REG 1st TEST

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

• Materials prepared by a client's actuary and provided to the practitioner with respect to tax preparation

• A schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client's tax return.

• Electronic materials provided to the practitioner that existed before the client retained the practitioner.

• Written records given to the practitioner at the beginning of the engagement.

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 the understatement of tax liability is related to a tax shelter and was properly disclosed, and there was substantial authority for the position.

• If there is a final judicial decision that there was no understatement of liability, the related tax preparer penalty paid earlier is not refundable.

• In general, the penalty does not apply unless the understatement of the tax liability is at least $10,000.

• 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.

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

• Pay the tax, then file an appeal with the IRS Appeals Division

• File an offer in compromise

• File an amended federal tax return along with payment of any deficiency.

Under Treasury Department Circular 230, a tax practitioner may charge a contingent fee related to

• Preparation of a taxpayer’s previous years’ income tax returns that the taxpayer had failed to timely file

• Obtaining a refund for the taxpayer by amending a previous year’s income tax return

• Reviewing previous returns filed by a different tax practitioner in the hope of finding an error on which to base a refund claim

• Assisting the taxpayer to obtain a refund in connection with statutory penalties and interest charged by the IRS

Kopel was engaged to prepare Raff's 20X4 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in 20X4. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raff had adequate records to support the deduction. Which of the following statements is correct?

• o avoid the preparer penalty for willful understatement of tax liability, Kopel was obligated to examine the underlying documentation for the deduction.

• To avoid the preparer penalty for willful understatement of tax liability, Kopel would be required to obtain Raff's representation in writing.

• Kopel is not subject to the preparer penalty for willful understatement of tax liability because the deduction that was claimed was more than 25% of the actual amount that should have been deducted.

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

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

• An unrelated party compliance statement.

• Taxpayer’s name and identification number or a copy of the tax return.

• Workpapers associated with the preparation of each tax return.

• A power of attorney.

Under the Internal Revenue Code, a person who is paid to prepare and file federal tax returns is referred to as which of the following?

• A tax return professional

• An enrolled agent.

• A tax return preparer.

• A tax practitioner.

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

• Facilitate a supplier's or lender's credit evaluation of the taxpayer.

• Accommodate the request of a financial institution that needs to determine the amount of taxpayer's debt to it, to be forgiven.

• Be evaluated by a quality or peer review.

• Solicit additional nontax business.

Which of the following statements is correct regarding a CPA's working papers? The working papers must be

• Transferred to a client's bank to help the client secure a loan even if the client has not given permission.

• Transferred permanently to the client if demanded.

• Turned over to a government agency that requests them as part of a criminal investigation.

• Turned over as part of an audit quality peer review process.

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 unmodified opinion of materially false financial statements?

• Lack of privity.

• Lack of scienter.

• Contributory negligence on the part of the client.

• A disclaimer contained in the engagement letter.