CPA Exam — Taxation and Regulation (REG) — All Questions

While preparing Ortega's current-year return, CPA Lin finds that Ortega's prior-year return, prepared by another firm, left out $12,000 of consulting income. Under Treasury Circular 230, what must Lin do?

• a.File an amended prior-year return without waiting for Ortega
• b.Report the omission to the IRS within 30 days of finding it
• c.Withdraw from the engagement before filing this year's return
• d.Promptly tell Ortega about the omission and its consequences✓

Circular 230 section 10.21 requires a practitioner who learns of a client's error or omission on a filed return to advise the client promptly of it and of its consequences under the Code. The rule does not require reporting the client to the IRS, and it does not by itself force withdrawal. Whether to amend is the client's decision; the practitioner cannot file an amended return on the client's behalf without the client.

Under Treasury Circular 230, in which engagement may a CPA charge a fee equal to a percentage of the tax refund obtained for the client?

• a.A refund claim for tax, filed when no IRS exam or challenge exists
• b.An amended return filed 18 months after a written IRS exam notice
• c.An amended return filed within 120 days of a written IRS exam notice✓
• d.Preparing an original return before the IRS has contacted the client

Section 10.27(b) bars contingent fees except in listed situations, one of which is an amended return or refund claim filed within 120 days of the taxpayer receiving written notice of an examination of, or challenge to, the original return. Preparing an original return is not one of the exceptions; the original-return exception covers services in an IRS examination of that return. An amended return filed long after the 120-day window, or a refund claim for tax with no IRS challenge, does not qualify (refund claims qualify only when solely for statutory interest or penalties).

A client disputes CPA Park's bill and asks for the return of the brokerage statements and prior-year returns she had given Park. State law does not allow an accountant to keep client records over a fee dispute. Under Circular 230, Park must:

• a.Hold the records until the disputed fee has been fully paid
• b.Return the records once the IRS makes a written request for them
• c.Return the records promptly, keeping copies if Park wishes✓
• d.Return only the records that must be attached to the return

Section 10.28(a) requires a practitioner, at the client's request, to promptly return client records needed to meet federal tax obligations, and lets the practitioner keep copies; a fee dispute generally does not change that. The narrower duty to return only records that must be attached to the return applies only where state law permits retention during a fee dispute, which is not the case here. No IRS request is needed to trigger the duty.

A client tells CPA Hale that she paid $18,000 of mortgage interest this year, but the Form 1098 she brings shows $8,100. Under Circular 230, how should Hale proceed?

• a.Use the $8,100 figure without raising the difference with the client
• b.Ask reasonable questions to resolve the conflict before using a figure✓
• c.Use the client's $18,000 figure, since good-faith reliance is allowed
• d.Decline the engagement and report the discrepancy to the IRS at once

Section 10.34(d) lets a practitioner rely in good faith on client information without verifying it, but not to ignore the implications of what the practitioner knows; reasonable inquiries are required when information appears incorrect, inconsistent or incomplete. A document showing less than half the claimed interest is exactly that situation, so neither figure should simply be used. Nothing in the rule calls for dropping the client or reporting her to the IRS.

A paid preparer charged $2,600 to prepare a client's return. Part of the resulting understatement comes from an undisclosed position that lacked substantial authority, which the preparer should have known. The position is not a tax shelter item, the conduct was not willful or reckless, and no reasonable-cause exception applies. What is the preparer penalty under IRC section 6694(a)?

• a.$5,000
• b.$1,300✓
• c.$1,000
• d.$2,600

Section 6694(a) imposes on the preparer the greater of $1,000 or 50 percent of the income derived from the return when an understatement is due to an undisclosed position without substantial authority that the preparer knew or should have known of. Fifty percent of $2,600 is $1,300, which exceeds $1,000. The full fee is not the measure, and $5,000 is the floor of the separate section 6694(b) penalty for willful or reckless conduct, which the facts rule out.

Under IRC section 7701(a)(36), which of these persons is a tax return preparer?

• a.A payroll clerk who prepares her own employer's return as part of her job
• b.A CPA who prepares a substantial portion of a client's return for a fee✓
• c.A typist who formats and prints a return from the CPA's finished figures
• d.A bank trust officer who prepares a trust's return acting as fiduciary

Section 7701(a)(36)(A) defines a tax return preparer as a person who prepares, for compensation, a return or claim for refund, and treats preparing a substantial portion as preparing the return. Section 7701(a)(36)(B) excludes a person who only furnishes typing or other mechanical help, an employee preparing the return of the employer that regularly employs her, and a person preparing a return as a fiduciary.

Without client consent, a tax preparer knowingly uses information from clients' returns to build a mailing list for an insurance agency owned by her brother. Under IRC section 7216, this conduct is:

• a.A federal misdemeanor punishable by fine, prison, or both✓
• b.A civil matter only, not a criminal offense
• c.Permitted, because the preparer charged the clients nothing extra
• d.Permitted once each client's return has already been filed

Section 7216(a) makes it a misdemeanor for a return preparer to knowingly or recklessly disclose return information, or use it for any purpose other than preparing returns, with a fine, imprisonment of up to one year, or both. Section 6713 separately imposes a civil penalty for the same conduct, but that does not make it only a civil matter. Whether an extra fee was charged or the return was already filed does not matter; the use itself is prohibited absent an exception such as client consent.

CPA Wu advised a client on the deductibility of certain payments. The IRS later opens a criminal tax investigation of the client and seeks Wu's communications. Does the IRC section 7525 practitioner privilege protect them?

• a.Yes, because the advice concerned a federal tax matter
• b.Yes; it protects them to the same extent as attorney advice
• c.No; CPAs have no statutory privilege in any IRS proceeding
• d.No; that privilege applies only in noncriminal tax matters✓

Section 7525(a) extends attorney-client confidentiality protections to tax advice from a federally authorized tax practitioner, but section 7525(a)(2) allows the privilege to be asserted only in noncriminal tax matters before the IRS and noncriminal tax proceedings in federal court. It therefore does not reach a criminal investigation. That the advice concerned a federal tax matter is what brings it within section 7525 in civil matters, but it does not carry the privilege into a criminal case. The privilege does exist for civil matters, so saying CPAs have none is wrong.

The IRS summons an audit firm's tax accrual workpapers for a publicly traded client under IRC section 7602. Under the Supreme Court's decision in United States v. Arthur Young & Co. (1984), the workpapers are:

• a.Protected because they are not used to prepare the tax return
• b.Protected unless the IRS shows that the client committed fraud
• c.Subject to the summons; no work-product immunity shields them✓
• d.Protected by a federal accountant-client privilege of confidentiality

In Arthur Young, the Court held that tax accrual workpapers are relevant under section 7602 even though they are not used to prepare the return, and it refused to create a work-product immunity for them, reversing the appeals court's rule that had required a showing of need or fraud. Relying on Couch v. United States (1973), it noted that no confidential accountant-client privilege exists under federal law.

Which body has the authority to revoke a CPA's license to practice public accounting?

• a.The IRS Office of Professional Responsibility
• b.The AICPA, through its Professional Ethics Division
• c.NASBA, the national association of state boards
• d.The state board of accountancy that issued it✓

Under the Uniform Accountancy Act, the state board of accountancy grants licenses and, after notice and hearing, may revoke, suspend or refuse to renew them and impose other discipline (UAA section 10). The AICPA can discipline its members but cannot take away a state license, and the IRS Office of Professional Responsibility controls only the right to practice before the IRS. NASBA is an association of boards, not the licensing authority.

An individual's return shows tax of $71,000; the correct tax is $80,000. She claimed no qualified business income deduction, and the underpayment has no substantial authority, disclosure or reasonable cause. What accuracy-related penalty applies under IRC section 6662?

• a.$9,000
• b.$1,800✓
• c.$6,750
• d.$900

The $9,000 understatement is substantial because it exceeds the greater of 10 percent of the correct tax ($8,000) or $5,000 (section 6662(d)(1)(A)). The penalty is 20 percent of the underpayment, or $1,800 (section 6662(a)). $900 applies a 10 percent rate that the statute does not use, $9,000 is the understatement itself rather than the penalty, and $6,750 is the 75 percent civil fraud rate of section 6663, which requires fraud.

Dana's return was due April 15 with no extension. She filed it and paid the $10,000 balance due 1 month and 20 days late, without reasonable cause and without fraud. What are the combined failure-to-file and failure-to-pay additions under IRC section 6651?

• a.$1,000✓
• b.$900
• c.$1,100
• d.$1,500

Both additions count each month or fraction, so the delay is 2 months. Failure to file is 5 percent per month (10 percent, $1,000) and failure to pay is 0.5 percent per month (1 percent, $100). Section 6651(c)(1) reduces the failure-to-file amount by the failure-to-pay amount for months both apply, so the total is $900 + $100 = $1,000. $1,100 ignores that reduction, $900 is the reduced failure-to-file amount alone, and $1,500 counts three months.

Kent's timely filed return reported $200,000 of gross income but left out $60,000 of gross income. There was no fraud. How long does the IRS generally have to assess additional tax for that year?

• a.6 years after the return was filed✓
• b.No limit, because income was omitted
• c.10 years after the return was filed
• d.3 years after the return was filed

The normal assessment period is 3 years (section 6501(a)), but section 6501(e)(1)(A) extends it to 6 years when the taxpayer omits gross income exceeding 25 percent of the gross income stated on the return. $60,000 is more than 25 percent of $200,000 ($50,000). An unlimited period applies only for a false or fraudulent return, a willful attempt to evade, or no return at all (section 6501(c)).

Lopez receives a statutory notice of deficiency (a 90-day letter) for $32,000 of income tax for one year. She wants to contest it without paying first and prefers an informal hearing. Which course fits?

• a.Petition the Tax Court within 30 days and plan to appeal any loss
• b.Petition the Tax Court within 90 days and elect small case procedures✓
• c.Sue in federal district court within 90 days, without paying the tax
• d.Pay half of the deficiency and sue in the Court of Federal Claims

Section 6213(a) gives 90 days (150 if addressed outside the U.S.) to petition the Tax Court, and assessment is barred meanwhile, so the tax need not be paid first. Because the amount in dispute for the year does not exceed $50,000, she may elect small tax case procedures under section 7463, whose decisions cannot be appealed. District court and the Court of Federal Claims hear refund suits, which require payment first.

Ines, a U.S. citizen, has two bank accounts in Spain. Neither balance ever exceeded $10,000, but on one day in July their combined balance was $11,500. The accounts earned no interest. What is her FBAR obligation?

• a.None, because the accounts produced no taxable income that year
• b.None, because no single account balance ever exceeded $10,000
• c.Attach FinCEN Form 114 to her Form 1040 by the return due date
• d.File FinCEN Form 114 because the combined value exceeded $10,000✓

A U.S. person must file an FBAR on FinCEN Form 114 if the aggregate value of foreign financial accounts exceeded $10,000 at any time during the calendar year; the test is the combined value, not each account alone. Whether the accounts produced income does not matter. The FBAR is filed electronically through FinCEN's BSA E-Filing System, not with the income tax return; it is due April 15 with an automatic extension to October 15.

A company finds a private letter ruling issued to a different taxpayer on facts nearly identical to its own planned transaction. How may the company use that ruling?

• a.It may rely on it just as it could rely on a published revenue ruling
• b.It cannot cite it as precedent; it binds the IRS only for the requester✓
• c.It carries the same authority as a final Treasury regulation on point
• d.It binds the IRS for every taxpayer who has substantially similar facts

The IRS describes a private letter ruling as a written statement to the taxpayer who requested it, binding on the IRS only if that taxpayer described the facts accurately and carries out the transaction as described; it may not be relied on as precedent by other taxpayers. A revenue ruling, by contrast, is an official IRS interpretation published in the Internal Revenue Bulletin for all taxpayers, and Treasury regulations rank above both.

A client wants to take a return position that is contrary to a Treasury regulation, as a good-faith challenge to the regulation's validity. To disclose the position properly, which form should be attached to the return?

• a.Form 8821, Tax Information Authorization
• b.Form 8275, Disclosure Statement
• c.Form 8275-R, Regulation Disclosure Statement✓
• d.Form 8886, Reportable Transaction Disclosure

The Form 8275 instructions direct taxpayers disclosing a position contrary to a regulation to use Form 8275-R instead of Form 8275; Form 8275 is used for other positions, such as those with a reasonable basis but not substantial authority. Form 8886 reports reportable transactions, and Form 8821 authorizes someone to receive tax information; neither discloses a regulation challenge.

A sole proprietor deducted $4,200 of out-of-town business travel. The only support is a credit card statement listing the amounts and vendors; there is no record of dates, destinations or business purpose. Is the substantiation sufficient?

• a.Yes, if the examiner can reasonably estimate the business portion
• b.No; travel needs records of amount, time, place and business purpose✓
• c.Yes; the card statement proves that the amounts were actually paid
• d.No, because travel receipts must be notarized to be accepted

Section 274(d) denies a deduction for traveling expenses unless the taxpayer substantiates by adequate records or corroborating evidence the amount, the time and place of travel, and the business purpose. Proof of payment alone does not show time, place or purpose, and section 274(d) overrides estimating an allowance. No notarization requirement exists.