Weekly Review Quiz #518: REG: Ethics, Professional Responsibilities and Federal Tax Procedures
Thank you for taking our Regulation (REG) review quiz. Check back again for five new sample REG CPA questions to help you prepare for the exam.
In a jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over workpapers without a client’s permission?
- Purchaser of the CPA's practice.
- State tax authorities.
- State court.
- State CPA society quality control panel.
Correct Answer D.
This answer is correct because in a jurisdiction having an accountant-client privilege statute, the CPA generally may not turn over workpapers without the client’s permission. It is allowable to do so, however, for use in a quality review under AICPA authorization or to be given to the state CPA society quality control panel.
ABC Corporation, a Chapter C corporation, had a correct tax amount of $1,000,000 but reported only $800,000. There is no claim of fraud. Is this a “substantial understatement” that will subject ABC to the 20% understatement penalty?
- Yes, and its penalty will be $40,000.
- Yes, and its penalty will be $20,000.
- Yes, and its penalty will be $10,000.
Correct Answer A.
Correct! This was a substantial understatement, because the $200,000 amount, while not exceeding $10,000,000, does exceed the lesser amount of 10% of the tax ($100,000) (which, in turn, exceeds $10,000). The penalty will be 20% × $200,000 = $40,000.
Edge Corp., a calendar year C corporation, had a net operating loss and zero tax liability for its 2016 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first quarter 2017 estimated income tax payment using the
- Yes, Yes
- Yes, No
- No, Yes
- No, No
Correct Answer B.
Corporations owing $500 or more in income tax for the tax year are required to make estimated tax payments or be subject to an interest penalty. The payments must be equal to the lesser of 100% of the tax liability for the current year (i.e., the annualized income method) or the preceding year (i.e., the preceding-year method). The payments cannot be based on the preceding year if: (1) the corporation did not file a return showing a tax liability for that year (e.g., the corporation experienced a net operating loss); (2) the preceding year was less than 12 months; or (3) the corporation had taxable income of over $1,000,000.
This response correctly indicates that the Edge Corp. could use the annualized income method for calculating its estimated tax payments. Firms can always use the annualized income method to calculate their estimated tax payments because there are no restrictions on the use of the method. In addition, this response correctly indicates that Edge Corp. could not use the preceding year’s tax liability as a basis for calculating its current year estimated tax payments. Edge Corp. cannot use the preceding year’s tax liability because the corporation experienced a net operating loss during that year and, as a result, there was no tax liability.
No penalty will be imposed on a corporation for underpayment of estimated tax for a particular year if
- The tax for that year is less than $500.
- Estimated tax payments for the year equal at least 93% of the tax shown on the return for that year.
- The corporation is a personal holding company.
- The alternative minimum tax is at least $1,000.
Correct Answer A.
The requirement is to determine the correct statement regarding the penalty imposed on a corporation for underpayment of estimated tax. No penalty will be imposed on a corporation for underpayment of estimated tax for a particular year if the tax for that year is less than $500.
Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:
- He is a member of the board of directors.
- The return does not contain a claim for a tax refund.
- He is not compensated.
- Returns for nonprofit organizations are exempt from the preparer rules.
Correct Answer C.
People are TRPs if (a) they are paid, (b) to prepare or retain employees to prepare, (c) a substantial portion, (d) of any federal tax return. Because Louis was not paid specifically to prepare the return, he does not satisfy the first requirement to be a TRP.
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