Return Preparers
Pierre and Leo are very close friends, but Pierre is still paying Leo to prepare his tax return. Because they're so close, Leo doesn't have to sign the tax return to claim primary responsibility for the preparation.
False
The tax preparer must sign a tax return or claim for refund if the tax preparer has primary responsibility for the overall substantive accuracy of the preparation of the tax return or claim for refund.
Herb has filed a tax return for a client which understates the client's tax liability. Because he acted in good faith and with a reasonable cause provided by the nature of the return, he will not be assigned a penalty.
True
The IRS will not impose a penalty for understating tax liability if the preparer demonstrates that he/she has acted with reasonable cause and in good faith.
In general, how long are practitioners required to keep most records?
3 years
Practitioners must keep records for a period of three years. This ensures that any future issues can be addressed using previous tax information.
There is no period of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later. For filing a claim for a loss from worthless securities the time to make the claim is 7 years from when the return was due.
If you are an employer, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.
What is the fee to receive an EFIN from the IRS?
$0
Currently there is no fee to obtain an EFIN. You must apply and pass a suitability and tax compliance check.
What method does the IRS use to initiate contact with taxpayers to request personal or financial information?
None of the above.
Preparers and taxpayers should be aware that the IRS does not initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts. The IRS does not call taxpayers with threats of lawsuits or arrests.
Tax preparers must provide an identifying number on returns which they sign. Which number is the generally accepted identifying number?
PTIN
A tax return preparer must obtain and exclusively use a PTIN, rather than a Social Security Number or any other number, as the identifying number to be included with the tax return preparer's signature on a tax return or claim for refund.
A tax preparer can be subject to penalty if a return he prepared understates a taxpayer’s tax liability due to the tax preparers willful conduct or reckless or intentional disregard of rules or regulations. The penalty is:
The greater of $5,000 or 75% of the fee for preparing the return.
Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to willful or reckless conduct shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $5,000, or 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
ow long should a taxpayer keep copies of her sales slips and expense receipts?
She should keep each document for as long as it may be needed for the administration of any provision of the tax code.
Paper records, such as receipts and invoices, support information summarized in a computer program or in a paper ledger. An individual should keep each supporting document for as long as is necessary and the length necessary will vary depending on the item the record supports. Documents that support expenditures for capital improvements or capital assets, for example, should be kept until the asset is disposed of and the tax consequences of the disposition have been reported and are closed. Documents that support other shorter-lived expenditures or income items do not have to be kept for as long a period of time. A taxpayer should keep each supporting document for as long as it may be needed for the administration of any provision of the tax code. Generally this means that the record should be kept until the period of limitations for the relevant return has run. So, if a taxpayer files a return that is not fraudulent and does not constitute an under-reporting violation, the period of limitations for that return will have run after three years from the date the return was filed or due, whichever is later.
Which of the following is an authorized IRS e-file Provider?
Both an electronic return originator and an intermediate service provider who processes information and returns it to the ERO.
Both an electronic return originator and an intermediate service provider, as described in the question, are authorized IRS e-file Providers and are subject to the IRS regulations that regard e-file Providers.
The act of efiling a return with commercially available software does not make a taxpayer an electronic return originator.
What is the main requirement of the FTC safeguards rule for a tax return preparer?
Develop, implement and maintain an Information Security Program.
This Safeguards Rule requires that financial institutions develop, implement and maintain an Information Security Program.
Identify the item below that does not describe information a preparer must maintain about every return prepared:
The date the return or claim for refund was prepared.
All return preparers must retain a completed copy of the return or claim for refund, or alternatively retain a record (by list, card file, electronically, or otherwise) of all the taxpayers, their taxpayer identification numbers, the taxable years, and the type of returns/claims for refund prepared.
Tom, a paid tax preparer, was assessed a penalty of $1,000 for taking an unreasonable position on a tax return. An Administrative Law Judge also determined that Tom acted with willful or reckless conduct on the same return. Tom's fee for preparing the return was $1,500. What is Tom's total penalty for his violations of Sec. 6694 on this return?
$5,000
The penalty for willful or reckless conduct is the greater of $5,000 or 75% of the preparer's fee. The penalty is reduced by any penalty for an unreasonable position. Tom will pay a penalty of $1,000 for the unreasonable position. The $5,000 penalty for willful or reckless conduct will be reduced to $4,000. Tom will pay a total of $1,000 + $4,000 = $5,000 penalty.
If a calendar-year taxpayer timely obtains an extension and so files his 20X1 return on June 29, 20X2, but then discovers a mistake in his favor and wants to amend the return to claim a refund, until when can he do so?
June 29, 20X5
If a taxpayer wants to amend a timely-filed return to claim a refund or credit, he can do so within three years from the due date of the return. Returns filed before the due date are treated as being filed on the due date. An extension changes the due date for filing a tax return; however, if you had an extension to file (for example, until October 15) but you filed earlier and the IRS receives it June 29, your return is considered filed on June 29.
What are the requirements to become an IRS Authorized E-File Provider?
All of these are requirements
Before you begin the online e-file application, you must have an IRS e-services account, which facilitates electronic interaction with the IRS.
Every principal and responsible official in your firm signs up for e-services.
After you submit your application and related documents, the IRS will conduct a suitability check on the firm and each person listed on your application as either a principal or responsible official. This may include: a credit check; a tax compliance check; a criminal background check; and a check for prior non-compliance with IRS e-file requirements. Once approved, you will get an acceptance letter from the IRS with your Electronic Filing Identification Number (EFIN).
Karina, a partner in a growing tax accounting firm, is reviewing her firm's policies for compliance with federal law. She comes across an article for best practices for compliance with the Gramm-Leach Bliley (Financial Modernization) Act of 1999. Which of the following statements is FALSE?
Financial institutions which outsource certain functions are exempted from the requirements of the Act
The Gramm-Leach Bliley (Financial Modernization) Act provides for the protection of client information. Tax return preparers are included in the scope of the Act as they are under the jurisdiction of the Federal Trade Commission (FTC). FTC regulations require the development of a plan to safeguard client information. Moreover, a financial institution maintains responsibility for the confidentiality of client information when services are outsourced.
Which of the following people is a tax preparer?
A person who is compensated for employing others to prepare tax returns.
The U.S. Tax Code specifically provides that a person who merely does any of the following is not a tax preparer: (i) furnishes typing, reproducing, or other mechanical assistance; (ii) prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he is regularly and continuously employed; (iii) prepares as a fiduciary a return or claim for refund for any person; or (iv) prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to such taxpayer or in response to any waiver of restriction after the commencement of an audit of such taxpayer or another taxpayer if a determination in such audit of such other taxpayer directly or indirectly affects the tax liability of such taxpayer.
What penalty may be asserted by the IRS against a practitioner who knows or reasonably should have known the tax on an individual's return she prepared was understated due to reliance on a position that had no realistic possibility of being sustained on its merits?
$1000
The penalty under 26 U.S. Code §6701 for aiding or abetting in the preparation of any portion of a return that results in an understatement of tax is $1,000 ($10,000 if the return is for a corporation).
Any person who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and who knows that such portion (if so used) would result in an understatement of the liability for tax of another person, shall pay a penalty with respect to each such document of $1,000 ($10,000 if the document is for a corporation).
Phillip has not filed a tax return since 2006 because his income generally consists only of partnership distributions. Based on his income after deductions, he does not have to file. How long should Phillip keep records of deductions?
Indefinitely
Phillip should keep his deduction records indefinitely. Because the IRS period for assessment does not start until a taxpayer files a return, it may be beneficial for Phillip to file a return, even if he does not owe tax.
Who is the owner of an EFIN?
The firm owns the EFIN.
The firm owns the EFIN. The firm uses either its Employer Identification Number or the sole proprietor’s Social Security Number, if it doesn’t have an EIN, to apply for an EFIN.
What is the goal of the FTC safeguards rule?
To ensure the security and confidentiality of customer records and information.
The FTC Safeguards Rule requires financial institutions to ensure the security and confidentiality of customer records and information.
When does a tax preparer have to furnish a complete copy of the return or claim to the taxpayer?
No later than the time it is presented for the taxpayer's signature.
The tax preparer must furnish a completed copy of the return or claim for refund to the taxpayer no later than the time it is presented for the taxpayer's signature.
A tax return preparer can avoid the understatement penalty that resulted from having taken an unreasonable position if the preparer:
Can show that he acted in good faith and can show that there was reasonable cause for the understatement.
No understatement of taxpayer's liability by tax return preparer penalty shall be imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.
Must a tax preparer review and verify each document that supports the items a taxpayer claims on his tax return?
No, but the tax preparer should advise the taxpayer that the IRS can review and examine each document.
In response to an IRS request, a taxpayer must be able to produce legible records of the information needed to determine his correct tax liability. In addition to any computerized records, each taxpayer must keep proof of payment, receipts, and other documents to prove the amounts shown on his tax return. A tax preparer is not required to verify the documents but should advise the taxpayer that the IRS can request and examine each document.
What is an Electronic Filing Identification Number (EFIN)?
The IRS assigns an EFIN to identify IRS Authorized IRS e-file Providers.
Providers need an EFIN to electronically file tax returns. The IRS assigns an EFIN to identify firms that have completed the IRS e-file Application to become an Authorized IRS e-file Provider. After an applicant passes the suitability check and the IRS completes processing the application, the IRS notifies the applicant of acceptance to participate in IRS e-file. The IRS assigns an Electronic Filing Identification Number (EFIN) to all providers and assigns an Electronic Transmission Identification Number (ETIN) to transmitters.
Jenny set up a tax practice and must comply with the standards of security and privacy. Which of the following standards must she implement in her practice?
Authorized IRS e-file Providers that participate in the role as Online Providers must follow the IRS's six security, privacy, and business standards to better serve taxpayers and protect their individual income tax information collected, processed, and stored. Compliance with these standards is mandatory.
The six standards are: