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Flashcards in REG 2 - Tax Standards and Research Deck (18):
1

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 initial investment in each partnership entity unless Shore has reason to believe that the information is incorrect.
b. To request the complete partnership returns of the partnership entities unless Shore has reason to believe that the information is incorrect.
c. To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect.
d. To verify the client's basis by examining client's records from the initial investment to the present.

c.
To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect.

2

While preparing a client's individual federal tax return, the CPA noticed that there was an error in the previous year's tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?
a. Inform the client and recommend corrective action.
b. Inform the client and the previous CPA in writing, and leave it to their discretion whether a correction should be made.
c. Discuss the matter verbally with the former CPA and suggest that corrective action be taken for the client.
d. Notify the IRS if the error could be considered fraudulent or could involve other taxpayers.

a.
Inform the client and recommend corrective action.

3

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
a. Internal Revenue Code.
b. Tax court decisions.
c. IRS regulations.
d. IRS agents' reports.

a.
Internal Revenue Code.

4

Wilma A. Guess, a CPA and a member of the AICPA, is preparing a federal tax return for her client, William H. Bates, one of the wealthiest businessmen in the town of Poughkeepsie, New York. Because of his extremely busy schedule, Bates keeps very few records for his various business operations. Guess has been preparing Bates' returns for the past 15 years. According to the AICPA's Statements on Standards for Tax Services, which of the following statements is correct for this situation?
a. Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.
b. Guess may use estimates provided by Bates only if the use of the estimates is disclosed on the return by checking the "Estimates Have Been Used in the Preparation of this Return" box at the bottom of the return.
c. Guess may not use estimates provided by Bates in any situation.
d. Guess may use estimates provided by Bates due to the fact that she has been preparing returns for Bates for more than 10 years.

a.
Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.

5

Arthur Younger, a CPA and a member of the AICPA, is preparing a federal tax return for his client, Albert Capon, a reputed member of an organized crime family near Chicago. Capon is very reluctant to provide any information to Younger to answer questions that are posed on the return.
According to the AICPA's Statements on Standards for Tax Services, which of the following statements is correct for this situation?
a.
With his responsibility as an advocate for Capon, Younger should answer only those questions that are advantageous or neutral to Capon and should omit those questions that might not be advantageous.
b.
If Younger cannot obtain the information to answer the questions, he can answer them as he thinks they should be answered given his knowledge of the facts of the situation.
c.
Younger should make an effort to extract from Capon the information needed to answer the questions, and, if he cannot obtain the information, he can just "forget" to answer the questions.
d.
Not all questions on a return are of equal importance. However, Younger must make a reasonable effort to answer all questions.

d.
Not all questions on a return are of equal importance. However, Younger must make a reasonable effort to answer all questions.

6

A member would be in violation of the Standards for Tax Services if the member recommends a return position under which of the following circumstances?
a. It meets the realistic possibility standard based on the well-reasoned opinion of the taxpayer's attorney.
b. It does not meet the realistic possibility standard but is not frivolous and is disclosed on the return.
c. It might result in penalties and the member advises the taxpayer and discusses avoiding such penalties through disclosing the position.
d. It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS.

d.
It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS.

7

Ivan von Hindenberg, CPA and a member of the AICPA, has been preparing federal tax returns for one of his clients for many years. Two years ago, he took a position on a return and that position was settled in an appeals conference. He is now considering a different position on the current return. According to the AICPA's Statements on Standards for Tax Services, which of the following statements is correct for this situation?
a.
Ivan cannot take a different position on the current return because the IRS is bound to be consistent in their positions and so is he.
b.
If the determination on the prior return was caused by lack of or insufficiency of supporting data, Ivan can take a different position on the current return if he has better supporting data for the new return.
c.
Ivan cannot take a different position on the current return under any circumstances. He is bound by the earlier determination.
d.
Ivan can take a different position if he files Form 1040 NP within two years of the date of the previous return or the date the tax was paid, whichever is earlier.

Choice "b" is correct. If the determination on the prior return was caused by lack of supporting data, Ivan can take a different position on the current return if he has better supporting data for the new return.

8

According to the AICPA Statements on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client?
a. Whether the client will seek a second opinion.
b. The client's business acumen.
c. The likelihood that current tax litigation will impact the advice.
d. The tax sophistication of the client.

d.
The tax sophistication of the client.

9

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?
a.
Substantial authority.
b.
Not frivolous.
c.
Realistic possibility.
d.
More likely than not.

d.
More likely than not.

10

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must:
a. Promptly advise the client of the error.
b. Prepare an amended return within 30 days of the discovery of the error.
c. Promptly resign from the engagement and cooperate with the successor accountant.
d. Document the error in the workpapers.

a.
Promptly advise the client of the error.

11

Starr, CPA, prepared and signed Cox's Year 1 federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in doctors' bills during Year 1. Based on Cox's representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox's figures and Starr did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox's Year 1 return, Starr is:
a.
Liable to the IRS for negligently preparing the return.
b.
Not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment of tax.
c.
Not liable to the IRS for any penalty or interest.
d.
Liable to Cox for interest on the underpayment of tax.

c.
Not liable to the IRS for any penalty or interest.

12

Kopel was engaged to prepare Raff's Year 4 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in Year 4. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raff had adequate records to support the deduction. Which of the following statements is correct?
a.
Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff's representation.
b.
To avoid the preparer penalty for willful understatement of tax liability, Kopel was obligated to examine the underlying documentation for the deduction.
c.
To avoid the preparer penalty for willful understatement of tax liability, Kopel would be required to obtain Raff's representation in writing.
d.
Kopel is not subject to the preparer penalty for willful understatement of tax liability because the deduction that was claimed was more than 25% of the actual amount that should have been deducted.

a.
Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff's representation.

13

Which of the following statements is correct with respect to the AICPA's Statements on Standards for Tax Services (SSTS)?
a.
SSTS apply only to tax returns that are being prepared for external clients and not to those that are being prepared for employers.
b.
A tax return position is (1) a position reflected on a tax return on which a preparer has specifically advised a taxpayer and (2) a position about which a preparer has concluded whether the position is appropriate.
c.
SSTS apply only to federal income tax returns and not to state and local tax returns.
d.
In general, a preparer should recommend a tax return position only if the preparer has a good faith belief that the position has a realistic possibility of being sustained on its merits.

d.
In general, a preparer should recommend a tax return position only if the preparer has a good faith belief that the position has a realistic possibility of being sustained on its merits.

14

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company?
a.
The tax preparer has no responsibility for disclosing any potential penalties to the company, because the position will probably be sustained on audit.
b.
The tax preparer is responsible for disclosing only the late-payment penalty to the company.
c.
The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.
d.
The tax preparer is responsible for disclosing both penalties to the company.

d.
The tax preparer is responsible for disclosing both penalties to the company.

15

Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take?
a.
Wait for the statute of limitations to expire.
b.
Discuss the requirements of the IRC with the client and recommend that client amend the return.
c.
Contact the prior CPA and discuss the client's exposure.
d.
Contact the IRS and discuss courses of action.

b.
Discuss the requirements of the IRC with the client and recommend that client amend the return.

16

A tax preparer can recommend a tax return position according to the Statements on Standards for Tax Services No. 1:
a.
If the tax authority has no written standards and the tax preparer has a reasonable basis for the position and it is adequately disclosed on the tax return.
b.
All of the above.
c.
If the tax position complies with the standards imposed by the applicable tax authority.
d.
If the tax authority has no written standards and the tax preparer has a good-faith belief that the position has a realistic possibility of being sustained if challenged.

Choice "b" is correct. The AICPA Statement on Standards for Tax Services No. 1 states that a tax professional should comply with the standards, if any, imposed by the applicable tax authority for recommending a tax position, or preparing or signing a tax return. If the tax authority has no written standards, then the tax professional may recommend a tax return position or prepare or sign a return when she has a good-faith belief that the position has a realistic possibility of being sustained if challenged, or if there is a reasonable basis for the position and it is adequately disclosed on the tax return.

17

Under the Statements on Standards for Tax Services, what is a CPA’s responsibility for verifying information furnished by the taxpayer or third parties?
a.
A CPA may, in good faith, rely on information furnished by the taxpayer or by third parties without verification.
b.
A CPA need not make additional inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent with other facts known to the CPA.
c.
A CPA should not refer to the taxpayer's previous tax returns unless the returns report transactions that affect the current tax period.
d.
A CPA need not consider implications of information furnished if the information comes directly from a third party.

Choice “a” is correct. A CPA may rely on information provided by a client without verification as long as the information does not appear to be incorrect, incomplete, or inconsistent.

18

A taxpayer wants to take a position on a tax return that the CPA determines is frivolous. However, the CPA and the taxpayer determine that the possibility of the return being selected for audit is remote and that even if the return is selected for audit the issue most likely will not be raised. According to the AICPA Statements on Standards for Tax Services, under these circumstances the CPA
a.
Can sign or prepare the return with this position because there is a realistic possibility that the position will not be challenged.
b.
Can sign or prepare the return with this position as long as the CPA advises the taxpayer that the position is frivolous.
c.
Can sign or prepare the return with this position if the taxpayer signs a tax preparer waiver of liability.
d.
Cannot sign or prepare the return with this position.

d.
Cannot sign or prepare the return with this position.