List the various "authorities" for purposes of determining whether there is substantial authority for the income tax treatment of an item.
- The Internal Revenue Code and other federal statutes.
- U.S. Treasury regulations.
- IRS revenue rulings and procedures; tax treaties and U.S. Treasury Department explanations of such treaties.
- Federal court cases
- Congressional intent set forth in committee reports, statements or managers included in conference committee reports and bill manager's floor statements.
- Explanations prepared by the Joint Committee on Taxation (the "Blue Book").
- Private letter rulings and technical advice memoranda.
- Actions on decisions and general counsel memoranda.
- IRS information or press releases and notices, announcements, and other administrative pronouncements.
What is a listed transaction?
The term "listed transaction" means a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the U.S. Department of the Treasury as a tax avoidance transaction.
What is a reportable transaction?
The term "reportable transaction" means any transaction which the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance (the legal use and application of the tax laws and cases in order to reduce the amount of tax due) or tax evasion (efforts by illegal means and methods to not pay taxes).
What is the "reasonable basis" standard?
Reasonable basis is a relatively high standard of tax reporting and is significantly higher than not frivolous and not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.
If a return position is reasonably based on one or more acceptable authorities, the return position will generally satisfy the reasonable basis standard even through the position may not satisfy the substantial authority standard.
What is the "substantial authority" standard?
An objective standard involving application of the law to relevant facts; less stringent than the "more likely than not" standard.
Substantial authority exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of the authorities supporting the contrary treatment.
There is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a U.S. Court of Appeals to which the taxpayer has a right of appeal with respect to the item.
The taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant.
What is a tax shelter?
The term "tax shelter" means any (i) partnership or other entity, (ii) investment plan or arrangement, or (iii) other plan or arrangement if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax.
List the various penalties the IRS can impose on a tax return preparer who understate the taxpayer's income tax liability.
Penalty for understatement of taxpayer's liability due to an unreasonable position by the tax return preparer.
Penalty for understatement of taxpayer' liability due to willful or reckless conduct of the tax return preparer.
Penalty for aiding and abetting understatement of tax.
List the paid income tax preparer's responsibilities to the client and to the IRS.
- Providing the client a completed copy of the tax return.
- Signing the tax return or refund claim.
- Indictating on the return or refund claim the tax identification number of the tax return preparer.
- Retaining tax return records (copies or lists) properly and for at least three years.
- Filing with the IRS the yearly information returns regarding other tax return preparers employed by the tax return preparer.
- Not negotiating the client's IRS refund check.
- Diligently determining the client's eligibility for the earned income credit.
- Not disclosing, except as permitted by law, client tax return information.
- Not using, except as permitting by law, client tax return information for any purpose other than to prepare a tax return.
List the exceptions to the penalty and/or fine for wrongful disclosure and/or wrongful use of tax return information.
- Disclosures allowed by any provision of the IRC and disclosures pursuant to a court order.
- Use in preparing state and local tax returns and declaration of estimated tax.
- Disclosures and uses permitted by U.S. Treasury regulations (disclosure and use for quality and peer reviews, computer processing, and administrative orders).
- Consent of the client.
What is Circular 230?
Circular 230 is an IRS publication containing the U.S. Treasury regulations governing the authority of the tax practitioner to practice befre the IRS, the duties and restrictions relating to practice before the IRS, the sanctions for violation of the regulations, and the rules appliable to IRS disciplinary proceedings.
Under what situations before the IRS may a tax practitioner charge a contingent fee?
- IRS examination (audit);
- Claim solely for a refund of interest and/or penalties; or
- A judicial proceedings arising under the Internal Revenue Code.
Note: These are the only situations before the IRS when a tax practitioner may change a contingient fee.
If a conflict of interest exists, under what circumstances may a tax practitioner represent the client for which there is a conflict of interest?
The practitioner may represent both (all) clients if:
- The practitioner reasonably believes that she/he can competently represent the clients;
- No state or federal law prohibits such representation; and
- Each affected client waives the conflict of interest and with respect to the waiver so confirms in writing within 30 days after so waiving.
What are the requirements for advertising?
No false or misleading advertising.
Each solicitation must identify the solicitation as such.
If applicable, identify the source of the information used to choose the recipient.
If advertising by radio and/or TV, keep at least 36 months a recording of the actual broadcast transmission.
If advertising by direct mail and/or ecommerce, keep for 36 months a copy of the communication and a listing of those to whom the communication was sent.
What are the requirements for written fee schedules?
If a practitioner publishes a written fee schedule, charge no more than the published fees for the 36-day period following the last date the fees were published.
Any statement of fee information concerning matters in which fees may be incurred (such as fees for the pracitioner's use of a tax return processor) must include a statement disclosing whether clients will be responsible for such costs.
What are the "best practices" for tax advisors?
- Communicating with the client regarding the terms of the engagement.
- Establishing the facts and arriving at a conclusion supported by the law and the facts.
- Advising the client about the import of the conclusions reached (for example, whether the client will ve able to avoid penalties).
- Making sure that all members, associates, and emplyees of the firm follow procedures that are consistent with the above.
Under what circumstances must the tax practitioner advise the client of penalties reasonably likely to apply?
With respect to penalties reasonably likely to apply for a position taken on a tax return, the practitioner must so advise if the practitioner either:
- advised the client with respect to the position, or
- prepared or signed the tax return.
Further, the practitioner must inform the client of any penalties "reasonably likely" to apply with respect to any document submitted to the IRS.
Once the tax practitioner has informed the client of penalties reasonably likely to apply, what additional information must the practitioner provide to the client?
The practitioner must inform the client of:
- the opportunity to avoid such penalties if the client so discloses the position to taken, and
- the requirements for adequate disclosure.
To what extent may the tax practitioner rely on client-provided information?
General rule: The practitioner may rely "in good faith without verification" upon client-furnished information.
However, the pracitioner cannot ignore contradictory information known to the practitioner.
The pracitioner must make reasonable inquires if client-furnished information appears questionable or incomplete.
Does the tax practitioner have any obligation to inform the client about the client's tax return errors or omissions?
Yes. The practitioner must advise the client promptly of any noncompliance, errors, or omissions in tax returns and other documents.
The practitioner must advise the client of the consequences under the law with respect to such noncompliance, errors or omissions.
What is a "covered option"?
A covered option is any written or electronic advice, other than excluded advice, concerning one or more federal tax issues and arising from:
- A tax avoidance transaction that the IRS identified in IRS publications as a listed transaction; or
- Any partnership or any other entity, plan, or arrangement whose principal purpose is federal tax avoidance or evasion; or
- Any partnership or any other entity, plan, or arrangement having as a signficant purpose federal tax avoidance or evasion if the advice is (i) a reliance opinion, (ii) a marketed opinion, (iii) subject to conditions of confidentiality, or (iv) subject to contractual protection.
What is a federal tax issue?
A question concerning (i) the federal tax treatment of any item or transaction, or (ii) the value of property for federal tax purposes.
What is a significant federal tax issue?
A federal tax issue for which:
- the IRS has a reasonable basis for successful challenge, and
- the resolution of the issue has a significant tax impact under any reasonably foreseeable circumstance.
With respect to the practitioner's having procedures in place to assure compliance with Circular 230, when will the IRS institute disciplinary actions?
Failure to have these procedures in place will result in IRS disciplinary actions under either of the following circumstances:
- These procedures are not in place, and the result is a failure to comply, or
- The practitioner (i) knows, or should have known, that others in the firm are not complying and (ii) fails to correect the noncompliance.
List some of the provisions of Sarbanes-Oxley related to the structure and duties of the PCAOB.
Two members must be (or must have been) CPAs and three members cannot be (and cannot have been) CPAs.
Public accounting firms registered with the PCAOB must adhere to certain auditing standards. What are these?
Maintain audit documentation for seven years;
What are some of the requirements of the PCAOB related to the operations of accounting firms?
Registered accounting firms must monitor professional ethics and independence from issuers that it audits and must supervise audit work. (Quality Control)
Name some of the provisions of SOX related to auditor independence.
Registered CPA firms performing SEC audits may not provide certain "prohibited services" to the audit client.
List some of the SOX requirements related to public company audit committees.
Public companies must have audit committees; the auditor reports directly to the audit committee.
The CEO and CFO (or equivalent position) must sign representations regarding annual and quarterly reports. What are their assertions related to those reports?
They have reviewed the report; The report does not contain untrue statements or omit material information;
Describe the provisions of whistle-blower protection.
An employee who lawfully provides evidence of fraud may not be discriminated against for providing such information.
List the eight common penalties imposed on taxpayers.
Earned Income Credit Penalty
Summarize the earned income credit penalty.
Taxpayers who negligently claim the earned income credit may lose the ability to claim this credit for two years or, if fraudulently claimed, for up to three years.
Summarize the penalty for failure to make estimated income tax payments.
Taxpayer (including corporations, estates, and trusts) who do not have sufficient amounts of withholding and who do not make timely payments of estimated income tax (including self-employment tax) must pay this penalty, which accrues from the date the estimated income tax must be paid until the tax return due date without extensions.
Summarize the failure-to-file penalty.
Generally, 5% of the amount of tax due for each month (or any portion thereof) the return is not filed.
Summarize the failure-to-pay penalty.
One-half of 1% per month (of any fraction thereof) up to a maximum of 25% of the unpaid tax.
Summarize the negligence penalty with respect to an understatement of tax.
The penalty amount is 20% of the understatement of tax.
Summarize the penalty for substantial underpayment of tax.
Except as set forth below, an understatement of tax is "substantial" if the understatement exceeds the greater of 10% of the correct tax or $5,000.
Summarize the penalty for a substantial valuation misstatement.
20% penalty on the understatement of tax if there is a substantial valuation.
Summarize the fraud penalties.
Both civil penalties (at least 75% of the understatement of tax due to fraud) and criminal penalties (as high as $100,000; $500,000 for corporations) can apply.
List the "Standard of Compliance" defenses that are available to avoid or reduce the penalties.
A Position That Is Not Frivolous
Summarize a position that is not frivolous.
A position that is NOT frivolous is:
Summarize the reasonable basis standard.
A position that has at least a 20% chance of succeeding; one that is arguable but fairly unlikely to prevail in court.
Summarize the substantial authority standard.
The substantial authority standard is a position that has more than a one-in-three chance of succeeding but less than a more-than-50% chance of succeeding.
Summarize the more likely than not standard.
The more likely than not standard is a position that has more than a 50% chance of succeeding.
What other circumstances will generally allow a taxpayer to avoid a penalty?
A taxpayer generally can avoid any penalty by showing that the taxpayer:
In what three ways can CPA legal liability arise?
Breach of contract
To whom may a CPA be liable for negligently performing an engagement?
Under the majority rule, a CPA is liable to the client and any person or limited forseeable class of persons whom the CPA knows will be relying on the CPA's work. Under the minority Ultamares decision, a CPA can only be liable to the client and intended their parties shown to be in privity of contract with the CPA.
To whom may a CPA be liable for fraudulently performing an engagement or performing an engagement with gross negligence?
Anyone who relied on the CPA's work and incurred damages as a result.
What are the defenses available to a CPA against a charge of negligence?
No duty--remote plaintiff
State whether the plaintiff can recover compensatory or punitive damages from a CPA in each of the following types of action:
Breach of contract
What are the elements of fraud?
A misrepresentation of material fact
What is the difference between fraud and constructive fraud?
Constructive fraud has the same elements as actual fraud, except instead of intentionally deceiving, the defendant acts recklessly (i.e., without regard for professional procedures or standards), which constitutes gross negligence.
Under what conditions may a CPA disclose confidential client information without the client's consent?
To defend against a lawsuit brought by the client (court proceeding)
In general, what is the purpose of the Securities Act of 1933?
The Securities Act of 1933 regulates the original distribution of securities. Its goal is to assure that investors have sufficient information on which to make informed investment decisions, but the SEC does not judge the merits of the investment.
Describe the registration statement.
Contains all information that a reasonable investor would consider important in deciding whether to invest.
When does the registration statement become effective?
Twenty days after filing unless the SEC issues a refusal or stop order, or unless it is made effective earlier by an SEC acceleration order.
What activities can take place during the waiting period regardless of whether the company is a seasoned issuer or a well-known seasoned issuer?
Oral offers can be made
What securities are exempt from registration requirements of the Securities Act of 1933?
What securities must be registered under the Securities Act of 1933?
Securities offered in connection with interstate commerce
What is Regulation D?
Regulation D exempts certain issuances of securities from the registration requirements of the Securities Act of 1933.
Generally, is a generally solicitation permitted under Regulation D?
General solicitation (e.g. a newspaper or magazine ad) is prohibited in most cases under Regulation D.
What are the dollar and investor limitations of rules 504, 505, and 506 under Regulation D?
Rule 504: $1 million / any number of investors
What must a plaintiff prove in a case brought under Section 11 of the Securities Act of 1933?
The plaintiff acquired the stock
Does a CPA who signed off on financial information in a registration statement have any defenses to Section 11 liability?
Yes: Due diligence.
What companies must register under the Securities Exchange Act of 1934?
Generally any company:
What securities are exempt from registration under the Securities Exchange Act of 1934?
What persons may be classified as insiders?
Can a defendant be liable from negligently violating Rule 10b-5?
No. Rule 10-b5 requires the plaintiff to prove that the defendant intended to deceive the plaintiff and that the plaintiff relied on the deception and was deceived into buying or selling securities.
What is a tender offer?
A tender offer is an offer made to all stockholders to purchase stock for a specified price for a specified period of time.