EA Exam Prep – Part 3
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• There will be several attendance verification questions
during the LIVE webinar that must be answered via the
online quiz at the conclusion to qualify for CPE.
• Today’s webinar will begin at 2:00pm EDT
• Please note: You will not hear any sound until the webinar
begins.
1
EA Exam Prep – Part 3
John O. Everett, Phd., CPA
Cherie J.Hennig, Phd., CPA
Learning Objectives
Upon completion of this course, you will be able to:
• Define the scope of “practice before the IRS,” and
identify individuals who may engage in such practice
• Recognize tax issues related to powers of attorney,
tax information authorizations, and central
authorization files
• Describe the administrative process for processing
complaints against enrolled agents
• Note special requirements for tax filing electronically
• Identify IRS appeals procedures and possible tax
preparer penalties
• Discuss competence and written tax advice issues
3
Topic 1
Practice Before the
IRS & Unenrolled
Preparers
4
1A Acts Constituting Practice
Before the IRS
• Circular 230 – Rules for enrollment and renewal
• Tax Returns - Include amended returns & claims
• Practice Before IRS – All matters related to
representations to IRS for clients
• Includes – Communicating with IRS, represent at
hearings (but not Tax Court), prepare and file
documents with IRS for client
• Does Not Include – Preparing tax return, or
furnishing information at request of IRS
• Question 1
5
Question 1
Identify the item below that is not considered practice
before the IRS:
a. corresponding with the Internal
Revenue Service on behalf of a client
b. preparing a tax return for an individual
c. representing a client at an audit
d. calling the IRS to discuss a letter
received by a client
6
1B Automatic Categories of
Representation Before IRS
• Circular 230 – Provides certain automatic privileges to
represent taxpayers
• Automatic Categories – Include:
–
–
–
–
–
Attorneys in good standing
CPAs in good standing
Enrolled agents
Enrolled actuaries (only for areas of expertise)
Enrolled retirement agents (only for expertise)
• Question 2
7
Question 2
All of the following types of individuals may practice before
the IRS except:
a. certified public accountants
b. certified financial advisors
c. attorneys
d. enrolled agents
8
1C Unenrolled Individuals Who
May Practice Before IRS
• Unenrolled Preparer – Not automatic;
– Only represent for tax return prepared
– Only appear before IRS Examination Division
• Duties Not Allowed – Sign claims, receive refund
checks, or sign consents, closing agreements, or
waivers of assessment
• Other Enrolled Individuals Qualifying – With ID,
can qualify: self-represent, family member, officer,
partner, alien, employee, trustee/ guardian, and
others if IRS authorizes
• Question 3 and Question 4
9
Question 3
Which of the following statements is correct with respect to
the limited practice of an unenrolled return preparer:
a. An unenrolled return preparer is only permitted to
represent the taxpayer for any year the taxpayer
provides authorization, whether or not the unenrolled
preparer prepared a return in question.
b. An unenrolled return preparer is only permitted to
represent taxpayers before the examination and
collection functions of the Internal Revenue Service.
c. If authorized by the taxpayer, an unenrolled return
preparer can sign consents to extend the statutory
period for assessment or collection of tax.
d. An unenrolled preparer cannot receive refund checks.
10
Question 4
The following persons are authorized to represent a
taxpayer before the IRS:
a. an individual representing a member of
his/her immediate family
b. a regular full-time employee of an individual
employer representing the employer
c. an officer or full-time employee of a
corporation representing the corporation
d. all of the above
11
1D Individuals Who May NOT
Practice Before IRS
• Ineligible Individuals – Include:
–
–
–
–
–
Criminal offense convictions
Convictions for dishonesty/breach
Disbarred/ suspended individuals
Individuals denied application
Officers & employees of U.S., state, Congress (if compensated)
• Question 5 and Question 6
12
Question 5
Identify the individual below who would not be eligible to
practice before the IRS under the limited practice rules.
a. An unenrolled tax preparer who works for a firm. The
taxpayer’s return was prepared by another individual
who also works for the firm.
b. An unenrolled tax preparer who prepared and signed
the tax return that is currently undergoing an audit.
c. An unenrolled preparer who appears as a witness for
the taxpayer.
d. Both a. and c.
13
Question 6
With regard to categories of individuals who may practice before the
Internal Revenue Service, which of the following statements is correct?
a. Only enrolled agents, attorneys, or CPAs may represent trusts and
estates before any officer or employee of the IRS.
b. An individual who is not an enrolled agent, attorney, or CPA who
signs a return as having prepared it for the taxpayer may, with
proper authorization from the taxpayer, appear as the taxpayer’s
representative, with or without the taxpayer, at an IRS Appeals
Office conference with respect to the tax liability of the taxpayer for
the taxable year or period covered by that return.
c. Under the limited practice provisions in Treasury Department
Circular 230, only general partners may represent a partnership.
d. Under the limited practice provision in Circular No. 230, an
individual who is under suspension or disbarment from practice
before the IRS may not engage in limited practice before the IRS.
14
Topic 2
Enrollment to
Practice and CPE
Requirements
15
2A Enrollment – Basic Privilege
• General Enrollment – Passing EA exam (duh!), or
past IRS technical experience requirements
• Director of Practice – May grant temporary
enrollment (may assist enrolled representatives)
• Denial of Application - 30 days to appeal – Treas.
• Automatic Enrollees – (CPA, Attorney, etc.) - File
written declaration with IRS, may represent
conflicting interests if all parties consent
• Representatives – Bound by Circular 230
• Question 7 and Question 8
16
Question 7
Larry Smith passed all parts of the Special Enrollment Examination in
October of 2014. Larry submitted the required forms to become an
enrolled agent. Larry failed the suitability test performed by the Internal
Revenue Service, and the Office of Professional Responsibility informed
Larry that he was denied participation and provided him with the
reasons for the denial. Larry received the notice on January 20, 2015.
What action should Larry take to appeal the denial received from the
Office of Professional Responsibility?
a. Larry must file a written appeal no later than the 19th of February
with the Commissioner of the IRS or his delegate.
b. Larry must file a petition no later than the 30th of January with the
District Court.
c. Larry must file a written appeal no later than the 30th of January
with the Secretary of the Treasury or his delegate.
d. Larry must file a written appeal no later than the 19th of February
with the Secretary of the Treasury or his delegate.
17
Question 8
Identify the individual below from whom an enrolled agent, in
practice before the Internal Revenue Service, may knowingly
accept assistance:
a. an individual who is under disbarment from practice
before the Internal Revenue Service
b. an individual who is under suspension from practice
before the Internal Revenue Service
c. an individual who has temporary recognition to
practice before the IRS
d. a former government employee where any federal law
would be violated
18
2B Enrollment Cycles and
Renewals
• Enrollment Cards – By Director of Practice
• Enrollment Period – 3-year cycles; each begins
April 1st (last begin 4/1/2013)
• Renewal Period – November 1st – January 31st of
last year of current period (last was 11/1/2012 –
1/31/2013)
• Staggered Renewal Schedule – By last digit of SS#,
either 2013 (0-3), 2014 (4-6), or 2015 (7-9)
• Question 9 and Question 10
19
Question 9
The appropriate renewal period for an enrolled agent is
determined by:
a. his or her last name
b. his or her last Social Security digit
c. his or her state of residence
d. none of the above
20
Question 10
If an enrolled agent’s last day of practice under
the current enrollment period is March 31, 2014,
he or she should renew the enrollment:
a. between November 1, 2013 and January 31,
2014
b. between January 1, 2013 and January 31,
2014
c. between November 1, 2013 and January 1,
2014
d. between November 1, 2013 and March 31,
2014
21
2C Enrollment CPE
Requirements
• Enrollee – Must certify CPE requirements are met
in each enrollment year (4/1 – 3/31), and keep
records for 4 years afterward
• Specific CPE Requirements:
– 72 hours during each 3-year cycle
– 16 hours minimum completed in each year (2 ethics)
– 2 hours for each month if enroll during cycle
• Instructing/Preparing Courses – Up to 50% CPE
• Question 11 and Question 12
22
Question 11
Generally, each individual who applies for renewal to
practice before the Internal Revenue Service must retain
the information required with regard to qualifying
continuing professional education hours. How long must
verification of CPE taken be retained?
a. for a period of one year following the date of renewal
of enrollment
b. for a period of four years following the date of
renewal of enrollment
c. for a period of five years if it is an initial enrollment
d. the individual is not required to retain the information
if the continuing professional education sponsor has
agreed to retain it
23
Question 12
With regard to continuing professional education (CPE) for enrolled
agents, all of the following statements are correct except:
a. an enrolled agent may obtain CPE credits only from an
organization that has filed a sponsor agreement with the
Director of Practice to obtain approval of its program as a
qualified CPE program
b. an enrolled agent must complete a minimum 72 hours of CPE
credit if enrolled for an entire enrollment cycle
c. an individual who receives initial enrollment during an
enrollment cycle must complete two hours of CPE credit for
each month enrolled during the cycle, beginning with the
month the individual is enrolled
d. an enrolled agent must complete a minimum of 16 hours of
CPE credit in each year of an enrollment cycle if enrolled for
the entire cycle
24
2D Failure to Comply With CPE
• Failure to Comply – Procedures are:
– Notice from Director of Practice
– 60 days to respond,
– If no response, then placed into inactive status for 3 years
• Question 13
25
Question 13
All of the following statements concerning continuing
professional education (CPE) requirements for enrolled agents
are true except:
a. the enrolled agent must complete a minimum of 72
hours of CPE credit if enrolled full enrollment cycle
b. the enrolled agent must complete a minimum of 24
hours of CPE credit in each year of an enrollment
cycle if enrolled for the entire cycle
c. an individual who receives initial enrollment during an
enrollment cycle must complete two hours of CPE
credit for each month enrolled
d. the Director of Practice may grant a waiver from the CPE
requirements for a given period if there is a compelling
reason and the request for waiver is appropriately
documented
26
Topic 3
Power of Attorney
Issues
27
3A – Scope of a Power of
Attorney
• Power of Attorney – Written authorization to act on
someone else’s behalf for tax
• Required – To represent taxpayer at conference or
file written response to IRS
• Permissible – Represent TP; record interview; sign
waiver, consent, & closing agreements; and receive
but not endorse refund check
• Taxpayer - receives documents, not represent.
• Question 14 and Question 15
28
Question 14
A power of attorney is required in all of the following
circumstances except:
a. to furnish information at the request of
the IRS
b. authorize the extension of the statute of
limitations
c. execute a closing agreement under
Sec. 7121
d. receive a refund check
29
Question 15
With regard to powers of attorney, all of the following statements are
correct except:
a. Form 2848, Power of Attorney and Declaration of
Representative, can be used to appoint an unenrolled return
preparer as a taxpayer’s representative before revenue agents
and examining officers of the examination division of the IRS.
b. A taxpayer’s representative can receive and endorse the
taxpayer’s check related to income tax from the U.S. Treasury
if authorized on the taxpayer’s power of attorney, Form 2848.
c. A document other than Form 2848 can be used to appoint a
power of attorney if it contains information required by the IRS.
d. A taxpayer can execute a durable power of attorney which
specifies that the appointment of the attorney-in-fact will not
end due to the incapacity or incompetency of the taxpayer.
30
3B Powers of Attorney – Special
Restrictions
• Signing return – Allowed only if specifically
authorized by taxpayer, and allowed by Code or
Regulations
• Other Limitations – Substitute another rep only if
allowed by PA, put in CAF, PA not required for info
disclosure (only Form 8821), and is not required
for attorney in Tax Court or by fiduciary
• Taxpayer – May revoke the PA
• Question 16
31
Question 16
The filing of a power of attorney does not authorize the
recognized representative to sign a tax return on behalf
of the taxpayer unless such an act is:
a. permitted under the Internal Revenue Code and
the regulations thereunder
b. specifically authorized in the power of
attorney
c. neither a. nor b.
d. both a. and b.
32
3C Power of Attorney – Form
2848 Requirements
• Form 2848 (POA) – Requires ID, name, CAF #,
type of tax, forms, years covered
• Required Attestations – Qualified, aware of Circular
230, not disbarred, represents TP
• Signatures on 2848 – Individuals (just sign), joint
(sign only for TP represented), corp (officer),
association (officer), p’ship (all must sign)
• Fiduciaries – do not need POA (File Form 56)
• More Than One Rep – Unless designated, IRS will
send communication to 1st name, latest date
• Questions 17 and 18
33
Question 17
A declaration of representative which accompanies a power
of attorney includes the following statements except:
a. I am authorized to represent the taxpayer(s) identified
in the power of attorney
b. I am aware of the regulations in Circular 230
c. I am an individual described in 26 C.F.R. 601.502(a)
(such as an attorney, CPA, enrolled agent, etc.)
d. I have never been sanctioned (e.g., reprimand,
suspension or disbarment) by the Director of Practice
34
Question 18
A properly executed power of attorney must
contain all of the following except:
a. identification number of the taxpayer
(i.e., social security number or employer
identification number)
b. the specific year(s) and period(s) involved
c. name of the preparer of the return for the
year(s) and period(s) involved
d. signature of the appointed representative
35
3D Changes in a Power of
Attorney
• Update POA – Write IRS where POA was filed, or
simply file a new POA
• Revoking POA (and not Issuing New) – Either:
– Send copy of 2848 to original IRS office & service
center, write REVOKE top center, sign, or
– File revocation statement to same place, sign
• New POA – Revokes prior POA (but has no effect
on tax information authorization)
• Inadequate Info on POA – Amend with new
• Question 19 and Question 20
36
Question 19
All of the following statements regarding changes to power
of attorney are true except:
a. a recognized representative may withdraw from
representation in a matter in which a power of
attorney has been filed
b. a taxpayer may revoke a power of attorney without
authorizing a new representative
c. if specifically authorized on the power of attorney, a
recognized representative may delegate authority to
another recognized representative
d. after a substitution of a representative is made, both
the old and newly recognized representatives will be
considered the taxpayer’s representative
37
Question 20
Judith wants to revoke a power of attorney that she previously executed
and does not want to name a new representative. In order to do this,
what is Judith’s most appropriate action?
a. Judith must call the Internal Revenue Service toll-free number,
verify that she is Judith, and inform them she wants to revoke the
current power of attorney that is on file.
b. Judith must send a letter to her nearest Internal Revenue Service
Center informing them that she wants to revoke the current power
of attorney that is on file.
c. Judith must send a copy of the previously executed power of
attorney to the Internal Revenue Service (with an original
signature) and write “REVOKE” across the top of the power of
attorney.
d. Judith must send a new power of attorney to the Internal Revenue
Service office(s) where the prior power was originally filed and
name herself as the representative.
38
Topic 4
Tax Information
Authorizations
(TIAs) and Central
Authorization Files
(CAFs)
39
4A Enrollment – Tax
Information Authorizations
• Form 8821 – Required for TIA (not a POA)
• TIA Disclosure – Does NOT have to be to an authorized
or enrolled representative
• TIA Form – NO effect on TP representation or POA
• TIA Info – Added to CAF for distribution
• Required Info – Generally same as POA
• Question 21 and Question 22
40
Question 21
Which of the following is not true concerning a Tax
Information Authorization, Form 8821?
a. the form may not be used to name a representative for
the taxpayer before the IRS
b. the Form 8821 information is also entered in the
Centralized Authorization File (CAF) when filed
c. a power of attorney is required simultaneously with the
filing of Form 8821 requesting the release of taxpayer
information
d. the information disclosed with a Form 8821 is not
limited to someone who is authorized to practice
before the IRS
41
Question 22
Regarding a Tax Information Authorization, Form 8821,
which of the following is correct?
a. the appointee can advocate the taxpayer’s position
b. the appointee can execute waivers
c. the appointee can represent the taxpayer by
correspondence
d. none of the above
42
4B Central Authorization Files
• CAF – Automated file containing info on TP reps
authorized as POA or TIA (3 maximum)
• Use by IRS – Determine if rep may receive
confidential information or other notices (for a
specific time period only)
• CAF – Does NOT authorize a person to practice
before IRS
• Durable Power of Attorney – Must also have a
Form 2848 to insure entry in CAF
• Question 23 and Question 24
43
Question 23
With regard to the Centralized Authorization File (CAF)
number on powers of attorney, which of the following is
true?
a. powers of attorney that relate to specific tax periods,
or to any other federal tax matter such as application
for an employee identification number, will be entered
into the CAF system
b. a CAF number is an indication of authority to practice
before the Internal Revenue Service
c. the fact that a power of attorney cannot be entered
into the CAF system affects its validity
d. a power of attorney that does not include a CAF
number will not be rejected
44
Question 24
A Centralized Authorization File (CAF) number may
be issued to which of the following?
a. an attorney licensed by the State of Texas
who represents taxpayers before the IRS
solely at IRS offices in Texas
b. an attorney licensed by the State of Texas
who files powers of attorney at the Austin
Service Center
c. a financial advisor named as a designee in a
tax information authorization
d. all of the above
45
Topic 5
Administrative
Proceedings for
Complaints Against
Enrolled Agents
46
5A – Enrollment – Disreputable
Conduct
• Disciplinary Action – for disreputable conduct
• Disreputable Conduct – Includes criminal offense,
false info, unlawful soliciting, failure to file or pay
tax, bribe IRS, embezzlement, disbarred, aided
suspended practitioner, false opinion,
contemptuous conduct with IRS, & failure to file his
or her own tax return (new in 2014 – next slide)
• Enrollee – Has obligation to inform IRS of Circular
230 violation, unless request violates confidentiality
or is of doubtful validity
• Question 25 and Question 26
47
5B - Practitioner Failure to File
His or Her Own Tax Returns
• Failure to Comply With Own Tax Obligations –
Now included in the Circular 230 definition of
“willful misconduct” by a practitioner
• Definition of “Failure to Comply” – Either:
1. the practitioner fails to file an annual return
for four out of the five preceding years, or
2. (2) fails to file a return required more
frequently than annually (e.g. Form 941) for
five of the seven preceding periods.
Question 25
Sam is an enrolled agent and a partner in the firm of Taxes-R-Us,
LLP. One of Sam’s former partners is under investigation by the
Office of Professional Responsibility for disreputable conduct. Sam
has been asked by the Office of Professional Responsibility to
provide information regarding his former partner. Sam must provide
all the information requested unless:
a. He has credible evidence that Sam is not guilty of the
disreputable conduct.
b. He believes in good faith and on reasonable grounds that the
information requested is privileged or that the request is of
doubtful legality.
c. The partnership agreement prohibits him from providing the
information. The conduct in question relates to one of Sam’s
clients.
d. The conduct in question relates to one of Sam’s clients.
49
Question 26
An enrolled agent may be disbarred or suspended
from IRS practice for which of the following conduct:
a. criminal conviction of an offense under the
Internal Revenue Code
b. misappropriation of funds received from a
client for the purpose of tax payments
c. disbarment or suspension from the practice
as an attorney, CPA, accountant, or actuary
d. all of the above
50
5C Complaints Against EAs
• IRS or Others – File complaint to the Director of
the Office of Professional Responsibility (OPR)
• OPR – Either reprimand or institute proceedings
(OPR is sole arbiter in disputes)
• Complaint – Describes (mail or personally) an
allegation, enrollee response within 15 days
Practitioner – Responds in writing to each specific
complaint (default if not), may appear in person or
with rep (does not have to be enrolled)
• OPR – Maintains roster of disbarred or suspended
practitioners and appraisers
• Question 27 and Question 28
51
Question 27
How is a proceeding for violation of the regulations in Circular 230
instituted against an attorney, certified public accountant, enrolled
agent, or enrolled actuary?
a. An aggrieved taxpayer files a petition with the U.S. Tax
Court stating a claim against the attorney, certified public
accountant, enrolled agent, or enrolled actuary.
b. The Commissioner of the IRS files a complaint against the
attorney, certified public accountant, enrolled agent, or enrolled
actuary with the U. S. Tax Court.
c. The Director of OPR signs a complaint naming the attorney,
certified public accountant, enrolled agent, or enrolled actuary,
and files the complaint in the Director’s office.
d. The Secretary of the Treasury files a complaint against the
attorney, certified public accountant, enrolled agent, or enrolled
actuary in the United States District Court for the District of
Columbia.
52
Question 28
Josephine Jones, an enrolled agent, received a compliant from the
Office of Professional Responsibility. Select the statement below
that is correct with respect to the contents of the answer that
Josephine will file in rebuttal to the complaint.
a. Josephine may only state a general denial of the allegations.
b. Josephine must specifically admit or deny each allegation set
forth in the complaint, and may not state that she is without
sufficient information to admit or deny a specific allegation.
c. Josephine may deny a material allegation in the complaint
even though she knows it to be true.
d. Josephine must specifically admit or deny each allegation set
forth in the complaint, except that she may state that she is
without sufficient information to admit or deny a specific
allegation.
53
5D Enrollment – Hearing on
Suspension or Disbarment
• Adm. Law Judge – default if TP not there
• Each Party – Submits proposed findings & concl
• ALJ Decision – disbar/suspend/reprimand or
dismissal; findings/conclusions filed with Director
of OPR; notice to IRS personnel
• Appeals- Within 30 days by either party to
Treasury, other party has 30 days to reply, final
decision by Sec. of Treasury
• Disbarred – Apply with OPR only after 5 years;
may prep returns during 5 yrs, but not represent
• Questions 29, 30, 31 and 32
54
Question 29(a)
John Jones prepared a return for a client that contained
a frivolous position that could not be defended under
any circumstances. The examiner who conducted the
examination referred Mr. Jones to the Office of
Professional Responsibility. After all procedural
requirements had been met, the Office of Professional
Responsibility filed a complaint against John Jones.
Which statement below is correct with respect to the
hearing that will take place for the complaint filed
against Mr. Jones?
(continued on next page)
55
Question 29(b)
a. An administrative law judge will preside at the hearing on a
complaint filed for the censure, suspension, or disbarment
of a practitioner or disqualification of an appraiser.
b. A request by a practitioner or appraiser that a hearing in a
disciplinary proceeding concerning him or her be public,
and that the record of such disciplinary proceeding be made
available for inspection by interested persons may be
granted by a United States District Court judge.
c. The United States District Court judge assigned to the case
will determine the location of the hearing.
d. If either party to the proceeding fails to appear at the
hearing, after notice of the proceeding has been sent to him
or her, the party will be deemed to have waived the right to
a hearing, and the United States District Court judge may
make his or her decision against the absent party by default.
56
Question 30
After a decision has been made on a complaint filed by the Office of
Professional Responsibility (OPR), the practitioner or OPR may appeal
the decision. Which statement is correct with respect to filing an
appeal of the decision?
a. Within 30 days from the date of the District Court Judge’s
decision, either party may appeal to the Secretary of the
Treasury, or his or her delegate.
b. Within 45 days from the date of the District Court Judge’s
decision, either party may appeal to the Secretary of the
Treasury, or his or her delegate.
c. Within 30 days from the date of the Administrative Law Judge’s
decision, either party may appeal to the Secretary of the
Treasury, or his or her delegate.
d. Within 45 days from the date of the Administrative Law Judge’s
decision, either party may appeal to the Secretary of the
Treasury, or his or her delegate.
57
Question 31
A practitioner who is disbarred by the Office of Professional
Responsibility may seek reinstatement after:
a. 1 year
b. 2 years
c. 4 years
d. 5 years
58
Question 32
The Director of Practice has documentation that an
enrolled agent has violated the law or regulations
governing practice before the IRS. He or she may:
a. reprimand such person
b. institute proceedings for disbarment
c. institute proceedings for suspension
d. all of the above
59
5E Assistance From
Disbarred/Suspended Persons
• Assistance From D/S Person– not allowed (knowingly),
either directly or indirectly
• EA – May not accept employment from a D/S person
• Former Gov’t Employee – EA may not accept assistance if
this person violates Circular 230 rules on separation from
service (e.g., old cases)
• Question 33
60
Question 33
Which of the following acts performed by an attorney, CPA, or
enrolled agent is not prohibited by Section 10.24 (assistance from
disbarred or suspended persons and former IRS employees) of
Circular 230?
a. accepting employment as an associate of a person
disbarred from practice before the IRS
b. preparing the tax return of an individual suspended or
disbarred from practice before the IRS
c. accepting assistance from a former government employee
where the provisions of Section 10.26 (practice by former
government employees, their partners and their associates)
of Circular 230 would be violated
d. employing a person disbarred from practice before the IRS
61
Topic 6
Electronic Filing –
Special Issues
62
6A Electronic Filing (EF) –
Business Filing
• EF – Required if partners > 100
• Form 941 –EF or Phone (Telefile Tax Rec)
• EFTPS – Payments may be direct, financial institutions, or
same day
• Form 8633 – EF Application, EFIN # received
• Required – Each “principal” or “responsible official” must
register w/ IRS (website)
63
6B Electronic Filing (EF) –
Paying Tax
• Authorized IRS e-file Provider – Electronic Return
Originator (ERO), Intermediate Service Provider
(ISP), transmitter, software developer, or reporting
agent
• Removal From EF – if no efile for 2 years (60 days
to respond)
• 30 Days to Appeal – For denied applicants (2nd)
• Pay Tax – Direct debit, Credit card, check,
installment agreement request
64
6C Electronic Filing – Signatures
• E-file Providers (except software) – Are tax preparers
Security & Privacy Stds. – (1) external validation cert.,
(2) external vulnerability scan, (3) privacy & safeguard
policies, (4) web challenge response test, (5) public domain
name reg., and (6) reporting security incidents
• Nonstandard Form Code – entered for altered W-2’s
• TP Signature – Signed electronically by self-select (must
be 16) or practitioner PIN methods (Form 8879)
• Paper Documents – Attach to Form 8453, e.g., forms
for Powers of Attorney, Change of Accounting Methods,
Noncash Charitable Contributions, etc.; must be file within
3 days of acknowledgement of receipt of electronic return
• Question 34
65
Question 34
Samantha Sharp, an enrolled agent, prepares and electronically files
Form 1040 tax returns. Samantha prepared the 2013 return for Tom,
her client. Samantha signs the return electronically, and also prepares a
Form 8453 for required attachments. On March 1 Samantha
electronically filed Tom’s return, which was a refund return. On March 3,
Samantha received acknowledgement from the IRS that Tom’s return
had been accepted. By what date must Samantha mail the executed
Form 8453 and related attachments to the IRS?
a. by March 13 (within three (3) business days after Tom receives his
refund)
b. by March 5 (within five (5) business days after the return was
electronically filed)
c. by March 6 (within three (3) business days after the return is
acknowledged as accepted by the IRS)
d. by March 31 (all Forms 8453 signed during the month must be
sent to the IRS by the last day of the month)
66
6D Electronic Filing – Sanctions
• Self-Select Method – Requires date of birth, prior-yr. AGI
• ERO – Provides paper copy & 8453 to TP, mail 8453 within
3 days, retains copies until end of yr., informs TP direct
deposit not rescinded
• Violations of E-file Rules – Warning/sanction (sanctions
effective 30 days after warning)
• Levels of Sanctions – One (little impact, letter or warning),
Two (adverse impact, restrict or suspend) or Three
(significantly adverse, suspend current year plus 2 years,
then expulsion)
• Question 35
67
Question 35
A 2013 income tax return filed in 2014 can be e-filed
only if the tax return is signed electronically using:
a. a Form 8453 signed by the taxpayer
b. the self-select PIN method with a
signature by the taxpayer
c. the practitioner PIN method with a
signature by the ERO
d. either b. or c.
68
6E Electronic Filing – Special
Returns
• Returns Ineligible for E-file – Prior years, fiscal years,
amended, M/S in community-property states,
nonprocessible forms, certain TINs (900-999),
rare/unusual
• Returns With Substitute W-2, W2-G, or Form 1099-R –
Cannot be transmitted until February 15th
• Question 36
69
Question 36
Some returns are not eligible for the Internal
Revenue Service electronic filing program. Which
item listed below is generally eligible to be filed
through the Internal Revenue Service electronic
filing program?
a. Form 1040 returns
b. tax returns for prior years
c. fiscal year tax periods
d. amended tax returns
70
6F Electronic Filing – Rejected
Returns
• If EF rejected – Notify TP within 24 hours with the reject
codes
• Signatures for Correction - If less than $50 income or
less than $14 difference, no signatures necessary)
• Changes – Normally corrected & transmit; new Form
8453 required only if substantive change
• Question 37
71
Question 37
If a taxpayer’s return is rejected by the IRS and
the ERO cannot fix the problem and re-transmit
the return in the time prescribed, the EOR must
make reasonable attempts to notify the taxpayer
of the reject. How long from the time the return is
rejected does the EOR have to try to contact the
taxpayer?
a. 12 hours
b. 24 hours
c. 48 hours
d. one week
72
6G Electronic Filing –
Advertising
• General Adv. Restrictions – Most apply to EF also
• Broadcast Commercials – Keep copy until end of
year following the last broadcast
• E-File Promotional Kit – Furnished by IRS, may be
incorporated into ads
• Acceptable Title – “Authorized IRS e-file Provider”
• If Cooperative Project – List all parties
• Question 38
73
Question 38
Which of the following applies to radio or
television broadcasting regarding advertisement
of electronic filing?
a. the broadcast must be preapproved by
the IRS
b. the broadcast must be prerecorded
c. the prerecorded broadcast advertisement
must be kept until the end of the calendar
year following the last broadcast
d. b. and c.
74
6H Electronic Filing – Refund
Anticipation Loans
• RALs – Loan to TP from lender based on antici-pated
refund: IRS not involved in any manner
• ERO – Must explain (int. bearing), include all RAL indicators
on return, may disclose financial information only with TP
written consent
• ERO & Lending Institution – May not be related
• Banks – In a settlement with the U.S. Government, banks
generally agree not to offer RALs after 2012
• Fees – ERO may charge flat fee to assist, identical for all,
no sharing fees w/ lender (other than flat fees lenders
charge clients for RALs)
• Question 39
75
Question 39
Which of the following statements applies to refund application
loans?
a. a refund application loan is money borrowed by the
taxpayer from the U.S. government
b. a refund application loan indicator must be included in the
electronic return data that is transmitted to the IRS
c. if the anticipated tax refund is not received after a refund
application loan is made, the loan is automatically
subtracted from the subsequent years’ refunds until paid
d. the Treasury Department is liable for any loss suffered by
taxpayers, electronic return originators, and financial
institutions resulting from reduced refunds or direct deposits
not being honored if documentation is provided that correct
procedures were followed
76
6I Electronic Filing – Fee
Structure
• ERO Fees – May not base fees on percentage of refund
or on amounts on return
• Direct Deposit – No separate fee for this
• Refunds – May not be direct deposited to credit card
accounts
• ERO Caution – Advise TP that some financial institutions
do not permit deposit of joint refunds into individual
accounts
• Question 40
77
Question 40
George knew that he had a substantial refund for tax year because he
had worked at a high salary early in the year with extra withholding. He
was unemployed the rest of the year. He wanted to electronically file the
return with direct deposit to expedite the refund. The Fix Tax Co. stated
that its fee would be 10% of the refund for preparation and filing, with
no additional charge for direct deposit. The No Tax Co. stated that its
fee would be $35 regardless of the refund, but that it charged a $10 fee
for direct deposit request. Which of the following is correct?
a. George cannot electronically file because he is not employed at
the end of the year
b. the Fix Tax Co. may charge a percentage of the refund because it
does not charge for direct deposit
c. the No Tax Co. may charge the $10 direct deposit fee because its
$35 filing and preparation fee is a flat fee
d. neither the Fix Tax Co. nor the No Tax Co. is in compliance with
electronic filing fee restrictions
78
Topic 7
IRS Audits and
Notices of
Deficiency
79
7A IRS Audits – Transfers to
Another District
• General Audit Rule – Audit performed in taxpayer’s
district
• Exception – If return can be examined more quickly and
conveniently in another district (e.g., location of TP’s
books and records), then transfer is allowed
• Question 41
80
Question 41
Under which of the following conditions can an examination of an
income tax return be transferred to another IRS district?
a. James lives in Maryland and his accountant is located in New
York. His records are in Maryland, where he works. James
wishes a transfer of his case from Maryland to New York for
the convenience of his accountant.
b. Donna lives in Ohio. Her books & records are in Ohio, where
her business is located. On occasion she works in Kentucky.
She wants a case transfer to Kentucky for her convenience.
c. Herb lives in Washington and travels to California on business
two months at a time. His records are in New York, where his
business is located. Herb wants his case transferred to
California to coincide with a business trip there.
d. Tom lives in New Jersey. His books and records are in
Delaware, where his business is located and where he works.
Tom wishes to transfer the return examination to Delaware.
81
7B IRS Audits – Repetitive
Audits
• Repetitive Audits – When TP examined for the same
items in either of two previous years and no change in
liability
• TP – May contact IRS to request that the exam be
discontinued
• TCMP Returns – Not covered by this rule -Taxpayer
Compliance Measurement Prog.
• IRS – Always has the right to reopen exam
• Question 42
82
Question 42
If your tax return was examined for the same items
in either of the two previous years and no change
was proposed to your tax liability:
a. you may ignore the examination notice
b. you should call the Taxpayer Advocate Office
and file a complaint
c. you should call the IRS as soon as possible to
see if the examination should be discontinued
d. you should write a letter to the service center
and complain that the revenue agents are
harassing you
83
7C IRS Audits – Recordings and
Taxpayer Rights
• Recordings – 10-day advance notice to other party,
provide own equipment
• TP – May represent self, or may bring enrolled
practitioner or nonenrolled return preparer
• IRS – Provide Pub. 1 (Rights) to TP before audit
• Info From 3rd Parties – IRS must give prior notice
to TP unless criminal case, in jeopardy, possible
reprisal, or TP consent
• Taxpayer Assistance Order to TP – May be issued
from TP Advocate Office, if sign. hardship
• Question 43
84
Question 43
The IRS has begun an examination of Mark’s 2013 income
tax return. The IRS would like to ask Mark’s neighbors
questions with respect to that examination. There is no
pending criminal investigation into the matter, and there is
no evidence that such contact will result in reprisals against
the neighbors or jeopardize collection of the tax liability.
Before the IRS contacts the neighbors, the IRS must:
a. provide Mark with reasonable notice of the contact
b. make an assessment of Mark’s tax liability
c. ask the court for a third-party recordkeeper subpoena
d. mail Mark a statutory notice of deficiency
85
7D IRS Audits – Interest
Charges
• Interest – Due on deficiency & penalties from due
date of return until notice issued
• No Add’l Interest – If paid w/i 10 days after receipt
of notice (21 days if < $100,000)
• TP Deposit – Stops interest on that amount only
• Amounts Sent by TP – Treated as payment
against deficiency unless written notice to treat as
a bond (deposit); if “payment” sent the full
deficiency, no notice mailed (and NO Tax Court)
• IRS Abatement – For errors, delays, etc., TP must
file Form 843 (global netting rule available)
• Question 44
86
Question 44
Mr. Shell’s 2013 income tax return was examined by the Internal
Service and he agreed with the proposed changes. He has several
ways by which he may settle his account and pay any additional tax
that is due. All of the following statements with respect to this
situation are correct except:
a. If he pays when he signs the agreement, the interest is
generally figured from the due date of the return to the date of
his payment.
b. If he does not pay the additional tax when he signs the
agreement, he will receive a bill. The interest on the additional
tax is figured from the due date of the return to the billing date.
c. If the bill is delayed, he will not be billed for additional interest
for more than 60 days from the date he signed the agreement.
d. If he pays the amount due within 10 days of the billing date, he
will not have to pay more interest or penalties.
87
7E Statutory Notice of
Deficiency – Basic Procedures
• 30-Day Letter & Proposed Notice of Deficiency with offer of conference on proposed audit adj.
• Requirements for Appeal – If deficiency is:
– > $2,500 – Need only letter explaining reason
– <= $2,500 – No letter/protest needed; notification only
– > $25,000 – Formal written protest required
• 90-Day Letter and Statutory Notice – To TP if no
response to 30-day or no settlement—90 days to
pay or file to Tax Court (issued w/i 3 yrs due)
• If Paid After Notice Rec’d – Tax Court still option
• Question 45
88
Question 45
The statutory notice of deficiency is also known as:
a. a 30-day letter, as the taxpayer has 30 days from the
date of the letter to file a petition with the Tax Court
b. a 90-day letter, because the taxpayer generally has 90
days from the date of the letter to file a petition with the
Tax Court
c. an Information Document Request (IDR), because the
taxpayer is asked for information to support its
position regarding liability for tax
d. a notice and demand, because the taxpayer is put on
notice that the tax liability is due and owing
89
7F Statutory Notices of
Deficiency and Court Options
• Tax Court – Only option TP does not have to pay
first (but TP must file petition within 90 days after
receiving the Statutory notice)
• District Court or Court of Claims – TP must pay first
and file claim for refund (TP may ask that claim be
immediately rejected)
• Once Claim Is Denied (or if no IRS Action in 6
months) – Suit may be filed in U.S. District Court or
Claims Court no later than 2 years after IRS notice
of rejection
• Question 46 and Question 47
90
Question 46
If a taxpayer with a notice of deficiency wishes his/her
case heard by a court before paying the tax, which court
would the taxpayer petition?
a. United States Tax Court
b. United States Claims Court
c. United States District Court
d. United States Court of Appeals
91
Question 46
Which of these statements on a statutory notice of deficiency is true?
a. If you do not respond to the 30-day letter or if you later do not
reach an agreement with an Appeals Officer, the IRS will send you
a 60-day letter, also known as a notice of deficiency.
b. If you receive a 30-day letter and send in an amount which is the
same as or more than the proposed liability, the IRS will not send
you a notice of deficiency. If the IRS does not send you a notice of
deficiency, you cannot take your case to the Tax Court.
c. If addressed to you outside the United States, the notice of
deficiency provides 200 days to either agree to the deficiency or to
file a petition with the Tax Court to re-determine the deficiency.
d. If you consent, the IRS can withdraw any notice of deficiency.
After the notice is withdrawn, you can file a petition with the Tax
Court based on the withdrawn notice. The IRS may later issue a
notice of deficiency for a greater or lesser amount.
92
Topic 8
IRS Appeals
Procedures and
Court Options
93
8A IRS Appeals Procedures and
Written Protest Requests
• Appeals Conference – Will be set up if TP responds
within 30-day letter period
• Protest – Required if case > $25,000 (or has p’ship
or S Corp.); need sworn statement w/ signature
(TP or rep)
• If Case > $2,500 <= $25,000 – May be designated
“small case”, requires letter with reasons for
position (otherwise, protest req.); if < $2,500,
notification only
• TP – May represent self, use rep, or preparer
• Question 48 and Question 49
94
Question 48
Sam is the sole shareholder in an S corporation. The
S corporation was examined, and the IRS proposed
a $20,000 deficiency. What must Sam do to request
an appeals conference?
a. file a formal written protest
b. pay the deficiency
c. hire a federally-authorized tax practitioner to
represent the S corporation
d. nothing, because he is eligible for the small
case procedure
95
Question 49
With respect to preparation of a case for IRS Appeals, the following
statements are correct except:
a. A brief written statement of the disputed issue(s) is not required if
the increase or decrease in tax, including penalties or refund,
determined by exam exceeds $2,500 but is less than $25,000.
b. If the proposed increase or decrease in tax, including penalties or
claimed refund, is more than $25,000, the taxpayer must submit a
written protest of the disputed issues, including a statement of
facts supporting the taxpayer’s position on all disputed issues.
c. A declaration that the statement of facts is true under penalties of
perjury must be added and signed by the taxpayer.
d. If a representative submits the protest for the taxpayer, he/she
must submit a declaration stating that he/she submitted the protest
and accompanying documents and whether he/she knows
personally that the statement of facts in the protest and
accompanying documents are true and correct.
96
8B IRS Appeals Procedures –
Waivers and Burden of Proof
• IRS Appeals – Not necessary for court
• Notice of Deficiency – May not appeal on religious,
political, or conscientious grounds
• TP – May request to waive 30-day period, and ask
that claim be rejected (save time)
• Burden of Proof – TP may ask Court to shift to IRS
on any factual issue if “credible evidence” offered
(records, cooperative, and net worth < $7 million if
corp., p’ship., or trust)
• Question 50 and Question 51
97
Question 50
The IRS has the burden of proof for any factual issue in a
court proceeding if the taxpayer has:
a. provided credible evidence relating to the issue in a
court proceeding
b. complied with all substantiation requirements and
maintained all required records
c. cooperated with all reasonable requests by the IRS for
information regarding the preparation and related tax
treatment of any item reported on the return
d. all of the above
98
Question 51
Gina disagrees with the results of an IRS examination of her
tax return. She pursued the appeals procedures and
disagreed with the appeals officer. If she wishes to appeal
further, Gina may:
a. request a conference with a new appeals officer in a
different district
b. wait for notice of deficiency, not pay the tax, and
petition the District Court
c. wait for a notice of deficiency, not pay the tax, and
petition the Tax Court
c. submit a revised written protest that outlines the
issues and authority for the position taken
99
8C U.S. Tax Court – Small Case
Procedure
• If Deficiency < $50,000 – Taxpayer may ask for TC Small
Case Division ($60 fee)
• Small Case – Legal representative is not required,
evidence rules relaxed, and judge is usually an
experienced lawyer
• No Appeal – If TP loses the case
• Figure 1
• Question 52
100
Figure 1
Court Options in Contesting A Tax Finding
U.S. Supreme
Court
U.S. Circuit Court of
Appeals
U.S. Tax
Court
U.S. District
Court
U.S. Federal Circuit
Court of Appeals
U.S. Court of
Federal Claims
Small Cases
Division
101
Question 52
Which statement is not correct concerning the small tax
case procedure of the Tax Court?
a. the disputed tax must be $50,000 or less for any
one year or period
b. the decision is final
c. no appeal is available for cases decided under this
procedure
d. the tax must have been assessed and paid before
the Tax Court proceedings
102
8D U.S. Tax Court – Basic
Procedure
• TC – 19 judges, appointed to 15-yr. terms
• Characteristics – Do not have to pay first, no jury,
appeals to TP’s U.S. Circuit; case heard by
Associate Judge, refers to Chief Judge, who may
submit to all 19 judges (en banc) for review
• Once Case is Docketed – TP must have a lawyer or
someone who passed TC exam (no power of
attorney needed); EA does not qualify
• Employment Tax Cases – TC hears only status
cases (employee or IC), various requirements
• Question 53
103
Question 53
A disagreement with the Internal Revenue
Service can be taken to the United States Tax
Court if:
a. it pertains to income tax
b. a statutory notice of deficiency has been
issued
c. a petition is filed within 90 days from the
date a statutory notice of deficiency is
mailed (150 days if it is addressed to the
taxpayer outside the United States)
d. all of the above
104
8E U.S. Tax Court Decisions
• TC Chief Judge – Labels each decision as either
– Regular Decision (law point, pub. by Gov’t.)
– Memorandum Decision (facts, not published)
• Board of Tax Appeals (BTA) – Pre-42 TC
• Acquiescence – IRS may announce it will abide by
a unfavorable court decision (Rev. Rul.)
• Nonacquiescence – IRS may announce it will
continue to contest unfavorable dec. (Rev. Rul.)
• Acq/Nonacq Policy – Now applies to all courts
• Question 54
105
Question 54
Which of the following statements is not correct
regarding a memorandum decision of the Tax
Court?
a. it is thought to be of little value because it
is fact-based and/or has been litigated
before
b. it is not published by the U.S. Government
Printing Office
c. it may not be appealed
d. all of the above are characteristics of a
memorandum decision
106
8F U.S. District Court and U.S.
Court of Federal Claims
• All Courts – Either party may appeal, stare decisis
rule (“let the decision stand”), dicta issued
(explanatory fact), may overturn Regulations, TP
has 2 years to file suit in DC or FC
• DC – 13 federal circuits, 94 districts; pay first, court
hears all types of cases, jury trial for facts (not
law), appeal to appropriate Circuit
• FC – National court, 16 judges, hears all types of
claims, appeal to CA for Fed. Circuit, no jury
• Figure 2
• Question 55 and Question 56
107
Figure 2
U.S. District Courts System
108
Question 55
If a taxpayer and the IRS still disagree after an appeals
conference, the taxpayer can take his case to:
a. United States Tax Court
b. United States Court of Federal Claims
c. United State District Court
d. any of the above
109
Question 56
A taxpayer may choose to pay a disputed
deficiency and then file a claim for refund. If the
claim is denied by the Internal Revenue Service or
if no decision is made in six months, the taxpayer
may petition:
a. the United States Tax Court
b. the Court of Appeals
c. either the United States District Court or
the Court of Appeals
d. either the United States District Court or
the United States Claims Court
110
8G U.S. Courts of Appeal and the
U.S. Supreme Court
• Circuit Courts of Appeal – 13 circuits (12
geographical, plus CA for Federal Circuit); 3 judges
will either affirm, reverse or remand; not required
to follow other circuits; appeal to U.S. Supreme
Court
• U.S. Supreme Court – 9 judges appointed for life, 4
judges req. for granting certiorari, few tax cases
(circuits conflict, or novel tax issue)
• Dicta – Statements of fact (not precedent)
• Figure 3
• Question 57 and Question 58
111
Figure 3
U.S. Circuit Courts of Appeal
112
Question 57
Which of the following statements is correct with respect to court
petitions and court appeals?
a. A taxpayer may petition the U. S. Tax Court for a judicial
determination of tax liability within a specified period (usually 90
days after receiving a notice of deficiency or paying the tax.
c. Both the taxpayer and the government may appeal decisions of
the Tax Court or District Court to the appropriate Circuit Court
of Appeals.
c. Decisions of the Courts of Appeals and some decisions of
other federal courts cannot be reviewed by the U. S. Supreme
Court.
d. If a taxpayer’s claim for refund is denied by the IRS or if no
decision is made by the IRS in six months, the taxpayer may
petition either the U. S. Claims Court or the U. S. Circuit Court
of Appeals having jurisdiction over the taxpayer.
113
Question 58
Mr. G does not agree with the findings of the Tax
Court and his case was not handled under the “small
tax case” procedure. Which one of the following
courts would he appeal to first?
a. Court of Appeals
b. U.S. Court of Appeals for the Federal Circuit
c. U.S. Supreme Court
d. Claims Court
114
Topic 9
Tax Preparers –
Definition and
Possible Penalties
115
9A Income Tax Preparer –
Definition
• ITP – Anyone who prepares or hires one to prepare
for compensation a tax return, substantial part or
return, or refund claim
• Tax Returns – Includes income, employment, gift,
estate, generation-skipping, and tax exempt
• Includes – Employer, employee, S/E person, but
normally not a fiduciary
• “Substantial Portion” – Does not include amt. <
$2,000 or <$100,000 and < 20% GI
• Signer of Return – Not automatically ITP
• Question 59
116
Question 59
Which of the following statements is false regarding tax
return preparers?
a. only a person who signs a return as the preparer may
be considered the preparer of the return
b. unpaid preparers, such as volunteers who assist lowincome individuals, are not considered to be preparers
for purposes of preparer penalties
c. an employee who prepares the return of his/her
employer does not meet the definition of a tax return
preparer
d. the preparation of a substantial portion of a return for
compensation is treated as the preparation of that
return
117
9B Identifying Preparers
• Employer of Person Preparing Return – Is automatically
an income tax preparer
• Employee – Is not an ITP for purposes of preparer
penalties
• ITP & Supervisory Advisor – May be subject to preparer
penalties (below)
• Questions 60 and Question 61
118
Question 60
Which of the following would not be a tax return preparer?
a. someone who employs one or more persons to
prepare for compensation all or a substantial portion
of any tax return under Subtitle A of the Code
b. someone who prepares a substantial portion of a
return or claim for refund under Subtitle A of the Code
c. someone who prepares an information return for a
person or entity under Subtitle A of the Code
d. someone who prepares, as a fiduciary, a return or
claim for refund for any person
119
Question 61
Which one of the following individuals is not considered a tax
return preparer?
a. Alfred, who prepared, for compensation, Schedule E
for a federal income tax return. The Schedule E
showed a net loss of $(10,000) and the adjusted gross
income was $40,000.
b. Shirley, who gave an opinion, for compensation,
regarding the tax implications of an investment
package a company was contemplating.
c. Larry, who prepared a tax return for a free paint job for
his car.
d. Sue, who prepares income tax returns for
compensation, but does not have a college degree.
120
9C Preparer Penalties – Sec.
6694(a) Understatement of Tax
• Penalty – For larger of (1) $1,000 or (2) 50% of income
from preparation for each occurrence for any tax
understatement due to lack of substantial authority
• Substantial Authority – Having at least a 40% chance
of being sustained in audit/court (Same requirement applies
to taxpayer for avoiding personal penalties); 50% required
for reportable positions & tax shelters
• Waiver of Penalty – If position is “reasonable” (20-25%
chance?) and fully disclosed on return
• Imposition – For poor inquiries, negligence, no due care
• Figures 4 and 5
• Question 62 and Question 63
121
Figure 4
Substantial Authority as Defined in Reg. §1.6662-4(d)(3)(i)
1.
2.
3.
4.
5.
The Internal Revenue Code and other statutes
Regulations (final, temporary, and proposed)
Court cases
Tax treaties
Statements of Congressional intent, including:
House Ways and Means Committee Reports
Senate Finance Committee Reports
Joint Conference Committee Reports
Congressional Record
Joint Committee on Taxation Report (the “Blue Book”)
6. Administrative pronouncements, including:
Revenue Rulings
Revenue Procedures
Private Letter Rulings (PLRs)
Technical Advice Memoranda (TAMs)
Actions on Decisions (AODs)
General Counsel Memoranda (GCMs)
Notices, Press Releases, and similar documents
122
Figure 5
Examples – Evaluating Tax Authority
Example: Tanya Flesher is preparing the 2014 income tax return of Willis McGee. Willis has taken a
questionable deduction on a repair vs. capitalization issue, and Tanya is evaluating the likelihood of
success should the issue be contested by the IRS or eventually go to court. Tanya can accept the
taxpayer’s position in the following situations:
 Tanya concludes that there is substantial authority for the position: at least a 40% or more
chance for success should the issue be challenged, and thus no disclosure of the position on the
return is necessary;
 Tanya concludes that there is a reasonable basis for success (at least 20%-25% chance for
success) should the issue be challenged in that one or more authorities support the issue, and the
position is disclosed prominently on the return; or
 The position relates to either a tax shelter or a reportable position as identified by the IRS, and
Tanya concludes that there is a “more likely than not (MLTN)” chance for success (greater than
50%) should the issue be challenged, and the position is disclosed prominently on the return.
Question 62(a)
Circular 230 Sec. 10.34 discusses standards for advising
clients with respect to tax return positions and for preparing
or signing returns. Which of the statements below is true?
a. A practitioner may not sign a tax return as a preparer
if the practitioner determines that the return contains a
position that does not have substantial authority for
being sustained on its merits (the realistic possibility
standard) unless the position has a reasonable basis
of success and is adequately disclosed
b. A practitioner advising a client to take a position on a
tax return, or preparing or signing a tax return as a
preparer, must inform the client with respect to the
position advised, prepared, or reported.
(continued on next page)
124
Question 62(b)
c. A practitioner advising a client to take a position on a
tax return, or preparing or signing a tax return as a
preparer, generally may rely in good faith without
verification upon information furnished by the client.
The practitioner may not, however, ignore the
implications of information furnished to or actually
known by the practitioner, and the information
furnished appears to be incorrect, inconsistent with an
important fact or another factual assumption, or simply
incomplete.
d. All of the above.
125
Question 63
An enrolled agent can recommend a position on the client’s
2013 return as long as the position is:
a. reasonable (supported by one or more tax
authorities)
b. not frivolous
c. adequately disclosed
d. all of the above
126
9D Preparer Penalties – Sec.
6694(b) Willful Understatement
• Penalty – For larger of (1) $5,000 or (2) 50% of income
from preparing the return for reckless disregard of rules or
willful understatement of tax
• Required – Intentional disregard of TP’s facts & information,
burden on preparer
• Imposition of Penalty – On actual preparer and not
employer, no statute of limitations
• Both Penalties – Unrealistic position and intentional
disregard may apply at same time; willful understatement
penalty reduced by any unrealistic position penalty
• Questions 64 and 65
127
Question 64
Bernard is a tax return preparer. While preparing a tax return
for a client, Bernard determines the client owes a substantial
amount of tax. In order to generate a refund for the client,
Bernard substantially overstates itemized deductions and
expenses claimed on the Schedule C. Bernard is subject to a
minimum penalty of at least:
a. $5,000 or, if greater, 50% of the income from the
engagement
b. $1,000 or, if greater, 50% of the income from the
engagement
c. $250
d. $100
128
Question 65
Delores is a tax return preparer. While preparing a return for a client, she
knowingly takes an unreasonable position that she does not disclose. She
also intentionally disregards rules and regulations. The position Delores
takes causes an understatement of her client’s liability. With regard to
the penalties that may be assessed against Delores, which of the
following statements is true?
a. only the penalty for understatement of liability due to unreasonable
positions may be assessed against Delores
b. only the penalty for willful or reckless conduct may be assessed
c. Delores must pay both the penalty for understatement of liability
due to an unreasonable position and the penalty for willful or
reckless conduct
d. Delores is liable for both penalties, but the penalty for willful or
reckless conduct will be reduced by the amount of the penalty for
understatement due to unreasonable positions
129
9E Tax Preparer Penalties – Sec.
6694 Payments by Preparers
• Preparer – May appeal 6694 assessments
• Appeals Procedure – Pay at least 15% of assessment
within 30 days of notice and file a claim for refund
• If Preparer Wins Appeal – Penalty will be abated and
refunded
• Question 66
130
Question 66
Which of the following statements is not correct in respect to
a penalty proposed pursuant to Code Section 6694?
a. The IRS must send a letter to the return preparer at
least 30 days before the statute of limitations expires.
b. After the IRS sends the return preparer a letter, that
preparer has 30 days to request further consideration.
c. If the IRS assesses either penalty, within 30 days the
preparer can either pay the entire amount and then file
for refund, or pay at least 15% of the entire amount
and then file a claim for the amount paid.
d. The preparer may bring suit in district court to
determine liability for the penalty if the claim is denied.
131
9F Tax Preparer Penalties –
Unauthorized Disclosures
• Civil Penalty - $250 per use ($10,000 maximum)
• Criminal Penalty – Reckless disclosure,
misdemeanor (up to 1 yr. prison, $1,000); preparer
definition much broader (e.g., clerk)
• Not Subject to Penalty – Code-required , client
permission, or court-ordered (not just subpoena)
• Client Death – Share info only with legal fiduciary
of the estate
• Question 67
132
Question 67
Which of the following situations describes a disclosure of tax
return information by a tax return preparer which would
subject the preparer to a penalty?
a. Grandfather’s tax information is made available to his
granddaughter to inform her she will be claimed as a
dependent on the grandfather’s return.
b. Employee of the tax return preparer makes corporate
return information available to shareholders.
c. After a client files for bankruptcy, the tax return
preparer provides a copy of the last return filed to the
court-appointed fiduciary without written permission.
d. None of the above.
133
9G Tax Preparer Penalties –
Earned Income Credit
• Due Diligence – In determining eligibility
• $500 Penalty – Each failure to exercise due diligence
with E/I credit compliance
• Penalty – Can be in addition to willfulness or
unreasonable position penalties
• Records – Preparer must retain eligibility checklist,
worksheet, info on TP providing information; retain for
each client using cr.
• Question 68
134
Question 68
When a prepared return claims the earned income
credit, which of the following is not true?
a. due diligence requirements apply
b. no special requirements apply to returns
claiming earned income credit
c. the preparer may be penalized $100 if no
attempt is made to determine eligibility for the
credit
d. the preparer must take additional steps to
ensure that a client is eligible for earned
income credit
135
9H Tax Preparers – Who Must
Sign the Return
• Primary Tax Return Preparer – Must sign (including
electronic signature); no facsimile, one individual treated as
preparer (one with primary responsibility for overall
accuracy, not math); a reviewing supervisor may sign (if OK
w/ TP)
• Signing Preparer - may represent TP at IRS if not EA
• Substitute – Sign if original preparer not available, if
thorough review of information & tax forms
• Signing – Preparer must sign before giving return to TP,
copy OK if signed by TP, sign Form 8453 if electronic (or
include signed copy)
• Question 69, 70 and 71
136
Question 69
Mr. K employs X, Y, and Z to prepare income tax returns for taxpayers.
X and Y collect the information from taxpayers and apply the tax laws.
The return forms are completed by a computer service. One day, when
certain returns prepared by X and Y were ready for their signatures, X
was out of town for two weeks and Y was out of the office for the day.
Which one of the following statements is correct?
a. Z may sign the returns prepared by X and Y if Z reviews the
information obtained by X and Y from the taxpayers and reviews
the preparation of the returns.
b. Z may sign the returns prepared by X if Z reviews the information
obtained by X from the taxpayers and reviews the preparation of
the returns.
c. Z may sign the returns prepared by Y if he reviews the information
obtained by Y from the taxpayers and reviews the preparation of
the returns.
d. X and Y must sign the returns that each one prepared.
137
Question 70
The duties in the preparation of Corporation XYZ’s income tax
return were assigned and completed as follows:
• Joe – Obtained the necessary information, applied to the tax law to
the information, and performed the necessary calculations.
• Sue – Joe’s supervisor reviews Joe’s work. In her review, Sue
reviews the information provided and the application of tax laws.
• Company A – A company tax service which takes the information
provided by Sue, verifies math accuracy, and prints the return.
• Pat – A partner in the firm where Joe and Sue work. Pat reviews the
return, the information provided, and applies this information to
XYZ’s affairs. Pat also verifies that the partnership’s policies have
been followed and makes the final determination.
Who is the preparer of XYZ’s return and is required to sign it?
a. Joe
b. Sue
c. Company A
d. Pat
138
Question 71
With regard to the requirements for preparers signing returns under Code
Section 6695, all of the following statements are correct except:
a. A $50 penalty is imposed on any preparer who does not inscribe
his and his employer’s identification number on the return.
b. If more than one preparer is involved in the preparation of the
return, the individual with primary responsibility for the overall
accuracy of the preparation of the return must sign it.
c. If a substitute preparer has first reviewed both the information
obtained by the original preparer and has reviewed the original
preparer’s preparation of the return, then the substitute preparer
may sign the return (assume the original preparer is available to
sign).
d. A facsimile signature stamp or gummed label will not satisfy the
signature requirement for individual income tax returns.
139
9I Tax Preparers – Penalty for
Failure to Sign a Return
• Preparer – Must sign return and provide a copy to the
taxpayer
• $50 Penalty – For failure to sign a return or claim as
required by Regulations
• $25,000 – Maximum total fine in one year
140
9J Tax Preparer Penalties –
Failure to Furnish Copies to TP
• Completed Copy – Must be furnished to TP no later than
when presented to TP for signature
• Penalty - $50 per failure, $25,000 maximum per year
• Reasonable Cause – May escape penalty
• Question 72
141
Question 72
When must an income tax return preparer provide a
copy of an income tax return to a taxpayer?
a. within 45 days after the return is filed,
including extensions
b. within 48 hours after the taxpayer requests a
copy of the income tax return
c. not later than the time the original return is
presented to the taxpayer for signature
d. none of the above
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9K Preparer Penalties – Failure
to Retain Copies or Records
• Copy of Return – Must be retained
• Alternative List – Preparer may instead retain a list (for 3
yrs) of name, ID number, and type of return for each
person’s return
• Penalty - $50 per failure, $25,000 max. per year
• Reasonable Cause – May escape penalty
• Question 73 and Question 74
143
Question 73
Identify the item below that is not accurate regarding preparer
retention of records.
a. The preparer must retain a completed copy of each return
or claim for refund prepared or retain a record, by list, card
file, or otherwise of information, as required by regulation,
about each return prepared.
b. The preparer must retain information about the preparer of
each return presented to a taxpayer for signature. This
information may be retained via retention of a copy of the
return or claim for refund, maintenance of a list or card file,
or otherwise.
c. The preparer must make the copy or record of returns and
claims for refund and record the individuals required to sign
available for inspection upon request by the district director.
d. None of the above.
144
Question 74
Jack, a return preparer, did not retain copies of all returns that he
prepared, but did keep a list that reflected the taxpayer’s name,
identification number, tax year, and type of return for all of his
clients. Which statement best describes this situation?
a. Jack is in compliance with the provisions of Code Section 6107
if he retains the list for a period of one year after the close of
the return period in which the return was signed.
b. Jack is in compliance with the provisions of Code Section 6107
providing he retains the list for a three-year period after the
close of the return period in which the return was signed.
c. Jack is not in compliance with Code Section 6107 since he
must retain copies of all returns filed.
d. Jack is not in compliance with Code Section 6107 since he has
not kept all the information required by the Code.
145
9L Tax Preparer – Failure to
Retain Employment Records
• Required – Retain a list of all persons employed by
TP to prepare returns/claims
• Retention – Keep for 3 years after next 7/1
• Info Req. – Name, ID #, Place of work
• Penalty - $50 per failure, $25,000 maximum yr.
• Reasonable Cause – May escape penalty
• Each Preparer – Must furnish their ID # and
employer ID # on each return prepared
($50/$25,000 fine for noncompliance)
• Question 75
146
Question 75
Which of the following is not true regarding the filing of
information returns concerning employees who prepare tax
returns?
a. annual listings of preparers, identification numbers,
and place of work are required for preparers who
employ others to prepare returns
b. the period for which the information return is required
is a 12-month period beginning July 1 of each year
c. no information return is actually required to be
submitted; a list is made and kept by the employing
preparer
d. information returns of income tax return preparers
must be maintained by the preparer for two years
147
9M Basics - Preparer Penalty for
Endorsing/Negotiating Refunds
• Power of Attorney – May be used by TP to authorize
representative to receive a tax refund check on his or her
behalf
• Preparer – Can NEVER be authorized to endorse or cash
check
• Circular 230 – Clear prohibition for attorney, CPA, EA
• $500 Penalty – For each violation (does not apply to deposit
of full amount in TP’s account by a bank)
• Preparer Options to Protest a Penalty –
– Request conference with agent, present evidence rebutting penalty
(may be sworn)
– Wait for penalty to be assessed and notice issued, pay at least 15%
within 30 days, then file a claim for refund
• Question 76
148
Question 76
If a penalty is proposed against a preparer that the preparer
does not agree with, what actions are available to the
preparer?
a. request a conference with the agent, and present
additional information and explanations showing that
the penalty is not warranted
b. wait for the penalty to be assessed and a notice and
demand statement to be issued, and then pay the
penalty within 30 days and file a claim for refund
c. wait for the penalty to be assessed and a notice and
demand statement to be issued, and then pay at least
15% of the penalty within 30 days and file a claim for
refund
d. any of the above
149
9N Penalty for Endorsing/
Negotiating Refund – Issues
• Tax Preparer – May receive the check and deposit the full amount for
the taxpayer, with a power of attorney
• Two New Circular 230 (2014) Restrictions on Negotiating Checks –
1. The prohibition on negotiating checks applies to any practitioner,
not just a practitioner who prepares returns (clients may not
negotiate a refund check to compensate for other practitioneroffered products)
2. The scope of “endorsing or otherwise negotiating any check”
includes directing or accepting payment by any means, electronic
or otherwise, into an account owned or controlled by the
practitioner.
• Check-Cashing Business – May be owned by taxpayer if not related in
any way to the tax preparation business
• Questions 77 and 78
150
Question 77(a)
Which of the following persons would be subject to
the penalty for improperly negotiating a taxpayer’s
refund check?
a. An income tax return preparer who operates
a check-cashing agency that cashes,
endorses, or negotiates income tax refund
checks for returns he prepared.
b. An income tax return preparer who operates
a check-cashing business and cashes checks
for his clients as part of a second unrelated
business.
(continued on next page)
151
Question 77(b)
c. The firm which prepared the tax return and is
authorized by the taxpayer to receive an
income tax refund, but not to endorse or
negotiate the check.
d. A business manager who prepares tax returns for
clients who maintain special checking accounts
against which the manager is authorized to
certain checks on their behalf. The clients’ federal
income tax refunds are mailed to the business
manager, who has the clients endorse the checks
and deposits them in the special accounts.
152
Question 78
Jim, a tax return preparer, has several clients who travel
extensively. They have requested that all returns and
correspondence with the IRS bear their preparer’s address so
that he can handle their tax matters timely. Several have given
Jim power of attorney. From time to time, a refund check will be
received for one of these clients and Jim will deposit it to that
client’s account. Based on these facts, it can be concluded that,
regarding the prohibition against endorsing or negotiating a
refund check,
a. Jim has not violated the prohibition in any circumstance
b. Jim has not violated the prohibition in any case when the
client is present to endorse the check
c. Jim is automatically in violation of the prohibition because
he receives the check
d. none of the above
153
9O Tax Preparer – Rights &
Responsibilities as to Penalties
• Form 8866 Disclosure – A “material advisor” must file
Form 8866 disclosing any “reportable transactions”
• Penalty - if not filed, a $50,000 penalty applies($200,000
or 50% income, if larger, 75% if listed transaction)
• Material Advisor – Significant aid/assist., derives
$250,000 income from transaction ($50,000 if all
individuals)
• Reportable Transaction – Potential for tax avoidance; 5
types – (1) “listed” (by IRS), (2) mkt. as confidential, (3)
contractual protection, (4) large loss transactions
(>$50,000 for individuals, higher for other entities), and (5)
others of interest
154
Topic 10
Tax Competence
& Written Tax
Advice
155
10A – Practitioner Competence
• Competent Practice – Requires the appropriate
level of knowledge, skill, thoroughness, and
preparation
• Competence – May be acquired through various
avenues, including consulting with experts in the
field or studying the relevant law
• “Responsible Individual”– For overseeing firm tax
matters must be identified by the firm, or the IRS
may identify such individual(s)
• Special Responsibilities – Identified by the IRS in
the 2014 changes to Circular 230 (next slide)
10B “Responsible Individual”
Duties per Circular 230
• Penalties – May apply if “responsible individual”
carelessly or recklessly fails to insure that:
1. The firm has adequate compliance procedures
in place, but one or more firm members fail to
comply;
2. The procedures in place are followed, but one
or more firm members fail to comply; and
3. The responsible individual knows or should
have known about the noncompliance but
fails to take prompt action or corrective action
• Question 79
Question 79
Individuals who have or share principal authority
and responsibility for overseeing a firm’s practice
in matters of competence must insure that
a. the firm has adequate procedures in place to
comply
b. the firm procedures in place have been
adequately followed
c. prompt action is taken if the responsible person
knows, or should have known, of such
noncompliance
d. all of the above
10C Written Tax Advice
Guidelines per Circular 230
• Guidelines – Apply to “federal tax matters” (any Code
section, tax obligation, or other IRS administered law)
• Not Written Tax Advice – Tax policy proposals sent to
the government or CPE presentations (unless
marketing or promoting transactions)
• Restrictions on Advice – (a) must not be based on
unreasonable assumptions, (b) must not rely on
unreasonable representations & statements of the
taxpayer & others, (c) must use reasonable efforts to
identify and ascertain all relevant facts, (d) must relate
applicable law & authority to the facts, and (e) must
ignore possibility of IRS audit (i.e., playing tax lottery).
10D Reasonable Practitioner
Standard
• Application – In evaluating compliance (considering
all facts and client circumstances)
• Special Scrutiny – Required if practitioner knows or
has reason to believe that advised arrangement has
a significant purpose of avoidance or evasion of tax
• “Additional Risk” – Caused by such arrangements
requires that the “reasonable practitioner standard”
place special emphasis on the practitioner’s lack or
knowledge of the taxpayers’ particular
circumstances
Question 80
Which of the following is subject to the Circular
230 rules on written tax advice on a federal tax
matter:
a. submission to the IRS on suggestions for
changes to proposed regulations
b. materials used in a CPE course explaining
the new tax law
c. materials used by a client in promoting a
tax planning strategy that was challenged
by the IRS in the past
d. all of the above
Questions?
As Time Permits
Or contact:
NSA EA Review Blog
162
Question
Answer
Explanation
1
b
Merely preparing a tax return does not constitute practice before the IRS
2
b
A certified financial adviser is not automatically granted representation
3
d
Unenrolled preparers may never receive refund checks
4
d
All are qualified under the special rules
5
d
Neither of these individuals qualify for practice
6
d
Individuals under suspension or disbarment may not practice
7
d
Appeal must be filed with Secretary of the Treasury within 30 days
8
c
Assistance may be accepted from someone with temporary grants to practice
9
b
The last digit of the SS number determines the enrollment period
10
a
The preceding November 1st until January 31st of the expiration year
11
b
Records must be kept 4 years beyond next enrollment date
12
a
Requirements do not specify prerequisite IRS approval
13
b
Minimum hours per year are 16 hours
14
a
No such requirement exists for furnishing documents
15
b
Endorsing the check is not permitted
16
d
These are the two conditions for a power of attorney to include signing
17
d
Such a statement is not required on the attestation
18
c
Name of the preparer of the tax return is not required
19
d
The new representative is assumed to replace the old one
20
c
The word “REVOKE” should be written across the power of attorney
21
c
A power of attorney is not required with a TIA request
22
d
Most powers listed are with a power of attorney, not a TIA
23
d
The CAF number is asked for (if held), but is not required
24
d
A CAF number is issued for most representative functions
25
b
These are grounds for refusing to disclose the information
26
d
All three actions are instances of disreputable conduct
163
27
c
Proceeding is instituted by a complaint signed by the Director of OPR
28
d
Each allegation must be addressed, unless there is insufficient info
29
a
Hearing conducted by an Administrative Law Judge, not District Judge
30
c
Administrative law judge’s ruling may be appealed within 30 days
31
d
The practitioner may apply after a minimum of 5 years
32
d
All actions are options available to the Director
33
b
Preparing the tax return of the individual is not a violation of the rules
34
c
Submission must be within three days of acknowledgement
35
d
Either method is acceptable
36
a
Basic 1040 returns are eligible for e-filing; others listed are not
37
b
Reasonable attempts to contact the taxpayer must be made within 24 hrs.
38
d
Must be retained until end of calendar year following last broadcast
39
b
The RAL indicator must be included in the transmitted electronic data
40
d
Fees based on a pct. or separate direct deposit charges are not allowed
41
d
A transfer to the location of the books and records is reasonable
42
c
Contact with the office is suggested under the repetitive audit rules
43
a
The IRS must generally provide reasonable notice of such actions
44
c
Taxpayer must pay within 10 days to avoid interest
45
b
The statutory notice is also known as a 90-day letter
46
a
Only the Tax Court does not require payment first
47
b
You must receive a notice of deficiency to go to the Tax Court
48
a
Case involves an S Corporation; a formal written protest is required
49
a
A brief statement is required at this level ($2,500 to $25,000)
50
d
All conditions are required to shift the burden of proof to the IRS
51
c
The only option with not paying the deficiency is to go to Tax Court
52
d
Tax does not have to be paid first to go to Tax Court (incl. small cases)
164
53
d
All of the characteristics listed are true
54
c
Memorandum decisions may be appealed
55
d
The three courts listed are all possible as initial courts of entry
56
d
These courts require payment first (assuming no tax court petition filed)
57
b
Either party may appeal
58
a
Tax Court decisions are appealed to the regular Circuit Court of Appeals
59
a
The signer is not determinative of ITP status
60
d
A fiduciary traditionally does not accept compensation; not an ITP
61
b
Giving investment opinions is not tax return preparation
62
d
All statements are true regarding tax preparers
63
d
All items are required to avoid a penalty
64
a
The willful neglect penalty is larger of the two amounts
65
d
The willful penalty is reduced by the reasonable position penalty
66
a
The preparer has 30 days to respond, not the IRS
67
d
None appear to violate the requirements (assuming no instr. to contrary)
68
b
Certain due diligence requirements must be met and records kept
69
b
X is absent for at least 2 weeks, and Z has reviewed materials thoroughly
70
d
Pat appears to be the person with primary responsibility
71
c
The original preparer is available to sign, so there is no need to substitute
72
c
Copy must be presented no later than when return is presented to sign
73
d
All answers are accurate and are required
74
b
The retained list with the 3 items of info per taxpayer is sufficient
75
d
The list must be maintained for 3 years, not 2
76
d
All actions are acceptable, though the practitioner needs only to pay 15%
77
a
Check-cashing business cannot be part of the tax preparation business
78
b
If Jim endorses the checks, he will be in violation of the prohibition
79
d
All three items are required of a “responsible individual”
80
c
Such tax avoidance schemes require special scrutiny
165
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You must complete this survey and the quiz or final exam (for the
recorded version) to qualify to receive CPE credit.
National Society of Accountants
1010 North Fairfax Street
Alexandria, VA 22314-1574
Phone: (800) 966-6679
members@nsacct.org
166