Return Preparers/Preparer Penalties
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.
How long should a taxpayer keep his copy of his W-2?
He should keep it for as long as it may be needed for the administration of any provision of the tax code.
Paper records, such as a W-2, support information reported on a tax return. 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 current-year and timely completed tax returns can be e-filed?
All of these returns may be e-filed.
An Adoption Taxpayer Identification Number (ATIN) is a temporary nine-digit number issued by the IRS to individuals who are in the process of legally adopting a U.S. citizen or resident child but who cannot get an SSN for that child in time to file their tax return. A return that includes an adopted child who has an ATIN can be e-filed. A return that includes a spouse who has neither an SSN or an ITIN cannot be e-filed.
Melissa has published a schedule of fees for her tax preparation services. For how long after the last date of publication must these fees remain the same?
30 days
A practitioner may charge no more than the rates published in a schedule of fees for at least 30 calendar days following the last date of publication.
Which of the following sanctions for incompetent or disreputable conduct prohibits a practitioner from practice before the IRS for a determined period of time of less than five years?
Suspension
If a practitioner is suspended, he/she is prohibited from practice for a determined period of time. Disbarment prohibits a practitioner from practice for an indefinite period of time. Censure is a public reprimand. A disbarred practitioner can petition for reinstatement five years after disbarment.
Sandra prepares Linda's income tax return. Linda sold some stock in a corporation and believes the proceeds of the stock are all a return of capital, and therefore, not included in her gross income. After research, Sandra determines that there is reasonable basis for Linda's position, but she does not believe there is a realistic possibility of success on the merits. Under what circumstances can Sandra sign Linda's return if the proceeds are not included in income reported on the return?
If the position is not frivolous and is adequately disclosed on the return.
The fact that Sandra does not think the IRS will support the claim on its merits is not sufficient grounds for Sandra to refuse to include the claim on the return. A taxpayer may make a claim that is not frivolous on the return, provided there is adequate disclosure. Under these circumstances, Sandra may sign the return.
Which of the following is NOT an information security incident which may require reporting to the IRS or other authorities?
Theft of IRS forms and publications
An information security incident is an adverse event or the threat of an event that can result in an unauthorized disclosure, misuse, modification, or destruction of information. Incidents can affect the confidentiality, integrity, and availability of taxpayer information or the ability for a taxpayer to prepare or file a return.
Types of incidents include:
Andrew gives his PIN to his tax return preparer and verbally authorizes the preparer to enter his PIN in order to e-file his income tax return. Who needs to sign Form 8879?
Both Andrew and the tax preparer
When a taxpayer does not enter his own PIN, the taxpayer has to sign and date Form 8879, IRS E-File Signature Authorization. The preparer can sign the form by rubber stamp, mechanical device, or a computer software program.
A federally-authorized tax practitioner must supply the IRS with any requested information regardless of whether or not the practitioner believes the information to be privileged.
False
A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.
How is a disbarment or suspension proceeding against an individual commenced?
With a complaint signed by the Director of the Office of Professional Responsibility.
Whenever the Director of the Office of Professional Responsibility determines that a practitioner violated any provision of the laws governing practice before the Internal Revenue Service or a provision of Circular 230, the Director of the OPR may institute a proceeding for a sanction. A proceeding is instituted by the filing of a complaint. A complaint must name the respondent, provide a clear and concise description of the facts and law that constitute the basis for the proceeding, and be signed by the Director of the OPR or a person representing the Director of the OPR. A complaint is sufficient if it fairly informs the respondent of the charges brought so that the respondent is able to prepare a defense.
Which of the following is an acceptable standard for providing advice on a position taken on a tax return?
That a position taken has a one in three or greater likelihood of being sustained on its merits.
A position is considered to have a realistic possibility of being sustained on its merits if a reasonable and well informed analysis of the law and the facts by a person knowledgeable in the tax law would lead such a person to conclude that the position has approximately a one in three, or greater,likelihood of being sustained on its merits. The authorities described in 26 CFR 1.6662-4(d)(3)(iii), or any successor provision, of the substantial understatement penalty regulations may be taken into account for purposes of this analysis. The possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be settled may not be taken into account.
A calendar-year taxpayer who did not obtain an extension waited until May 1, 2021 to file his 2019 tax return and pay the tax due. Shortly afterward, the IRS discovered an error on the return. Until when can the IRS assess additional tax?
May 1, 2024
The IRS is permitted to assess additional tax during the three year period that follows the date a tax return was filed if there is no allegation of fraud or significant underreporting. (Were there an allegation of fraud or significant underreporting, the period of limitation could be extended.)
Taxpayers often elect the Direct Deposit option because it is the fastest way of receiving refunds. How is the financial institution that will receive the deposit identified?
The ERO may rely upon the taxpayer to provide the bank's routing number and account number.
The ERO may rely upon the taxpayer to provide the bank's routing number and account number. The ERO must accept any direct deposit election to any eligible financial institution designated by the taxpayer.
Which of the following tasks can be performed by any Enrolled Agent (EA) on behalf of their client?
Prepare and sign a protest to challenge examination results in the IRS Appeals Office.
Enrolled agents, certified public accountants, and attorneys have unlimited representation rights before the IRS. Tax professionals with these credentials may represent their clients on any IRS matters including audits, payment/collection issues, and appeals.
The EA exam does not qualify a practitioner to practice law before any court. It is possible for a non-attorneys to practice in tax court if satisfying the requirements, which include passing a separate qualifying examination (see TC Rule 200(a)(2)).
IRS Form 12203; Pub 947; Pub 5; Instructions for Form 2848
Identify the individual below from whom a tax preparer, in practice before the Internal Revenue Service, may knowingly accept assistance:
An individual who has temporary recognition to practice before the IRS.
An enrolled practitioner may accept assistance from an individual who has temporary recognition to practice before the IRS.
When a prepared return claims the earned income credit, which of the following is NOT true?
No special requirements apply to returns claiming earned income credit.
A paid preparer should exercise extra due diligence when dealing with certain tax benefits, including the Earned Income Credit (EIC), as it is a popular target for fraud and abuse. Section 6695 of the Internal Revenue Code requires paid preparers to exercise due diligence in the preparation of returns involving EIC. Paid preparers must complete all required worksheets and meet all record-keeping requirements.
The FTC financial privacy rule requires financial institutions, including tax return preparers, to perform which of the following actions?
Give their customers privacy notices
The Financial Privacy Rule aims to protect the privacy of the consumer by requiring financial institutions, as defined, which includes professional tax preparers, data processors, affiliates and service providers to give their customers privacy notices that explain the financial institution’s information collection and sharing practices.
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).
If an IRS examiner believes that a practitioner filed a return that contains a frivolous position, to whom does he report his concern?
To the Director of the Office of Professional Responsibility.
Circ. 230, Section 10.53 provides that if an officer or employee of the Internal Revenue Service has reason to believe that a practitioner has violated any provision of Circular 230, the officer or employee will promptly make a written report to the Director of the Office of Professional Responsibility of the suspected violation. The report will explain the facts and reasons upon which the officer's or employee's belief rests.
Which of the following is incorrect regarding receiving assistance from or assisting a person who is disbarred or suspended from practice before the IRS?
An enrolled agent can receive payment from a suspended person in return for temporarily handling audits for that person's clients until the suspension is lifted.
A practitioner may not, knowingly and directly or indirectly accept assistance from or assist any person who is under disbarment or suspension from practice before the Internal Revenue Service if the assistance relates to matters constituting practice before the Internal Revenue Service. Handling an audit is a form of practice before the IRS, and therefore a practitioner may not accept assistance from or assist any person who is under disbarment or suspension.
Barbara is an enrolled practitioner who only prepares tax returns. One of her clients was audited by the IRS and a substantial income tax deficiency resulted. The IRS determined that Barbara was an income tax return preparer and the underpayment was due to an unreasonable position. The IRS assessed a preparer penalty. If Barbara wants to contest the validity of the penalty, what can she do?
She can contest the validity of the penalty in district court but has to pay at least 15% of the penalty beforehand and claim a refund.
A preparer can contest a penalty imposed by IRC Sec 6694 by paying 15% of the penalty and then filing a claim for a refund. If the claim for a refund is denied, the tax preparer must commence a proceeding in district court within thirty days from the date of the denial.
A calendar-year taxpayer has W-2 wages and withholds taxes through the year. He files his 2019 return and writes the IRS a check for his remaining 2019 tax liability on May 1, 2021. He discovers a mistake in his favor and wants to amend the return to claim a full refund, until when can he do so?
April 15, 2023
A taxpayer has 3 years from the date the return is filed (not due), or 2 years from paying the tax to file a claim for refund, whichever is later. Three years from the filing date (May 1, 2021) is May 1, 2024.
Remember, only payments made within that 3-year period are eligible, so this taxpayer can only receive the May 1, 2021 payment.
Tax withholding and payments made prior to the due date are considered made on the due date.
To get a full refund, including his W-2 withholding, he would have to request the refund within 3 years of the original due date.
The taxpayer has 3 years from the due date (April 15, 2020) of the return to request a claim for any withholding or credits prior to the due date. This is April 15, 2023.
What is a popular target for fraud and abuse that an Electronic Return Originator (ERO) should look out for?
Earned Income Tax Credit (EITC)
An ERO who is also the paid preparer should exercise due diligence in the preparation of returns involving the Earned Income Tax Credit (EITC) because it is a popular target for fraud and abuse. EROs must not electronically file individual income tax returns prior to receiving Forms W-2, W-2G or 1099-R.
Caramel Corp was unsuccessful in the appeal of their tax case in a conference with the IRS. Caramel was represented during the appeal by Jackson, an enrolled agent, who also regularly prepares Caramel's tax returns. He advises Caramel to take the case to United States Tax Court. Jackson is not an attorney. What statement is true regarding Jackson's role?
Jackson may only appear as a witness for the taxpayer.
The IRS enrolled agent designation does not permit the EA to practice law before the tax court, only a lawyer or individual admitted to practice before the tax court can do that. Therefore, unless duly qualified, enrolled agents may only appear as witnesses in a court case.
Conditions imposed on a practitioner who has been censured or suspended are designed to enforce high standards of conduct and reflect the nature of the behavior resulting in the sanction.
True
Conditions may be imposed on a censured or suspended practitioner's continued practice before the IRS for a reasonable period in light of the behavior resulting in the sanction.