Professional Responsibilities , Tax Procedures

Question 1

What are the circumstances a tax preparer can disclose information regarding client returns?

Answer 1

1. Preparation of state and local tax returns
2. Quality and peer reviews
3. Court order or administrative order

Question 2

What is the role of The Joint Ethics Enforcement Program?

Answer 2

JEEP was created to enforce the AICPA and state societies’ codes of conduct.

Question 3

What are the different types of taxpayer penalties?

Answer 3

1. Earned Income Credit Penalty
2. Penalty for failure to make sufficient estimated income tax payment.
3. Failure to file Penalty
4. Failure to pay Penalty
5. Negligence with regards to an understatement of tax (Accuracy related penalty - non substantial)
6. Penalty of substantial understatement (Accuracy related penalty)
7. Penalty for substantial valuation Misstastement
8. Fraud Penalties

Question 4

What is the reasonable basis standard in regards to the substantition and disclosure of tax position?

Answer 4

It is a way to reduce tax avoid or reduce tax penalty. This tax position that has at least a 20% chance - fairly unlikely to prevail in court.
Reasonable basis will the substantial underpayment penalty, only if the taxpayer disclosed the tax return position (except for tax shelters) for which the taxpayer has a reasonable basis.

Question 5

What is the more likely than not standard?

Answer 5

It is a way to reduce or avoid tax penalty. The more-likely-than-not standard involves a position that has a more than 50 percent chance of succeeding.

Question 6

What are the courts in the federal court system?

Answer 6

The Trial Courts or courts of original jurisdiction for tax cases are:
U.S. Tax Court
U.S. District Court
U.S. Court of Federal Claims
The Appelate Courts are:
U.S. Court of Appeals
Federal Court of Appeal
U.S. Supreme Court

Question 7

What is the role of the U.S. Tax Court?

Answer 7

The U.S. Tax Court hear only federal tax cases. Taxpayers who file a petition with the U.S. Tax Court have the option of having the case heard before the small cases mgmt. if the tax in dispute does not exceed $50K in a yr.

Question 8

Accuracy vs Negligence penalty in regard to understatement of tax.

Answer 8

Accuracy-related penalties apply to the portion of tax underpayments attributable to negligence or disregard of tax rules and regulations as well as to any substantial understatement of income tax.
The negligence penalty with respect to understatement of tax is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.

Question 9

What is the substantial authority standard?

Answer 9

It is a way to reduce or avoid tax penalty. It is a position that has more than a 40% chance of succeeding in court.

Question 10

What is an IRS Statutory Notice of Deficiency?

Answer 10

Also called 90-day letter if the taxpayer does not request an administrative appeals conference after receipt of the 30-day letter or if the taxpayer and the IRS still do not agree on the revenue agent’s proposed adjustment after the appeals conference. It explains that the taxpayer has 90 days to either pay the deficiency or file a petition with the U.S. Tax Court.
If an individual taxpayer rejects the IRS examiner’s findings in an audit of the taxpayer’s tax return, the IRS will issue the taxpayer a 30-day letter (preliminary notice) notifying the taxpayer of the right to appeal.

Question 11

How is the estimated tax payment calculated for individual taxpayers?

Answer 11

An individual taxpayer must pay taxes throughout the tax year, through withholdings and/or quarterly estimated tax payments, of the lesser of (a) 90 percent of the current year’s tax or (b) 100 percent of the prior year’s tax (110 percent if prior year’s AGI is more than $150,000).

Question 12

What are the penalties for failure to file and to pay taxes?

Answer 12

The penalty for failure to file a tax return by the due date is 5% per month or fraction of month (up to a maximum of 25%) on the amount of tax shown as due on the return.
The penalty for failure to pay by the due date (1/2% per month) is also based on the amount due on the return.

Question 13

What is the civil fraud penalty?

Answer 13

Imposition of the civil fraud penalty requires conduct that transcends negligence or stupidity. Maintaining false records and reporting fictitious transactions is adequate to demonstrate civil fraud, a willful and deliberate attempt to evade taxes.

Question 14

What is a Private Letter ruling?

Answer 14

It is the IRS’s interpretation of the federal tax law as it applies to a specific taxpayer situation. A PLR is issued by the IRS in response to a taxpayer’s request for guidance as to the federal tax consequences of a proposed transaction. It is binding for that specific taxpayer and transaction, but may not be relied on as precedent by other taxpayers or the IRS.

Question 15

What are the elements to make a case for common law negligence?

Answer 15

There are 4 elements to make a case for negligence.
1. The defendant owed a duty of care to the plaintiff.
2. The defendant breached that duty by failing to act with due care.
3. The breach of duty was the actual and proximate cause of the plaintiff’s losses.
4. The plaintiff suffered damages.

Question 16

Common law fraud requires proof of 5 elements. what are they?

Answer 16

(i) a misrepresentation of material fact;
(ii) intent to deceive;
(iii) actual and justifiable reliance by the plaintiff on the misrepresentation;
(iv) an intent (also known as scienter) by the defendant to induce the plaintiff’s reliance on the misrepresentation; and
(v) damages.

Question 17

What is the ultamares rule?

Answer 17

Ultramares limits the accountant’s liability for negligence to: (i) parties in privity and (ii) intended third party beneficiaries; parties who are merely “foreseen” cannot recover.

Question 18

What is scienter?

Answer 18

Scienter is having a knowledge of wrong or recklessly disregarded the truth. Willful intent to deceive.

Question 19

What is the difference between actual fraud and constructive fraud?

Answer 19

Actual fraud requires intent in making a material misstatement, upon which the plaintiff justifiably relies (and that the plaintiff suffers damages). Constructive fraud only requires reckless disregard for truth or falsity.

Question 20

What is the restatement rule?

Answer 20

The Restatement rule is the rule followed by a majority of jurisdictions providing that if a CPA performs an audit negligently, the CPA is liable to the client and to any foreseeable class of persons whom the CPA knows will be relying on the audit.

Question 21

what are the exceptions to a CPA showing its client’s working papers?

Answer 21

Lawful subpoena.
Prospective purchasers, as long as the prospective purchasers do not disclose the confidential information.
Quality control panel.
AICPA/State Trial Board.
Court proceedings.
When GAAP requires disclosure of such information in the financial statements.

Question 22

What is Circular 230?

Answer 22

It is an IRS publication titled Regulations Governing Practice before the IRS, with regards to:
- Rules governing the authority to practice before the IRS
- Duties & Restrictions
- Sanctions for violation of the regulations
- rules applicable to disciplinary proceedings

Question 23

What is a contingent fee arrangement?

Answer 23

• In connection to an IRS audit or challenge (a) an original tax return; or (b) an amended tax return or refund claim, if it was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.
• connection with a refund claim filed for penalties or interest assessed by the IRS.
• in connection with any judicial proceeding arising under the IRC. The IRS would be happiest if your tax adviser sticks to these three permitted exceptions.