Surgent Tax Assessment 2
Reference: 4132.05 Who must file
A corporation must file Schedule UTP with its income tax return if: (1) the corporation files IRS Forms 1120, 1120-L, or 1120-PC, (2) the corporation has assets that equal or exceed $10 million, (3) the corporation or a related party issued audited financial statements reporting all or a portion of the corporation's operations for all or a portion of the corporation's tax year, and (4) the corporation has one or more tax positions that must be reported on Schedule UTP. b. The Schedule UTP should not be filed separately but should be attached to the corporation's income tax return.
Reference: 4111.11
A practitioner has a duty to promptly submit records or information to the IRS upon proper request. Also, there is a duty not to interfere with any lawful effort of the IRS to obtain such records or information. These duties exist unless the practitioner in good faith and on reasonable grounds believes the record or information is privileged.
Reference: 4111.12
A practitioner has a duty to provide the director of practice with any requested information regarding violations of any regulations dealing with practice before the IRS.
Reference: 4111.15
A practitioner may not unreasonably delay prompt disposition of any matter before the IRS.
Reference: 4111.13
A practitioner who knows that a client has not complied with the revenue laws of the United States, or has made an error in or omission from any return, document, affidavit, or other paper, has a duty to advise the client promptly of such noncompliance, error, or omission.
Tax Position
A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. FASB ASC 740-10-20
Charitable Contributions
Charitable contributions are deductible gifts or donations for tax purposes. Both individuals and corporations are allowed charitable contribution deductions. To qualify as deductible from federal income tax, a charitable contribution must meet certain requirements of the Internal Revenue Code as described by IRC Section 170. Contributions may be to such organizations as churches, educational institutions, hospitals and other medical care and research organizations, certain nonprofit service organizations (approved as such under IRC Section 501(c)(3)), certain governmental units, or certain private foundations.
Question #100739 What is the "work product doctrine"? A. A rule that allows courts to pull work product for all cases B. None of the answer choices are correct. C. A doctrine that allows discovery of work product D. A judicial doctrine that protects work product from discovery by the other side in litigation
D. A judicial doctrine that protects work product from discovery by the other side in litigation Work product doctrine, also known as work product rule, is a doctrine or rule that protects some documents from discovery in tax litigation. The material in question is shielded from attorneys for the other side. Work product in tax matters usually involves a CPA's or attorney's analysis of certain facts and application of the law and analysis of how the law applies.
Question #100861 In addition to citing the tax law to which it refers, a tax communication should include all of the following except: A. a brief summary of the facts. B. each tax issue considered. C. a reasoning for the tax conclusion reached. D. one complete conclusion for all of the issues.
D. one complete conclusion for all of the issues. A tax communication should include: a brief statement of the facts, each tax issue considered, a separate conclusion for each tax issue, and where the conclusions came from, e.g., the authority.
Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unmodified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not: A. have privity of contract with Cable. B. sign an engagement letter. C. perform the audit recklessly or with an intent to deceive. D. violate generally accepted auditing standards in performing the audit.
D. violate generally accepted auditing standards in performing the audit. Under general legal liability, a CPA must not perform work negligently and therefore must exercise due care. There is no legal requirement that there be an engagement letter. A finding of negligence does not require reckless behavior or the intent to deceive. Privity does not have to be considered; Cable and Drake do not need a relationship for the agreement. However, a CPA's responsibility is defined by generally accepted auditing standards (GAAS). Defenses to legal actions concerning the lack of due care include the fact that the CPA adhered to GAAS. The failure to follow GAAS would be considered a lack of due care.
Form 2220
Form 2220 is used by a corporation to compute the underpayment of estimated income tax and any penalties due on the underpayment.
Reference: 4142.02
Generally, a communication should include the following elements: a. A brief statement of the essential facts necessary to answer the tax question(s) b. The identification of the tax issue(s). If there are multiple tax issues to be researched, each issue should be separately laid out for clarity. c. A clear identification of the conclusion(s) reached by the researcher. A separate conclusion should be stated for each tax issue. Also, if more than one conclusion may exist due to a conflict in the tax authorities, this should be clearly communicated. d. A clear statement of the tax sources on which the conclusion was based and the reasoning that supports the conclusion
Revoke
In contract law, to revoke is to withdraw an offer by the offeror before it is accepted by the offeree.
Property
In the strict legal sense, property is all rights relating to ownership and the resultant control of things tangible and intangible, guaranteed and protected by law, which may include the following: Realty (real property)—land and anything erected, growing on, or permanently attached to the land (immovables) Personalty (personal property)—everything that is the subject of ownership that is not real property (movables)
Authority in Tax Law Authorities in tax law are the following:
Internal Revenue Code Regulations: proposed, temporary, and final Revenue rulings and revenue procedures Tax treaties, regulations, and official explanations thereof Court cases Congressional intent reflected in committee reports, joint explanatory statements of the managers, and floor statements by the bill's managers (the Blue Book) Private letter rulings and technical advice memoranda (issued after October 31, 1976) Actions taken on decisions and general counsel memoranda (issued after March 12, 1981) IRS information or press releases Notices, announcements, and other administrative pronouncements
Reference: 4132.05 Who must file
a. A corporation must file Schedule UTP with its income tax return if: (1) the corporation files IRS Forms 1120, 1120-L, or 1120-PC, (2) the corporation has assets that equal or exceed $10 million, (3) the corporation or a related party issued audited financial statements reporting all or a portion of the corporation's operations for all or a portion of the corporation's tax year, and (4) the corporation has one or more tax positions that must be reported on Schedule UTP. b. The Schedule UTP should not be filed separately but should be attached to the corporation's income tax return.
Reference: 4131.07 Appeals process
a. An oral request for an Appeals conference can be made in the case of an office examination or a correspondence examination. b. In the case of a field examination, a written request is necessary in order to have the case sent to the IRS Appeals Office. c. If the proposed adjustment in tax for a particular period is $25,000 or less, the taxpayer only has to file a small case request indicating the adjustments they disagree with and stating the reasons for disagreement. d. If the total amount of proposed adjustment in tax for a particular period is over $25,000, a formal written protest is required. e. The written protest must include: (1) a list of the proposed changes that the taxpayer does not agree with and the reason for disagreement, (2) the tax periods involved, (3) a statement of facts supporting the taxpayer's position, and (4) a statement of the law or other authorities that the taxpayer relies upon. f. The Appeals Division will settle disputes based on the hazards of litigating the issues in court. Example: The taxpayer will have to weigh the cost of appealing against the amount of the tax owed. Furthermore, the Appeals Division can raise additional issues. g. If a taxpayer agrees to settle the case with the Appeals Division, they will sign an IRS Form 870-AD (Offer of Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment). Acceptance of this form means that the case will not be reopened unless there has been fraud, misrepresentation of a material fact, a significant error in a mathematical calculation, or other administrative wrongdoing. h. If a settlement is not reached with the Appeals Division, a statutory notice of deficiency (90-day letter) is sent to the taxpayer. This gives the taxpayer the opportunity to file a petition, within 90 days, with the Tax Court. The 90-day period is statutory. No extension of the time can be granted by the Tax Court. A case in the Tax Court is heard without payment of the tax. If the taxpayer loses, the taxpayer pays the tax with interest. If the 90-day statutory period is missed, the taxpayer must pay the tax and sue for a refund in the U.S. District Court or the U.S. Court of Federal Claims. To assure receipt by the Tax Court, the petition should be sent by registered mail; this is not required, but it is prudent. Example: If the alleged tax owed is high, a taxpayer's better option is to file in the Tax Court and defer paying the tax until after the judgment of the Tax Court, rather than to liquidate assets to pay the tax and file for a refund.
Reference: 4131.07 Appeals process
a. An oral request for an Appeals conference can be made in the case of an office examination or a correspondence examination. b. In the case of a field examination, a written request is necessary in order to have the case sent to the IRS Appeals Office. c. If the proposed adjustment in tax for a particular period is $25,000 or less, the taxpayer only has to file a small case request indicating the adjustments they disagree with and stating the reasons for disagreement. d. If the total amount of proposed adjustment in tax for a particular period is over $25,000, a formal written protest is required. e. The written protest must include: (1) a list of the proposed changes that the taxpayer does not agree with and the reason for disagreement, (2) the tax periods involved, (3) a statement of facts supporting the taxpayer's position, and (4) a statement of the law or other authorities that the taxpayer relies upon. f. The Appeals Division will settle disputes based on the hazards of litigating the issues in court. Example: The taxpayer will have to weigh the cost of appealing against the amount of the tax owed. Furthermore, the Appeals Division can raise additional issues. g. If a taxpayer agrees to settle the case with the Appeals Division, they will sign an IRS Form 870-AD (Offer of Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment). Acceptance of this form means that the case will not be reopened unless there has been fraud, misrepresentation of a material fact, a significant error in a mathematical calculation, or other administrative wrongdoing. h. If a settlement is not reached with the Appeals Division, a statutory notice of deficiency (90-day letter) is sent to the taxpayer. This gives the taxpayer the opportunity to file a petition, within 90 days, with the Tax Court. The 90-day period is statutory. No extension of the time can be granted by the Tax Court. A case in the Tax Court is heard without payment of the tax. If the taxpayer loses, the taxpayer pays the tax with interest. If the 90-day statutory period is missed, the taxpayer must pay the tax and sue for a refund in the U.S. District Court or the U.S. Court of Federal Claims. To assure receipt by the Tax Court, the petition should be sent by registered mail; this is not required, but it is prudent. Example: If the alleged tax owed is high, a taxpayer's better option is to file in the Tax Court and defer paying the tax until after the judgment of the Tax Court, rather than to liquidate assets to pay the tax and file for a refund.
Reference: 4131.06 Audit process
a. Before the start of an examination, the IRS is required to provide the taxpayer with an explanation of the audit process and the rights available to the taxpayer. The taxpayer must also be informed that the taxpayer can suspend the interview at any time to consult with a representative. b. A taxpayer may represent themselves or they may be represented by a CPA, an attorney, an enrolled agent, or the preparer of the return who signed the return as the preparer. c. The taxpayer must give a representative written authority to represent them. This is generally done by use of IRS Form 2848 (Power of Attorney and Declaration of Representative). d. At the conclusion of the exam, the tax auditor or revenue agent provides the taxpayer with any proposed adjustments of tax liability and any tax balance due. e. If the taxpayer agrees with the adjustments, the taxpayer will sign an IRS Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment). By signing this form, the taxpayer waives the right to receive a statutory notice of deficiency (90-day letter) needed to petition the Tax Court and also gives up the right to go to the IRS Appeals Division. f. If the taxpayer does not agree with the adjustments, the taxpayer will receive a 30-day letter notifying them of the right to appeal the proposed adjustment to the IRS Appeals Office within a 30-day period. If an appeal is not requested, the taxpayer is issued a Notice of Deficiency (90-day letter), which gives them 90 days in which to file a Tax Court petition.
Question #100755 A small corporation has $100,000 of taxes due in Year 3 and $110,000 of taxes due in Year 4. What is the "safe harbor" amount which must be paid in estimated taxes in Year 4 to avoid penalties for underpaid estimated taxes? $121,000 $100,000 $107,800 $106,700
$100,000 The safe harbor rules protect a small corporation from a penalty on current-year underpayment as long as the business had a prior-year tax liability, had a current-year adjusted gross income of $150,000 or less, and paid 100% of the prior-year tax liability as current-year estimated tax payments. In other words, the safe harbor is $100,000 in this question.
Question #102156 A taxpayer makes a noncash contribution to charity; a qualified appraisal regarding the value of the property is also required if the contribution exceeds what amount? $10,000 $2,500 $5,000 $500
$5000 If the taxpayer donates noncash gifts valued at more than $500, additional substantiation must be provided with the taxpayer's return, including a description of how the property was acquired and the taxpayer's basis in the property. If the noncash contribution exceeds $5,000, a qualified appraisal is also required.
Question #102162 What is the maximum prison sentence for willful attempt to evade or defeat tax? 5 years 3 years 10 years 4 years
5 years The maximum penalty for a willful attempt by an individual to evade or defeat tax is a $100,000 fine and/or five years in prison. For a corporation, there is no imprisonment, but the maximum fine is $500,000.
Question #100017 When must a practitioner exercise due diligence? A. All of the answer choices are correct. B. In determining the correctness of oral or written representations by the practitioner to the Department of the Treasury C. In preparing, approving, and filing returns D. In determining the correctness of oral or written representations in any matter administered by the IRS
A . All of the answer choices are correct. A practitioner must exercise due diligence in: determining the correctness of oral or written representations in any matter administered by the IRS, preparing, approving, and filing returns, and determining the correctness of oral or written representations by the practitioner to the Department of the Treasury. Reg 10.22 [Circular 230]
Reference: 4112.01
A compensated tax return preparer can be liable for civil and criminal penalties for negligently or intentionally understating a taxpayer's liability.
Tax Return
A tax return is a statement of information, usually on a prescribed form, required by governments from individuals, businesses, and other entities. The most common U.S. tax return form is federal IRS Form 1040, U.S. Individual Income Tax Return, which is used by an individual to report income to the Internal Revenue Service. The complete tax return will include this form, or a similar one, plus any related schedules and other attachments that may be required with this form. The amount of tax to be paid with the return, or the amount of tax to be refunded to the taxpayer, is reported on the tax return. Corporations usually file an income tax return on Form 1120, U.S. Corporation Income Tax Return, with accompanying schedules and other attachments. Nonprofit organizations usually file Form 990, Return of Organization Exempt From Income Tax, which is an "information only" type of tax return. Even if a nonprofit organization is tax-exempt, it is still required to report its financial status and activities to the Internal Revenue Service. Among other tax return forms is Form 1065, U.S. Return of Partnership Income, which is generally used as an information-only return by partnerships.
Question #100077 Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A. A state board of accountancy B. The AICPA C. The SEC D. A state CPA society
A. A state board of accountancy There are 54 jurisdictions that administer the licensing of Certified Public Accountants. These include the 50 states, Washington, D.C., Guam, Puerto Rico, and the U.S. Virgin Islands. In each state or other jurisdiction, a board of accountancy has been established by statute. All boards utilize the scores from the Uniform CPA Examination and evaluate the qualifications of those who take the exam. The boards issue certificates and licenses to practice to those that pass. On the disciplinary side, the boards investigate complaints, hold hearings, and, where necessary, suspend or revoke licenses to practice public accounting.
Question #100014 According to the profession's standards, which of the following actions should be taken by a CPA tax preparer who discovers an error in a client's previously filed tax return? A. Advise the client. B. Advise the IRS. C. End the relationship with the client. D. Correct the error.
A. Advise the client. When the CPA tax preparer discovers an error in a previously filed tax return, the CPA is under an obligation to so advise the client. The CPA is not obligated to inform the IRS of the error, and (except where required by law) is not permitted to do so without the client's permission.
Question #102146 The Secretary of the Treasury, after notice and opportunity for a hearing, may censure, suspend, or disbar any practitioner in which of the following circumstances? A. All of the answer choices are correct. B. The practitioner, with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. C. The practitioner refuses to comply with any rules in Treasury Circular 230. D. The practitioner is shown to be incompetent or disreputable.
A. All of the answer choices are correct. The Secretary may censure (a public reprimand), suspend, or disbar a practitioner in all of the circumstances listed.
Tax Court
The Tax Court is located in Washington, D.C., and is made up of 19 judges who hear only tax cases. In addition, the Tax Court rules on disputes between taxpayers and the IRS involving underpayment of federal income, gift, and estate taxes.
Question #101951 Which agency is responsible for determining the continuing professional education requirements for licensed CPAs? A. The board of accountancy for the state in which the licensed CPA practices B. The American Institute of Certified Public Accountants C. The Securities and Exchange Commission D. The National Association of State Boards of Accountancy
A. The board of accountancy for the state in which the licensed CPA practices State boards of accountancy are generally in charge of maintaining records of continuing education of all CPAs licensed in that state. The CPA must attest to the state board that the continuing education requirements have been completed. Most jurisdictions run random audits of the CPA records to determine if the reporting of continuing education was both accurate and timely.
Question #100019 Pursuant to Treasury Circular 230, which of the following statements about the return of a client's records is correct? A. The practitioner may retain copies of the client's records. B. The practitioner does not need to return any client records that are necessary for the client to comply with the client's federal tax obligations. C. The client's records are to be destroyed upon submission of a tax return. D. The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client's records.
A. The practitioner may retain copies of the client's records. Circular 230 advises that the taxpayer may request and receive any and all records that are necessary to comply with the taxpayer's federal tax obligation. The practitioner may retain a copy of the records returned to the client.
Question #100737 What is a Schedule UTP used for? A. To disclose specific information regarding uncertain tax positions B. To disclose basic information regarding uncertain treated property C. To disclose the tax position does not need an adjustment D. To disclose the company is not taking a specific tax position
A. To disclose specific information regarding uncertain tax positions UTP stands for "uncertain tax position." The schedule discloses specific information regarding uncertain tax positions taken on tax returns. Multiple tax positions affecting a single line item must be reported individually on the Schedule UTP.
Question #100857 Of the various administrative sources available from the IRS, which is held to be the strongest and most important source? A. Treasury Regulations B. Revenue Rulings C. Letter Rulings D. Revenue Procedures
A. Treasury Regulations Treasury Regulations have the most weight in interpreting the IRS Code. Regulations are the interpretation of the Code by the government department responsible for administering the income tax laws. When regulations are challenged, courts will only invalidate a regulation if it does not follow the intent of Congress. Revenue Rulings are the second most important source of administrative law. Revenue Rulings are interpreted as the position of the IRS. They are much easier to challenge in court than Treasury Regulations. Revenue Procedures tell taxpayers how to comply with complex provisions in the law. For example, Revenue Procedures 87-56 and 87-57 explain cost recovery. Letter Rulings are issued in response to a request from a taxpayer for a ruling on his or her personal tax situation. These cannot be cited as authority by anyone else.
Question #100861 In addition to citing the tax law to which it refers, a tax communication should include all of the following except: A. one complete conclusion for all of the issues. B. brief summary of the facts. C. A reasoning for the tax conclusion reached. D. each tax issue considered.
A. one complete conclusion for all of the issues. A tax communication should include: a brief statement of the facts, each tax issue considered, a separate conclusion for each tax issue, and where the conclusions came from, e.g., the authority.
Question #101791 Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unmodified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not: A. violate generally accepted auditing standards in performing the audit. B. have privity of contract with Cable. C. sign an engagement letter. D. perform the audit recklessly or with an intent to deceive.
A. violate generally accepted auditing standards in performing the audit. Under general legal liability, a CPA must not perform work negligently and therefore must exercise due care. There is no legal requirement that there be an engagement letter. A finding of negligence does not require reckless behavior or the intent to deceive. Privity does not have to be considered; Cable and Drake do not need a relationship for the agreement. However, a CPA's responsibility is defined by generally accepted auditing standards (GAAS). Defenses to legal actions concerning the lack of due care include the fact that the CPA adhered to GAAS. The failure to follow GAAS would be considered a lack of due care.
Reference: 4141.20
According to the foreseen user rule applied by some courts, if a CPA is retained by a client to perform an audit examination for purposes of obtaining a bank loan from Fourth National Bank, the bank may successfully recoup loan losses by proving that the CPA was negligent (if the bank, in fact, relied upon the audited financial statements).
Error
An error is an unintentional misstatement or omission of amounts or disclosures in financial statements. AU-C 240.02 Errors may involve the following: Mistakes in gathering or processing accounting data Incorrect accounting estimates arising from oversight or misinterpretation of facts Mistakes in the application of accounting principles relating to amount, classification, manner of presentation, or disclosure (compare to fraud) The primary factor that distinguishes errors from fraud is whether the underlying cause of the misstatement in the financial statements is intentional. Intent is often difficult to determine and must involve the auditor's professional judgment and professional skepticism. The independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. An assessment of the likelihood of errors and fraud is an element of the auditor's assessment of audit risk in the planning stage. In statistics, the error refers to the difference of one observation in a sample from the unobservable, theoretical value that would be derived from the entire population. Statistics assumes that the errors from individual observations are uniformly dispersed from the theoretical value
Question #101952 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? A. The husband's attorney, for the evaluation of the negligence claim B. The CPA's attorney, for the evaluation of the negligence claim C. The husband, for the evaluation of the negligence claim D. No one, because all disclosures must be made with the wife's consent
B. The CPA's attorney, for the evaluation of the negligence claim Under IRC Section 7525, a privilege is available for communication between a federally authorized tax practitioner (e.g., a CPA, attorney, enrolled agent, or enrolled actuary) and a client or potential client under certain circumstances. The attorney-client privilege can be waived if the third party is under an obligation of confidentiality (e.g., the CPA's attorney). The AICPA Code of Professional Conduct allows a CPA to disclose confidential client information only pursuant to a subpoena (court order), or applicable laws or government regulations; AICPA or state CPA society or board of accountancy authorization; or inquiry made by a recognized investigatory or disciplinary body. Additionally, tax return preparers within the same firm in the United States may, without taxpayer consent, use or disclose information within the firm to assist in the preparation of, or provide auxiliary services in connection with, return preparation.
Question #100727 When appealing an IRS tax decision, which of the following is not included in the protest letter? A. Taxpayer name, address, and daytime phone number B. Tax periods involved C. A list of the proposed changes the taxpayer agrees with D. The law supporting the taxpayer's position
C. A list of the proposed changes the taxpayer agrees with A written protest needs to be filed when an appeals conference is requested. The protest must include: the taxpayer's name, address, and daytime phone number, a statement requesting the appeal on the IRS findings, a copy of the letter showing the findings, the tax periods or years involved, a list of the proposed changes the taxpayer does not agree with and why, the facts to support the taxpayer's position, the law or authority supporting the taxpayer's position, and a signature from the taxpayer stating that it is true, under the penalties of perjury. IRS Publication 5
Question #101987 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? A. If the notice is addressed to a taxpayer outside of the United States, 120 days from the mailing date of the notice B. If the taxpayer has filed for bankruptcy under Chapter 11, 150 days from the mailing date of the notice C. Ninety (90) days from the mailing date of the notice if the notice is not addressed to a taxpayer outside of the United States D. Sixty (60) days from the mailing date of the notice if the notice is not addressed to a taxpayer outside of the United States
C. Ninety (90) days from the mailing date of the notice if the notice is not addressed to a taxpayer outside of the United States A notice of deficiency may be sent at the close of an audit by the IRS as the final notification they are going to make changes to a taxpayer's tax return. The notice of deficiency will list the changes the IRS proposes to make to the return (e.g., disallowing a home office deduction or business use of a car) and calculate a new tax due, along with interest and penalties. The notice of deficiency is also known as a "90-day letter" or "statutory notice of deficiency," and is authorized in IRC Section 6212. The taxpayer who wishes to contest the IRS adjustments may either pay the tax and sue to recover in U.S. District Court or file a petition to have the matter heard in Tax Court before paying the tax.
Question #100073 Starr, CPA, prepared and signed Cox's 20X1 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 20X1. 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 20X1 return, Starr is: A. liable to Cox for interest on the underpayment of tax. B. not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment of tax. C. not liable to the IRS for any penalty or interest. D. liable to the IRS for negligently preparing the return.
C. not liable to the IRS for any penalty or interest. Starr is not liable to the IRS for any penalty or interest. The key issue addressed by this question is the extent of liability an accountant has in the preparation of tax returns. Here the problem tells you that the CPA had no reason to doubt the client's assertions. A CPA may be liable for: negligence in preparing the return—computational errors, failure to file the return in a timely fashion or just plain erroneous advice. None of these elements are present in this particular case. an understatement of liability if the tax preparer knows or should know that the deductions or credits resulting in the understatement have no realistic possibility of being sustained on its merits. Again, the problem tells you that Starr had no reason to doubt the accuracy of Cox's figures.
Married Filing Separately
Married filing separately is the filing status used by a married couple who choose to record their respective incomes, exemptions, and deductions on separate individual income tax returns.
Negligence
Negligence is the failure to exercise the ordinary reasonable care required under the circumstances. In a civil tort, no knowledge of error or falsity or reckless disregard need be proven (ordinary or simple negligence as distinguished from gross negligence). When applied to accountants, negligence involves the following: Failure to follow GAAP/GAAS Failure to do what duty requires to be done (e.g., failure to investigate further missing or suspicious data) Disregard of warnings or suspicious comments, behavior, or documents
Responsibility of Confidentiality
One of the ethical responsibilities to clients is the obligation not to reveal client information obtained during the client-accountant relationship. Section 1.700 of the AICPA Code of Professional Conduct addresses this issue: Confidential Client Information Rule: "A member in public practice shall not disclose any confidential client information without the specific consent of the client. "This rule shall not be construed (1) to relieve a member of his or her professional obligations of the 'Compliance With Standards Rule' [1.310.001] or the 'Accounting Principles Rule' [1.320.001], (2) to affect in any way the member's obligation to comply with a validly issued and enforceable subpoena or summons, or to prohibit a member's compliance with applicable laws and government regulations, (3) to prohibit review of a member's professional practice under AICPA or state CPA society or Board of Accountancy authorization, or (4) to preclude a member from initiating a complaint with, or responding to any inquiry made by, the professional ethics division or trial board of the Institute or a duly constituted investigative or disciplinary body of a state CPA society or Board of Accountancy. Members of any of the bodies identified in (4) above and members involved with professional practice reviews identified in (3) above shall not use to their own advantage or disclose any member's confidential client information that comes to their attention in carrying out those activities. This prohibition shall not restrict members' exchange of information in connection with the investigative or disciplinary proceedings described in (4) above or the professional practice reviews described in (3) above." ET 1.700.001 There are certain times when confidential client information must be disclosed, which are: compliance with a validly issued and enforceable subpoena or summons, review of CPA's professional practice under the AICPA or state CPA society authorization review, responding from inquiry by a recognized investigative or disciplinary body, and compliance with the Compliance with Standards Rule and Accounting Principles Rule. The important time to remember this rule is during the planning stage of rendering professional services. Here, for example, the auditor usually discusses with the prior auditors all information relevant to the audit. However, the client must give full consent before such a discussion can occur. ET 1.700.050 ("Disclosing Client Information in Connection with a Review of the Member's Practice") declares that "a review of a member's professional practice includes a review performed in conjunction with a prospective purchase, sale, or merger of all or part of a member's practice." However, the interpretation also imposes on prospective purchasers the obligation not to disclose or use to their advantage any such confidential client information that comes to their attention during such a review.
Reference: 4132.04
Required disclosure of tax return positions (in general) a. In IRS Schedule UTP, certain companies are required to disclose specific information regarding uncertain tax positions taken on their tax return. b. Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return if the following two conditions are met: (1) The corporation has taken a tax position on its federal income tax return for the current tax year or a prior tax year. (2) Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. c. A tax position meeting one of the two above criteria must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above. d. A tax position taken on a tax return is a tax position that would result in an adjustment to a line item on that return if the position is not sustained. If multiple tax positions affect a single line item, each tax position must be reported separately on the Schedule UTP. e. Analysis of whether a reserve has been recorded for the purpose of completing Schedule UTP is determined by reference to the reserve decisions made by the corporation or related party for audited financial statement purposes. f. A corporation is not required to report on Schedule UTP, a tax position taken in a tax year beginning before January 1, 2010, even if a reserve is recorded with respect to that tax position in audited financial statements issued in 2010 or later.
Safe Harbor Rules
Safe harbor rules are rules or regulations that outline conditions under which the Internal Revenue Service (IRS) will not challenge the position taken by the taxpayer in reporting certain types of transactions. Example: In the Regulations under Section 704(b), the IRS has outlined conditions under which it will accept a special allocation of income, deductions, or credits. If a taxpayer satisfies each of the conditions, he or she can be satisfied that the IRS will not challenge that special allocation in the event of an audit. These conditions are referred to as safe harbor rules for special allocations.
Reference: 4121.14
State boards of accountancy all use scores from the Uniform CPA Examination to qualify candidates for certification and licenses to practice. Each state board establishes its own rules on residency, citizenship, education, and experience, and some require the completion of an ethics examination to qualify for a CPA license. After licensing, state boards have established requirements for continuing professional education (CPE). State boards establish the rules to qualify for a license and also the rules for revoking a license.
Reference: 4121.08 CPE requirements:
State boards of accountancy are generally in charge of maintaining records of continuing education of all CPAs licensed in that state. The CPA must attest to the state board that the continuing education requirements have been completed. Most jurisdictions run random audits of the CPA records to determine if the reporting of continuing education was both accurate and timely.
Reference: 4141.09 Defenses available to the CPA include the following:
The CPA was not negligent or fraudulent. Contributory negligence of the client caused the loss. The CPA adhered to professional standards. The error was immaterial. The proximate cause of loss was not the CPA's error.
Treasury Regulations
The IRS commissioner, under authority granted by the U.S. Congress, publishes interpretations of the tax law in the form of Treasury Department Regulations. These regulations carry significant authority because they are the Treasury Department's official interpretation of tax statutes. Although courts often do refer to the regulations' interpretation of the tax code, the regulations do not have the full force and effect of law, except in those cases in which the law on a particular subject calls for rules on that subject to be expounded through regulations, which are called legislative regulations. Specifically, a legislative regulation is a Treasury Regulation that is issued under a specific directive by Congress. In a sense, Congress gives the Treasury Department the authority to write the law. Thus, it is not possible to claim that the regulation is not in line with Congressional intent. For example, the regulations for filing consolidated returns are legislative, and therefore provide the majority of the law applicable to such tax filings. Legislative regulations are less common than interpretive regulations, which are explained below. An interpretive regulation is a Treasury Regulation that is issued under the general authority provided to the Treasury Department. It interprets the statutory law. Interpretive regulations generally have the force of law, but it may be possible to demonstrate to a court that the regulation goes beyond the intent of Congress. In addition, regulations can be proposed, temporary, or final. Many regulations are first issued in proposed form, with a designated time period in which practitioners and other interested parties can provide written or oral comments. Interested parties do not have the ability to comment on other sources of Treasury Department tax guidance, such as Revenue Rulings and Revenue Procedures. Because proposed regulations are simply "invitations to comment," courts have consistently held that they lack any authoritative weight. Taxpayers must be careful when taking a tax-filing position that contradicts a proposed regulation, however, because the regulation could be issued in temporary or final form without material changes. A temporary regulation has the same authority as a final regulation, but a temporary regulation has the force of law immediately upon issuance—it is never a proposed regulation with a comment period. A temporary regulation does not have an initial comment period because it is meant for matters where immediate tax guidance is warranted. A temporary regulation is also issued as a proposed regulation, and it can be later superseded by a final regulation. A temporary regulation expires within 3 years of issuance. A final regulation is the final stage in the process of issuance of regulations after the comments have been received and considered. After release as a final regulation, the regulation has the force of law, subject to the right to challenge an interpretive regulation. Proposed, temporary, and final regulations are published in the Federal Register and Internal Revenue Bulletin, as well as by major tax services.
Due Diligence
The dictionary meaning of the word "due" as used here is "sufficient" or "adequate." The meaning of "diligence" is an act performed with great effort and care. In regard to taxation, the IRS states: "In general. A practitioner must exercise due diligence— "In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; "In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and "In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service." Treasury Circular 230, Section 10.22(a) In the context of mergers and acquisitions, due diligence is the process of examining the books and records of the parties to the transaction.
Scope of Authority
The scope of authority is determined and conferred on an agent by consent of the principal. Authorities have the legal power to act, commit, or change the legal status of another. It may be express (stated in words), implied (unstated, as is customary or usual in the circumstance to fill the gaps in express authority needed to conduct the purpose of the agency), actual (express plus implied authority), or apparent (the appearance of authority).
Treasury Circular 230
Treasury Circular (TC) 230 regulates the conduct of tax professionals admitted to practice before the Internal Revenue Service, including ethical and technical types of matters. For example, TC 230 requires a practitioner to inform the client of any known error or omission in a prior year's return and to advise the client of the consequences of such error or omission. Circular 230 also covers all written forms of federal tax advice, which scope extends not just from legal opinions but to e-mails and regular correspondence between a practitioner and client. Written tax advice must take the form of a complete and detailed opinion or else state explicitly it is not such a reliance opinion and thus cannot be relied upon for avoiding penalties from the Code. TC 230 also restricts the notion of "substantial authority" to a much higher degree of certainty.
Reference: 4132.03 Substantiation of charitable contributions
a. For cash contributions, a deduction is only allowed if the taxpayer has written receipts such as a canceled check or a written statement from the charity that show: (1) the name of the charity and (2) the date and amount of the contribution. b. A written statement must provide an estimate of the value of any goods or services received by the donor if: (1) a payment is made to the charity for more than $75 and (2) the payment is partly a charitable contribution and partly a payment for goods and services. c. For gifts of property other than money, the taxpayer must have a receipt from the charity. If the property is clothing or other household items, the property must in "good used condition or better." d. To deduct a single cash or noncash property contribution of $250 or more, the taxpayer must receive a written acknowledgment from the charity. The acknowledgment must include: (1) the amount of cash received or a description of the noncash property contributed, (2) whether or not the charity provided the donor any goods or services for the contribution, and (3) a description and estimate of the value of any goods or services that were provided. e. If the taxpayer donates noncash gifts valued at more than $500, additional substantiation must be provided with the taxpayer's return. This includes: (1) how the property was acquired and (2) the taxpayer's basis in the property. f. If a taxpayer makes a noncash contribution that exceeds $5,000 in value, a qualified appraisal regarding the value of the property may also be required. g. If a taxpayer donates a used car to a charity, the taxpayer must obtain a statement from the charity stating the sales price of the car in cases where the car is sold by the charity. The amount that the charity receives from selling the car generally is the amount that the taxpayer can deduct for contributing the car to the charity.
Reference: 4142.05 There is no general federal accountant-client privilege
a. Generally, any state-created accountant-client privilege is not recognized for federal law purposes. b. Under Internal Revenue Code (IRC) Section 7525, however, a privilege is available for communication between a federally authorized tax practitioner (e.g., a CPA, attorney, enrolled agent, or enrolled actuary) and a client or potential client. (1) This privilege can only be asserted in either of the following: (a) Noncriminal tax matters before the Internal Revenue Service (b) Noncriminal tax proceedings in federal court brought by or against the United States (2) Tax advice is advice given with respect to a matter that is within the scope of the tax practitioner's authority to practice before the IRS. (3) The privilege exists only to the extent the communication would be privileged under the attorney-client privilege if the communication had been made between a client and an attorney. (4) The privilege does not apply to any written communication between a tax practitioner and a corporate representative (including a director, shareholder, officer, employee, or agent) concerning the corporation's participation in any tax shelter (as defined in IRC Section 6662(d)(c)(iii)).
Reference: 4132.04 Required disclosure of tax return positions (in general
a. In IRS Schedule UTP, certain companies are required to disclose specific information regarding uncertain tax positions taken on their tax return. b. Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return if the following two conditions are met: (1) The corporation has taken a tax position on its federal income tax return for the current tax year or a prior tax year. (2) Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. c. A tax position meeting one of the two above criteria must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above. d. A tax position taken on a tax return is a tax position that would result in an adjustment to a line item on that return if the position is not sustained. If multiple tax positions affect a single line item, each tax position must be reported separately on the Schedule UTP. e. Analysis of whether a reserve has been recorded for the purpose of completing Schedule UTP is determined by reference to the reserve decisions made by the corporation or related party for audited financial statement purposes. f. A corporation is not required to report on Schedule UTP, a tax position taken in a tax year beginning before January 1, 2010, even if a reserve is recorded with respect to that tax position in audited financial statements issued in 2010 or later.
Reference: 4111.14 A practitioner must exercise due diligence in the following situations:
a. In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to IRS matters b. In determining the correctness of oral or written representation made by the practitioner to the Department of the Treasury c. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS A practitioner will be presumed to have exercised due diligence if the practitioner relies on the work product of another person.
Reference: 4132.06 Policy of restraint
a. The IRS has announced that it will use a policy of restraint and forgo seeking certain documents that relate to uncertain tax positions and the workpapers that document the completion of IRS Schedule UTP. b. If a document is otherwise privileged under the attorney-client privilege, the tax advice privilege in IRC Section 7525, or the work product doctrine and the document was provided to an independent auditor as part of an audit of the taxpayer's financial statements, the IRS will not assert during an examination that privilege has been waived by such disclosure. c. The above will not apply if: (1) the taxpayer has engaged in any activity or taken any action, other than those described in that paragraph, that would waive the attorney-client privilege, the tax advice privilege in IRC Section 7525, or the work product doctrine; or (2) a request for tax accrual workpapers is made because unusual circumstances exist, or the taxpayer has claimed the benefits of one or more listed transactions. d. Under current procedures, examiners request tax reconciliation workpapers as a matter of course. The taxpayer may redact the following information from any copies of tax reconciliation workpapers relating to the preparation of Schedule UTP it is asked to produce during an examination: (1) Working drafts, revisions, or comments concerning the concise description of tax positions reported on Schedule UTP (2) The amount of any reserve related to a tax position reported on Schedule UTP (3) Computations determining the ranking of tax positions to be reported on Schedule UTP or the designation of a tax position as a Major Tax Position e. Other than requiring the disclosure of the information on the schedule, the requirement to file Schedule UTP does not affect the policy of restraint.
Reference: 4134.03 Administrative sources
a. The Treasury Regulations are the official interpretation of the Internal Revenue Code by the Department of the Treasury. The regulations are the administrative source of tax authority that carry the most weight. b. Regulations are given great deference by the courts if the taxpayer ends up litigating their tax dispute with the government. This is because the regulations are the interpretation of the Code by the government department responsible for administering the tax law. c. A court will generally only invalidate a regulation if the taxpayer can convince the court that the regulation does not clearly reflect the intent of Congress in enacting the Code section. d. The second most important source of administrative tax authority is revenue rulings. e. Revenue rulings carry far less weight than regulations. This is because a Revenue Ruling is issued by the Internal Revenue Service and is therefore viewed as the position of the IRS on a particular tax issue. f. Revenue rulings are therefore easier to challenge in court. As a result, finding a revenue ruling that conflicts with the position of the taxpayer may not be fatal. It does, however, show the IRS position on the issue. g. Other administrative tax sources generally carry less weight than regulations and revenue rulings. However, in a given situation, one of these other sources may be very valuable to the taxpayer position in question. These other administrative sources include the following: (1) Revenue Procedures (2) Letter Rulings (These technically cannot be cited as authority by any taxpayer other than the taxpayer requesting the ruling; note, however, that letter rulings have been cited by courts, including Courts of Appeals.) (3) Treasury Decisions (4) Determination Letters (5) Technical Advice Memoranda
Reference: 4133.08 Criminal penalties: The criminal tax penalties in the Internal Revenue Code include the following:
a. Willful attempt to evade or defeat tax: The maximum penalty is a $100,000 fine and/or five years in prison. For a corporation, there is no imprisonment, but the maximum fine is $500,000. b. Willful failure to collect or account for and pay over tax: The maximum penalty is $10,000 fine and/or five years in prison. c. Willful failure to pay a tax or an estimated tax, to file a required return, to keep required records, or to provide required information: The maximum penalty is a $26,000 fine and/or one year in prison. For a corporation, there is no imprisonment, but the maximum fine is $100,000. d. Willfully furnishing an employee with a false statement regarding tax withholding on wages: The maximum penalty is a $1,000 fine and/or one year in prison. e. Making a knowingly false declaration under penalty of perjury, preparing or assisting in preparation of a fraudulent return or other documents, or concealing goods or property in respect of any tax: The maximum penalty is a fine of $100,000 and/or three years in prison.
Reference: 4111.29 The Secretary of the Treasury, after notice and an opportunity for a proceeding, may censure (a public reprimand), suspend, or disbar any practitioner from practice before the IRS if the practitioner
a. is shown to be incompetent, or disreputable, b. refuses to comply with any rules in Circular 230, or c. with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client.