Tax Preparers and Penalties Flashcards
Mike is an enrolled agent. For the past 5 years, the information that Anne provided Mike to prepare her return included a Schedule K-1 from a partnership showing significant income. However, Mike did not see a Schedule K-1 from the partnership among the information Anne provided to him this year. What does due diligence require Mike to do?
A. Call Anne’s financial advisor and ask him or her about Anne’s investments.
B. Nothing, because Mike is required to rely only on the information provided by his client, even if he has a reason to know the information is not accurate.
C. Ask Anne about the fact that she did not provide him with a Schedule K-1.
D. Without talking to Anne, Mike should estimate the amount that would be reported as income on the Schedule K-1 based on last year’s Schedule K-1 and include that amount on Anne’s return.
C. Ask Anne about the fact that she did not provide him with a Schedule K-1.
Which of the following is an evasion of tax?
A. Paying reasonable wages to a child hired into the family business.
B. Paying employee wages in cash.
C. Assigning taxable income to a child’s tax return.
D. Purchasing tax exempt bonds instead of taxable private activity bonds.
C. Assigning taxable income to a child’s tax return.
Which of the following statements is false regarding tax return preparers?
A. An employee who prepares the return of his or her employer does not meet the definition of a tax preparer.
B. Unpaid preparers, such as volunteers who assist low-income individuals, are not considered to be preparers for purposes of preparer penalties.
C. Only a person who signs a return as the preparer may be considered the preparer of the return.
D. The preparation of a substantial portion of a return for compensation is treated as the preparation of that return.
C. Only a person who signs a return as the preparer may be considered the preparer of the return.
Sam, an enrolled agent, is representing Fred before the Examination Division of the Internal Revenue Service. The Internal Revenue Service is questioning Fred on his Schedule C gross income that is listed on the 2019 tax return. While reviewing the documentation Fred provided, Sam discovers income that was omitted from the tax return. What is the appropriate action for Sam to take?
A. Sam must advise Fred on how to keep the omission from being discovered by the Internal Revenue Service.
B. Sam must immediately advise the Internal Revenue Service examiner of the omitted income.
C. Sam must advise Fred promptly of the omission and the consequences provided by the Internal Revenue Code and regulations for such omission.
D. Sam must notify the Internal Revenue Service that he is no longer representing Fred by withdrawing his Form 2848.
C. Sam must advise Fred promptly of the omission and the consequences provided by the Internal Revenue Code and regulations for such omission.
In preparing an Earned Income Credit Worksheet and Form 8867, to meet the due diligence requirements, a return preparer must retain for a certain period all of the following EXCEPT:
A. A copy of Form 8867.
B. A record of from whom the information used to prepare Form 8867 and the worksheets was obtained.
C. Copies of documents provided by the taxpayer that the return preparer relied on to determine the eligibility for the credit.
D. A record of any questions the taxpayer may have asked the tax preparer about his or her eligibility for the credit.
D. A record of any questions the taxpayer may have asked the tax preparer about his or her eligibility for the credit.
The IRS began an examination of Mr. Honeycutt’s Year 1 income tax return. Mr. Honeycutt hired Tyler, an enrolled agent and former IRS employee, to represent him before the IRS. Tyler wrote a memorandum to Mr. Honeycutt outlining the issues that might be raised by the IRS and how to address these issues. Tyler correctly marked this memorandum as confidential and privileged under Sec. 7525 of the Internal Revenue Code. During the examination, the Revenue Officer assigned to the case asked Tyler for a copy of the memorandum. Mr. Honeycutt, invoking the Sec. 7525 privilege, told Tyler not to disclose it to the Revenue Officer. Tyler is not required to provide the Revenue Officer with a copy of the memorandum because
A. Circular 230 does not authorize officers or employees of the IRS to request any documents other than a tax return.
B. The IRS cannot request documents during an examination.
C. Section 7525 extends the attorney-client privilege to federally authorized tax practitioners.
D. The Revenue Officer did not issue a summons requesting it.
C. Section 7525 extends the attorney-client privilege to federally authorized tax practitioners.
Jane is a Certified Public Accountant who specializes in preparing federal tax returns. Which of the following returns would NOT qualify Jane as a tax return preparer?
A. None of the answers are correct.
B. Excise tax returns.
C. Estate or gift tax returns.
D. Withholding tax returns.
A. None of the answers are correct.
Which of the following allows a taxpayer to legally avoid paying income tax?
A. Earning only interest income (nonlabor/passive income).
B. Treating a portion of compensation as a tax-free fringe benefit.
C. Bartering, not using cash.
D. Working for a charitable organization.
B. Treating a portion of compensation as a tax-free fringe benefit.
When a prepared return claims the Child Tax Credit, which of the following is false?
A. The preparer must take additional steps to ensure that a client is eligible for the Child Tax Credit.
B. The preparer may be penalized $530 if no attempt is made to determine eligibility for the credit.
C. No special requirements apply to returns claiming the Child Tax Credit.
D. Due diligence requirements apply.
C. No special requirements apply to returns claiming the Child Tax Credit.
The duties in the preparation of XYZ Corporation’s income tax return were assigned and completed as follows:
Joe - The employee who obtained the information, applied the tax law to the information, and performed the necessary calculations.
Sue - Joe’s supervisor, who reviews Joe’s work. In her review, Sue reviews the information provided and the application of the tax laws.
Company A - A computer tax service, which takes the information provided by Sue, verifies the mathematical accuracy, and prints the return form.
Pat - A partner in the public accounting firm where Joe and Sue work. Pat reviews the return and the information provided and applies this information to XYZ’s affairs. Pat also verifies that the partnership’s policies have been followed and makes the final determination.
Who is the preparer of XYZ’s return and therefore is required to sign it?
A. Joe.
B. Company A.
C. Pat.
D. Sue.
C. Pat.
What is the statute of limitations for assessing penalties for understatement due to willfulness or reckless conduct under Sec. 6694(b)?
A. 7 years.
B. No period of limitation.
C. 5 years.
D. 3 years.
B. No period of limitation.
All of the following are tax return preparers EXCEPT
A. A person who prepares a claim for a refund for a fee.
B. A person who prepares a substantial portion of the return for a fee.
C. A person who prepares a United States return for a fee outside the United States.
D. A person who gives an opinion about theoretical events that have not occurred.
D. A person who gives an opinion about theoretical events that have not occurred.
By what date must a tax return preparer furnish a copy of the original return to a taxpayer?
A. By the date the taxpayer pays for the preparation of the return.
B. By the date the tax return is presented for the signature of the taxpayer.
C. By the seventh work day after the preparer signs the completed return.
D. By the date the tax return is due to be filed with the IRS.
B. By the date the tax return is presented for the signature of the taxpayer.
Which of the following is a tax return preparer according to the tax return preparer rules?
A. Mr. D, an attorney, regularly advises clients in arranging future business transactions to minimize income tax.
B. Mr. A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.
C. Mr. B, controller of Corporation X, prepares and files X’s corporate tax return.
D. Mr. C is a fiduciary and files returns for the trust.
B. Mr. A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.
When must a tax return preparer provide a copy of a tax return to a taxpayer?
A. Within 48 hours after the taxpayer requests a copy of the tax return.
B. Within 45 days after the return is filed, including extensions.
C. Not later than the time the original return is presented to the taxpayer for signature.
D. None of the answers are correct.
C. Not later than the time the original return is presented to the taxpayer for signature.
Money Office, Inc., prepares tax returns and lends money to the public. Money would like to solicit business for its lending services from its tax return customers through the use of tax return information. What action must Money take in order to disclose taxpayer information to solicit this business?
A. Obtain formal, written consent from the IRS.
B. Obtain verbal consent from each taxpayer.
C. No action is required.
D. Obtain formal, written consent from each taxpayer.
D. Obtain formal, written consent from each taxpayer.
Identify the item below that is accurate regarding preparer retention of records.
A. All of the answers are correct.
B. The preparer must retain information about the preparer of each return presented to a taxpayer for signature. This information may be retained via retention of a copy of the return or claim for refund, maintenance of a list or card file, or otherwise.
C. The preparer must make the copy or record of returns and claims for refund and record of the individuals required to sign available for inspection upon request by the commissioner.
D. The preparer must retain a completed copy of each return or claim for refund prepared or retain a record by list, card file, or otherwise, of information, as required by regulation, about each return prepared.
A. All of the answers are correct.
Identify the item below that does NOT describe information a preparer must maintain about every return prepared.
A. The taxable year of the taxpayer (or nontaxable entity) for whom the return was prepared.
B. The type of return or claim for refund prepared.
C. The taxpayer’s name and taxpayer identification number.
D. The date the return or claim for refund was prepared.
D. The date the return or claim for refund was prepared.
If a penalty is proposed against a preparer that the preparer does not agree with, what actions are available to the preparer?
A. Wait for the penalty to be assessed and for a notice and demand statement to be issued, then pay at least 15% of the penalty within 30 days and file a claim for refund.
B. Wait for the penalty to be assessed and for a notice and demand statement to be issued, then pay the penalty within 30 days and file a claim for refund.
C. All of the answers are correct.
D. Request a conference with the agent and present additional information and explanations showing that the penalty is not warranted.
C. All of the answers are correct.
What are listed transactions?
A. Transactions when taxpayers claim losses under Sec. 165 exceeding certain thresholds.
B. Transactions when a taxpayer claims a tax credit exceeding $250,000 and the asset generating the credit is held less than 45 days.
C. Transactions offered under conditions of confidentiality.
D. Tax avoidance transactions the IRS has identified that are expected to obtain the same or substantially similar types of tax consequences.
D. Tax avoidance transactions the IRS has identified that are expected to obtain the same or substantially similar types of tax consequences.
A penalty may be assessed on any preparer or
A. Any member of a firm who gives advice (written or oral) to a taxpayer or to a preparer not associated with the same firm.
B. The individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
C. Any person who prepares and signs a tax return or claim for refund.
D. Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
D. Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
What level of evidence must a tax return preparer have in order to take a position?
A. Certainty.
B. Clear and convincing evidence.
C. Substantial authority.
D. Preponderance of the evidence (more likely than not).
C. Substantial authority.
In relation to a disclosure penalty, the taxpayer’s consent must be written, formal consent authorizing the disclosure for a specific purpose. The taxpayer must authorize all of the following EXCEPT
A. Disclosure of information to additional third parties.
B. Disclosure of information in connection with another person’s return.
C. Disclosure pursuant to other provisions in the Code.
D. Use of the taxpayer’s information to solicit additional current business in matters not related to the IRS from the taxpayer.
C. Disclosure pursuant to other provisions in the Code.
Which of the following is considered a tax preparer under the tax preparer regulations?
A. An individual who prepares a return for a friend, free of charge, and then receives a gift of gratitude from the friend.
B. An individual who prepares a return for his or her employer if (s)he is regularly and continuously employed by the employer.
C. Someone who employs another person to prepare, for compensation, a substantial portion of any return of tax under the Code.
D. An individual who prepares, as a fiduciary, a return or claim for refund for any person.
C. Someone who employs another person to prepare, for compensation, a substantial portion of any return of tax under the Code.
During an interview conducted by the tax return preparer, the client stated that he had paid $1,500 for deductible travel expenses and $3,000 for charitable contributions. The preparer asked if documentation existed in support of the deductions and was assured by the client that adequate documentation did exist. When the client’s return was later examined by the IRS, a tax deficiency resulted due to the client’s lack of supporting documentation for the travel expenses. Which of the following statements best describes this situation?
A. The preparer is subject to a penalty under Sec. 6694 because she did not verify that her client had supporting documentation.
B. The preparer is not subject to a penalty under Sec. 6694 because the understatement was not substantial.
C. The preparer is not subject to a penalty under Sec. 6694 because she is not required to examine or review the client’s books and records in order to verify the client’s information.
D. The preparer is subject to a penalty under Sec. 6694 because she did not verify the existence of the documentation and a tax deficiency resulted from the examination.
C. The preparer is not subject to a penalty under Sec. 6694 because she is not required to examine or review the client’s books and records in order to verify the client’s information.
All of the following constitute frivolous returns EXCEPT
A. A return based on the position that wages are not income.
B. A return where the taxpayer has altered the return’s “perjury” language.
C. A position that compliance with internal revenue laws is voluntary.
D. A return showing a substantially correct tax.
D. A return showing a substantially correct tax.
With regard to the reporting requirements for tax return preparers under Sec. 6060, which of the following statements is false?
A. The provisions in this section only apply to preparers who employ five or more tax preparers.
B. For purposes of this section, a partnership is treated as the employer of the partners and shall retain and make available a record with respect to the partners and other tax return preparers employed or engaged by the partnership.
C. For purposes of this section, a sole proprietor shall retain and make available a record with respect to himself or herself.
D. For purposes of this section, the term “return period” means the 12-month period beginning on July 1 of each year.
A. The provisions in this section only apply to preparers who employ five or more tax preparers.
Which of the following entities must file an employer’s informational return reporting the name, identifying number, and principal place of work of each tax return preparer?
Corporation with
employees who
complete tax returns
A. Yes
B. Yes
C. Yes
D. No
Partners in a partnership
where only partners
prepare returns
A. Yes
B. No
C. Yes
D. No
Sole proprietor who
prepares returns
with no employees
A. No
B. No
C. Yes
D. No
C. Yes, Yes, Yes
Jack, a return preparer, did not retain copies of all returns that he prepared but did keep a list that reflected the taxpayer’s name, identification number, tax year, and type of return for each of his clients. Which of the following statements best describes this situation?
A. Jack is not in compliance with Sec. 6107 since he must retain copies of all returns filed.
B. Jack is in compliance with the provisions of Sec. 6107 if he retains the list for a period of 1 year after the close of the return period in which the return was signed.
C. Jack is in compliance with the provisions of Sec. 6107 provided he retains the list for a 3-year period after the close of the return period in which the return was signed.
D. Jack is not in compliance with Sec. 6107 since he has not kept all the information required by the Code.
C. Jack is in compliance with the provisions of Sec. 6107 provided he retains the list for a 3-year period after the close of the return period in which the return was signed.
Which one of the following would result in a penalty against the preparer for failure to sign a tax return?
A. D, who is not an enrolled agent, an attorney, or a CPA, prepares and signs income tax returns for compensation.
B. L, a law firm, employs A, an attorney, to prepare tax returns. A obtained information from X, L’s client, and determined X’s tax liability. A signed the tax return instead of his employer.
C. P, an unenrolled preparer, prepares income tax returns for compensation and gives the client the unsigned copy while retaining a photocopy for documentation.
D. N, an individual, has an arrangement with C, a corporation, to prepare tax returns for compensation. C does not provide office space, supplies, etc. N used forms provided by C, which N sent back to C to be reviewed by E, C’s employee, for math and proper application of tax law. N signed the return instead of C or E.
C. P, an unenrolled preparer, prepares income tax returns for compensation and gives the client the unsigned copy while retaining a photocopy for documentation.
