Enrolled Agent > EA - Part 3: Representation > Unit 7: Recordkeeping Requirements and Penalties > Flashcards

Unit 7: Recordkeeping Requirements and Penalties Flashcards

Know practitioner recordkeeping duties and related penalties. (51 cards)

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1
Q

What are the basic recordkeeping requirements for U.S. taxpayers?

A
  • Records must demonstrate income, expenses, and basis.
  • No specific types of records are required by tax law. The IRS does not require original documents.
  • Records can be kept digitally.
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2
Q

What is the preparer’s responsibility regarding supporting documents?

A
  • Request appropriate documentation from clients.
  • Review prior-year tax returns to identify relevant issues.
  • Ensure due diligence in preparing accurate tax returns.
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3
Q

What types of supporting documents may a tax preparer need access to?

A
  • Income Records: W-2 forms, 1099 forms, bank statements, brokerage statements.
  • Expense Records: Receipts, invoices, canceled checks, credit card statements.
  • Property Records: Purchase and sale documents, improvement records, insurance records.
  • Charitable Records: Written acknowledgments for donations over $250.
  • Other Records: Medical bills, college receipts.
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4
Q

What records must a taxpayer keep to claim deductions for travel, gifts, transportation, charitable donations, business expenses, and similar expenditures?

A

The taxpayer must have adequate records or other evidence to substantiate the deduction. This generally means:
* Receipts, canceled checks, or bills showing the amount, date, place, and business purpose.
* Mileage logs or travel records for transportation expenses.
* Written acknowledgments from charities for contributions of $250 or more.
* Contemporaneous records (kept at or near the time of the expense) to prove business purpose and necessity .

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5
Q

What is the definition of ‘ordinary and necessary’ in terms of business expenses?

A
  • ‘Ordinary’ means common within the taxpayer’s specific trade or business.
  • ‘Necessary’ means helpful and appropriate in the taxpayer’s trade or business.
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6
Q

For federal income tax purposes, are personal, family, and living expenses deductible as business expenses?

A

No. Personal, family, and living expenses are generally not deductible as business expenses.

If an asset is used for busines and personal purposes, only the business portion can be claimed as a deductible expense.

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7
Q

When can a taxpayer use a good-faith estimate for deductions?

A

When they are victims of a casualty or a disaster.

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8
Q

What is the general statute of limitations for the IRS to issue refunds?

A

Three years from the return due date or two years from the date the tax was paid, whichever is later.

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9
Q

What is the statute of limitations for claiming a refund on amended returns?

A

Three years from the date the original return was filed or two years after the date the tax was paid, whichever is later.

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10
Q

What are the exceptions to the three-year statute of limitations?

A
  • Net operating losses
  • Capital loss carrybacks (for C corporations)
  • Foreign tax credits
  • Losses from worthless securities
  • Exceptions for Armed Forces personnel
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11
Q

How long must records relating to the basis of property be retained?

A

Until the statute of limitations expires for the tax year in which the asset is sold or disposed of.

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12
Q

How long must employment tax records be retained?

A

A business must retain payroll and employment tax records for at least four years after the tax becomes due or is paid, whichever is later.

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13
Q

What is the statute of limitations if omitted income exceeds 25% of the gross income shown on the return?

A

Six years from the filing date.

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14
Q

What is the statute of limitations for a fraudulent return?

A

No limit.

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15
Q

What is the retention period for records related to worthless securities?

A

Seven years

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16
Q

What is the difference between tax avoidance and tax evasion?

A
  • Tax avoidance: Legal reduction of taxable income through deductions, credits, and adjustments to income.
  • Tax evasion: Illegal failure to pay owed taxes, subject to penalties.
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17
Q

What are some common tax evasion schemes?

A
  • Intentional omission of income
  • Claiming fictitious deductions
  • False allocation of income
  • Improper claims, credits, or exemptions
  • Concealment of assets
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18
Q

What is the penalty for willfully not filing a tax return?

A
  • A fine of up to $25,000 and a prison sentence of up to one year.
  • If done to evade taxation, it can result in a felony conviction with a fine up to $100,000 ($500,000 for corporations) and a prison sentence of up to five years.
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19
Q

What is the typical penalty for failing to file taxes on time?

A

5% of the unpaid taxes for each month or part of a month that a return is late, up to a maximum of 25% of the amount due.

If both the FTF and FTP apply in any month, the 5% FTF penalty is reduced by the FTP penalty (0.5%)

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20
Q

How is the failure-to-pay penalty calculated?

A

0.5% of unpaid taxes for each month or part of a month after the due date, up to 25% of the unpaid taxes.

If both the FTF and FTP apply in any month, the 5% FTF penalty is reduced by the FTP penalty (0.5%)

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21
Q

Under what circumstances can the IRS waive penalties for late filing or payment?

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A
  • Reasonable cause
  • Members of the Armed Forces serving in a combat zone
  • U.S. citizens or residents living and working abroad
  • Victims in certain disaster situations
22
Q

What is the penalty for a substantial understatement of income tax for individual taxpayers?

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A

The accuracy-related penalty is 20% of the portion of the underpayment that is attributable to the substantial understatement.

23
Q

What is the accuracy-related penalty for substantial valuation misstatements?

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A

20% of the understatement of tax.

Substantial valuation misstatement occurs when the asset’s value or basis is overstated by at least 150% of the actual value.

24
Q

What is the penalty for a gross valuation misstatement?

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A

40% penalty against the taxpayer for the gross valuation misstatement.

A gross valuation misstatement occurs when the reported value is more than 200% of the actual value.

25
What penalty applies if a taxpayer **undervalues** an estate?
A **20% substantial valuation** misstatement penalty.
26
How can a taxpayer avoid **substantial understatement** and overvaluation penalties?
By having a **reasonable basis** for their position and properly disclosing it. ## Footnote If an understatement is due to fraud, the penalty increases to 75% of the understated amount.
27
# Define: **Negligence** according to IRC §6662
Failure to make a reasonable attempt to comply with the Internal Revenue laws. ## Footnote Disregard means a taxpayer carelessly, recklessly or intentionally ignored the tax rules or regulations.
28
What is the penalty for **civil fraud** under IRC §6663?
A penalty of **75%** of the underpayment due to fraud. ## Footnote Fraud is intentional and must be proven by the IRS with clear and convincing evidence.
29
# True or False: Simple ignorance of tax laws constitutes fraud.
False ## Footnote Fraud requires willfulness, which is a deliberate violation of known legal duties.
30
What is the penalty for filing a **frivolous tax return** under IRC §6702?
**$5,000** penalty for filing a frivolous tax return. ## Footnote Frivolous submissions include tax protester arguments and returns lacking sufficient information to calculate the correct tax. In cases brought before the U.S. Tax Court, the penalty for making frivolous agruments can be up to $25,000.
31
What is the **Trust Fund Recovery Penalty**? | (TFRP)
A penalty equal to **100%** of the **unremitted trust fund taxes**. ## Footnote It applies to any responsible person who willfully fails to remit withheld taxes.
32
What is a common indicator of **tax fraud**?
Filing a **false** tax return. ## Footnote Other indicators include hiding income, claiming false deductions, and keeping a second set of books.
33
What is the penalty for **intentional disregard** while failing to file information returns?
The greater of - $680 per return/statement or - 10% of the aggregate amount required to be reported, with no maximum limit. ## Footnote Examples of information returns include Form W-2, Form 1099-MISC, and Form 1099-NEC.
34
What is the penalty under IRC §6694(a) for **understatement due to an unreasonable position**?
The greater of * **$1,000 per tax return** or * **50% of the income** the preparer received (or would have received) for preparing the tax return with the understatement.
35
What is the penalty under IRC §6694(b) for **understatement due to willful or reckless conduct**?
The greater of * **$5,000 per tax return** or * **75% of the income** the preparer received (or would have received) for preparing the tax return with the understatement.
36
# True or False: A preparer can use **Form 8888** to divert a portion of a taxpayer’s refund into their own bank account.
False ## Footnote Form 8888, Allocation of Refund, is primarily used by taxpayers to split a direct deposit refund between two or more accounts (up to 3) or to split a refund between a direct deposit and a paper check
37
Which **division of the IRS** works with the U.S. Justice Department to prosecute tax professionals who commit financial fraud?
IRS Criminal Investigation Division
38
What is the penalty for a preparer who **endorses or negotiates a taxpayer’s refund check** for returns filed in 2026?
**$650** for returns filed in **2026** (2025 returns) and **$635** for returns filed in **2025** (2024 returns)
39
What is the penalty under IRC §6700 for **promoting abusive tax shelters?**
* If false statements are made about tax benefits, the penalty is **50% of the gross income** made from the activity. * If a gross valuation overstatement is provided, the penalty is **$1,000 or 100% of the gross income** (whichever is less) for each entity or arrangement
40
What is the penalty under IRC §6701 for **aiding and abetting an understatement of tax liability**?
$1,000 or $10,000 for a corporate tax return.
41
What is the civil penalty under **IRC §6713** for **unauthorized disclosurer or use of taxpayer information**?
**$250 for each unauthorized disclosure** or use, with a maximum penalty of $10,000 a year. ## Footnote For disclosures that relate to a crime of identity theft, the penalties are enhanced to $1,000 for each disclosure with a maximum aggregate penalty of $50,000 a year.
42
What are the potential criminal penalties under **IRC §7216** for **unauthorized disclosure or use of tax return information by preparers**?
* Fined up to $1,000 * Imprisoned up to 1 year * Required to pay for the costs of prosecution ## Footnote The penalty applies to tax preparers who knowingly or recklessly disclose information give to them to prepare a tax return or use the information for any other purpose than to prepare a return.
43
Under IRC §7408, what can the U.S. government do regarding **unlawful conduct related to tax shelters** and reportable transactions?
It can seek an **injunction** in federal district court against the individual engaging in the prohibited conduct. ## Footnote Action to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions – IRC §7408
44
What **recourse** does a tax preparer have if they disagree with a penalty assessment?
The preparer may be able to **request an appeal**.
45
When is an understatement considered substantial for corporations (other than S corps or PSCs)?
If it exceeds the lesser of: * 10% of the correct tax (or $10,000 if 10% exceeds that amount), or * $10,000,000.
46
What is the minimum penalty if a taxpayer files their 2025 return more than **60 days after the due date?**
The minimum late-filing penalty is the lesser of **$525** or **100% of the unpaid tax due** on the return.
46
When does the **Trust Fund Recovery Penalty** apply? | (TFRP)
When businesses **neglect to remit** the **income** and **Social Security taxes withheld** from employee's wages. ## Footnote This penalty can be assessed against anyone who is considered a "responsible person" in the busines, such as corporate officers, directors, stockholders, and even rank-and-file employess.
47
What is an **abusive tax shelter**?
A type of illegal investment strategy that manipulates the tax system to **create tax benefits that are not supported by law**.
48
When can a tax preparer be assessed a **$65 penalty** (Max penalty cannot exceed $32,500 for 2025) related to the **preparation of a tax return?**
* Not furnishing a copy of the return to the taxpayer (§ 6695(a)). * Not signing the return when required (§ 6695(b)). * Not furnishing their PTIN or other identifying numbers (SSN,ATIN or ITIN) (§ 6695(c)). * Not retaining proper records (§ 6695(d)). * Not filing correct information returns (§ 6695(e))
49
What are the 2025 Recordkeeping requirements for **qualified tips and overtime**?
Practitioners should advise clients to retain supporting documentation such as: * Earnings statements of pay stubs * Copies of **Form 4070 (Employee’s Report of Tips to Employer)** or similar monthly tip reports * Daily tip logs, point-of-sale reports, or individual receipts * Third-party settlement organization statements * Documentation supporting the calculation of the qualified overtime premium
50
What is the purpose of §70605 of the One Big Beautiful Bill Act ?
A specific penalty targeting promoters of improper Em- ployee Retention Tax Credit (ERTC) claims. A COVID-ERTC promoter who provides aid, assistance, or advice and fails to comply with required due diligence standards related to ERTC eligibility or credit amounts is subject to a penalty of $1,000 for each failure. ## Footnote For purposes of this penalty, a promoter is generally defined as a person or entity that provides such assistance and meets one of the following criteria: * More than 20% of their annual revenue comes from ERTC-related services and they charge fees based on the refund or credit size; * More than 50% of their revenue comes from ERTC-related services; or * Their ERTC-related services exceed 20% of their revenue and total over $500,000.
EA - Part 3: Representation
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