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Thank you for taking our Pop Quiz #138: REG: Ethics and Legal Responsibilities: Ethics and responsibilities in tax practice. Following are the answers and rationales.

Kopel was engaged to prepare Raff's 2005 federal income tax return. During the tax preparation interview, Raft told Kopel that he paid $3,000 in property taxes in 2005. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability.

Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raft had adequate records to support the deduction.

Which of the following statements is correct?

A. To avoid the preparer penalty for willful understatement of tax liability, Kopel was obligated to examine the underlying documentation for the deduction.

B. To avoid the preparer penalty for willful understatement of tax liability, Kopel would be required to obtain Raff's representation in writing.

C. Kopel is not subject to the preparer penalty for willful understatement of tax liability because the deduction that was claimed was more than 25% of the actual amount that should have been deducted.

D. Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff's representation.

The correct answer is D.

A. Incorrect...
Refer to the correct answer for the complete explanation.

B. Incorrect...
A tax preparer may rely on oral information from a client, provided that the preparer has a reasonable basis for believing that the client's statements are truthful.

C. Incorrect...
There is no "magic number" that allows a tax preparer to escape liability. The key is whether a preparer had knowledge of the misrepresentation and intentionally aided in the underpayment of income tax.

D. Correct!
When an tax preparer has a reasonable basis for believing that a client has been truthful and possesses adequate documentation for claims made, he need not actually examine all such documentation.



A CPA who prepares clients' federal income tax returns for a fee must:

A. File certain required notices and powers of attorney with the IRS before preparing any returns.

B. Keep a completed copy of each return for a specified period of time.

C. Receive client documentation supporting all travel and entertainment expenses deducted on the return.

D. Indicate the CPA's federal identification number on a tax return only if the return reflects tax due from the taxpayer.

The correct answer is B.

A. Incorrect...
A tax preparer need not file power of attorney before preparing a return. Federal law requires that a CPA keep copies of all returns for three years, reasonably correct inaccurate returns, and give a copy of the return to the taxpayer.

B. Correct!
Each return must be kept by the preparer for a period of three years under the Tax Reform Act of 1976.

C. Incorrect...
A CPA must take only reasonable steps to verify the accuracy of each return. This usually means that he can rely on a client's statements when calculating deductions. Only when the CPA suspects that the client is lying or incorrect is documentation required.

D. Incorrect...
The CPA's number and signature should accompany every tax return, regardless of whether tax is due or a refund to the taxpayer is required.



According to the profession's standards, which of the following statements is correct regarding the standards a CPA should follow when recommending tax return positions and preparing tax returns?

A. A CPA may recommend a position that the CPA concludes is frivolous as long as the position is adequately disclosed on the return.

B. A CPA may recommend a position in which the CPA has a good faith belief that the position has a realistic possibility of being sustained if challenged.

C. A CPA will usually not advise the client of the potential penalty consequences of the recommended tax return position.

D. A CPA may sign a tax return as preparer knowing that the return takes a position that will not be sustained if challenged.

The correct answer is B.

A. Incorrect...
If a CPA considers a position frivolous, he may not prepare a tax return that takes that position. Knowingly assisting a client in understating his tax liability can bring penalties against the tax preparer.

B. Correct!
Penalties are assessed if a tax preparer knowingly or recklessly assists a client in understating tax liability. If a CPA believes in good faith that the position taken can be defended, he has acted properly.

C. Incorrect...
This is the opposite of a correct answer. In fact a CPA must advise the client of potential consequences, especially if an aggressive position is taken.

D. Incorrect...
If a CPA considers a position frivolous, he may not prepare a tax return that takes that position. Knowingly assisting a client in understating their tax liability can bring penalties against the tax preparer.



According to the standards of the profession, which of the following statements is(are) correct regarding the action to be taken by a CPA who discovers an error in a client's previously filed tax return?

I. Advise the client of the error and recommend the measures to be taken.

II. Withdraw from the professional relationship regardless of whether or not the client corrects the error.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

The correct answer is A.

A. Correct!
A client must be advised of the error and of what remedial steps are needed. However, there is no need to withdraw from the relationship. If a CPA had to quit every time he discovered an error in a client's records, there would be little acceptable work left.

B. Incorrect...
Refer to correct answer (A) for explanation.

C. Incorrect...
Refer to correct answer (A) for explanation.

D. Incorrect...
Refer to correct answer (A) for explanation.



Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?

A. The SEC.
B. The AICPA.
C. A state CPA society.
D. A state board of accountancy.

The correct answer is D.

A. Incorrect...
Refer to correct answer (D) for explanation.

B. Incorrect...
Refer to correct answer (D) for explanation.

C. Incorrect...
Refer to correct answer (D) for explanation.

D. Correct!
While certain types of punishments may be meted out by the SEC, the AICPA, and state CPA societies, only a state board of accountancy truly has the power to revoke a CPA's license to practice public accountancy. Nonetheless, the SEC may, for example, prevent an accountant from appearing before it or doing any attest work for a public company.

The AICPA may revoke an accountant's membership, as may a state CPA society. But only the state board of accountancy may revoke a license to practice.

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