REG CH 5
A client suing a CPA for negligent preparation of a tax return in a state court must prove each of the following factors except
Answer (A) is correct.A client suing an accountant for the unintentional tort of negligence must establish the following elements: (1) The accountant owed the client a duty, (2) the accountant breached this duty, (3) the accountant's breach actually and proximately caused the client's injury, and (4) the client suffered damages. Reasonable reliance on a misrepresentation is an element of fraud or of negligent misrepresentation.
Which of the following elements, if present, would support a finding of common law constructive fraud on the part of a CPA who prepared a tax return?
Answer (A) is correct.Scienter is a prerequisite to liability for fraud. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. For constructive fraud, the scienter requirement is met by proof of gross negligence (reckless disregard for the truth)
An a nonstatutory action against a CPA, lack of privity is a viable defense if the plaintiff
Answer (B) is correct.A CPA's liability for negligence may be restricted to those parties in privity of contract or who are primary beneficiaries of the engagement. The liability of the CPA also may extend to foreseen third parties. Some courts hold that reasonably foreseeable third parties have standing to sue. Thus, (1) the nature of the action, (2) the nature of the plaintiff, and (3) the jurisdiction whose law is to be applied determine whether lack of privity is a possible defense. A creditor of the client who sues for negligence is more likely to be subject to the defense than a party whose suit is based on gross negligence or fraud.
Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Hark also took several tax return positions that were not likely to be sustained on the merits because they were not supported by substantial authority. Long's management had told Hark that the audited statements and tax returns would be submitted to several banks to obtain financing. Relying on these documents, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the traditional common law doctrine, if Third sues Hark, Hark will
Answer (B) is correct.An accountant is not liable to all persons who are damaged by his or her negligence. Lack of privity is still a defense in some states. For example, under the holding in the Ultramares case, an accountant is liable for negligence only if the plaintiff was in privity of contract with the accountant or a primary beneficiary of the engagement. Under the primary benefit test, the accountant must have been aware that (s)he was hired to produce a work product to be used and relied upon by a particular third party. Because Long's management did not specifically name Third Bank to Hark, Hark will not be liable. However, most courts now extend a CPA's liability to anyone in a class of foreseen (but not necessarily individually identified) third parties who the CPA knows will use the information.
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?
Answer (B) is correct.Fraud consists of a material misrepresentation made with scienter and an intent to induce reliance. The misrepresentation also must have caused damage to a defendant who reasonably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. The CPA firm's best defense is that the plaintiff failed to prove an element of the fraud claim, i.e., scienter.
Under state law, one of the elements necessary to hold a CPA liable to a client for preparing a tax return negligently is that the CPA
Answer (B) is correct.The elements of common law negligence on the part of a CPA are (1) a duty owed to the client, (2) a loss incurred by the client, (3) a failure to exercise the skill and care of an ordinarily prudent CPA in the same circumstances, and (4) proximate (legal) causation of the loss by the failure to exercise due care.
Which of the following pairs of elements must a client prove to hold a CPA liable for common law negligence
Answer (B) is correct.To hold an accountant liable for negligence, the plaintiff-client must prove all of the following elements of negligence: (1) the CPA owed the client a duty of reasonable care and diligence, (2) the CPA breached this duty, (3) the CPA's breach actually and proximately caused the client's injury, and (4) the client suffered damages (loss).
If a CPA recklessly departs from the standards of due care when preparing a tax return, the CPA will be liable to third parties who are unknown to the CPA based on common law
Answer (C) is correct.In some states, if the CPA has not contracted to perform for the third party, (s)he is not liable to that third party for negligence. Lack of privity is a defense. However, reckless departure from the standards of due care is treated as a form of constructive fraud and results in liability to foreseeable third parties that may be unknown to the CPA.
Under the position taken by a majority of state courts, to which third parties will a CPA who negligently prepares a client's tax return be liable?
Answer (C) is correct.The majority rule is that the CPA is liable to foreseen (but not necessarily individually identified) third parties (foreseen users and users within a foreseen class of users).
Mac sued Beckler to recover for its losses associated with Queen's default. Under the common law, which of the following must Mac prove to recover? 1. Beckler was negligent in conducting the audit and preparing the tax returns. 2. Mac relied on the financial statements and tax returns.
Answer (D) is correct.A CPA has a duty to exercise the skill and care that an ordinarily prudent CPA would in the same circumstances. A CPA who fails to exercise due care is negligent. According to the majority rule, liability for breach of the duty can be to any person who (1) is a foreseen user or within a foreseen class of users and (2) incurs damages proximately caused by the breach.
Ernesto was an employee of Med-Tech Corporation for all of 2019. He earned $134,400 in salary. What is the amount of FICA tax paid by Med-Tech Corporation with respect to Ernesto?
This answer is correct. Beginning in 1994, only the OASDI (old-age, survivors, and disability insurance) component of the FICA tax has a wage ceiling. The OASDI rate is 6.20% for employers up to a maximum of $132,900 (in 2019). For the Medicare component, which has no wage ceiling, the rate is 1.45% for employers and employees. The employment taxes paid by Med-Tech with respect to Ernesto in 2019 are as follows: OASDI$132,900 × 0.0620=$8,240 Medicare$134,400 × 0.0145=1,949 Total$10,189
Federal Insurance Contributions Act (FICA) -- Social Security & Medicare Tax
While assessed on both employees and employers, employers are the ones required to deposit to the IRS this payroll tax based on the employee's pay. The employer must pay 6.2% of the first $132,900 (2019) of wages paid for Social Security (i.e., OASDI) tax, plus 1.45% of all wages for Medicare tax. There is no cap on this tax. The employer must withhold the following amounts from the employee's wages: Tier 1 - From $0 to $132,900; Employee's wages × 7.65% (6.2% Social Security + 1.45% Medicare) Tier 2 - Above $132,900 to $200,000; Employee's wages × 1.45% (Medicare) Tier 3 - Above $200,000 of earned income; Employee's wages × 2.35% (1.45% Medicare + 0.9% Additional Medicare). The Additional Medicare Tax on earned income is a 0.9% tax on wages and net self-employment income in excess of a threshold.This additional tax applies to earned income exceeding $200,000 for single, head-of-household, or surviving spouse; $250,000 for married filing jointly; and $125,000 for married filing separately. Employers withhold an additional 0.9% for income beyond $200,000 regardless of filing status.