PROFESSIONAL RESPONSIBILITIES
AND TAX RETURN PREPARER
PENALTIES REG R4-M2 EXAM
QUESTIONS WITH VERIFIED
ANSWERS
Historically, the most commonly tested issues regarding the tax liability rules include:
- Answer-• Endorsing and cashing refund checks. (Key: Endorsing and negotiating a
client's refund check—regardless of amount—is forbidden.)
• Preparing returns that understate tax liability. (Key: Although a tax preparer cannot
willfully aid in understating tax liability, the preparer has no affirmative duty to check
the veracity of the facts presented by the client, with a possible exception for facts
that appear implausible.)
• Disclosure of tax return information. (Key: Memorize the situations in which the tax
preparer is able to disclose information without the taxpayer's consent—disclosure in
all other situations without taxpayer consent is disallowed.)
Role of State Boards of Accountancy - Answer-Grant
Suspend
Revoke
State Boards of Accountancy have the sole power to license and revoke or suspend.
• Statutes in all 50 states grant the state boards of accountancy the sole power to
license certified public accountants.
• State boards are also the only entity with power to suspend or revoke a CPA's
license.
• Requirements for licensure vary from state to state and include all or some of the
following:
o Successful completion of CPA exam
o A residency requirement
o Educational requirements
o Experience requirements
Disciplinary Power of State Boards - Answer-• Although each state determines what
constitutes professional misconduct by a CPA sufficient to subject the CPA to
disciplinary action, there are three broad categories of misconduct:
o Misconduct while performing accounting services (e.g., negligence, fraud,
dishonesty, etc.)
o Misconduct outside the scope of accounting services (e.g., intoxication from
alcohol or drugs that significantly impairs the accountant's ability to perform
accounting services, insanity, etc.)
o Criminal conviction (e.g., commission of a felony, failure to file tax returns, crimes
relating to the practice of accounting, etc.)
,• After investigation of professional misconduct, the state board can conduct a formal
hearing for possible disciplinary action.
o The board must find it was more likely than not that the accountant's actions
constituted professional misconduct. Proof beyond a reasonable doubt is not
required.
o The accountant is entitled to due process of law.
-- Due process generally required when penalty includes loss of license, monetary
fine and/or jail.
o All adverse state board decisions are subject to judicial review.
State Board:
• Due process or judicial review is required.
• Can impose fines and revoke or suspend a license
State Society/AICPA:
• Due process or judicial review is not required.
• Cannot impose fines or revoke or suspend a license.
There are five penalties that a state board of accountancy may impose for
professional misconduct: - Answer-o Suspension or revocation of license
o A monetary fine
o A reprimand or censure
o Probation
o Requirement for continuing professional education (CPE) courses
probation - Answer-the release of an offender from detention, subject to a period of
good behavior under supervision
reprimand - Answer-(v.) to scold; find fault with; (n.) a rebuke
censure - Answer-harsh criticism or disapproval
Understatement Due to an Unreasonable Position [IRC Section 6694(a)] - Answer-•
Assessed because of the understatement of a taxpayer's liability due to an
unreasonable position taken by the taxpayer.
• A position is deemed unreasonable unless:
o There is reasonable basis for a disclosed position (>20 percent chance of winning
in court).
o There is substantial authority for the position (>40 percent chance of winning in
court).
- non disclosed position
o It relates to a tax shelter or reportable transaction which would meet the more-
likely-than-not standard (>50 percent chance of winning in court).
For disclosure:
Report on form 8275, if position is not contrary to U.S. treasury regulations
Report on form 8275-R, if position is contrary to U.S. treasury regulations
, Ordinary negligence (no intent) - Answer-• The penalty is equal to the greater of
$1,000 or 50% of the income the preparer received for tax return preparation
services
Understatement Due to Willful or Reckless Conduct [IRC Section 6694(b)] - Answer-•
Fraud—not in good faith.
o A willful attempt to understate the tax liability; or
o Reckless or intentional disregard of tax rules and regulations.
• Higher penalty - $5,000 or 75 percent of income preparer received.
Supporting Documentation - Answer-• Preparer is not required to obtain supporting
documentation unless the preparer has reason to suspect the accuracy of the
information provided by the client.
o Preparer must make reasonable inquiries if the information appears incorrect or
incomplete.
Penalty for Willful or Reckless Conduct - Answer-• The more egregious the conduct,
the higher the penalty.
o Equal to greater of $5,000 or 75 percent of the income the preparer derived with
respect to the tax return or refund claim.
o The penalty is reduced by any penalty assessed as a result of an unreasonable tax
position by a tax return preparer.
Tax Return Preparer Penalties for Unethical Behavior - Answer-Penalties assessed
under IRC Section 6695 are intended to protect the taxpayer from unethical
behavior.
Penalty is $60 per failure; maximum penalty of $30,000 per return period/calendar
year
• Failure to Provide Copy to Taxpayer (IRC Sections 6695, 6107)
o Does not apply if failure is due to reasonable cause and not willful neglect.
• Failure to Sign Return (IRC Section 6695)
• Failure to Furnish Identification Number of Preparer (IRC Section 6695)
• Failure to Properly Retain Records (IRC 6695, 6107, 6060)
o Preparer is required to keep a copy of the return or claim for three years following
the last day of the return period.
--- copy of returns and/or client list
• Failure to File Correct Information Returns (IRC Section 6695, 6060)
o Information about employees working as tax return preparers (name, address, tax
ID, where they work, etc.).
Negotiation of IRS Refund Check (IRC Section 6695) - Answer-• Any preparer who
endorses or negotiates a refund check issued to a taxpayer shall pay a penalty of
$600 for each check endorsed
Failure to Be Diligent in Determining a Client's Eligibility for the Earned Income
Credit [IRC Section 6695(g)] - Answer-• Penalty for failure to comply with the IRS'
due diligence requirements is $600 for each failure.
• Due diligence is required by the tax preparer to determine whether a client is
eligible for the earned income credit. Requirements include:
o Eligibility checklists;
AND TAX RETURN PREPARER
PENALTIES REG R4-M2 EXAM
QUESTIONS WITH VERIFIED
ANSWERS
Historically, the most commonly tested issues regarding the tax liability rules include:
- Answer-• Endorsing and cashing refund checks. (Key: Endorsing and negotiating a
client's refund check—regardless of amount—is forbidden.)
• Preparing returns that understate tax liability. (Key: Although a tax preparer cannot
willfully aid in understating tax liability, the preparer has no affirmative duty to check
the veracity of the facts presented by the client, with a possible exception for facts
that appear implausible.)
• Disclosure of tax return information. (Key: Memorize the situations in which the tax
preparer is able to disclose information without the taxpayer's consent—disclosure in
all other situations without taxpayer consent is disallowed.)
Role of State Boards of Accountancy - Answer-Grant
Suspend
Revoke
State Boards of Accountancy have the sole power to license and revoke or suspend.
• Statutes in all 50 states grant the state boards of accountancy the sole power to
license certified public accountants.
• State boards are also the only entity with power to suspend or revoke a CPA's
license.
• Requirements for licensure vary from state to state and include all or some of the
following:
o Successful completion of CPA exam
o A residency requirement
o Educational requirements
o Experience requirements
Disciplinary Power of State Boards - Answer-• Although each state determines what
constitutes professional misconduct by a CPA sufficient to subject the CPA to
disciplinary action, there are three broad categories of misconduct:
o Misconduct while performing accounting services (e.g., negligence, fraud,
dishonesty, etc.)
o Misconduct outside the scope of accounting services (e.g., intoxication from
alcohol or drugs that significantly impairs the accountant's ability to perform
accounting services, insanity, etc.)
o Criminal conviction (e.g., commission of a felony, failure to file tax returns, crimes
relating to the practice of accounting, etc.)
,• After investigation of professional misconduct, the state board can conduct a formal
hearing for possible disciplinary action.
o The board must find it was more likely than not that the accountant's actions
constituted professional misconduct. Proof beyond a reasonable doubt is not
required.
o The accountant is entitled to due process of law.
-- Due process generally required when penalty includes loss of license, monetary
fine and/or jail.
o All adverse state board decisions are subject to judicial review.
State Board:
• Due process or judicial review is required.
• Can impose fines and revoke or suspend a license
State Society/AICPA:
• Due process or judicial review is not required.
• Cannot impose fines or revoke or suspend a license.
There are five penalties that a state board of accountancy may impose for
professional misconduct: - Answer-o Suspension or revocation of license
o A monetary fine
o A reprimand or censure
o Probation
o Requirement for continuing professional education (CPE) courses
probation - Answer-the release of an offender from detention, subject to a period of
good behavior under supervision
reprimand - Answer-(v.) to scold; find fault with; (n.) a rebuke
censure - Answer-harsh criticism or disapproval
Understatement Due to an Unreasonable Position [IRC Section 6694(a)] - Answer-•
Assessed because of the understatement of a taxpayer's liability due to an
unreasonable position taken by the taxpayer.
• A position is deemed unreasonable unless:
o There is reasonable basis for a disclosed position (>20 percent chance of winning
in court).
o There is substantial authority for the position (>40 percent chance of winning in
court).
- non disclosed position
o It relates to a tax shelter or reportable transaction which would meet the more-
likely-than-not standard (>50 percent chance of winning in court).
For disclosure:
Report on form 8275, if position is not contrary to U.S. treasury regulations
Report on form 8275-R, if position is contrary to U.S. treasury regulations
, Ordinary negligence (no intent) - Answer-• The penalty is equal to the greater of
$1,000 or 50% of the income the preparer received for tax return preparation
services
Understatement Due to Willful or Reckless Conduct [IRC Section 6694(b)] - Answer-•
Fraud—not in good faith.
o A willful attempt to understate the tax liability; or
o Reckless or intentional disregard of tax rules and regulations.
• Higher penalty - $5,000 or 75 percent of income preparer received.
Supporting Documentation - Answer-• Preparer is not required to obtain supporting
documentation unless the preparer has reason to suspect the accuracy of the
information provided by the client.
o Preparer must make reasonable inquiries if the information appears incorrect or
incomplete.
Penalty for Willful or Reckless Conduct - Answer-• The more egregious the conduct,
the higher the penalty.
o Equal to greater of $5,000 or 75 percent of the income the preparer derived with
respect to the tax return or refund claim.
o The penalty is reduced by any penalty assessed as a result of an unreasonable tax
position by a tax return preparer.
Tax Return Preparer Penalties for Unethical Behavior - Answer-Penalties assessed
under IRC Section 6695 are intended to protect the taxpayer from unethical
behavior.
Penalty is $60 per failure; maximum penalty of $30,000 per return period/calendar
year
• Failure to Provide Copy to Taxpayer (IRC Sections 6695, 6107)
o Does not apply if failure is due to reasonable cause and not willful neglect.
• Failure to Sign Return (IRC Section 6695)
• Failure to Furnish Identification Number of Preparer (IRC Section 6695)
• Failure to Properly Retain Records (IRC 6695, 6107, 6060)
o Preparer is required to keep a copy of the return or claim for three years following
the last day of the return period.
--- copy of returns and/or client list
• Failure to File Correct Information Returns (IRC Section 6695, 6060)
o Information about employees working as tax return preparers (name, address, tax
ID, where they work, etc.).
Negotiation of IRS Refund Check (IRC Section 6695) - Answer-• Any preparer who
endorses or negotiates a refund check issued to a taxpayer shall pay a penalty of
$600 for each check endorsed
Failure to Be Diligent in Determining a Client's Eligibility for the Earned Income
Credit [IRC Section 6695(g)] - Answer-• Penalty for failure to comply with the IRS'
due diligence requirements is $600 for each failure.
• Due diligence is required by the tax preparer to determine whether a client is
eligible for the earned income credit. Requirements include:
o Eligibility checklists;
