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EA Exam Prep – Part 3

• All audio is streamed through your computer speakers.

• 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.

EA Exam Prep – Part 3

John O. Everett, Phd., CPA

Cherie J.Hennig, Phd., CPA

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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

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Topic 1

Practice Before the IRS & Unenrolled

Preparers

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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

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

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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

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

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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

Question 3Which 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.

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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

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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

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.

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Question 6With 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.

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Topic 2

Enrollment to Practice and CPE

Requirements

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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

Question 7Larry Smith passed all parts of the Special Enrollment Examination in October of 2014. Larry sub mitted 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.

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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

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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

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

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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

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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

Question 11Generally, 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

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Question 12With 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

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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

Question 13All 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

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Topic 3

Power of Attorney Issues

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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

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

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Question 15With 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.

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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

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.

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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

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

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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

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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

Question 19All 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

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Question 20Judith 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.

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Topic 4

Tax Information Authorizations

(TIAs) and Central Authorization Files (CAFs)

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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

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

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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

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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

Question 23With 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

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Question 24A 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

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Topic 5

Administrative Proceedings for

Complaints Against Enrolled Agents

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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

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 25Sam 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.

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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

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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

Question 27How 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.

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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

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)

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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.

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Question 30After 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.

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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

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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

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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

Question 33Which 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

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Topic 6

Electronic Filing – Special Issues

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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)

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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

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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

Question 34Samantha 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)

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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

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.

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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

Question 36Some 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

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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

Question 37If 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

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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

Question 38Which 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.

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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

Question 39Which 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

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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

Question 40George 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

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Topic 7

IRS Audits and Notices of Deficiency

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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

Question 41Under 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.

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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

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

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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

Question 43The 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

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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

Question 44Mr. 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.

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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

Question 45The 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

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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

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

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Question 46Which 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.

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Topic 8

IRS Appeals Procedures and Court Options

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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

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

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Question 49With 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.

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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

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

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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

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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

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Figure 1 Court Options in Contesting A Tax Finding

U.S. Supreme Court

U.S. Circuit Court of Appeals

U.S. Federal Circuit Court of Appeals

U.S. Court of Federal Claims

U.S. Tax Court

U.S. District Court

Small Cases Division

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

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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

Question 53A 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

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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

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

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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

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Figure 2 U.S. District Courts System

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

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Question 56A 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

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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

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Figure 3 U.S. Circuit Courts of Appeal

Question 57Which 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.

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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

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Topic 9

Tax Preparers – Definition and

Possible Penalties

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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

Question 59Which 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 low- income 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

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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

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

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Question 61Which 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.

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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

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Figure 4 Substantial Authority as Defined in Reg. §1.6662-4(d)(3)(i)

1. The Internal Revenue Code and other statutes 2. Regulations (final, temporary, and proposed) 3. Court cases 4. Tax treaties 5. 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

Figure 5Examples – 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)

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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.

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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

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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

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

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Question 65Delores 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

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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

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.

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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

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.

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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

Question 68When 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

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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

Question 69Mr. 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.

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Question 70The 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

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Question 71With 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.

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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

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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

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

Question 73Identify 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.

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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.

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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

Question 75Which 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

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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

Question 76If 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

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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 practitioner-offered 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

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)

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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.

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Question 78Jim, 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

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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

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Topic 10

Tax Competence & Written Tax

Advice

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 79Individuals who have or share principal authority and responsibility for overseeing a firm’s practice in matters of competence must insure thata.the firm has adequate procedures in place to complyb.the firm procedures in place have been adequately followed•prompt action is taken if the responsible person knows, or should have known, of such noncomplianced. 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 80Which 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 regulationsb.materials used in a CPE course explaining the new tax lawc. 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

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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

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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)

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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

Thank you for participating in this webinar.Below is the link to the online survey and CPE quiz:

http://webinars.nsacct.org/postevent.php?id=15983

Use your password for this webinar that is in your email confirmation.You must complete this survey and the quiz or final exam (for the recorded version) to qualify to receive CPE credit.

National Society of Accountants1010 North Fairfax Street

Alexandria, VA 22314-1574Phone: (800) 966-6679

members@nsacct.org

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