CPA® > CPA (3) REG > Area I - Ethics, Professional Responsibilities and Federal Tax Procedures > Flashcards

Area I - Ethics, Professional Responsibilities and Federal Tax Procedures Flashcards

Understanding ethical responsibilities and tax procedures. (48 cards)

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2
Q

What is the goal of a Consulting Engagement?

A

To assist the client in optimizing their personnel and resources to achieve their objectives.

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3
Q

What are the obligations outlined by the Statements on Standards for Consulting Services (SSCS)?

A

The SSCS demands:

  • Proficiency
  • Due Professional Care
  • Planning
  • Supervision
  • Gathering Adequate Data
  • Client Interest Priority
  • Agreement: Written or Oral
  • Client Communication
  • Objectivity NOT REQUIRED: Independence
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4
Q

How do Express and Implied duties differ for an accountant under contract?

A

Express: Duties are explicitly stated in the contract.

Implied: Duties involve performing without negligence.

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5
Q

What are the conditions for an accountant’s liability concerning negligence?

A

The conditions include:

  • Duty: A duty to act with the average accountant’s care.
  • Damages: Actual harm experienced by the client.
  • Causation: The harm was directly due to negligence.
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6
Q

What is the accountant’s responsibility for uncovering fraud under typical circumstances?

A

Accountants are generally not responsible for detecting fraud and are not typically liable for failing to do so.

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7
Q

Under what conditions can an auditor face legal action for not identifying fraud?

A

An auditor can be sued if:

  • A standard GAAS audit would have uncovered the fraud.
  • The auditor assumed more responsibility than a normal audit requires.
  • The audit report suggests heightened responsibility.
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8
Q

When is an accountant considered to have committed fraud?

A

Misrepresentation: Providing false material facts.

Scienter: Intentional deception.

Damages: Actual harm to the client.

Reasonable Reliance: Client’s reasonable trust in the false information.

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9
Q

What does Scienter entail?

A

Scienter involves knowingly reporting false information.

  • It shows a reckless disregard for truth.
  • It involves intentional fact concealment.
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10
Q

What is the Privity Defense in accountant liability to third parties?

A

Lack of privity can defend against contract breaches and negligence but not against fraud.

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11
Q

Summarize the Ultramares decision.

A

Accountants are only liable to third parties if the third party was an intended beneficiary and the accountant was aware they would rely on the financial statements.

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12
Q

What constitutes Common Law Fraud?

A
  • General fraud
  • Misrepresentation of material facts
  • Scienter
  • Damages
  • Reasonable reliance
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13
Q

Define Constructive Fraud.

A

Constructive Fraud is Gross Negligence, demonstrating reckless disregard for truth.

CPAs are typically not liable for simple negligence, but Gross Negligence (also known as Constructive Fraud) exposes CPAs to liability to third parties.

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14
Q

What steps must be taken upon discovering illegal activity?

A

The accountant should report illegal activity to the Audit Committee or Board of Directors. If the illegal activity is material in a public company, the Board of Directors has one day to inform the SEC.

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15
Q

Is there an Accountant-Client Privilege at the federal level?

A

There is NO Federal Accountant-Client privilege to prevent court disclosure unless recognized by specific state laws.

If a client admits to tax evasion, a court may compel the accountant to testify.

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16
Q

What are the confidentiality rules for an Accountant’s Workpapers?

A
  1. They can be subpoenaed.
  2. They are available for peer review by another CPA.
  3. They are owned by the accountant who created them.

Note: Client-provided documents must be returned upon request, even in billing disputes.

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17
Q

True or False:

Are accountants obligated to audit personal finances when preparing tax returns?

A

False. Accountants are not required to audit an individual’s personal finances when preparing a return.

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18
Q

What steps should an accountant take if they discover a previous error in a client’s tax return?

A

The accountant should notify the client about the error. Reporting it to the IRS is unnecessary. If the client refuses to correct it, the accountant should reconsider the business relationship.

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19
Q

What are the primary duties of an accountant when completing a tax return?

A

An accountant must complete the return with honesty and request additional information if needed. When suggesting a tax position, they should be confident it will withstand tax court examination.

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20
Q

List the fundamental guidelines for submitting a form 1120.

A
  • The return is due regardless of income.
  • Due on 4/15 if on a calendar year, or 3 1/2 months after the fiscal year ends.
  • A six-month extension is automatic.
  • S Corp returns have a deadline of 3/15, while C Corps are due 4/15.
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21
Q

Gift tax returns are filed on what basis, and when are they due?

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A

Gift tax returns follow a calendar-year basis and are due by April 15.

22
Q

Individual tax returns are prepared using which accounting method?

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A

Cash Basis.

Note: Cash basis is not permitted for Corporations, Partnerships with a C-Corp partner, or for businesses with inventories if Gross Receipts exceed $25MM over a three-year period.

23
Q

What deductions are used to calculate Adjusted Gross Income (AGI) for individuals?

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A
  • MSA/HSA contributions
  • Investment penalties for early withdrawal
  • Self-employed medical insurance premiums
  • Self-Employment Tax (approx. 50%)
  • IRA Contributions (Roth excluded)
  • Student loan interest (not if another taxpayer’s dependent)
  • Alimony (divorce must occur prior to 2019)
  • Qualified Tuition & Fees
  • Teacher Expenses
24
Q

Which items can be carried forward to subsequent years on a personal tax return?

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A
  • Investment interest expense exceeding investment income
  • Charitable donations (5-year carryover)
  • Excess Section 179
  • Capital losses
  • AMT Paid
  • Passive Activity Losses
25
Q

How is a Passive Activity Loss characterized in terms of carryover for individuals?

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A

Characteristics of Passive Activity loss:

  • No carryback
  • Indefinite carry forward
26
What is the maximum Section 179 Deduction for 2025?
**$1,250,000** deduction, with a dollar-for-dollar reduction after $2,700,000 in qualified purchases.
27
What is the current percentage for bonus depreciation?
40% bonus depreciation for 2025 - Apply the 179 Deduction initially - 100% of the remaining amount qualifies for Bonus Depreciation - Must be New Equipment
28
For how long can investment interest expense exceeding investment income be carried forward?
Indefinitely.
29
When is the deadline for a Partnership Return for a partnership with a calendar year-end?
**3/15** with a six-month extension available.
30
What is an IRS audit?
An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is reported correctly according to tax laws and to verify the reported amount of tax is correct. ## Footnote Audits can be conducted by mail or through in-person interviews to review financial records, and they are often initiated when the IRS identifies discrepancies in a taxpayer's return.
31
# True or False: The IRS typically notifies you by phone if you are selected for an audit.
FALSE ## Footnote The IRS will initiate contact with a taxpayer through mail. They do not use phone calls, emails, or social media to notify about an audit.
32
What are the three types of IRS audits?
* Correspondence audits * Office audits * Field audits ## Footnote Correspondence audits are conducted by mail, office audits occur at an IRS office, and field audits take place at the taxpayer's location.
33
# Fill in the blank: Taxpayers usually have \_\_\_\_\_\_ days to respond to an IRS audit notice.
30 days ## Footnote The IRS allows taxpayers a 30-day window to respond to an audit notice, which can be extended if the taxpayer requests additional time.
34
What is the statute of limitations for the IRS to audit a tax return?
3 years from the date the return was filed or the due date, whichever is later. ## Footnote In some cases, such as substantial errors, the statute of limitations can extend up to 6 years, and there is no limit if fraud is involved.
35
What rights do taxpayers have during an IRS audit?
* Right to be informed * Right to quality service * Right to pay no more than the correct amount of tax * Right to challenge the IRS's position ## Footnote These are part of the Taxpayer Bill of Rights, which ensures fair treatment during the audit process.
36
# True or False: Taxpayers can represent themselves in an IRS audit.
TRUE ## Footnote Taxpayers can choose to represent themselves, or they can appoint an attorney, CPA, or enrolled agent to represent them.
37
What is a 'Notice of Deficiency'?
A formal letter from the IRS stating that the taxpayer owes additional tax. ## Footnote This notice gives the taxpayer 90 days to dispute the amount before the IRS assesses the tax.
38
What is an Offer in Compromise (OIC)?
An agreement between a taxpayer and the IRS to settle a tax debt for less than the full amount owed. ## Footnote The IRS considers factors such as ability to pay, income, expenses, and asset equity in determining eligibility for an OIC.
39
# Fill in the blank: The IRS accepts an OIC when it is unlikely that the tax liability can be collected in \_\_\_\_\_\_.
full ## Footnote An OIC is considered when the taxpayer's financial situation demonstrates that full payment is not feasible.
40
What are the three grounds on which an OIC can be accepted?
* Doubt as to collectibility * Doubt as to liability * Effective tax administration ## Footnote These grounds ensure the IRS collects the highest amount possible given the taxpayer's circumstances.
41
# True or False: Taxpayers have the right to appeal an IRS decision on an OIC.
TRUE ## Footnote If an OIC is rejected, taxpayers can appeal the decision through the IRS Office of Appeals.
42
What is the Collection Due Process (CDP) hearing?
A legal procedure allowing taxpayers to dispute a levy or lien before it takes effect. ## Footnote CDP hearings are an opportunity for taxpayers to discuss alternatives to enforced collection actions, like installment agreements or an OIC.
43
What is the timeframe to request a CDP hearing after receiving a notice?
30 days from the date of the notice. ## Footnote Filing within this period preserves the taxpayer's rights to challenge the IRS's collection actions.
44
Which publication outlines taxpayer appeal rights?
Publication 5 ## Footnote Publication 5 provides guidance on how to appeal various IRS decisions, including audits and collections.
45
# True or False: An installment agreement is a collection alternative to full payment.
TRUE ## Footnote An installment agreement allows taxpayers to pay their tax debt over time in smaller, more manageable amounts.
46
What is a 'Currently Not Collectible' status?
A status where the IRS agrees not to collect a tax debt because the taxpayer cannot pay. ## Footnote This status doesn't eliminate the debt but suspends collection actions, often due to the taxpayer's financial hardship.
47
# Fill in the blank: Taxpayers can request an adjustment to their tax liability through an \_\_\_\_\_\_.
amended return ## Footnote Filing an amended return (Form 1040-X) allows taxpayers to correct errors and claim additional refunds or credits.
48
What is the primary function of the IRS Appeals Office?
To resolve tax disputes without going to court. ## Footnote The IRS Appeals Office is an independent organization aiming to impartially resolve disputes between the IRS and taxpayers.
49
# True or False: All IRS audits result in additional taxes owed.
FALSE ## Footnote Not all audits result in additional taxes; some may confirm the accuracy of the original return or result in a refund.
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