Tax Preparer's Responsibilities Flashcards
Who grants your license to practice accounting? Who can take it away?
Your state board of accountancy.
State board of accountancy must find what to constitute misconduct?
“preponderance of the evidence” (more likely than not)
Does NOT have to prove “beyond a reasonable doubt”
Is there a penalty for violating client confidentiality during the PEER REVIEW PROCESS?
no penalty
AICPA / MACPA - any authority to take license away?
No, just dinners, CPEs, Peer Review.
3 Reasons State Board May REVOKE LICENSE
1) MISCONDUCT while performing accounting services - negligence, fraud dishonesty
2) MISCONDUCT outside the scope of accounting services - intoxication, drug use, insanity
3) CRIMINAL CONVICTION of a felony, failure to file own tax return
An accountant is entitled to due process of law. Can the state board ruling be appealed?
Yes, you can appeal the state board ruling to the courts. State Board of accountancy decisions are subject to judicial review.
Can a state board due to the following:
- Impose civil fines?
- Revoke license?
- Jail time
Yes to fines and revoking license.
No to jail time.
AICPA Professional Code of Conduct - what authority do they have?
- Sanction members
- Terminate membership WITHOUT hearing
- CAN’T revoke license or charge monetary fines
Who can impose both CIVIL and CRIMINAL penalties and suspend a CPA from practicing?
the IRS and the SEC
Can the IRS revoke a CPA license?
NO, ONLY the State Board of Accountancy.
Who is responsible for determining the continuing professional education requirements
Board of accountancy for the state in which the licensed CPA practices
The joint ethics enforcement program (JEEP) is run by whom?
The AICPA & the State Societies
In what cases is a CPA allowed to share confidential client information?
- Court cases
- Peer review by the PCAOB / State Society
- The SEC (if auditor is replaced)
- Successor auditor with proper approval from client
Is a CPA allowed to reveal the name of their client without their permission?
Yes, as long as you are NOT revealing a client’s poor financial health
Does a CPA firm own client workpapers?
Yes.
But they only own copies of client originals. Must hand over client originals to client if requested.
In event of subpoena, CPA must comply with court.
Should a CPA give workpapers to the IRS or the FASB?
Not without the consent of the client. Submission of workpapers to the IRS or FASB would require a subpoena.
In what cases would a contingent fee be allowed?
In Bankruptcy and some Tax Cases (tax audit).
These cases are exceptions because an INDEPENDENT JUDGE is involved.
Contingent fees ARE / ARE NOT allowed in the filing of an original tax return?
Contingent fees ARE NOT allowed in the filing of an original tax return
If a tax preparer discovers and error in a previously filed return, who should the CPA notify? IRS? Prior CPA? Client?
Only the client. NOT allowed to contact the IRS or prior CPA (without client’s written permission).
Frivolous Tax Position Penalty.
What is it and how much is the fine?
“patently improper” tax position
Greater of $1,000 or 50% of income derived from preparing return
Frivolous Tax Position Penalty
What is the “reasonable basis” argument?
Position has a REASONABLE BASIS.
At least 20% chance of winning if challenged because at least one primary authority has not been over-ruled, supports the position.
Frivolous Tax Position Penalty
What is the “Substantial Authority” argument?
Higher level of confidence than a reasonable basis.
Substantial authority is assumed to 33.3-40% chance of winning your position of challenged.
A position is unreasonable if there is not “substantial authority” to support it.
Exception to needing substantial authority for a frivolous tax position?
If the position is disclosed (Form 8275) and there is a reasonable basis for the position, preparer penalty can be avoided without needing substantial authority.
Tax Position Penalties
What is the “More Likely Than Not” argument?
For certain tax positions, you need a greater than 50% chance of winning your position to avoid a tax preparer penalty, tax shelters, reportable transactions.
What if a CPA WILLFULLY or RECKLESSLY or INTENTIONALLY DISREGARDS RULES to understate tax liability from an unreasonable position? Fine if found guilty?
Penalty is greater of $5,000 or 75% of the preparer fee
Penalty for failure to sign the return
$50
Penalty for failure to report PTIN
$50
Penalty for failure to give taxpayer a copy of the return
$50
Penalty for failing to keep a copy of returns prepared
$50
Penalty for failure to keep a list of tax return preparers employed
$50
Penalty for each instance of endorsing or negotiating the taxpayer’s refund check
$530
Penalty for failure to exercise due diligence in determining tax payer eligibility for the Earned Income Credit, American Opportunity Credit, Child Tax Credit
$530
Penalty for knowingly or recklessly disclosing tax return information without clients explicit written consent.
Each violation could result in a fine up to $1000 OR
1 year imprisonment
or Both
Penalty for knowingly or recklessly disclosing tax return information without clients explicit written consent AND
the disclosure results in taxpayer identity theft.
Penalty is $1000 for each disclosure
Annual maximum of $50,000
Does a tax preparer have the obligation to examine the client’s records?
No they must:
1) Be advised that adequate documentation exists
AND
2) Make inquiries when the information appears to be inaccurate or incomplete.
Difference between tax AVOIDANCE vs tax EVASION?
Avoidance = legal
Evasion = illegal
Definition of a REPORTABLE TRANSACTION
Any transaction with respect to which information is required to be included on a return because the Secretary of Treasury has determined as either tax avoidance or evasion.
Reasonable Basis
Greater than 20% chance that the tax position will be held up in courts in order to avoid tax preparer penalty.
Necessary for DISCLOSED tax positions to avoid penalty, even if they throw out our position.
Substantial Authority
33%-50% chance that the tax position will be held up in courts in order to avoid tax preparer penalty.
Necessary for UNDISCLOSED tax positions.
More Likely than Not
Greater than 50% chance that the tax position will be held up in courts in order to avoid tax preparer penalty.
TAX SHELTERS require a position to be “more likely than not” chance of being upheld to avoid penalty.
Arrange 3 tax positions in order from: Least likely to be upheld to most likely to be upheld
Reasonable basis 20%+
Substantial Authority 33-50%
More Likely Than Note 50%+
Whose job is it to keep the list of transactions that meet the requirements of “tax avoidance”? What are these items called?
Secretary of the Treasury
Known as “listed transactions”
For a tax preparer to recommend a position it must have at least a _____ _____ which means at least a ___% chance of being upheld, otherwise it runs the risk of being considered _______.
For a tax preparer to recommend a position it must have at least a reasonable basis which means at least a 20% chance of being upheld, otherwise it runs the risk of being considered frivolous.
What is a tax shelter?
A tax shelter is any partnership, investment plan, or arrangement that has as a principal purpose the avoidance or evasion of federal income tax.
A synonym for “tax shelter” on the exam is:
A reportable or listed transaction.
Both require “more likely than not” chance of being upheld to avoid preparer penalty.
Tax Law flow through government
- US House of Rep - House Ways and Means
- Full House
- US Senate - Senate Finance Committee
- Full US Senate
- President
If the President vetoes a bill, what is needed to override?
2/3 majority by both the House and Senate
Joint Committee for Reconciliation process
Members of House Ways and Means and Members of Senate Finance Committee get together to reconcile difference.
Those changes must then be approved by the full House & Senate.
For a new tax bill to be approved by the House, what % vote is needed?
Just majority.
Only need 2/3 majority in the case of overriding a veto.
Where does the authority for the US government to tax its citizens come from?
The US Constitution via the 16th amendment.
primary authority
Who has legislative authority to create tax law?
Congress
primary authority
Who is included under administrative authority?
IRS
US Dept of Treasury
(primary authority)
Who has judicial authority?
Tax court cases
primary authority
Who has Secondary Authority?
- IRS publications (IRS Code = primary)
- CPA journals
- Tax Journals
What does LIP stand for? What is it?
- Legislative, Interpretive, and Procedural
- A category of Treasury regulations.
LIP Treasury Regulation:
Legislative Regulations: What are they?
Where the Treasury Dept fills in the blanks deliberately left by Congress on this one specific regulation.
HIGHEST SOURCE of administrative regulation. PRIMARY SOURCE.
LIP Treasury Regulation:
Interpretive Regulations: What are they?
US Treasury interprets Internal Revenue Code and makes it easier for tax preparers/advisors to understand/apply through these Interpretive Regulations.
Legislative Regulations > Interpretive Regulations
LIP Treasury Regulation:
Procedural Regulations: What are they?
Deal with when a return should be filed, where it should be filed, how it should be filed.
Legislative Regulations > Procedural Regulations
Are tax court cases a primary source of tax law?
YES
Are TREASURY REGULATIONS a primary source of tax law?
YES, very important to know
Proposed, Temporary, Final Treasury Regulations:
What are they?
Order of priority?
Proposed: Do NOT have any effect of law, might be available for comment by IRS & tax preparers
Temporary: full effect of law, for only 3 years, expire
Final: Most, full effect of law
Highest to lowest: Final, Temp, Proposed
What is a REVENUE RULING?
IRS gives it’s opinion on a given set of facts. This can be relied upon and cited.
Revenue Ruling < Treasury Regulations
PRIVATE LETTER RULING
Issued only at the request of a taxpayer who requests that a decision be made by the IRS for a transaction that has NOT YET occurred.
Can be used to establish SUBSTANTIAL AUTHORITY (33-50%).
What source of tax law is the Internal Revenue Code?
IRC is the HIGHEST SOURCE of administrative tax law.
Administrative Authority from highest to lowest
- Internal Revenue Code
- Treasury Regulations
- Revenue Rulings
- Private Letter Rulings
- Limited: Revenue Procedures
- Limited: Technical Advice Memoranda
What is the general Statute of Limitations for the IRS to assess taxes on a taxpayer?
Expires 3 years from the due date of the return
OR
3 years from filing date.
(whichever is later)
When does the IRS Statute of Limitations get extended? For how long?
The Statute of Limitations gets extended to 6 years when there is a substantial omission (more than 25% of gross income).
Is “priviledge of communication” between client and CPA recognized in most states?
No, it is recognized in only a few states.
It means that only in those states can a client prevent a CPA from testifying in criminal and civil suits.
Are taxpayers required to keep workpapers associated with the preparation of each tax return?
No, they must keep a copy of the return for 3 years.
What is Circular 230 about?
Define practice before the IRS regarding:
- taxpayer rights
- privileges or liabilities including preparing and filing documents AND
- corresponding/communicating with the IRS
- rendering written advice with respect to any transaction
- representing client at hearings
Can a contingent fee be charged on an original return? Amended return? Defending of a return?
Original return? NO
Amended return? NO
Defending of a return? YES
Is the “seasonal method” of paying tax available to individuals?
NO. Must still pay in equal payments as an individual.
Only available to corporations.
Tax Court (original jurisdiction)
Hear only tax cases, judges are tax experts.
Don’t have to already have paid tax.
District Court (original jurisdiction): Pros and Cons
Pro: Can already have paid tax
Pro; Can have a JURY trial
Con: Judges are not tax experts
If you went to the United States Court of Federal Claims and did not like the result, where would you appeal to?
United States Court of Appeals
If you would like to appeal again:
United States Supreme Court.
If you wanted to appeal a decision from Tax Court or a District Court, who would you appeal to?
One of the 11 Circuit Courts + DC Circuit
If appeal again,
United States Supreme Court.
A taxpayer who seeks a refund of a tax amount already paid must be heard by:
United States Court of Federal Claims
or
District Court
Which court of original jurisdiction has a small claims court for quick resolution?
Tax Court
Withholding at what rate is required if a taxpayer fails to furnish or certify a tax identification number or SSN to a bank of brokerage firm?
24%, considered backup withholding, and the purpose is to compel the taxpayer to provide the SSN. Without the SSN, the IRS can’t tax the investment account.
For individuals, a substantial understatement is considered what?
What is the penalty %?
More than the greater of the two:
$5000 or 10% of the tax
Penalty = 20%
In order for a C Corp to avoid a penalty, they should generally pay:
the LESSER of 100% of current year or 100% of prior year
Is there a penalty for failure to file a return if no tax is due or if the taxpayer is owed a refund?
NO penalty
Can more than one person be considered a “preparer” of a return?
YES
Is a person considered a tax return “preparer” if no compensation is received?
No, compensation must be received
A taxpayer must file a tax return if they have net self-employment income in excess of what amount?
$400
With regard to tax penalties, an accuracy penalty of __% related to an underpayment of tax will be applied if a taxpayer fails to substantiate a deduction due to inadequate recordkeeping
20%
With regard to tax penalties, an accuracy penalty of __% related to an underpayment of tax will be applied even if a taxpayer discloses a tax position that is “negligently taken” since that position has no reasonable basis.
20%
