Question

1. Kopel was engaged to prepare Raff's 20x9 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in 20x9. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, 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 Raff had adequate records to support the deduction. Is Kopel subject to the preparer penalty for willful understatement of tax liability? Explain. 2. A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company? 3. Lin, CPA, is auditing the financial statements of Exchange Corporation under the Federal Securities Exchange Act of 1934. He detects what he believes are probable material illegal acts. What is his duty under the Private Securities Litigation Reform Act?

Answer 1

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

A tax return preparer may rely, without verification, on information provided by the taxpayer when the preparer is reasonably justified in relying upon the taxpayer's representations. However, a preparer must make a reasonable inquiry if the information appears to be incorrect or incomplete.

2. The tax preparer is responsible for disclosing both penalties to the company.

3. He must inform the audit committee or BOD.

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