R4 M2 - Professional Responsibilites And Tax Return Preparer Penalties Flashcards
(8 cards)
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.
Explanation
Choice “D” is correct. No tax return preparer penalty is imposed for understatement of a taxpayer’s liability if the tax preparer shows that there is reasonable cause for the understatement and the tax return preparer acted in good faith.
Choice “A” is incorrect. The more-likely-than-not standard applies to tax shelters, and is a more stringent standard than substantial authority or reasonable basis with proper disclosure.
Choice “B” is incorrect. If there is a final administrative determination or a final judicial decision that there was no understatement of liability, any related tax return preparer penalty previously assessed and paid is refunded.
Choice “C” is incorrect. There is no requirement that the understatement of tax liability must be at least $10,000 for the tax preparer penalty to apply.
In order to avoid a tax return preparer penalty when determining earned income credit eligibility, a tax return preparer must do each of the following, except:
A. Dispose of earned income credit documentation after return preparation. B. Complete and submit a Paid Preparer's Due Diligence Checklist. C. Make reasonable inquiries if the information furnished to the preparer appears incorrect. D. Document the earned income credit calculation, including the method and information used to make the computation.
Explanation
Choice “A” is correct. A tax return preparer is required to retain earned income credit documentation for three years from the latest of the date the return was filed or the due date of the return, not dispose of the documentation after return preparation.
Choice “B” is incorrect. A tax return preparer is required to complete Form 8867, Paid Preparer’s Due Diligence Checklist, and submit the completed form with the tax return.
Choice “C” is incorrect. A tax return preparer is required to make reasonable inquiries if the information furnished to the preparer appears to be incorrect, inconsistent, or incomplete.
Choice “D” is incorrect. A tax return preparer is required to document the calculation of the earned income credit, including the method and information used to make the calculations.
Choice “B” is correct. Tax preparer penalties may be assessed for improper use or disclosure of information. Acceptable circumstances for disclosure include:
Preparation of state and local tax returns
Quality and peer reviews
Court order or administrative order
A tax preparer penalty may be assessed for fraud and accuracy related acts. Intentional disregard of the regulations would be deducting of personal help as a business expense.
Which of the following statements is correct for the disciplinary power of the state boards of accountancy?
A. The state boards of accountancy have no disciplinary power other than the power to reprimand licensees and refer the situation to the state's Attorney General for civil prosecution. B. The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction. C. Negligence, fraud, and dishonesty are types of misconduct outside the scope of performing accounting services. D. The failure to file a tax return is an example of misconduct outside the scope of performing accounting services.
Explanation
Choice “B” is correct. The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.
Choice “A” is incorrect. The state boards of accountancy have considerable disciplinary power other than the power to reprimand licensees. The Attorney General of the various states will not be interested in civil prosecution.
Choice “C” is incorrect. Negligence, fraud, and dishonesty are types of misconduct while performing accounting services, not types of misconduct outside the scope of performing accounting services.
Choice “D” is incorrect. The failure to file a tax return is an example of a criminal conviction (assuming that a conviction actually occurred), not misconduct outside the scope of performing accounting services.
Which regulatory body coordinates the state boards of accountancy in their role of licensing and regulation for CPAs?
A. The National Association of State Boards of Accountancy B. The Financial Accounting Standards Board C. The Public Company Accounting Oversight Board D. The American Institute of Certified Public Accountants
Explanation
Choice “A” is correct. The National Association of State Boards of Accountancy (NASBA) coordinates the state boards of accountancy in the licensing and regulation of CPAs.
Choice “B” is incorrect. The Financial Accounting Standards Board (FASB) establishes financial accounting and reporting standards for public and private companies that follow Generally Accepted Accounting Principles (GAAP).
Choice “C” is incorrect. The Public Company Accounting Oversight Board (PCAOB) oversees the audits of accounting firms auditing public companies.
Choice “D” is incorrect. The American Institute of Certified Public Accountants (AICPA) is a national professional organization representing CPAs. The AICPA develops and scores the Uniform CPA Exam but does not coordinate the state boards of accountancy in the licensing and regulation of CPAs.
Which of the following actions will most likely not result in the imposition of the false and fraudulent statement penalty of up to $500,000 and imprisonment under IRC Section 7206 against a CPA engaged in the practice of public accounting?
A.
In the preparation of an estate tax return, the CPA deliberately omits cash that the decedent obtained from illegal activities.
B.
The CPA omits the income from the material exercise of statutory stock options at the taxpayer’s request since the taxpayer will receive a refund either way.
C.
The CPA helps make a good case for a taxpayer by making materially inflated statements under penalties of perjury.
D.
The CPA reports the taxpayer’s income from drug dealing on the client’s tax return but does not deduct the kickbacks paid to city employees.
Explanation
Choice “D” is correct. The Internal Revenue Code (IRC) provides for criminal penalties for any person, including a tax return preparer who prepares a tax return in a fraudulent or false manner with regard to any material matter. In this scenario, the CPA appropriately reported the client’s income from drug dealing on the tax return and did not take a deduction for the kickbacks paid to city employees. These actions are not likely to result in imprisonment or a penalty.
Choice “A” is incorrect. The CPA deliberately did not report the cash that the client received from illegal activities on the client’s estate tax return. This fraudulent omission would result in a false and fraudulent statement penalty of up to $500,000 and/or imprisonment if the CPA is found guilty.
Choice “B” is incorrect. Because the CPA fraudulently omitted the income from the material exercise of statutory stock options, the CPA would likely be subject to the false and fraudulent statement penalty of up to $500,000 and/or imprisonment.
Choice “C” is incorrect. The CPA knowingly made false statements on a material matter to help his client. This action would likely result in the imposition of the false and fraudulent statement penalty of up to $500,000 and/or imprisonment under IRC Section 7206.
The state board of accountancy have the power to grant, revoke, or suspend.
Misconduct while performing accounting service ( dishonesty, fraud , negligence )
Misconduct outside the scope of accounting services
Criminal Conviction
