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Exam 1 Chapters 1 - 6 SOLUTIONS

Exam 1 Chapters 1 - 6 SOLUTIONS - E xam I Chapters 1 6 1...

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Exam I: Chapters 1 – 6 1. CPA Jones is preparing Ron Richards individual tax return for the information submitted to him from Ron. The information appears to be correct and complete and does include information on travel and entertainment expenses. How much verification of the information should CPA Jones do? a. She should audit all items of information that appear on the return so as not to be subject to penalties. FALSE. A return preparer does not have to audit information presented by a client to prepare a tax return. See SSTS #3 and Circular 230 §10.22, §10.33 and especially §10.34 b. She should spot check some of the data to get a feel for the accuracy of all the information. FALSE See a. above. c. She can always complete rely on the information provided by the client. FALSE See citations for a. above. d. She can rely on the client information in this case as long as she also asks the required questions concerning any item on the return subject to special substantiation requirements, i.e., travel and entertainment. TRUE S ee a. above. 2. CPA Smith prepares the annual tax return for Bates & Company. He is not involved in the annual audit of Bates & Company’s financial statements. The audit is prepared by CPA Mitchell. In preparing the year-end audit, CPA Mitchell discovers an error in the prior year’s income tax return filed for Bates & Company. What should CPA Mitchell do? a. CPA Mitchell should report the error to CPA Smith, as a matter of professional courtesy, so CPA Smith can talk to the management of Bates & Company about it. FALSE See SSTS #6 and Circular 230 §10.21 CPA Mitchell, under no circumstances, may discuss the return with anyone other than the client. b. CPA Mitchell should advise the management of Bates & Company about the error and recommend that they talk to CPA Smith about it. TRUE See a. above. c. CPA Mitchell should not say anything since he knows CPA Smith and doesn’t want to get him in trouble. And, besides, CPA Mitchell is not a tax accountant so he doesn’t feel qualified to point out an error. FALSE See a. above.
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d. CPA Mitchell should advise the management of Bates & Company as well as the IRS about the error. FALSE See a. above 3. Who has the final responsibility for any tax return that is filed with the IRS? a. The tax return preparer, since this is the person who prepared it. FALSE, see SSTS #3 (6) and the taxpayer must sign the return and the return is prepared using the taxpayer’s information. The preparer has numerous responsibilities in preparing the return, but ultimately, it is the taxpayer who is responsible for the return. This is why a taxpayer can appear before the IRS without a representative and why if a practitioner discovers an error on a return the practitioner has to notify the taxpayer and it’s up to the taxpayer to correct the error.
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