1
Q
Circular 230
A
- IRS’s rules of practice governing CPA’s
- government may fine, suspend, or disbar advisors from practice before IRS for violations
2
Q
Subpart A - Circular 230
A
sets forth rules governing authority to practice before the IRS, where any CPA who is not under suspension or disbarment from practice before the IRS may practice before the IRS by filing with the IRS a written declaration that he or she is currently qualified as a CPA and is authorized to represent the party or parties
3
Q
Subpart B - Circular 230
A
Substantive rules that govern tax practitioners
4
Q
Subpart C - Circular 230
A
Sanctions for violations
5
Q
Practice before the IRS
A
- Preparing documents
- Filing documents
- Corresponding and Communicating with the IRS
- Rendering written advice with tax avoidance/evasion
- Representing a client at conference, meetings, and hearings
- Power of attorney required for an individual to represent a tax payer in front of IRS
6
Q
Subpart D - Circular 230
A
Procedural rules for disciplinary proceedings
7
Q
Substantive provisions - Subpart B
A
- Promptly submit info by law unless it is privileged
- Promptly let client know mistakes; no direct contact with IRS
- Due Diligence
- No unreasonable delay
- Cannot knowingly accept work from a disbarred or suspended individual
- Practice by former IRS agents (2 year rule)
- No notaries
8
Q
Substantive provisions
A
- Promptly submit info by law unless it is privileged
- Promptly let client know mistakes; no direct contact with IRS
- Due Diligence
- No unreasonable delay
- Cannot knowingly accept work from a disbarred or suspended individual
- Practice by former IRS agents (2 year rule)
- No notaries
- No unconscionable fee, contingent fee allowed in some cases
- Return client records (everything attached to the taxpayer) and practitioner can keep record
- No conflicts of interest (3 year written consent retained for records)
- No solicitation
- No Check negotiation
- Don’t have to practice law
- Tax Return Standards
- Best Practice
9
Q
When are contingent fees allowed?
A
“audit lottery” (stance) chance is small
- IRS examination or challenge to original tax return or amended return or refund within 120 days of receiving written notice
- Claim or refund is filed in connection with statutory interest or penalties
- Accountant is representing client in judiciary proceedings
PCAOB considers auditor not independent if he/she offers contingent fee
10
Q
What are the tax return standards?
A
Cannot sign tax return or refund that the practitioner knows
- lacks reasonable basis
- unreasonable position
- willful attempt to understate tax liability or reckless intentional disregard
Practitioners cannot advise client to:
- take frivolous positions
- must inform clients of penalities
- may not ignore inconsistent info but may rely on reasonable good faith of the client
11
Q
Tax Return Payer
A
any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claims for refund of tax
12
Q
What is an insubstantial portion to not be considered a non signing TRP?
A
- less than $10K
2. less than $400K, which is also less than 20% of the gross income
13
Q
When are you NOT considered a TRP?
A
- Furnish typing, reproducing (mechanical assistance)
- Prepare as a fiduciary a return or claim for refund for any person
- VITA or LITC (low income tax clinic)
- No agreement for compensation
- Prepare by company where regularly employed
14
Q
Undisclosed position is unreasonable if…
A
No substantial authority
Less than 40% chance of being sustained
15
Q
Disclosed position is unreasonable if…
A
No reasonable basis for the position
Less than 20% chance being sustained
16
Q
Tax Shelter
A
unreasonable unless more likely than not (>50%) position will be sustained
17
Q
What is the maximum civil penalty fine for subsection a?
civil penalties
A
greater than $1K or 50% of the income derived by TRP
18
Q
What is the maximum civil penalty fine for subsection b?
criminal penalties
A
greater of $5K or 75% of the income derived by TRIP
19
Q
What are some items the TRP can be punished for?
A
- failure to provide copy
- failure to sign and show identity
- failure to furnish number to IRS
- failure to keep a copy of return
- failure to file correct returns
- negotiation of check
- failure of diligent in determining eligibility of earned income tax credit and child tax credit
20
Q
State Board of Accountancy
A
can prohibit non CPA’s from performing attest functions
punish and license CPA firms
- collect fees for CPA license
21
Q
AICPA
A
- investigates violation of AICPA code and sanctions minor cases
- grant membership, take away membership, and punish by suspension
- ethical complaints and national implications
22
Q
CPA requirements
A
BA + 30 (150 college education + bachelors degree)
Ethics course
CPE credits
One year professional experience
23
Q
Joint Trial Board
A
- hears more serious cases
- power to acquit, admonish, expel, or suspend
- initial decisions by panel that are conclusive
24
Q
Joint Ethics Enforcement Program (JEEP)
A
- single investigation across state lines
- matters of national concern, matters involving more than one state, matters in litigation
25
Disclosed petition - Form 8275 or 8275R
Reasonable basis more than 20% of being sustained
26
Undisclosed petition
Substantial authority, more than 40% chance of being sustained
27
Reasonable cause
ordinary care
judged objectively
substantial undisclosed / reasonable basis
reliance on advice
28
Good Faith
honesty of purpose
judged subjectively
adequately disclosed if invalid
not based on unreasonable assumptions
29
Records that should be retained
- records for 3 years
| - tax for 7 years
30
Charitable deductions
must document for larger than $250
| must have receipt for larger than $5K
31
Substantiation
Failure to maintain adequate records
| Failure to substantiate items that give rise to understatment
32
Late Filing or failure to file Penalty
5% per month; upto 25% of unpaid taxes
33
Fraudulent late Filing or failure to file Penalty
15% per month; upto 75% of unpaid taxes
34
Late payment for tax
.5% per month; upto 25% of unpaid taxes
35
For returns filed more than 60 days after the due date (taking into account extensions granted), the minimum penalty for returns filed after 12/31/19 is the lesser of $330 or 100% of the unpaid tax. This amount is frequently inflation-adjusted upwards.(T/T)
True
36
Taxpayers who have asked for extension by due date and paid 50% of taxes will not have penalty (t/F)
Fasle, must pay 90%
37
Individual Substantial Understatement
exceeds the greater of:
10% of correct tax or $5K
then penalty is 20% of the understatement
38
Nonsubchapter S Corp substantial understatement
exceeds the lesser of:
10% of correct tax or $10M
then penalty is 20% of the understatement
39
Tax Shelter
- partnership or other entity
- investment plan or arrangement
- good faith to believe >50% sustained
40
Negligence underpayment is how much
20%
41
Primary Authority
Legislative
Administrative
Judicial
42
Legislative authority
1. Constitution
2. Internal Revenue Code Statutes
3. Treaties
4. Committee Reports of the House Ways and Mean Committees, Senate Finance Committee, and Joint Conference Committee
43
What are the steps in order for tax laws to be passed by Congress?
1. Tax bills must be passed by House of Ways and Means Committee
2. House of Representatives
3. Senate Finance Committee - debates bill and passes own version
4. Joint Conference Committee determines decision between house and senate
5. Returned to House and Senate for another vote
6. President signs or vetoes the bill
7. If vetoed, Congress can override by 2/3 of vote
44
Administrative Authority
Treasury dpt or IRS
- treasury regulations
- revenue rulings
- private letter rulings
- revenue procedures
- technical advice memoranda
45
Treasury Regulations
- organized in sequential terms w/ numbers before decimal (tax law or type of reg) after the decimal (IRC section)
- classified as legislative, interpretive, or procedural
46
Proposed Regulations
must be issues at least 30 days before going final, provide an IRS view on tax issue but have no effect on law
47
Temporary Regulations
effect for law for 3 years and made for immediate guidance on tax issue
48
Final Regulations
effect of law until revoked
49
Private Letter Rulings
request for taxpayer to reveal consequences based on specific facts
used by taxpayers to establish substantial authority for penalty
IRS does not have to provide a ruling on the request
50
US Tax Court
- hears only tax cases
- 19 judges travel
- no deficiency
- no jury trial
- acquiescence policy (follow decision in future)
- appealed to U.S court of appeals
Small court - $50K or less and no appeal
51
U.S District courts
- jury trial
- pay deficiency first then sue for refund
- many different district courts
- judges are not tax specialists
52
US court of federal claims
- one court in DC
- pay deficiency first then sue for refund
- 16 judges
- no jury trial
53
Appellate courts
US court of appeals -
hears appeals from tax and district
11 circuits + District of columbia circuit
US Court of Appeals for Federal Circuit- only hears federal claims
54
Supreme court
hears few tax cases and highest court in US
55
Discriminate Function System (DIF)
determine which audits should be reviewed
56
Tax Audit Process
- if taxpayer agrees for changes in Revenue Agent Report (RAR), he or she cannot pursue tax relief through appeals process or through the tax court
- once deficiency is paid taxpayer can obtain a refund district or claims
- if agreement not reached, taxpayer will receive a RAR and 30 day audit letter, not required to respond but encouraged to accept RAR or do an appellate
- if no change report issued by IRS after audit, cannot reopen unless fraud
57
Tax Appeals Process
- If taxpayer doesn't respond to 30 day then 90 day is issued where taxpayer has to file petition in tax court
- If the petition is not filed in a timely manner, the taxpayer's only judicial recourse is through a U.S. District Court or a U.S. Claims Court, both of which require the deficiency to be paid before the judicial process can begin
58
Penalty for signing return or provide PIN
$50 for each tax preparer
59
Who must file a tax return?
- if your gross exceeds standard deduction
- 65 + additional standard deduction (not for blind)
- net self employment income exceeds $400
60
What are the four major type of penalties?
1. Nonfiling penalty
2. Underpayment penalty
3. Nonpayment penalties
4. Accuracy penalties
61
Non-filing penalty
5% per month (25% max)
* if not due within 60 days it is the lesser of $215 or the tax owed
15% per month fraud ( 75% max)
62
Underpayment penality
- no penalty if less than $1k in tax
Individuals: lower of payment was at least 90% of current year or 100% of last years taxes but if AGI exceeds $150K, must be 110% * or if annualization is met
Corporations: lower of 100% of CY or 100% of PY
- if corporation has $1M or more in taxable income can only use exception in preceding tax year exemption for first year installment * or if annualization is met
- no NOL in prior year
Annualization Method: amount due within an installment is the tax due for months ending before the due date of installment less amount required for previous installments
63
Nonpayment Penalties
- calculated using federal short term interst rate
.5% upto 25%
- if both non filing and non payment then max is 5% unless there is a reasonable cause
64
Accuracy Penalties
20% due to inaccuracy unless reasonable basis
Individual exceeds the greater of:
10% of correct tax or $5K
then penalty is 20% of the understatement
greater of:
Fraud is 75% or 5k
substantial misevaluation: 150% more than corrected amount
gross misevaluation: 400% more than corrected amount
65
Tax Preparer Penalties
greater of $1K or 50% of income for unreasonable basis
| greater of $5K or 75% for willful attempt
66
Form 1045
individuals/corps to claim refunds based on credits or capital losses
67
Form 1040x
refund for erroneous tax refund
68
Form 1120x
corps must file to amend a return
69
Elements of a contract breach
1. existence of enforceable contract
2. plaintiff complied with contractual obligations
3. defendant breached the contract
4. damages caused by breach
70
Negligence
1. accountant owed duty of care to plaintiff
2. defendant breached standard of care
3. breach proximately causes an injury
4. plaintiff suffers damages (compensatory are recoverable but punitive are not)
71
Defenses to Contract breach
statute of limitations
oral - 2 years from breach
written - 4 years from breach
72
Defenses for Negligence
Statute of limitations - 2 years from when the plaintiff should have known
if plaintiff was also careless then recovery will be reduced
73
Defenses for Negligence
Statute of limitations - 2 years from when the plaintiff should have known
if plaintiff was also careless then recovery will be reduced
74
Elements of Fraud
1. Defendant made false representation of fact
2. Material fact
3. Knew or recklessly disregarded the falsity
a. scienter - actual fraud
b. reckless disregard or gross negligence - constructive fraud
4. defendant intended to induce reasonable reliance from the plaintiff
5. false statement caused damages to plaintiff
75
Defenses for Fraud
Statute of Limitations - 4 years
76
Intended beneficiaries
creditor - tulsi asks pk to paint house but pay dad since she owes dad $1K. dad can sue pk
donee-same as above except dad receives $1k as a gift
77
Intended beneficiaries (can sue)
creditor - tulsi asks pk to paint house but pay dad since she owes dad $1K. dad can sue pk
donee-same as above except dad receives $1k as a gift
78
Incidental Beneficiaries (cannot sue)
someone who is not a party in the contract the benefits cannot sue
79
Testimonial Privilege
Classic privileged communications include attorney-client, doctor-patient, and priest-penitent. Where applicable, the protected party (client, patient, penitent) can prevent the party who received the protected communications (attorney, doctor, priest) from testifying.
80
Work Product Privilege
Prevents one party from learning the other sides for litigation
81
Accountant client privilege
-federal and state courts recognize this
- state courts refuse common law
only 15 states
-testimonial belongs to client
- can be waived by client (applies to all)
- applies only to state court
82
Exceptions to Confidential Communications
1. GAAP calls for disclosure
2. subpoena or summons
3. ethical examination
4. peer review requires disclosure
Disclosure is to other firm members on a “need-to-know” basis such as financial difficulties or bankruptcy
83
Generally Accepted Privacy Principles (10)
1. Management
2. Notice
3. Choice and consent
4. Collection
5. Use, retention, disposal
6. Access
7. Disclosure to third parties
8. Security for privacy
9. Quality
10. Monitoring and enforcement
84
When will there be no penalty
For 2019, there will be no penalty if the total tax shown on the return less the amount paid through withholding (including excess social security tax withholding) is less than $1,000., individuals will incur no penalty if the amount of tax withheld plus estimated payments are at least equal to the lesser of (1) 90% (85% just for the 2018 tax year) of the current year's tax (determined on the basis of actual income or annualized income), or (2) 100% of the prior year's tax. In this case, since the tax shown on Krete's return ($16,500) less the tax paid through withholding ($16,000) was less than $1,000, there will be no penalty for the underpayment of estimated taxes.
85
Fraud req
This answer is correct because under common law, a third party (e.g., a stockholder) attempting to sue a CPA for fraud must prove that damages were incurred, there was a material misstatement or omission of a material fact in the financial statements, and that there was justifiable reliance on the financial statements which led to the damages. Of the defenses listed, the CPA’s best defense is that the false statements were immaterial because it relates directly to the second requirement needed to successfully sue the CPA for fraud.
The following elements are needed to establish fraud against an accountant: (1) misrepresentation of the accountant's expert opinion, (2) scienter shown by either the accountant's knowledge of falsity or reckless disregard of the truth, (3) reasonable reliance by injured party, and (4) actual damages.
86
Computing corporations income tax
A corporation must make estimated tax payments unless its tax liability can reasonably be expected to be less than $500. A corporation's estimated tax is its expected tax liability (including the accumulated earnings tax) less its allowable tax credits.
87
Self employment threshold
A self-employed individual must file an income tax return if net earnings from self-employment are $400 or more.
88
accuracy related penalty
An accuracy-related penalty equal to 20% of the underpayment of tax may be imposed if the underpayment of tax is attributable to one or more of the following: (1) negligence or disregard of the tax rules and regulations; (2) any substantial understatement of income tax; (3) any substantial valuation overstatement; (4) any substantial overstatement of pension liabilities; or (5) any substantial gift or estate tax valuation understatement. The penalty for gift or estate tax valuation understatement may apply if the value of property on a gift or estate tax return is 50% or less of the amount determined to be correct. The penalty for a substantial income tax valuation overstatement may apply if the value (or adjusted basis) of property is 150% or more of the amount determined to be correct.
89
requirement to avoid underpayment of federal taxes
This answer is correct. The requirement is to determine which methods of estimated tax payment can be used by Jarovsky Corp. to avoid the penalty for underpayment of federal estimated taxes. Generally, to avoid a penalty for the underpayment of estimated taxes, a corporation’s quarterly estimated payments must be at least equal to the least of (1) 100% of the tax shown on the current year’s tax return, (2) 100% of the tax that would be due by placing income for specified monthly periods on an annualized basis, or (3) 100% of the tax shown on the corporation’s return for the preceding year, provided the preceding year showed a positive tax liability and consisted of 12 months. In this case, Jarovsky cannot base its estimated payments on its preceding year because Jarovsky had a net operating loss for 2019.
Regulation - CPA Excel
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