to prevent disclosures?

Answer 106

No - There is no general federal accountant-client privilege

Question 107

Rules of accountancy differ from state to state and are difficult to understand. Where can a candidate find information that will allow him or her to maintain licensure records and view requirements for multiple jurisdictions?

Answer 107

NASBA tools for accounting compliance

Question 108

What is the civil penalty if a taxpayer claims withholding allowances that are based upon false information?

Answer 108

$500

Question 109

Which of the following acts constitute(s) grounds for a tax preparer penalty?

I. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.
II. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.

Answer 109

II. Only – this is an attempt to understate a tax liability. $1000 Fine

Question 110

Common Law CPA Defenses (5)

Answer 110

.

1. Contributory negligence of the client caused the loss.
2. The CPA adhered to GAAS and planned audit examination to search for material fraud.
3. The error was immaterial.
4. The proximate cause of loss was not the erroneous financial statements.
5. The CPA was not negligent or fraudulent

Question 111

if a taxpayer agrees to changes made during an examination and he signs an agreement, but does not pay the taxes due….when will he not have to pay more in interest/penalties

Answer 111

If the taxpayer pays the amount due within 21 calendar days of the billing date and the amount is less than $100,000……if above $100K, then they will receive a bill w/ interest.

If over $100k & If they pay when the agreement is signed, interest is figured in from the due date to the date of payment

Question 112

An IRS agent has just completed an examination of a corporation and issued a “no change” report. Which of the following statements about that situation is correct?

The taxpayer may not amend the tax return for that taxable year.
The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
The IRS may not reopen the examination.
The IRS may not examine any other tax return of the corporation for a period of one year

Answer 112

The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.

The IRS examines some federal tax returns to determine if income, expenses, and credits are being reported accurately. Once an examination is concluded and the taxpayer agrees, the case will generally not be reopened unless there has been fraud or misrepresentation of a material fact.

Question 113

The Secretary of the Treasury, after notice and opportunity for a hearing, may censure, suspend, or disbar any practitioner in which of the following circumstances?

The practitioner is shown to be incompetent or disreputable.
The practitioner refuses to comply with any rules in Circular 230.
The practitioner, with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client.
All of the answer choices are correct.

Answer 113

All correct

Question 114

Which of the following fee arrangements generally would not be permitted under the ethical standards published in the Treasury Department Circular 230?

A referral fee paid by a CPA to obtain a client
A commission for compiling a client’s internal-use financial statements
A contingent fee for preparing a client’s income tax return
A contingent fee for representing a client in tax court

Answer 114

Contingent Fee for prepping client’s income return

Referral fees to obtain clients & commission for INTERNAL-USE F/S are permitted

Question 115

Communications w/ IRS agents should be

Answer 115

more detailed

Question 116

Of the various administrative sources available from the IRS, which is held to be the strongest and most important source?

Revenue Rulings
Revenue Procedures
Treasury Regulations
Letter Rulings

Answer 116

Treasury Regulations -Treasury Regulations have the most weight in interpreting the IRS Code

Question 117

When researching tax law for a client, which committee report would not be used as a source of tax law?

House Ways and Means Committee Report
Accounting and Review Services Committee Report
Senate Finance Committee Report
Joint Conference Committee Report

Answer 117

Accounting and Review Services Committee Report

The Committee on Accounting and Review Services is not a source of information for the tax law. It is concerned with entity accounting rules for unregistered companies and those CPAs providing review services.

Question 118

What are the three committees involved w/ writing hte tax laws of the US

Answer 118

Senate Finance
Joint Confernce
House Ways & Means

JHS ( Jeff Highschool)

Question 119

At what level must all tax cases start?

Answer 119

Trial

Question 120

State boards typically require that the licensees attest to their jurisdiction that they have ____

Answer 120

completed the requirements for continuing education

Question 121

A CPA, while employed as an employee in a securities company, prepares misleading financial records for the company at his superior’s directive. He knows what the correct entry should be, yet does not make the correct entry, although the actual making of such an entry is under his control. The CPA has chosen to look the other way due to his superior’s orders. Which of the choices listed is the best answer concerning the CPA’s responsibilities?

The CPA has no responsibility since he prepared the materials under the orders of his superior. The superior has the responsibility.
The CPA has responsibility only if he has not documented his objection.
The CPA is a bad person and should be fired since he made incorrect entries.
The CPA is responsible for the accuracy of the financial records prepared by himself.

Answer 121

The CPA is responsible for the accuracy of the financial records prepared by himself.

Question 122

If the Internal Revenue Service is forced to seize an individual’s weekly paycheck in order to pay past-due taxes owed by the individual, the individual has the legal right to keep an amount of weekly income equal to:

Answer 122

the individual’s standard deduction divided by 52.

Question 123

Generally, what are the terms of IRC Section 7525?

Answer 123

terms are limited to the words of the statute.

Question 124

What is the Appeals Division of the IRS?

Answer 124

A division of the IRS which settles disputes based upon the hazards of litigation – recognizes all cases cant go to court.

Question 125

Appeals Division of IRS
If the proposed tax deficiency is $25,000 or less, the taxpayer only has to file a ____; if the total amount of proposed adjustment is over $25,000, ___is required.

Answer 125

small case request

a formal written protest

Question 126

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?

Answer 126

A practitioner must inform a client of any and all penalties that are likely to apply to the client with respect to a position taken on a tax return.

Question 127

A tax preparer filed a return for a taxpayer and used the taxpayer’s detailed check register containing both business and personal expenses. If the tax preparer knowingly included personal expenses as deductible business expenses on the taxpayer’s business, then the:

Answer 127

tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.

They intentionally understated the TP’s liability. - this is reckless.

Question 128

What must a third-party beneficiary prove to hold a CPA liable for unaudited financial statements?

Answer 128

Fraud or gross negligence

Question 129

In a principal-agent relationship that is not contractual, which of the following remedies is not available to the agent whose principal is guilty of violating a duty owed the agent?

Recovery for past services
Recovery for future damages
Specific performance
Withholding further performance

Answer 129

In a principal-agent relationship that is not contractual, specific performance is not available to the agent whose principal is guilty of violating a duty owed the agent.

Specific performance is an order by a court to complete a previously established transaction in a contract. Specific performance has a unique matter stated in the contract.

Question 130

A taxpayer received a notice of deficiency from the IRS. If the tax underpayment is not the result of the taxpayer’s mathematical or clerical error, how long does the taxpayer have to file a petition with the Tax Court for a redetermination of the deficiency?

Answer 130

90 days - known as the 90 day letter

Question 131

A corporation must file IRS Schedule UTP if it: (4)

Answer 131

filed Form 1120, 1120-L, or 1120-PC,
has assets equal to or exceeding $10 million,
issued audited financial statements, and
has one or more tax positions that must be reported.

Question 132

What does the professional ethics division of the AICPA do?

Interprets the Code of Professional Conduct
Investigates potential disciplinary action
Presents disciplinary cases before the AICPA joint trial board
All of the answer choices are correct.

Answer 132

All correct

Question 133

Under Treasury Circular 230, a practitioner may be sanctioned for what? (3)

Answer 133

Willful/reckless violation of regulations
Gross incompetence
Prohibited solicitation of employment

Question 134

Thorp, CPA, was engaged to audit Ivor Co.’s financial statements. During the audit, Thorp discovered that Ivor’s inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent Thorp from testifying.
Which of the following statements is correct regarding Ivor’s claim?

Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege.
Ivor can claim an accountant-client privilege only in federal courts.
The accountant-client privilege can be claimed only in civil suits.
The accountant-client privilege can be claimed only to limit testimony to audit subject matter.

Answer 134

Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege.

The “accountant-client” privilege does not generally exist, although some states have adopted statutes providing for such a privilege.

Question 135

A 20% “accuracy-related” civil penalty applies to the portion of an understatement of tax on a tax return that is due (absent reasonable cause) to:

___or a disregard of rules or regulations,
substantial ___of income tax,
substantial _misstatement,
substantial __of pension liabilities, or
substantial ___or gift tax valuation understatement.

Answer 135

negligence 
understatement 
valuation 
overstatements 
estate

Question 136

T/F

The U.S. Supreme Court is the ultimate judicial authority on tax law unless Congress disagrees and changes the Internal Revenue Code.

A decision of a U.S. Circuit Court is given more weight than that of a U.S. District Court.

The decisions of the U.S. Tax Court are appealable to a Circuit Court of Appeals.

Answer 136

True to all

Question 137

T/F
Working papers are subject to the privileged communication rule which, in most jurisdictions, prevents any third-party access to the working papers.

Answer 137

While working papers are the property of the CPA, not the client, they are not considered “privileged” and a CPA may be required to turn over such documents for peer review or when subject to a subpoena