R4 Professional Responsibilities and Federal Tax Procedures

Which of the following individuals is acting as a tax return preparer under IRS regulations?

A CPA who prepares a substantial portion of a claim for refund of tax for a client. (A tax return preparer is any person who prepares for compensation, or employs one or more persons to prepare for compensation, a substantial portion of any tax return required under the IRC or any claim for refund of tax imposed by the IRC. The CPA is considered a tax return preparer because he or she prepared a substantial portion of the claim for refund of tax for a client.)

Which of the following statements is correct regarding the liability of a CPA for services performed?

A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner. (A CPA does not guarantee everything to be accurate, only that the work was performed in a competent and professional manner.)

According to Treasury Department Circular 230, a CPA is not allowed to charge a client a contingency fee for services provided in connection with which of the following types of refund claims filed with the IRS for the client?

A claim for refund of income tax paid to the IRS. (Circular 230 provides that practitioners are prohibited from charging an unconscionable fee and are only allowed to charge a contingent fee in certain circumstances. One situation in which a contingent fee is allowed is for a claim solely for a refund of interest and/or penalties assessed by the IRS but not for a claim for any refund of income tax paid to the IRS.)

A CPA in public practice may not disclose confidential client information regarding auditing services without the client's consent in response to which of the following situations?

A letter to the client from the IRS. (A CPA is required to disclosed confidential client information if the information is subpoenaed and relevant to a court case. The IRS would have to do more than request the information in a letter. The IRS would have to subpoena the information and show that the information was relevant to an examination (audit).

Each of the following constitutes substantial authority for a taxpayer to take a tax position, except:

A private letter ruling in which the taxpayer is named and that is inconsistent with a subsequently issued Treasury Regulation. (Treasury Regulations have the highest authoritative weight of the administrative sources of tax law Although a private letter ruling in which the taxpayer is named can generally be relied on by that taxpayer as substantial authority for the taxpayer to take a tax position, the taxpayer would not be able to rely on the private letter ruling if it is inconsistent with a subsequently issued Treasury Regulation.)

When a taxpayer needs guidance with a specific tax issue related to a proposed transaction, the taxpayer can ask the IRS for:

A private letter ruling. (A private letter ruling (PLR) 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.)

Under Treasury Circular 230, the IRS requires that certain records be returned to a client by the tax practitioner even though no payment for services has been received. Records of the client for this purpose do not include.

A schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client's tax return. (According to Treasury Circular 230, a practitioner is not required to provide a client with the practitioners work product, which would include a mathematical schedule prepared by the practitioner.)

Which of the following individuals qualifies as a tax return preparer for federal tax purposes?

A staff accountant at a CPA firm who prepares a client's claim for a tax refund, but the claim is signed by a firm manager. (A tax return preparer is any person who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return required under the Internal Revenue Code or any claim for refund of tax imposed by the Internal Revenue Code. The staff accountant prepared all of the tax refund claim, so he or she is a tax return preparer, even though the tax return is signed by another member of the firm.)

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?

A state board of accountancy. (Only a state board of accountancy has the authority to suspend or revoke a CPA'S license to practice public accounting.)

An accounting firm was hired by a company to perform an audit. The accounting firm knew that the company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor's report. Fifteen months later the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank:

Can sue the accounting firm for the loss of the loan because of negligence. (In most states, a CPA or accounting firm is liable not only to the client for negligence, but also to any person or foreseeable class of persons whom the CPA or firm knows will be relying on the CPA's work. Here, if the accounting firm knew that the purpose of the audit was to obtain a loan from a bank, the CPA could be held liable by any bank that made a loan based on a negligently performed audit.)

Which of the following is an evidentiary privilege that protects communication between a CPA and the CPA's taxpayer-client in a noncriminal tax matter before the IRS?

Tax practitioner privilege (The tax practitioner privilege in the Internal Revenue Code provides that the same common law protections of confidentiality that apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner. A federally authorized tax practitioner is anyone authorized to practice before the IRS, including CPAs and enrolled agents. The privilege can only be asserted in a noncriminal tax matter before the IRS or a noncriminal tax proceeding in federal court brought by or against the United States.)

Arthur Old employs Darleen, an accountant, who recklessly misstates a material fact in Arthur's financial statements that misleads Arthur's bankers. The bankers justifiably relied on the misstatement to their detriment Darleen may be liable for:

Constructive fraud only. (Constructive fraud does not require intent. Constructive fraud only requires reckless disregard for truth or falsity. Actual fraud, on the other hand, requires intent in making a material misstatement, upon which the plaintiff justifiably relies (and that the plaintiff suffers damages). We did not have such intent here. Thus, Darleen can be liable only for constructive fraud.)

Which of the following statements concerning an accountant's disclosure of confidential client data is generally correct?

Disclosure may be made to any party on consent of the client. (An accountant may disclose confidential client information to any party if the client specifically consents to the release of information.)

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?

Discuss the requirements of the IRC with the client and recommend that client amend the return. (The CPA should notify the client concerning the noncompliance and recommend the proper course of action.)

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:

Dispose of earned income credit documentation after return preparation. (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.)

Which of the following defenses is likely to be successful in a suit alleging negligence by a CPA?

Due care (Negligence arises when a CPA breaches a duty of care. A CPA owes a duty to preform work with due care. Thus, if a CPA can prove due care, the CPA cannot be held liable for negligence.)

Under Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum. (Characteristic of a best practice in rendering tax advice is establishing in a tax memorandum relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts.)

John S. Loppe has not been particularly careful in preparing his income tax returns and, as a result, has substantially understated his tax. The negligence penalty with respect to understatement of tax might thus be applicable to him. The negligence penalty with respect to understatement of tax:

Is an accuracy-based penalty for negligence or for disregard of tax rules and regulations. (The negligence penalty with respect to understatement of tax is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.)

An individual taxpayer rejected the IRS examiner's findings in an audit of the taxpayer's tax return. What will the IRS do in response to the taxpayer's rejection?

Issue a 30-day letter. (If an individual taxpayer rejects the IRS examinees 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. The taxpayer has 30 days to request an administrative appeals conference with the IRS Office of Appeals.)

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer:

It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

A CPA who prepares clients' federal income tax returns for a fee must

Keep a completed copy of each return for a specified period of time. (The CPA must retain a completed copy of each return for three years after the close of the return period (IRC Section 6107).

Kopel was engaged to prepare Raffs 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, Raffs property taxes amounted to only $600. Based on Raffs word, Kopel deducted the $3,000 on Raffs return, resulting in an understatement of Raffs tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raffs representation that Raff had adequate records to support the deduction. Which of the following statements is correct?

Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raffs representation. (In preparing or signing a return, a CPA may in good faith rely without verification upon information furnished by the client or by third parties.)

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements?

Lack of scienter. (A suit for common law fraud may succeed only if the accountant acted with scienter (knew that the statement was wrong or recklessly disregarded the truth).

Which of the following is the best defense a CPA firm can assert in defense to a suit for common law fraud based on their unqualified opinion on materially false financial statements?

Lack of scienter. (Common law fraud requires a showing of intent to deceive, which is scienter.)

The best defense a CPA can assert in a suit brought against the CPA for common law fraud based on the CPA's unqualified opinion on materially false financial statements is:

Lack of scienter. (To make a case for common law fraud, five elements must be proved. The lack of any element is a good defense. The five elements are: (i) misrepresentation of a material fact; (ii) scienter (which is an intent to deceive); (iii) actual and justifiable reliance; (iv) intent to induce reliance; and (v) damages Because scienter is one of the elements of fraud, the lack of scienter is a good defense.)

A civil fraud penalty can be imposed on a corporation that underpays tax by:

Maintaining false records and reporting fictitious transactions to minimize corporate tax liability. (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.)

A client claims to have driven 50 ,000 miles for business purposes during the preceding year and wishes to deduct all of the mileage. The CPA suspects that the client is overstating the amount of mileage actually driven for business purposes. According to Treasury Department Circular 230, the CPA should do which of the following?

Make reasonable inquiries about the information supplied. (Although a CPA who signs a tax return may generally rely in good faith without verification upon information provided by the client, the CPA must make reasonable inquiries if the information provided appears to be incorrect or incomplete.)

A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed?

$5,000 (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.)

Which of the following situations would not result in an Internal Revenue Code tax return preparer penalty?

A tax preparer fails to keep a copy of a taxpayer-client's tax return for the period ending five years after the close of the return period. (An Internal Revenue Code (IRC) tax return preparer penalty can be assessed by the IRS for failure to retain a completed copy of a taxpayer-client's tax return for the period ending three years after the close of the return period, not five years. The tax preparer can retain, on a list, the name and taxpayer identification number for the return prepared for the client, rather than a copy of the return itself.)

A tax return preparer is researching authorities to support a position of deferral of gain taken on the disposal of an asset. Which of the following will provide the highest authority for this position?

A temporary regulation issued by the Treasury Department. (A temporary regulation issued by the U.S. Department of the Treasury is a primary authority because it is official tax law issued by a branch of the federal government, the administrative branch. Regulations are the Treasury Department's official interpretation of the Internal Revenue Code and have the highest authoritative weight of the administrative sources of tax law. A temporary regulation has the same authoritative weight as a final regulation.)

An IRS agent has sent a 30-day letter reflecting a proposed adjustment to increase a client's taxable income in three prior years. The CPA and the client have reviewed the proposed changes and agree with the proposed adjustment. What would be the CPA's most appropriate recommendation to the client?

Accept the proposed IRS changes and pay any deficiency. (If the taxpayer agrees with the conclusions reached by the IRS agent in an audit, the taxpayer will sign Form 870 and pay any additional tax assessed (plus interest and penalties).

Vee Corp. retained Walter, CPA, to prepare its income tax returns for Years 4-6. During the Year 6 engagement, Walter discovered that he had made a mistake on Vee's Year 4 income tax return. What is Walter's professional responsibility under Circular 230 regarding Vee's incorrect Year 4 income tax return?

Advise Vee of the associated penalties that may be incurred as a result of the error. (Upon discovery of an error in a previously filed return the tax practitioner should promptly notify the client (either orally or in writing) of the error, noncompliance, or omission and advise the client of reasonably likely penalties.)

Which of the following statements is correct regarding the use of preparer tax identification numbers (PTINs) by tax return preparers?

An individual who prepares income tax returns for compensation must include the individual's PTIN on the tax returns. (An individual tax return preparer must include the preparer's PTIN on any tax returns prepared for compensation.)

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client's financial report be liable?

Any foreseen or known third party who relied on the report. (Under the majority position an accountant is liable for negligence only to third parties whom the accountant knows or should foresee will be relying on the accountant's work.)

American Corp. retained Baker, CPA, to conduct an audit of its financial statements to obtain a bank line of credit. American signed an engagement letter drafted by Baker that included a disclaimer provision. As a result of Baker's failure to detect a material misstatement in American's financial statements, the audit report contained an unmodified opinion. Based on American's audited financial statements, National extended credit to American. American filed a petition in bankruptcy shortly thereafter National sued Baker for damages based on common law fraud. What would be Baker's best defense?

Baker lacked the intent to deceive. (In order to prove fraud, National must prove the five elements of fraud. These are a misrepresentation of a material fact, intent to deceive, actual and justifiable reliance on the misrepresentation, an intent to induce that reliance, and damages. A defense by Baker that there was no intent to deceive would be a valid defense against a claim of fraud.)

Baner, a CPA, is preparing a tax return for Affleck, a new client. During the course of the interview, Baner asks to inspect Affleck's source documents. Affleck responds that the supporting information is not readily available but assures Baner that the summary information is reliable. Which of the following statements best describes how Baner should proceed?

Baner can accept the representations but should make reasonable inquiries to determine if the information appears to be incorrect, incomplete, or inconsistent. (A preparer is allowed to accept a taxpayer's representations as a preparer is not required to obtain supporting documentation unless the preparer has reason to suspect the accuracy of the information provided by the taxpayer. However, a preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.)

A tax return preparer may disclose or use tax return information without the taxpayer's consent to:

Be evaluated by a quality or peer review. (A tax return preparer may disclose or use tax return information without the taxpayers' consent to be evaluated by a quality or peer review)

An accuracy-related penalty applies to the portion of tax underpayment attributable to: I. Negligence or a disregard of the tax rules or regulations. II. Any substantial understatement of income tax.

Both I and II. (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.)

Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth- Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover? I. Beckler was negligent in conducting the audit. II. Mac's reliance on the financial statements caused Mac to extend the loan to Queen.

Both I and II. (Although a CPA generally is liable to third parties only for fraud or constructive fraud (gross negligence), where the CPA knows that the third party will be relying on the audit, the CPA can be liable to the third party for mere negligence (the CPA owes the third party a duty of care since the third party is an intended beneficiary of the engagement). An action for gross negligence requires both reliance on a misstatement and negligence.)

A company engaged a CPA to perform an audit of the company's financial statements for Year 2 in order to apply for a bank loan. After the bank made the loan, it was discovered that the company's assets had been materially overstated. The overstatement was not discovered as part of the CPA's audit procedures. If the company defaulted on the loan and the case occurred in a jurisdiction that follows the Restatement rule, then the CPA could have liability to which of the following?

Both the bank and the company. (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. Because the CPA firm knew that it was performing an audit so the company could obtain a bank loan, the bank's reliance was foreseeable. Therefore, the CPA can be found liable to both the bank and the company.)

Which of the following pairs of elements must a client prove to hold an accountant liable for common law negligence?

Breach of the accountant's duty of care and loss. (A plaintiff must show four elements to make a case for negligence against a CPA. The plaintiff must show that the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintiffs injury, and damages.)

To which of the following parties will a CPA be liable if the CPA fraudulently issues an unqualified opinion on a corporation's materially misstated financial statements?

Corporate shareholders (Yes) Corporate bondholders (Yes) (A CPA who commits fraud is liable to anyone who can prove the case for fraud. Fraud has five elements: (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 plaintiffs reliance on the misrepresentation; and (v) damages. A CPA will be liable to corporate shareholders and corporate bondholders as long as they can prove the elements.)

Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to be liable under common law negligence, Sun at a minimum must prove that Frank:

Failed to exercise due care. (For a cause of action for negligence, the client must prove at least that the CPA failed to exercise due care. - Knowledge of the irregularities without reporting them to the client would constitute fraud. This is not the minimum that must be proved for negligence. - A client can maintain a cause of action against a CPA for simple negligence; gross negligence need not be proved. - Scienter (either intent to deceive or reckless disregard for the truth) is not required for negligence.)

A CPA quickly prepares the financial statements for WSA Co. without noticing that an asset was inadvertently overstated on the balance sheet by 10 percent An investor who had purchased stock in WSA based on the financial statements lost $10,000 as a result of the investment. The investor claims that WSA committed fraud. Which of the following is true concerning whether fraud was committed?

Fraud was not committed because the misstatement was due to negligence. (Fraud was not committed because the misstatement was due to negligence. Fraud has five elements: 1. A misrepresentation of material fact by the defendant; 2. Defendant's intent to deceive (knowing the statement was false or recklessly making a statement without knowing whether it is true or false); 3. Actual and justifiable reliance by the plaintiff on the misrepresentation; 4. Defendant's intent to induce the plaintiff's reliance on the misrepresentation; and 5. Damages. In this case, fraud was not committed because the defendant-CPA did not intend to deceive the plaintiff-investor or intend to induce the plaintiff-investor's reliance on the misrepresentation.)

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA under the law of:

Gross negligence. (Gross negligence is a tort that arises when a CPA recklessly departs from the standards of due care. There is no requirement of privity in a gross negligence case. The CPA can be held liable by anyone who relied on the resulting misinformation.)

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on:

Gross negligence. (Reckless departure from standards of due care constitutes gross negligence, which is also called constructive fraud. A CPA who commits constructive fraud is liable to all plaintiffs, not just those with whom the CPA dealt or of whom the CPA knew.)

A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client's home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except:

Holding the check for safe keeping and awaiting the clients return. (Circular 230 does not prohibit a practitioner's holding the check for safe keeping and awaiting the client's return.)

A CPA is permitted to disclose confidential client information without the consent of the client to: I. Another CPA firm if the information concerns suspected tax return irregularities. II. A state CPA society voluntary quality control review board.

II only. (A CPA may reveal confidential information without the client's consent in a number of situations (e.g., when subpoenaed, when requested by a CPA society voluntary quality control review board). However, there is no exception to the duty of confidentiality merely because tax irregularities are suspected.)

Which of the following acts constitute(s) grounds for a tax preparer penalty? I. Without the taxpayer's consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court. II. At the taxpayer's suggestion, the tax preparer deducted the expenses of the taxpayer's personal domestic help as a business expense on the taxpayer's individual tax return.

II. At the taxpayer's suggestion, the tax preparer deducted the expenses of the taxpayer's personal domestic help as a business expense on the taxpayer's individual tax return. (Tax preparer penalties may be assessed for improper use or disclosure of information. Acceptable circumstances for disclosure include: 1. Preparation of state and local tax returns 2. Quality and peer reviews 3. 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.)

A CPA is permitted to disclose confidential client information without the consent of the client to: I. Another CPA who has purchased the CPA's tax practice. II. Another CPA firm if the information concerns suspected tax return irregularities. III. A state CPA society voluntary quality control review board.

III. A state CPA society voluntary quality control review board. (The CPA generally cannot give out a client's confidential information to anyone without the client's consent. However, exceptions are generally made for court subpoenas and state CPA society quality control panels.)

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

Internal Revenue Code. (The IRC holds the most authoritative value.)

John R Fudge is an individual taxpayer in Cut and Shoot, Texas. He has been accused of understating the tax on one of his returns and is concerned about the possibility of imprisonment if he is convicted. The understatement has nothing to do with a tax shelter. Which of the following statements is correct for his situation?

If John relied on the opinion of a reputable accountant or attorney who prepared his return and furnished all relevant information, in general, he would have a reasonable basis for the tax return position and could avoid the penalties for understatement of tax. (If John relied on the opinion of a reputable accountant or attorney who prepared his return and furnished all relevant information, in general, he would have a reasonable basis for the tax return position and could avoid the penalties for understatement of tax.)

To avoid tax return preparer penalties for a return's understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

Make reasonable inquiries if the taxpayer's information is incomplete. (A tax preparer must make reasonable inquiries if the taxpayer's information is incomplete. A compensated preparer is liable for a penalty if his understatement of taxpayer liability on a return or claim for refund is due to negligent or intentional disregard of rules and regulations. A preparer is not required to obtain supporting documentation unless he has reason to suspect the accuracy of the taxpayers figures; however, the preparer must make reasonable inquiries if the taxpayer's information appears incorrect or incomplete.)

Which of the following statements is correct for disciplinary action by the AICPA and state CPA societies?

Membership in the AICPA can be suspended or terminated without a hearing. (Membership in the AICPA can be suspended or terminated without a hearing for certain offenses. These offenses include but are not limited to (1) proof of conviction of a crime punishable by imprisonment for more than one year, (2) proof of conviction for willful failure to file any income tax return, (3) proof of conviction for filing a false or fraudulent income tax return or aiding in the preparation of a false or fraudulent income tax return of a client.)

Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client?

Money damages. (When a CPA breaches a contract for professional services, the client and any third party beneficiary of the contract are entitled to compensatory money damages.)

With respect to any given tax return, which of the following statements is correct?

More than one person may be deemed to be a preparer of a tax return. (More than one #rson can be deemed to be a preparer of a tax return because anyone who prepares a substantial portion of a return will be treated as a preparer.)

Which of the following statements is (are) correct regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm? I. A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client. II. A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise.

Neither I nor II. (Information contained in client files ("workpapers") are the property of the CPA firm. Although the accounting firm owns the workpapers, the firm and its employees are generally prohibited from showing the workpapers to anyone without the client's permission. Furthermore, an employee of a CPA firm may not take information contained in client files when leaving the firm. Workpapers produced by the firm for, or on behalf of a client, may not be copied and removed by an employee for personal use.)

A taxpayer received a notice of deficiency from the IRS. If the tax underpayment is not the result of the taxpayer's mathematical or clerical error, how long does the taxpayer have to file a petition with the Tax Court for a redetermination of the deficiency?

Ninety days from the mailing date of the notice if the notice is not addressed to a taxpayer outside of the United States. (Upon receipt of a notice of deficiency from the IRS, the taxpayer has 90 days to pay the deficiency or file a petition with the Tax Court for a redetermination of the deficiency.)

Which of the following statements is correct concerning a penalty for a tax return preparer who understates a taxpayer's liability?

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. (No tax return preparer penalty is imposed for understatement of a tax payer's liability if the tax preparer shows that there is reasonable cause for the understatement and the tax return preparer acted in good faith.)

A taxpayer contemplates entering into a complex transaction. The taxpayer wants assurance that there will be no adverse tax effects from the transaction. The taxpayer should apply for which of the following?

Private letter ruling (PLR) (The IRS issues a private letter ruling (PLR) in response to a taxpayer's request for guidance on the tax treatment of a proposed transaction, typically one with significant tax consequences. A private letter ruling can be relied on by the taxpayer to whom it is issued, but cannot be relied on as precedent by other taxpayers.)

Phillips, CPA, was engaged by Veda Inc. to audit Veda's financial statements. Phillips was told that the financial statements and the audit report were to be shown to Ryan, a potential investor. As a result of the audit, Phillips issued an audit report containing an unqualified opinion on Veda's financial statements. Ryan, after seeing the financial statements and audit report, made a substantial investment in Veda shares. Although Phillips exercised reasonable care in performing the audit, inaccuracies in the financial statements were later discovered causing Veda share prices to fall. Ryan claimed that had Ryan known of the inaccuracies, Ryan would not have purchased the shares. Will Ryan succeed in a suit against Phillips for negligence?

No, because Phillips exercised reasonable care in performing the audit. (A CPA owes a duty to his client and to third parties within a limited, foreseeable class of persons whom the CPA knows will be relying on the CPA's work to refrain from doing the work negligently. Negligence is the failure to act with due care. Phillips was engaged to perform an audit, and Phillips knew Ryan would be relying on the audit in making an investment decision. However, even assuming that Phillips owed a duty to Ryan, Phillips cannot be held liable because Phillips exercised reasonable care, and reasonable care is the care that is due; that is, the exercise of reasonable care is proof of the lack of negligence.)

A taxpayer received a 90-day letter proposing a deficiency. The taxpayer challenged the proposed deficiency in the Small Cases Division of the U.S. Tax Court. If the taxpayer loses the case, then the decision is:

Not appealable. (Neither party can appeal a decision of the Small Cases Division of the U.S Tax Court.)

Starr, CPA, prepared and signed Cox's Year I 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:

Not liable to the IRS for any penalty or interest (A CPA is entitled to rely on the client's representations that adequate documentation exists to support the expenses that the client claims. As long as the CPA asks the client whether the client has documentation, the CPA will not be liable for either a penalty or interest because of the client's misrepresentation.)

The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must:

Notify the IRS of the identity of any person who, according to the CPA's belief, could have the records. (If the CPA does not have possession or control of the records, the CPA must notify the IRS of the identity of any person who, according to the CPA's belief, could have the records.)

Under the "Ultramares" rule, to which of the following parties will an accountant be liable for negligence?

Parties in privity (Yes) Foresee parties (No) (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.

A statutory notice of deficiency explains that the taxpayer has 90 days to either pay the deficiency or else to file a:

Petition with the U.S. Tax Court. (A statutory notice of deficiency, or 90-day letter, explains that the taxpayer has 90 days to either pay the deficiency or file a petition with the U.S. Tax Court The taxpayer does not have to first pay the deficiency and file a claim for a refund with the IRS to file a petition with the U.S. Tax Court.)

According to Treasury Circular 230, which of the following rules related to the prompt disposition of pending matters before the IRS applies to CPAs?

Practitioners may not unreasonably delay the prompt disposition of matters pending before the IRS.(Treasury Circular 230 Section 10.23 provides that a practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service (IRS). CPAs are practitioners subject to the Circular 230 duties and restrictions related to practice before the IRS.)

Which of the following situations could result in a preparer penalty assessed by the IRS?

Preparer does not sign the tax return. (Internal Revenue Code (IRC) Section 6695(b) provides a penalty of $60 for each failure of a preparer to sign a tax return [maximum penalty of $30,000 per calendar year (2023)].

Able, CPA, was engaged by Wedge Corp. to audit Wedge's financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Bank. Able and Wedge's president agreed that Able would give an unqualified opinion on Wedge's financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able's agreement with Wedge's president was revealed. As a result, Wedge stock lost half its value and Ranch sued Able for fraud. will the result of Ranch's suit?

Ranch will win because Able intentionally gave an unqualified opinion on Wedge's materially misstated financial statements. (This question is about to whom a CPA owes a duty. A CPAs duties are broadest with regard to fraud. A duty to refrain from fraud is owed to anyone who can make out the elements of a fraud case (misrepresentation, intent to deceive, reliance, intent to induce reliance, and damages). Because Able intentionally made the false statement and Ranch was harmed as a result, Ranch can hold Able liable for his damages.)

A client suing a CPA for negligence must prove each of the following factors, except:

Reliance. (Negligence has 4 elements: duty of care, breach (which is lack of due care), causality and injury.)

Which of the following pairs of elements must a client prove to hold an accountant liable for common law fraud?

Scienter and justifiable reliance (Common law fraud requires proof of five elements: (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.)

A tax preparer filed a return for a taxpayer and used the taxpayers detailed check register containing both business and personal expenses. If the tax preparer knowingly included personal expenses as deductible business expenses on the taxpayer's business, then the:

Tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct. (A tax preparer is liable for the penalty for "willful or reckless" conduct (which is the greater of $5,000 or 75 percent of the income derived with respect to the tax return or refund claim on which the "willful or reckless" conduct exercised) for conduct that is either 1) a willful attempt to understate the tax liability; or 2) a reckless or intentional disregard of tax rules and regulations. Knowingly deducting personal expenses as business expenses could constitute such "willful or reckless" conduct)

Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?

Taxpayers name and identification number or a copy of the tax return. (For each tax return prepared, a tax preparer must retain either the taxpayers name and identification number, or a copy of the return.)

Which of the following statements is correct for the disciplinary power of the state boards of accountancy?

The 3 broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction. (The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.)

Which of the following statements is generally correct regarding the liability of a CPA who negligently gives an opinion on an audit of a client's financial statements?

The CPA is liable to anyone in a class of third parties whom the CPA knows will rely on the opinion. (The majority rule (the law followed in the majority of the states) is that accountants are liable to anyone in a class (such as potential lenders or investors) of third parties whom the CPA knows will rely on the opinion of the financial statements.)

men preparing a client's Form 1040, U.S. Individual Income Tax Return, a CPA determined that there was documentation supporting only $12,000 of the $20,000 travel expenses claimed by the client. Which of the following courses of action taken by the CPA would be in compliance with Treasury Circular 230?

The CPA makes reasonable inquiries to obtain the needed documentation if the information as furnished appears to be incorrect or incomplete. (Under the provisions of Treasury Circular 230, a practitioner who signs a tax return can generally rely "in good faith without verification" on information furnished by the client. However, the practitioner cannot ignore evidence that such information is incorrect or incomplete. In that case, the practitioner must make reasonable inquiries to obtain the necessary information.)

A CPA prepares a client's tax return containing business travel expenses without inquiring about the existence of documentation for the expenses even though the amounts provided by the client seemed questionable. Which statement best describes the consequence of the CPAs lack of inquiry?

The CPA may be assessed a tax return preparer penalty. (A preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided. However, the preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.)

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?

The CPA probably is liable to any person who suffered a loss as a result of the fraud. (A CPA who commits fraud is liable to anyone who is injured by the fraud.)

Which of the following situations would most likely be a violation of the Treasury Circular 230 solicitation guidelines by a CPA, assuming that there are no violations of federal or state laws or other rules?

The CPA sends unsolicited e-mails to potential clients guaranteeing tax refunds from the Internal Revenue Service. (Circular 230 regulations provide that a practitioner may not, with respect to any IRS matter, in any way use or participate in the use of any form of public communication or private solicitation containing a false, fraudulent, or coercive statement or claim, or a misleading or deceptive statement or claim. The unsolicited e-mails to potential clients are a form of private solicitation, and guaranteeing tax refunds from the IRS is a false or misleading claim, so the situation violates the solicitation guidelines of Circular 230)

Which of the following statements is correct regarding a CPAs workpapers? The workpapers must be:

Turned over pursuant to a valid federal court subpoena. (Client workpapers must be turned over pursuant to a valid federal court subpoena. Client permission is not necessary in the case of a subpoena.)

A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any tax work. The husband believed that his wife's tax return was negligently prepared and that he was financially harmed. He hired an attorney, without his wife's consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the negligence claim. To which party, if any, may the CPA disclose the wife's tax return information without the wife's consent?

The CPA's attorney, for the evaluation of the negligence claim. (The accountant is prohibited from showing the workpapers to anyone without the client's permission except in certain situations. One of those situations is to the accountant's attorney in defense of a lawsuit brought by a client.)

Under the common law, which of the following defenses, if used by a CPA would best avoid liability in an action for negligence brought by a client?

The CPA's negligence was not the proximate cause of the client's losses. (A plaintiff must show four elements to make a case for negligence against a CPA The plaintiff must show the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintiffs injury, and damages. A defense that the negligence was not the proximate cause of plaintiff's losses would be a valid defense, as the third element would not exist.)

To which of the following parties may a CPA partnership provide its working papers without either the client's consent or a lawful subpoena?

The IRS (No) The FASB (No) An accountant is prohibited from showing the workpapers to anyone without the client's permission, except. 1. Lawful subpoena. 2. Prospective purchasers, as long as the prospective purchasers do not disclose the confidential information. 3. Quality control panel. 4. AICPA/State Trial Board. 5. Court proceedings. 6. When GAAP requires disclosure of such information in the financial statements.

Which regulatory body coordinates the state boards of accountancy in their role of licensing and regulation for CPAs?

The National Association of State Boards of Accountancy (The National Association of State Boards of Accountancy (NASBA) coordinates the state boards of accountancy in the licensing and regulation of CPAs. - The Financial Accounting Standards Board (FASB) establishes financial accounting and reporting standards for public and private companies that follow Generally Accepted Accounting Principles (GAAP). - The Public Company Accounting Oversight Board (PCAOB) oversees the audits of accounting firms auditing public companies. - 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 is a list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters?

The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims. (The courts of original jurisdiction for tax cases, i.e., the courts in which a taxpayer would first bring a lawsuit against the IRS, are the Tax Court the U.S. District Court, and the U.S. Court of Federal Claims.)

Which of the following statements is correct for the judicial process when a taxpayer and the Internal Revenue Service cannot reach agreement on a tax issue using the administrative appeals process?

The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States. (The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States, one type of which is tax refunds.)

An accountant's audit documentation, created by an accountant when performing an audit for a client, is owned by:

The accountant only. (The accountants audit documentation is the sole property of the accountant. However, the information contained within the audit documentation may concern the client and in that case is confidential for the benefit of the client.)

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?

The board of accountancy for the state in which the licensed CPA practices. (State boards of accountancy have the sole power to license certified public accountants and thus have the sole responsibility for determining the continuing professional education requirements for certified public accountants practicing in their states.)

With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:

The burden of proof shifts to the IRS from the taxpayer. (With respect to the penalty for aiding and abetting an understatement of tax liability on a tax return, the burden of proof shifts to the IRS from the taxpayer. Unless the law expressly states otherwise, the taxpayer has the burden of proof to establish by the preponderance of the evidence that the law and the evidence do not support the position of the IRS. With respect to any criminal action, the government has the burden of proof to establish by evidence beyond a reasonable doubt that the taxpayer is guilty of the charges. Note that these burdens of proof are different criminal (beyond a reasonable doubt) is considerably higher than civil (preponderance of the evidence).

Which of the following is a correct statement about the Small Cases Division of the IU.S. Tax Court?

The decision of the Small Cases Division cannot be relied on as precedent in other courts. (A decision of the Small Cases Division of the U.S. Tax Court cannot be relied on as precedent in any other court. The decision only applies to that particular taxpayer in that particular case.)

Which of the following statements is correct for penalties and fines with respect to exercising due diligence for the earned income credit?

The due diligence requirements address eligibility checklists, computation worksheets, and record retention. (The due diligence requirements for the earned income credit address eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer.)

Under the Internal Revenue Code, a CPA who was engaged in the business of preparing tax returns could incur a penalty for disclosing taxpayer information without the taxpayer's formal consent in which of the following circumstances?

The information was disclosed pursuant to a court order. (A tax return preparer who discloses taxpayer information without the taxpayer's formal consent is subject to a civil penalty under Internal Revenue Code (IRC) Section 6713 of $250 for each such disclosure (maximum annual penalty of $10,000) and a criminal penalty under IRC Section 7216 of a fine up to $1,000 and/or imprisonment up to one year. Disclosure of taxpayer information pursuant to an attorney's solicitation request is not an exception to the penalties for wrongful disclosure without the taxpayer's formal consent. Except: - in the client's state and local tax return; - in the client's electronically filed tax return; - pursuant to court order)

In which of the following circumstances would a tax return preparer be prohibited from disclosing a client's tax return information?

The information will be provided to a section 501 (c)(3) charity. (Generally, a tax preparer is prohibited from disclosing a client's tax return information. Although some exceptions exist, providing the information to a charity is not one of them.)

Chatham Corporation is a defendant in a lawsuit by the IRS- Which of the following statements is correct with respect to the various defenses that might be available to Chatham to avoid or reduce civil and criminal penalties that might otherwise be imposed on it?

The more-likely-than-not standard involves a position that has a more than 50 percent chance of succeeding. (The more-likely-than-not standard involves a position that has a more than 50 percent chance of succeeding.)

Sumner is an accountant accused of negligence by a client. Which of the following defenses should Sumner argue?

The negligence was not the proximate cause of the client's losses. (The client does not have a case for negligence if the negligence was not the proximate cause of the client's losses. The elements of a negligence claim are: 1. The defendant owed a duty of care to the plaintiff. 2. The defendant breached that duty of care. 3. The breach of duty was the actual and proximate cause of the plaintiffs losses. 4. The plaintiff suffered damages.

Which of the following statements is correct regarding a tax return preparers penalty for aiding and abetting the understatement of a tax liability?

The penalty applies to a return preparer who knows about and does not prevent the actions of a subordinate who understates the tax liability. (The IRC Section 6701 penalty for aiding and abetting the understatement of a tax liability applies to any person who knows about the actions of a subordinate to understate a tax liability and does not prevent those actions.)

The disclosure of a tax return position will reduce or eliminate an accuracy-related penalty on the taxpayer in which of the following circumstances?

The position does not concern a tax shelter and has a reasonable basis. (A penalty of 20% of the understatement is assessed for a substantial understatement of tax. This penalty can be avoided if the taxpayer has a reasonable basis for taking the position, the taxpayer has disclosed the position on the tax return, and the position does not pertain to a tax shelter.)

A reportable transaction is one with respect to which additional information is required to be included with a federal income tax return because the transaction is of a type, according to an IRS determination, that has:

The potential for tax avoidance or evasion. (The term "reportable transaction" is any transaction that the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance or tax evasion.)

Leslie Ponzi has just received written tax advice from her attorney, Dewey H. Cheatem. Which of the following statements is not a requirement of written advice under Circular 230 of the Internal Revenue Service?

The practitioner may not provide written advice in the form of electronic communications. (Written advice does include electronic communications.)

Pursuant to Circular 230, which of the following statements about the return of a client's records is correct?

The practitioner may retain copies of the client's records. (A tax preparer may retain copies of records returned to the taxpayer.)

Which of the following statements is correct for the disciplinary power of the state boards of accountancy?

The state board of accountancy can conduct a formal hearing for possible disciplinary action.

The only entity that can censure a CPA or revoke a license to practice as a CPA is:

The state board of accountancy for the state in which the CPA practices. (Because the state board of accountancy is the only entity that can license a CPA, the state board is also the only entity with the power to censure a CPA or suspend or revoke a CPA's license to practice.)

To whom must a CPA pay license fees in order to maintain a CPA license?

The state board of accountancy of the CPAs state of licensure. (State boards of accountancy have the sole power to license CPAs; thus, the only body to which the CPA must pay fees in order to maintain the CPA license is to the state board of accountancy for the state in which the CPA is licensed.)

Who is responsible for auditing a CPA's compliance with applicable continuing professional education requirements?

The state board of accountancy of the state in which the CPA practices. (The state board of accountancy has the sole power to license CPAs who practice in that state, which includes ensuring that CPAs are in compliance with applicable continuing professional education (CPE) requirements.)

Which of the following bodies has the authority to suspend or revoke a CPA's license for acts discreditable to the profession?

The state board of accountancy. (A suspension or revocation of a CPA's license may only be imposed by a state board of accountancy.)

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?

The tax preparer is responsible for disclosing both penalties to the company. (This position passes the realistic probability standard. Given the facts, the position meets the more- likely-than-not standard; that is, a greater than 50% likelihood that the position, if it is challenged, will be upheld on the position's merits. Therefore, it is proper for the tax preparer to recommend the position to the client. However, the tax preparer is required to inform the client of all possible penalties that the IRS could collect if the IRS disallows the position and, if upon subsequent appeal by the taxpayer the courts conclude that the taxpayer has not met the more-likely-than-not standard.)

Interest on a tax deficiency begins to accrue on the date on which:

The tax was due, without regard to extension of time to file. (Interest on a tax deficiency begins to accrue on the date the original tax was due, even if an extension of time to file was filed.)

Which of the following statements is correct with respect to penalties?

The taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, and if the taxpayer did not have willful neglect.

A taxpayer has just received a 30-day letter from the IRS related to the audit of the taxpayer's Year 1 federal income tax return. Which of the following is a true statement about the 30-day letter?

The taxpayer has 30 days to either request an administrative appeals conference or agree to the IRS proposed adjustments. (If an agreement cannot be reached between the taxpayer and the revenue agent following an audit, the taxpayer receives a copy of the revenue agent's report and a 30-day letter notifying the taxpayer of the right to appeal. The taxpayer has 30 days to either request an administrative appeals conference or agree to the IRS proposed adjustments.)

A taxpayer has just received a 90-day letter from the IRS related to the audit of the taxpayer's Year 1 federal income tax return. Which of the following is a true statement about the 90-day letter?

The taxpayer has 90 days to either pay the tax deficiency or file a petition with the U.S. Tax Court. (The 90-day letter is sent to the taxpayer after the 30-day letter if the taxpayer does not respond to the 30-day letter notifying the taxpayer of the right to appeal or if the taxpayer does appeal but does not agree with the proposed adjustments at the administrative appeals conference. The 90-day letter gives the taxpayer 90 days to either pay the tax deficiency or file a petition with the U.S. Tax Court.)

An individual taxpayer's adjusted gross income (AGI) for the current year is $200,000 and AGI for the prior year is $160,000. The taxpayer had federal income tax withholdings from wages throughout the year. In which of the following independent situations could the IRS impose a penalty for failure to pay sufficient estimated tax payments for the current year?

The taxpayer's current year withholding is 100% of the prior year's tax liability. (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 yeads tax or (b) 100 percent of the prior year's tax (110 percent if prior year's AGI is more than $150,000). This question evaluates each situation independently Here, the taxpayer's prior year AGI of $160,000 is more than $150,000, so withholding of 100 percent of the prior year's tax liability is not sufficient to avoid the penalty for failure to pay estimated tax payments.)

A taxpayer received a 90-day letter proposing a deficiency of $28,000. The taxpayer's CPA told the taxpayer that a client with similar circumstances successfully sustained such a position in the Small Claims Division of the U.S. Tax Court. If the taxpayer decides to file a petition with the US. Tax Court, what is the significance of the success of the CPA's other client in sustaining the position in the Small Claims Division?

There is little significance since decisions in the Small Claims Division of the U.S. Tax Court lack precedential value. (Decisions of the US. Tax Court Small Claims Division cannot be relied on as precedent and cannot be appealed.)

Which of the following is a function of state boards of accountancy?

To censure CPAs for violations of the Code of Professional Conduct. (The state board of accountancy has the sole power to license CPAs who practice in that state and to censure CPAs for violations of the state's Code of Professional Conduct.)

Dewey Cheatam, Esq. is a leading candidate for the next open seat on the U.S. Supreme Court. He recently addressed the graduating class at The University of Texas Law School on the subject of the judicial process for tax issues. Which of the following statements in his address was correct?

U S. District Court cases are heard before one judge, not a panel of judges. (U.S. District Court cases are heard before one judge, not a panel of judges. - The U.S. Court of Federal Claims follows the decisions of the Federal Court of Appeals but not the geographical Courts of Appeals. - Judges for the U.S. Tax Court hear cases at various locations in the country, but the justices for the U.S. Supreme Court do not. The Supreme Court hears cases in Washington, DC with all nine justices present. The Supreme Court does not conduct jury trials. - the U.S. Supreme Court denies a writ of certiorari, it does not confirm the lower courts decision.)

Which of the following acts by a CPA will not result in a CPA incurring an IRS penalty?

Understating a client's tax liability as a result of an error in calculation. (The IRS does not impose a penalty on a CPA for making an error in calculating a tax return.)

Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA?

Working papers may not be transferred to another accountant without the client's permission. (As a general rule, although a CPA owns his or her working papers, because of confidentiality issues, the working papers cannot be turned over to another accountant without the client's permission.)

Spinner, CPA, had audited Lasco Corp.'s financial statements for the past several years. Prior to the current-year's engagement, a disagreement arose that caused Lasco to change auditing firms. Lasco has demanded that Spinner provide Lasco with Spinners working papers so that Lasco may show them to prospective auditors to help them prepare their bids for Lasco's audit engagement. Spinner refused and Lasco commenced litigation. Under the ethical standards of the profession, will Spinner be successful in refusing to turn over the working papers?

Yes, because Spinner is the owner of the working papers. (Work papers belong to the accountant who prepares them, not the client. Thus, as the owner of the workpapers, Spinner does not have to disclose them to the client, Lasco.)