104 MCQ Flashcards
Work on this
A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable?
A There was substantial authority for the position.
B It is reasonable to believe that the position would more likely than not be upheld.
C There was a reasonable possibility of success for the position.
D There was a reasonable basis for the position.
** It is reasonable to believe that the position would more likely than not be upheld.**
Tax Positions are as follows:
Frivolous Position Less than a 20% probability of being sustained on its merits
Reasonable Basis At least a 20% probability of being sustained on its merits
Realistic Possibility Requires a 33.33% likelihood of success
Substantial Authority Requires a 40% likelihood of success
More likely than not Requires a more than 50% probability of being sustained on its merits
A tax return preparer will not be subject to penalty for a tax shelter transaction that has been reported on a tax return with adequate disclosures, provided it meets at minimum the more likely than not standard. According to this standard, a tax shelter transaction must have more than a 50% chance of being sustained on its merits to avoid penalty.
Question 34 Blueprint Area 1 A ii IRC and Regulations Related to Tax Return Preparers
Work on this
In preparing Watt’s individual income tax return, Stark, CPA, took a deduction contrary to a Tax Court decision that had disallowed a similar deduction. Stark’s position was adopted in good faith and with a reasonable belief that the Tax Court decision failed to conform to the Internal Revenue Code. Under the circumstances, Stark will
A Not be liable for a preparer penalty unless the understatement of taxes is at least 25% of Watt’s tax liability
B Not be liable for a preparer penalty if Stark exercised due diligence
C Be liable for the preparer’s negligence penalty
D Be liable for the preparer’s penalty because of Stark’s intentional disregard of the Tax Court decision
Not be liable for a preparer penalty if Stark exercised due diligence
Though an accountant will be subject to criminal penalties for willful preparation of a false return, if after due diligence in research and analysis, an accountant has a reasonable, good faith belief in the correctness of the position, s/he will not be held liable. The percentage of understatement of taxes is not relevant in these circumstances. A penalty for an understatement of liability due to a preparer’s negligent or intentional disregard of rules or regulations does not extend to Tax Court decisions.
A calendar-year taxpayer files an individual tax return for year 1 on March 20, year 2. The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return. What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency?
A March 20, year 5
B March 20, year 4
C April 15, year 5
D April 15, year 4
April 15, year 5
Section 6072(a) requires that an individual who uses a calendar year file a federal income tax return by April 15 of the following year unless the taxpayer receives an extension under §6081(a). Section 6501(a) provides that in general no assessment of additional taxes may be made after 3 years from the time the tax return was filed. A return that is filed early will be deemed to have been filed on its due date. Thus, the return filed on March 20, year 2, is deemed to have been filed on April 15, year 2, for purposes of §6501. The Internal Revenue Service until April 15, year 5, to assess additional taxes and assert a notice of deficiency.
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?
A The CPA may be assessed a tax return preparer penalty.
B The CPA may be charged with preparing a fraudulent return.
C The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
D The client will not be subject to a fraud penalty.
The CPA may be assessed a tax return preparer penalty.
According to the Statements on Responsibilities in Tax Practice, preparers may rely on information provided by the client without verification unless it is clearly incorrect or incomplete. However, reasonable enquiries must be made about the existence of the documentation for certain expenses like business travel expenses. As the CPA has failed to make the inquiry related to the documentation of the travel expenses, he may be assessed a tax return preparer penalty. Options (b) and (d) are incorrect because the CPA may be assessed a tax return preparers penalty for lack of inquiry. Fraud charges apply if the CPA’s non-inquiry was intentional. The fact pattern of this question does not indicate fraud. Option (c) is incorrect because the client is primarily responsible for any liabilities arising out of the tax return and as such for any understatements assessed in an IRS audit, the client will be penalized.
A CPA will be liable to a tax client for damages resulting from all of the following actions except
A Failing to timely file a client’s return
B Failing to advise a client of certain tax elections
C Refusing to sign a client’s request for a filing extension
D Neglecting to evaluate the option of preparing joint or separate returns that would have resulted in a substantial tax savings for a married client
A CPA will not be liable to a tax client for refusing to sign a client’s request for a filing extension. This extension can be signed by either the client or the preparer. A CPA has a primary responsibility to the client to see that the client pays the proper amount of tax and no more. A CPA must adhere to the same standard of truth and personal integrity in tax work as in all other professional activities. Failure to timely file a client’s return or advise a client of certain tax elections, and neglecting to evaluate an option that would result in substantial tax savings all would violate the responsibilities of the CPA to exercise due care.
A single-member LLC engages a CPA to prepare the year 2 income tax return. In the course of preparing the tax return, the CPA discovers that a partnership return was filed for year 1. Under the AICPA Statements on Standards for Tax Services, which of the following statements is not true regarding the CPA’s duties upon discovering an error in filing the year 1 partnership return?
A The CPA must inform the client that an incorrect return was filed; under the AICPA standard, the CPA has the duty to report the error to the taxpayer.
B The CPA should make sure the LLC files the correct return for year 2; under the AICPA standard, the CPA has the duty to take reasonable steps not to repeat the error.
C The CPA must inform the IRS that the LLC filed an incorrect tax return for year 1; under the AICPA standard, the CPA has the duty to report the error to all relevant taxing agencies.
D The CPA should let the LLC decide whether it wants to correct the error; under the AICPA standard, the CPA has the duty to let the LLC make the decision to correct the error.
WHAT OUT FOR THE “IS NOT TRUE”
The CPA must inform the IRS that the LLC filed an incorrect tax return for year 1; under the AICPA standard, the CPA has the duty to report the error to all relevant taxing agencies.
The CPA does not have to inform the IRS that the LLC filed an incorrect tax return for year 1; under the AICPA standard, the CPA has no duty to report the error to any relevant taxing agencies.
Under the Statements of Standards for Tax Services (SSTS), a CPA does not have the duty to report an error on a previously-filed tax return to taxing agencies, nor does the CPA have the responsibility of making the decision of whether to correct the error, as that decision is left to the taxpayer.
The CPA must inform the client that an incorrect return was filed.
The CPA should make sure the LLC files the correct return for year 2. And the CPA should let the LLC decide whether it wants to correct the error.
The question is asking which of the following is not true. A CPA has no responsibility to inform the IRS or any other taxing agency that an incorrect return was filed in year 1. As such, (C) is not true and therefore the correct answer.
A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate tax return information, if the disclosure is made
A To enable a third party to solicit business from the taxpayer
B To enable the tax processor to electronically compute the taxpayer’s liability
C For peer review
D Under an administrative order by a state agency that registers tax return preparers
To enable a third party to solicit business from the taxpayer
Section 6713 authorizes a civil penalty and §7216 authorizes a criminal penalty for the unauthorized disclosure by a tax preparer of information furnished to the preparer by a taxpayer. Reg. 301.7216-2(o) allows disclosure for the purpose of a quality or peer review. Reg. 301.7216-2(c) allows disclosure pursuant to an administrative order by a state agency that registers tax return preparers. Reg. 301.7216-2(h) allows disclosure for the purpose of processing the tax return, including electronic filing. Disclosure for the purpose of enabling a third party to solicit business from the taxpayer is not an exception to the general prohibition on unauthorized disclosure.
According to the ethical standards of the profession, which of the following acts generally is prohibited?
A Accepting a contingent fee for representing a client in connection with obtaining a private letter ruling from the Internal Revenue Service
B Retaining client records after the client has demanded their return
C Using information gained from one client’s return to prepare another client’s return
D Accepting a fee for tax matters, the amount of which is determined by judicial proceedings
Retaining client records after the client has demanded their return
A tax practitioner must return a client’s records after the client has demanded them. Representing a client in connection with obtaining a private letter ruling is one of the specific tax matters for which an accountant may charge a contingent fee. When preparing a tax return, a member should consider information actually known to that member from the tax return of another taxpayer if the information is relevant. Fees fixed by the courts or public authorities are not considered contingent and, therefore, are permitted.
Clark, a professional tax return preparer, prepared and signed a client’s federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check?
A Clark will be subject to the penalty if Clark endorses and cashes the check.
B Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service.
C Clark may not endorse and cash the check, without penalty, because the check is for more than $500.
D Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark’s fee for preparation of the return.
Clark will be subject to the penalty if Clark endorses and cashes the check.
Section 6695 of the IRC states that any income tax return preparer who endorses or otherwise negotiates any check which is issued to a taxpayer shall pay a penalty for each check.
Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships. According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore’s professional responsibility regarding the reporting of these partnership losses on Fuller’s federal income tax return?
A To verify the client’s basis by examining client’s records from the initial investment to the present
B To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect
C To verify the initial investment in each partnership entity unless Shore has reason to believe that the information is incorrect
D To request the complete partnership returns of the partnership entities unless Shore has reason to believe that the information is incorrect
To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect
According to AICPA Statements on Standards for Tax Service, a tax preparer may rely on the information provided by the client without verification unless it is clearly incorrect or incomplete. Options (a), (c) and (d) are incorrect because Shore’s responsibility is to rely on the information provided by client Fuller without verification, unless the information appears inaccurate or incomplete.
Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except?
A Sign a tax return as a preparer
B Disclose a conflict of interest
C Provide a client with a copy of the tax return
D Keep a record of returns prepared
Here the wording is odd. Read it this way: TRP can be subject to penal
Disclose a conflict of interest
The following are addressed in the IRC:
* Tax preparers must sign the return and include preparer’s address and IRS identification number
* Tax preparers must provide a copy of the return to the tax to the taxpayer when signed
* Tax preparers must retain a file of all returns for three years after the close of the return period
Conflict of interest is addressed in Circular 230
* Tax preparer is not allowed to represent conflicting interests before the IRS
* However, each affected client can give consent and waive the conflict of interest
* No penalty is designated for conflict of interest
A tax return preparer must keep either a copy of the return or a list of names, identification numbers, and tax years for three years following the close of the return period. A tax return preparer will incur a penalty for each failure to provide a client with a copy of an income tax return and for each failure to sign a tax return as a preparer. The IRC does not require disclosure of a conflict of interest for tax preparation.
The IRC and the regulations do not impose penalties on tax return preparers
for which of the following?
A. Failure to sign tax return as a tax preparer
B. Failure to provide a copy of a prepared tax return to the taxpayer
C. Failure to notify a taxpayer about an inadvertent error on a tax return
filed 10 years ago
D. Failure to retain copies of prepared tax returns or a list of taxpayers for
whom such returns were prepared for the last 3 years
B. The practitioner may retain copies of the client’s records
To avoid tax 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?
A. Audit the taxpayer’s corresponding business operations
B. Review the accuracy of the taxpayer’s books and records
C. Make reasonable inquiries to determine if the taxpayer’s information is
incomplete
D. Examine the taxpayer’s supporting documents
C. Make reasonable inquiries to determine if the taxpayer’s information is
incomplete
Circular 230 and 26 CFR 1.6694-1 (e) cover tax return preparer penalties
* An audit or review is not required
* Examination of the taxpayer’s supporting documents is only sometimes
required
* However, reasonable inquiries are generally required
Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must a plaintiff prove to hold a CPA liable?
I. The misstatements contained in the financial statements certified by the CPA were material.
II. The plaintiff relied on the CPA’s unqualified opinion.
A I only
B II only
C Both I and II
D Neither I nor II
** I only**
Under the liability provisions of Section 11 of the Securities Act of 1933, in order to hold a CPA liable, it is only necessary to prove that (i) Material misstatements or omissions were made in the financial statements and (ii) A financial loss was suffered as a result of the above. The plaintiff need not prove reliance on the unqualified opinion. Options (B), ( C) and (D) are incorrect based on the above explanation.
Note: While the CPA Exam no longer tests the Securities and Exchange Act content, some of the concepts are still relevant and testable for the Ethics portion of the Regulation section as it pertains to an accountant’s liability.
Watch out. I knew the right answer but chose the wrong one.
work on this
Which of the following statements is correct concerning a penalty for a tax return preparer who understates a taxpayer’s liability?
A No penalty is imposed if the understatement of tax liability is related to a tax shelter and was properly disclosed, and if there was substantial authority for the position
B If there is a final judicial decision that there was no understatement of liability, the related tax preparer penalty paid earlier is not refundable
C In general, the penalty does not apply unless the understatement of the tax liability is at least $10,000
D No penalty is imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith
No penalty is imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith
The correct answer is (D).
Preparers may rely on information provided by the client without verification unless it is clearly incorrect or incomplete. However, reasonable inquiries must be made when information appears incorrect or incomplete to avoid potential tax preparer penalties. No penalty is imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.
(A) is incorrect because a tax return preparer will not be subject to a penalty for a tax shelter transaction that has been reported on a tax return with adequate disclosures, provided it meets the more likely than not standard. According to this standard, a tax shelter transaction must have more than 50% chance of being sustained on its merits to avoid penalty. So it has to meet more likely than not standard and not substantial authority standard.
(B) is incorrect because if there is a final judicial decision that there was no understatement of liability, the related tax preparer penalty paid earlier is refundable.
(C) is incorrect because penalties are assessed against preparers who knowingly or recklessly understate the tax liability of a client.
