Ethics & Penalties Flashcards
Tax Payer Penalties
Late Filing Penalties/Failure to File: 5% of the net tax due per month (up to 25% of unpaid taxes)
- on top of what you owe in tax
- no penalty for refund and late filing
Fraudulent File: 15% per month with max penalty of 75% of unpaid tax
Late Payment Penalty:
0.5% of tax due per month, capped at 25% of the tax owed
- no failure-to-pay penalty for request for extension by due date and pay 90% of taxes owed
Accuracy Related Penalties: 20%
- lack of reasonable attempt to follow tax rules
- failure to keep adequate books and records to substantiate items that give rise to the understatement
- tax position that lacks a reasonable basis (must have at least a 20% chance to be upheld if challenged)
Substantial Understatement of tax:
- personal: exceeds the GREATER of 10% of the tax or $5000
- corporate: lesser of 10% of the tax or $10 million
Reasonable Cause Exception - cause outside the taxpayers control to delay estimated tax payment
Extension - additional time to file not to pay tax on time (unless you pay the estimated tax)
Backup withholding - withholding at the rate of 24% is required if taxpayer fails to furnish or certify a tax id number of SSN (bank is forced to do this)
Estimated Tax - self employed
- April 15th, June 15th, Sept 15 and Jan 15 (final payment to pay all tax for prior year)
- if you are overpaid, usually will apply to 1st estimated payment
- to avoid a penalty <$1000 for taxes owed
Requirements
- if you will owe $1000 or more (self-employed, capital gains, rent income)
To avoid penalty:
- 90% of the current years tax
- 100% of prior year tax (AGI <$150K)
- 110% of prior year tax (AGI >$150K)
Annualized Income Method
- use annualized income method if seasonal
- individuals and corporations can use
Estimated Tax - corporations
- April 15th, June 15th, Sept 15 and Dec 15 (final payment to pay all tax for prior year)
- small c-corp: lesser of 100% of tax shown on return for current year or 100% of prior year (assuming tax paid last year)
- to avoid a penalty <$500 for taxes owed
- large c-corp ($1mil or more): preceding year only for first payment, must use current year for all other installments
- must pay all to avoid penalty
Annualized Income Method
- use annualized income method if seasonal
State Board of Accountancy
State Board of Accountancy
- grant your license
- can take license away
Why would they 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
Due Process - Hearing
- conduct a formal hearing for possible disciplinary action
- “preponderance of the evidence” (more likely than not) that actions constituted professional misconduct
- you can appeal
AICPA
AICPA
- fraternity
- CPE Dinner Meetings
- Peer review - quality control
- review panel set for quality control standards (can breach confidentiality for this work)
- no penalty for violating client confidentiality during peer review process
- code of professional conduct has been adopted by state boards
- joint ethics panel (JEEO)
- sanction you, terminate membership (without a hearing)
- suspended: no dues or if CPE requirements was not met
1. proof of conviction of crime with imprisonment of at least 1 year
2. proof of conviction of not filing tax return
3. proof of conviction for filing false or fraudulent tax return for yourself or client, aiding and abetting
IRS & SEC
- IRS can impose both civil and criminal penalties and suspend CPA from practicing before IRS
- SEC can impose civil fines and suspend from practicing before the SEC, audit reports of issuers, etc.
- SEC can investigate for criminal activity but then ask the justice department to prosecute and impose jailtime
Confidential Client Info
Info is confidential except:
- court cases
- peer reviews and reviews by PCAOB
- SEC (if auditor is replaced)
- successor auditor with proper approval from client
- you are allowed to reveal the name for “bragging rights” even without clients info as long as you don’t reveal a clients poor financial health
Working Papers & Privileged Communication
Ownership: Account firm owns working papers & copies of client originals
Subpoenas: CPA must comply with court order to produce information like working papers
Contingent Fees
- not allowed in connection with audit clients
- bankruptcy and some tax cases (like tax audit) - contingency fees can be accepted
- not allowed in filing of an original tax return.
Client Records
- belong to client
- include original leases, original pension plan, contracts, bank statements, etc
- all originals must be handed back to client
- workpapers can include copies of client originals which may need to be retained for due diligence
Tax Preparer Penalties
- if discover an error -> notify client and encourage them to refile (1040X)
– if they won’t, consider withdrawal from the engagement
Requirements of Tax preparer:
- required to make reasonable inquiries if taxpayer’s info appears incorrect or incomplete
- required to register with IRS and obtain PTIN and renew each year
Frivolous Tax Position Penalty
- $1,000 for claiming a frivolous tax position, great of $1000 or 50% of income derived from preparing the return (patently improper)
- could argue that position has reasonable basis of at least 20% chance of winning if challenged
–Substantial Authority
- higher level of confidence then a reasonable basis
- assumed to be 33.33 - 40% chance
* Exception - if position is disclosed on tax return and reasonable basis, penalty can be avoided
– More likely than not
- 50% chance of winning
- examples: tax shelters, reportable transactions
Willful Underestimate From Unreasonable Position
- $1,000 for claiming a frivolous tax position, great of $1000 or 50% of income derived from preparing the return
- preparer willfully attempts to understate tax liability or recklessly or intentionally disregard rules: $5,000 or 75% of fee
$50 penalty for failure to:
- preparer to sign return
- report preparer’s PTIN number on return
- give taxpayer a copy of the return
- keep a copy of returns prepared
- keep a list of tax return preparers employed
- $530 for each instance of endorsing or negotiating the taxpayers refund check
- $530 for failure to exercise due diligence in determining tax payer eligibility for earned income credit, american oppty credit, or child tax credit
- $1000 and 1 year imprisonment if tax preparer uses or discloses tax return info without written consent of client
– annual max of $50,000 - exceptions peer review and quality review or subpoena or admin order
Frivolous Tax Position Penalty
- $1,000 for claiming a frivolous tax position, great of $1000 or 50% of income derived from preparing the return (patently improper)
- could argue that position has reasonable basis of at least 20% chance of winning if challenged
Tax Avoidance/Tax Evasion
Tax Avoidance: legal use and application of the tax laws and cases in order to reduce the amount of tax due
Tax Evasion: illegal means and methods to avoid taxes
Reportable Transaction - any transaction when information is required to be included in a return because it has been reported by the secretary of the treasury as either tax avoidance or tax evasion
Reasonable Basis - tax position when there is a greater than 20% chance the tax position will be upheld by court
Substantial Authority - higher level of confidence then a reasonable basis
- assumed to be 33.33 - 40% chance
More likely than not - greater than 50% chance of winning
US Treasury
- run by secretary of treasury
- list of transactyons that meet requirements of tax avoidance
- tax avoidance - legal
- tax evasion - illegal
