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http://www.flashcardexchange.com/cards/reg-individual-tax-memorize-827364 http://www.flashcardexchange.com/cards/reg-accountants-legal-responsibilities-cpafor-free-829212 1040 Individual Tax

2010 Personal exemption amount: 2010 Standard deduction: Single MFJ & Qualifying Widower Head of HH Addl ded for Elderly & Blind: Single Married (each) Dependent of another S - $1400 M - $1100 S - $5,700 MFJ-$11,400 H of H - $8,400

$3,650

FICA taxable wage limit Age 62-64 Social Security limit Child tax credit Annual Gift Tax Exclusion Student Loan Interest Deduction IRA Contribution

Greater of $950 or $300 + earned income, not to exceed regular standard deduction $106,800 $14,160 $1,000 $13,000 $2,500 $5,000

Age 50 catch-up SIMPLE IRA

$1,000 $11,500

Contribution limit Age 50 catch up 401(k), 403(b) and 457 limit: Contribution Limit Age 50 Catch-up Defined contribution - limit Defined benefit - benefit limit HSA Minimum deductible: Self Family 2009 Personal Exemption phaseout begins

$5,500

$16,500 $5,500

$49,000 $195,000 $1,200 $2,400 Single - $166,800 MFJ - $250,200 HOH - $208,500 Single - $112,500 MFJ - $150,000 HOH - $112,500 Single - $166,800 MFJ - $166,800 HOH - $166,800 Single - $100,000 MFJ - $100,000 HOH - $100,000 Single - $105,000 MFJ - $166,000 HOH - $105,000 $100,000 (for all) S - $55,000 MFJ - $89,000 HOH - $55,000 S or HOH - $4000 to $65,000 $2000 $65K-$80000 MFJ - $4000 to $130,000 $2000 $130K-$160,000 10% 15% 25% 28% 33% 35%

2009 AMT Exemption phaseout begins

2009 Itemized Deduction Reduction begins

2009 Rental Real Estate Allowance

2009 ROTH IRA contribution

IRA to ROTH conversion 2009 IRA deduction when active participant

2009 Higher Education Expense Deduction threshhold

Personal Tax brackets

2009-2010 L/T capital gains Making Work Pay credit

thru 15% tax bracket - 0% 25% and above - 15% Lesser of $400/$800 or 6.2% of tyhe taxpayer's earned income

Ineligible for Making Work Pay credit:

Making Work Pay phaseout limits & % Legal and court costs incurred for a discrimination awared is deducted where? Non-discrimination? Current year unemployment overpayments that are repaid in the current year are deducted where? Overpayments of $3000 or less that were paid in prior years are deducted where? Overpayments greater than $3000 from prior years that were repaid in the current year are deducted where? Is net income on Schedule C for statutory (W-2) employees treated as self-employment income? Statutory employees are (4):

Dependents Estates & trusts Taxpayers with no valid SS# (one spouse w/ valid # is OK) Non-resident aliens Over phaseout S/HOH/MFS: $75K-$95K, 2% MFJ: $150K - $190K Above-the-line, coded "UDC";

Itemized - 2% From current year unemployment received.

Schedule A 2% AGI ded

Lowest tax: 1. Schedule A 2%, or 2. Calculate current year credit and report on 1040 p 2 IRC 1341 based on difference in tax in the year originally received No

1. Drivers who distribute beverages (except milk), meat, veg, fruits, bakery products, or who pick up and deliver laundry or dry cleaning (if paid on commission) 2. Life insurance sales agents full-time 3. Home workers who work on materials or tgoods furnished by the enployer to the employers specs

4. F/T traveling sales agents, selling to wholesalers, retailers, contractors, or operators of hotels, restaurants, similar establishments. Common Law employee vs independent contractor: What are the 3 categories IRS looks at to determine this relationship? 1. Behavioral control

2. Financial control (worker has other customers? method of pmt hourly or set fee? workers investment in the business? worker has unreimbursed business expenses? Worker has risk of loss?

Which of the 3 independent contractor determining categories is irrelevant to IRS for professional occupations? Is an officer who receives payment always a statutory employee? Under what circumstances can an employee receive both a W-2 and a 1099? Give 3 examples.

3. Relationship of the parties involved (fringe benefits? vacation? ongoing indefinitely? workers services critical to business?) Behavioral control

Yes If the 2 services are completely different: Officer and Director; Officer and Salesman; Real Estate Agent and Bookkeeper 1. Reasonable basis for classification 2. Consistently report all information and file all required 1099 forms, on time. Filing W-2s for some of the employees, this requirement was not met. 3. Current and any predecessor businesses must have consistently6 classified the workers as independent contractors. employment taxes only (FICA, FUTA, income tax withholding, RRTA) 1. Reliance on court case or IRS ruling 2. Prior audit workers werent reclassified, tho issue was raised

3 requirements for Section 530 Safe Harbor (independent contractor) relief:

The Sec 530 safe harbor applies to which of the following: federal employment taxes, qualified retirement plans, fringe benefit plans. What are the 4 categories of reasonable basis for the Sec 530 safe harbor (independent contractor)?

3. Long-standing (10 years or more; 18%-25% of businesses or more) industry practice 4. Reliance on the advice of an attorney or accountant who knew the facts about the business Sec 530 independent contractor relief - can this be used if only a few of the workers performing the same duties are W-2 memployees? Can Sec 530 indep contractor relief be used for technical workers employed by firms to provide services to third parties? What are these types of positions? No

No

Engineer, designer, drafter, computer programmer, systems analyst, similarly skilled worker Is the taxpayer eligible for CSP (Classification Settlement Program) if 1099s were not timely filed? What is the problem with filing a Form SS-8 (worker classification determination ruling)? No. Fiilng the request could spark an IRS workerclassification audit. Could get an employee determination without providing a reasonable forum for employer to present case.

Can an employee file a Form SS-8 (worker classification determination ruling)?


What are the penalties when a worker is impropertly classified as an independent contractor? (7 answers)

Yes. This is a danger to the 1099 employer.

1.5% of FWT if 1099 was issued

3% of FWT if no 1099 was issued

Employee's income tax 20% of employee's FICA tax if 1099 was filed 40% of employee's FICA if no 1099 was filed Possibly liability for all employee's taxes

Possible invalidation of employee benefit plans, with resulting penalties Possible criminal fines

Are payments "paid by the United States or an agency thereof to an employee of the U. S. or an agency thereof" subject to the Form 2555 Foreign Earned Income Exclusion? To protect against worker classification, what 3 items should be in the indep. contractor agreement?

No.

1. Signed before worker is hired 2. Actual business arrangement should be described 3. Specifically mention that worker will not be treated as employee for federal tax purposes. Require competitive bids from independent contractors.

To protect against worker classification, what should be done regarding bids?

To protect against worker classification, what should be done regarding workers' compensation coverage?

Encourage them to carry their own.

To protect against worker classification, what should be done regarding loans to them?

Don't.

To protect against worker classification, what should be done regarding filing? What are 5 items that should be in the file?

Keep vendor records separate from employee records.

1. bids

2. contracts 3. Form W-9 4. workers' comp certificates 5. documented times work was turned down by the worker

For a taxpyer who is reclassified as an employee but paid SE tax, what happens to the excess FICA paid?

FSA 1992-1 IRS reclassifies the excess as income tax payment. (Very beneficial to the individual.)

What is From 8919 - Uncollected SS and MCare tax on Wages?

Employee who received a 1099 files this with his portion of the taxes. (Will cause an employer audit.) Usually must file with a SS-8.

Federal Income Tax: Transactions Relating to Dissolution of Marriage; Deductions

Front Back

Alimony: only category with tax consequences (deductible by payor; taxable by recipient) 1) In writing pursuant to a written divorce or separation All rules apply where spouses separate under written agreement separation agreement w/o getting a final divorce decree. 2) Living together disallowed- can't be same household 3) Cease at (or before death) of recipient (continued after = prop settlement) 4) Cash: payments must be in cash Above the Line Deductions (desirable bc subject to less restrictions): Other ATL deductions: Gross income - ATL deductions = adjusted gross income (AGI) Depreciation expense on property; rental expenses (incurred by owner/landlord); losses from sale/exchange Trade/Business expenses: ordinary and necessary of property (capital losses); deduction for alimony; *Business meals and entertainment may be deductible, if moving expenses; contrib to individual retirement incurred in overall business situation and taxpayer account substantiates expenses and business reasons for incurring (only 50% deductible) Deductions allowable in lieu of Standard Deduction (below the line or itemized deductions) Property taxes and income taxes imposed by state/local gov. are deductible. * Choose between itemized deductions and standard deduction, taking whichever's more In 2004-2005, taxpayer can elect to deduct sales taxes in lieu of deducting state and local income taxes. Neither fed Some of more important itemized deductions: income taxes, nor employee's share of Social Security - Mortgage interest paid on debt incurred to acquire 1st or taxes are deductible. 2nd home up to a total indebtedness of $1m For 2009, taxpayers may deduct up to $2500 as ATL * Interest expense is deductible based on what the taxpayer deduction on student loans incurred to pay the costs of does with borrowed proceeds. May be deductible if loan education, with this deduction not allowed if taxpayer has for business purposes or to purchase investments; home $75k of adjusted gross income for that year. Other types mortgage interest expense; educational expense. of personal interest are not deductible. Education expenses deductible only if they maintain or CREDITS: tax credits (one-for-one reductions of taxes improve necessary business skills and are not minimum owed) are allowed for education expenses. Hope credit requirement for a new field or do not qualify taxpayer for a (AOTC) allows a tax credit for up to $1800 a year, but

new job.

only for students who have not completed first 2 yrs of college. Lifetime Learning Credit may be chosen, which Exceptions: provides a max credit of $2k for 2009, with this credit DEDUCTIONS: Higher education expenses of up to $4k may not being limited to first 2 years of college. Law may be deducted ATL. Deduction out if taxpayer's AGI > students may take the Lifetime Learning Credit. Both $65k for a single person ($130k for joint); may not be Hope and Lifetime are out if taxpayer's AGI > $50k for taken in conjunction with te Hope Credit or Lifetime single person ($100k for married) Learning Credit May not be deducted because it is incurred to help qualify BarBri Expenses for a new job CLE Expenses May deduct expenses as business expense "Ugly Clothes Rule"- may only deduct cost of uniform (so no business suits); can't deduct lunch costs, commuting expenses Employee Expenses Deduct cost of interviewing for job only if search is in same field and then only certain expenses (2% floor) Legal Fees Legal expenses deductible only if they are allocable either to tax advice or to alimony. Rest are nondeductible.

Legal expenses are deductible only to the extent that they are properly allocable to taxable. The rest are Generally expenses aren't deductible bc personal. nondeductible. Sale of house/car --> realized loss (personal consumption, so not deductible) Personal losses Loss on sale of stock --> capital loss (ductible) Expenses may be deducted (up to point of income); additional expenses above the income amount are not deductible Married, joint: $11400 Married, separate: $5700 Head of household: $8350 Single: $5700 Treat debt as equivalent to cash. When person buys property and borrows to finance purchase, debt amt is included in the basis. When person sells property, and buyer assumes debt of seller, it's treated like the buyer paid additional cash.

Hobby Losses

Standard Deduction (2009)

Mortgage Transactions

Like kind exchange No gain or loss is recognized when property in a trade or business or held for investment (besides stock or securities) is exchanged solely for property of like kind (realty for realty or pesonalty for personalty)

* Generally, the basis of the new property received is equal to the basis of the old property given up.

Same rule for involuntary conversions (i.e., property is Rationale: taxpayer has continued ownership of same type destroyed, stolen or condemned and insurance or an of asset award is received/reinvested w/in 2 years in property for similar or related use) Apt building for grocery store qualifies. Personal residence for bus office bldg, business truck for investment real estate --> doesn't.

Personal residence

Under rule, if married couple files a return, and they both would qualify under rule, they may exclude up to $500k * If single person has owned and occupied their home for of gain from being taxed. at least 2 out of the last 5 years, they may exclude from income up to $250k of gain from the home sale. Age of Generally, this rule may be used, for both single and taxpayer irrelevant for qualifying. married persons, once every 2 years. Capital assets: all assets exceptLong-term capital gain taxed at max rate of 15% as Inventory; depreciable property; real property used in opposed to ordinary income, taxed at max rate of 35% business; accounts receivable; copyright/literary/musical/artistic compositions in their To qualify for LTCG, must have held capital asset > 12 creator's hands mos. If income low enough that you pay max of 10% on ordinary income, then you pay 5% on LTCG. Capital gains may be taxed at lower rates. Special harsh rule for capital gains on collectibles (art, Short-term capital gain taxed at max of 35% (same as rugs, antiques, metals, gems, stamps, coins). Assets don't ordinary income). STCG recognized when you have held qualify for LTCG rate of 15% tho held for > 12 mos. capital asset for 12 mos or less. Assuming more than 12 mos, they qualify for special rate of 28%. To qualify for LTCG, seller must have held prop > 12 mos. Holding Periods Tack In case of property acquired by seller as a gift, seller may tack/add on donor's hold period. Compare: ordinary losses (inventory property owned is * Capital losses are deducted first against capital gains. If sold for a loss): business assets ded. w/o lim they wipe out all capital gains, an additional $3k of capital losses may be deducted in the current year. Compare: Personal losses (pers furniture, pers car, home sold for loww)- never deductible

REG - Individual tax memorize


that it was included in income. Bad debt expense is actually the removal of a previously recognized income that was never received. If No income was recognized (cash basis) - no expense can be reported. Organizational costs of up to $5,000 can be expensed immediately. Then, the remaining organizational expenses are amortized over 180 months. Total = $5000+ amortized costs for the #of months municipal bond and losses on sales between them cannot be deducted until the property is eventually sold to an outside party. In contrast, gains continue to be taxable until the ownership level hits 80 percent. NET Any resulting capital gain is taxed but at the ordinary tax rate. There is no reduced rate as is applicable for individual taxpayers. Any net loss is not deductible. Instead, it can be carried back for three years to reduce or eliminate net capital gains. In addition, it can then be carried forward for up to five years. When a loss is carried back and forward in this manner, it is always handled as a short-term capital loss. ordinary and necessary In addition, the expense must be reasonable in amount.

A bad debt can only be deducted to the extent ________

How much of organizational costs of Corporation can be expensed in their first year of operations? In computing AMT , a portion of ___________ interest should be added to taxable income as a component of the adjusted current earnings (ACE) adjustment. When one party owns over 50 percent of a corporation, they are viewed as related parties Loses and Gains on sales_____

Corporations must ____ all short-term and long-term CAPITAL / INVESTMENT gains and losses.

Business expenses must be _______________ to be deductible. When property is conveyed from a corporation to an owner, whether as a nonliquidating distribution or as a liquidating distribution, it is recorded as ________

if it had been sold for its fair value.

When an owner transfers property to a corporation and the tax basis is retained by both parties and no income winds up with 80 percent or more of the outstanding stock, effect results. the transfer is handling like a partnership rather than a corporation. That is __________ Life insurance proceeds,

Schedule M-1 is a schedule found on the corporate income state and municipal bond interest, tax return (form 1120) in which the tax return preparer is and penalties and fines required to reconcile financial statement income (referred to as "book income") to the taxable income reported to the government. _______________ are all reported for tax purposes The payment of a foreign income tax is one of the few Normally, the benefit is larger if a credit is taken but the items in federal income tax rules that an item can be used at taxpayer is also allowed the option of using the amount either of two places. as an itemized deduction. adjusted gross income if the taxpayer is forced to move at least fifty miles. Moving expenses that relate to employment are deductible Casualty losses and gambling losses are both included in arriving at with itemized deductions. The cost of child care is a tax credit that reduces the amount of income taxes rather than adjusted gross income. ($250 in recent years). Qualified expenses include ordinary and necessary Educators in all of the grades from kindergarten through expenses paid in connection with books, supplied, the twelfth grade are allowed to deduct their out-of-pocket equipment, software, and the like. costs up to a maximum amount $___________ However, expenses for home schooling are not included as allowable costs for this deduction. What is true with respect to GAIN/LOSS on capital assets The taxpayer must report gains and losses on investment for individual taxpayers? property, but only reports gains on personal property. Because of the potential for abuse that would be available on transactions between related parties, GAIN/LOSS gains are taxed but losses are not deductible. are_______ written-off in the year the loan is deemed worthless and is categorized as short-term irrespective of the time period involved. The foregone interest is not A loan to a relative which has not been repaid is deductible.Non-business bad debts are deductible as categorized as Non-business bad debt and is _________ short term capital losses on Schedule D of the form 1040 in the year the debt becomes worthless. Such losses are treated as short-term capitales loss no matter how long the debt was outstanding. not earning income. The property will have a tax basis equal to the fair value The value of assets received through inheritance is not of the assets on the date of death. However, the executor reportable on an income tax return as income for the simple of the estate may choose an alternate valuation date reason that inheriting assets is which is 6 months from the date of death (or the date of conveyance, if earlier). The short-term capital loss and the long-term capital gain $3,000 per year. must be netted. Individual taxpayer can deduct capital Any remaining loss can be carried over indefinitely. losses but only up to $_______ Qualified dividends are those dividends collected from a US domestic corporation or a qualified foreign corporation. the same reduced rate that applies to long-term capital To encourage investments in these companies, the gains. dividends are taxed at _______ no taxable gain or loss is recognized. In the like-kind exchange of property and no boot (cash) Because no gain or loss is recognized, the taxpayer was received, __________ retains the tax basis given up. Because the trade was not of like-kind property, the basis removed and the asset received is recorded at its fair

of the property given up is

value. The difference in the new tax basis and the tax basis given up+cash paid is recorded as a gain on the exchange. Like-kind exchanges are normally tax-free. However, if the the lower of the boot or the gain on the exchange. The taxpayer receives boot (usually cash to even up the gain is determined by taking the tax basis surrendered exchange), a gain is recognized that is _____ and comparing it to the fair value received When property that has been received as a gift is sold above the previous owners tax basis, the difference is the gain on the sale. _________ a loss must be computed by comparing the amount When property that has been received as a gift is sold received with the lower of the previous owners basis or below the previous owners tax basis,________ the fair value at the date of gift. General rule: FMV>Donor's Basis -> use DONOR'S BASIS Basis of gifted stock and gain or loss on resale FMV < Donor's Basis -> 1) sell higher --> use Donor's Basis to calc. gain 2) sell between --> NO G/L 3) Sell lower --> use LOWER FMV on the day of gift The net short-term capital gain is taxed at ________rate. ordinary income rate In a like-kind exchange, the taxable gain is the lower of What is the tax basis of a new property in a like kind the gain on the trade or the cash (boot) received. If the exchange when FMV of a new item is < than FMV of old gain is actually a loss -- no gain is recognized. and boot is received? The items received must have a tax basis of the old item less boot received. the operation fails to earn a profit in any three of the Hobby loss rules apply to individuals, S corporations, most recent five years including the tax year in question. partnerships, estates, and trusts that are attributable to an Losses from a business can be used to reduce other activity not engaged in for profit. Taxpayers are presumed income but expenses related to a hobby are deductible to be engaged in a hobby if only to the extent of revenues earned. Benefits received under a cafeteria plan (child care reimbursements, group-term life insurance premiums, received in cash. Employer-provided health insurance) are not taxable unless _________ 1)breach of contract damages, compensation for services, jury duty fees and unemployment compensation, debt The items INCLUDED in income are : forgiven Other items that would be EXCLUDED from income are: 2)Employer-provided health insurance, group-term life insurance premiums (up to $50,00), gifts and inheritance and workers compensation. 1)the taxpayer has the right to choose cash instead of the stock. Stock dividends are not taxable as long as the new shares 2)Preferred stock dividends issued on common stock are are the same type as the previous shares. Stock dividends taxable because the stocks are different. The taxable are taxable if 1 and 2 amount is the fair market value per share times the number of shares issued. Normally, employees who have the option of receiving benefits or cash are deemed to have constructive receipt cafeteria plans. Employees are only required to include of the money and must include the amount of cash or the cash received in lieu of benefits that are offered under benefit no matter which option is chosen. An exception to these plans. this rule is provided under the rules for ________

Winnings from gambling activities are reported __________ Losses are shown as________

passive losses on rental activities are _______ Under normal situations, in non cash transaction, revenue reported for tax purposes is equal to ______ of the items actually received. All ordinary and necessary expenses to maintain and rent these houses can be taken as a deductible expense. This includes costs such as ______ For tax purposes, when work is done and an asset is received as payment other than cash, the assumption is that the ________ has been earned. The benefit received rule requires that when a taxpayer makes a contribution to a qualified charity, the deductible charitable contribution is reduced by the value of whatever is received by the taxpayer. An exception to this rule applies to contributions made to a college or university wo receives the right to purchase tickets to an athletic event. %?

1)within the income of the taxpayer. 2) miscellaneous itemized deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported. deductible up to $25,000 as long as the owner is an active participant in the management. The deductibility of this $25,000 is lost gradually if the taxpayer's income is especially high. the value depreciation, interest, insurance, repair, and maintenance. Charitable contributions are not necessary for the operation of rental homes. fair value of this asset Eighty percent of the payment is treated as a charitable contribution regardless of whether the tickets would have been otherwise available. The value of donated services or foregone income are not tax deductible but unreimbursed expenses related to these activities may be deductible. not deductible, but the cost of reconstructive surgery if necessitated by illness, accident, or the like. The installation of a swimming pool is not deductible even thought the exercise benefits the taxpayer. Burial expenses do not qualify as medical deductions and are not deductible for income tax purposes.

The cost of surgery that is purely cosmetic is ______

Joannie McKenzie is a single taxpayer. She incurs the following medical expenses for the current year: Medical insurance premiums: $2,000, Doctors' appointments: $800, Eyeglasses: $900, Handicapped ramp installation which Surgery that is only cosmetic in nature (liposuction) and does not increase the value of her home: $2,810, Home nonprescription medicine (such as for heartburn and health nurse: $16,000, Dentist: $580, Nonprescription migraines) are not deductible for income tax purposes. medicine for heartburn and migraines: $120, Liposuction: $21,000, Cost of mileage for medical appointments: $54. Which items are ND in calculation of Med. deduction? not deductible The cost of a business suit is _______ if it is required to even if it is required to comply with a dress code comply with a dress code because such clothing can be worn outside the workplace. in the year paid. be amortized and deducted over the life of the loan. To be deductible, points must be paid to secure a home Thus, points paid simply to refinance an existing equity or home acquisition loan . If the points are on the mortgage must be amortized over the life of the loan. original mortgage or the purpose of the loan is to make Points paid on a home equity loan used to improve the improvements to the property, the points can be deducted property (such as by adding a swimming pool) are ________ Otherwise, the points must________ deductible when paid. Points paid on home equity loan where the proceeds are not used for home improvements

Only three types of interest can be taken as an itemized deduction by an individual taxpayer:

must be amortized over the life of the loan. Prepayments of mortgage interest are required to be matched with the tax years to which the interest applies. interest on a home acquisition loan (to buy, construct, or improve home) of up to $1 million of debt, interest on a home equity loan (the house is used as security but the money is not used to buy, construct, or improve home) of up to $100,000 of debt, and interest expense to buy investments (but only the interest up to the amount of net investment income can be deducted). the lesser of the cost or fair value of the gift. The loss is the LOWER of the tax basis of the property OR the drop in value. That amount is then reduced by any insurance payment to arrive at the actual loss incurred Each casualty loss must then be reduced by $100 and all of the casualty losses combined must be further reduced by 10 percent of adjusted gross income.

If a short-term capital asset is donated to a qualified charity, the itemized deduction is ____

Calculate casualty loss

For individual income tax purposes, filing status is either a joint return or each must file as married but filing determined by examining the taxpayer's marital status as of separately. Anna may not file head of household, even December 31 of the tax year. Taxpayers who are married as though she maintains a home for dependent children, of the end of the year and do not have a separate maintence because she is not legally separated. agreement must file Taxpayers who meet the requirements for qualifying widow(er) may not file as head of household. Head of household is taxed at lower tax rate than single filers but at a higher rate than joint filers. Head of household also gets a higher standard deduction than single filers but FILING status rules lower than joint filers. Single taxpayers pay the highest tax rate of the three and have the lowest standard deduction. Filing status is determined as of December 31 of the tax year. Head of household is for single filers who maintain a home for an unmarried child or dependent relative. He/she should file married filing jointly in the year of What filing status should a taxpayer use in the year of death, then qualifying widow with dependent child for death and subsequent years in which the unmarried two years, and then head of household for all subsequent children continue to live with her/him? years,as long as she does not remarry and either an unmarried child or dependent relative lives with her. The statute is normally the due date for the return. If the taxpayer files before the due date, the statute still starts to run on the due date for the return. If the taxpayer files one or more extensions and files the return after the due date, the statute of limitation begins The statute of limitations is the time available to correct on the filing date. errors on a return by both the taxpayer and government. However, if there is fraud involved, there is no statute of limitations. If the taxpayer omits more than 25 percent of the income to be reported, the statute of limitations is extended to six years. If no extension and filed after due date - the statute of

limitation begins on the due date. If the couple takes itemiezed deductions each year rather any state income tax refunds as revenue and payment of than the standard deduction, they must include balances due on the state return in the year paid. parent, grandparents, siblings, children, grandchild, aunts. uncles, nephews, and nieces. Do not have to live with taxpayer to be Qualifying Blood relatives include relative Cousins are not considered to be blood relatives nor are in-laws. have to live for the Whole year with taxpayer increased level for the standard deduction. If 65 y.o. The tax laws provide a few tax benefits for the elderly. One Hitchcock does not itemize his deductions, he will take of those is an the standard deduction and he will be somewhat higher because of his age. If a couple has divorced or received a legal separation by they cannot file as married. the end of the tax year, an unmarried child lives with the taxpayer, the taxpayer can have the head of household status when without the child having to be a dependent. When doing a tax return for a client, the CPA is not required to do any investigation and can rely on the information provided unless it appears to be incomplete, inconsistent, or inaccurate. If a question arises, the CPA a 1/3 likelihood of success. can complete the return and take any position as long as it has a realistic possibility of being sustained. That has been defined as _____ that the amended return needs to be filed as quickly as possible. The CPA has been hired to complete the Year Two tax If the client does not file the amended return to correct return. The Year One tax return is the property of the the problem, CPA should consider resigning from the client. The problem with Year One T/R may well have Year Two engagement. The CPA should not be been an innocent mistake. CPA should advise the client associated with a party who files erroneous tax returns and refuses to correct them. the earned income credit. This credit is designed to provide benefit to low-income workers who have wages Under normal circumstances, income tax credits are or salaries (and, in most cases, a qualifying child). nonrefundable. The taxpayer can use them to reduce Because the purpose is to benefit workers with low income taxes to zero but cannot use them to create credits. income, the earned income credit was designed to be One major exception to that rule does exist: refundable; the benefit is available regardless of the amount of income tax that is owed. the Hope Scholarship credit is only available for the first two _______ year(s) of post-secondary education.

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REG Accountants' legal responsibilities MEMORIZE


Front Back the difference between the price paid for the securities

In a suit for damages under Section 11 of the Securities Act

of 1933 damages are calculated as A registration statement is used in connection with the issuance of securities. Misstatements contained in a registration are governed by

and their value on the date suit was filed. the provisions of the 1933 Securities Act.

actions which are tantamount to common law fraud, or a slightly lesser standard, gross negligence which amounts to reckless disregard for the truth. There must be evidence of a material misstatement or omission knowingly (or recklessly) made, which the injured Under the provisions of Section 10(b) of the Securities party relied upon to his or her detriment. The reliance is Exchange Act of 1934, an accountant may be held liable for an element which must be proven. The U. S. Supreme Court, in Central Bank of Denver v. First Interstate Bank of Denver (1994), ruled that entities may not be held liable under the provisions of the Securities Exchange Act of 1934 for merely aiding and abetting. (assisting). Under the provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be held liable for actions material is one of the elements which must be proven. which are tantamount (equivalent ) to common law fraud, or There must be evidence of a material misstatement or a slightly lesser standard, gross negligence which amounts to omission knowingly (or recklessly) made, which the reckless disregard for the truth. That the misstatement (or injured party relied upon to his or her detriment. omission) was a misstatement or omission of a material fact; knowingly made with an intent to deceive (scienter); relied upon by the complaining party; which results in To recover in an action for common law fraud, one must damages. prove five elements: Privity of contract may exist, but is not a necessary element. And, proof of mere negligence is not sufficient to establish scienter. an ordinarily prudent accountant would have, and exercise the degree of care that an ordinarily prudent accountant would exercise. This standard of care, An accountant must possess the skills that however, is dependent on the particular circumstances existing at the time the work is performed. An accountant is expected to exercise ordinary care and diligence, measured by the particular circumstances. more than merely negligent, but did not act with malice Constructive fraud by a CPA means that the CPA was of with a specific intent to deceive, but was reckless or grossly negligent. liability for breach of contract regardless of negligence. A CPAs failure to carry out the duty expressed in the (A CPAs failure to carry out the duty expressed in the engagement will result in engagement may or may not have been a product of negligence.) they are aware that their work will be relied upon, such CPAs are liable to third parties when as for an extension of credit. Orth, a CPA, conducted an audit of Palladium Resources, The correct answer was C. Inc., and rendered an opinion as to the companys financial condition. In a suit by Palladium Resources, Inc., against An accountant will be liable for breach of contract if Orth for breach of contract and negligence, which of the negligent in performing the contracted work. It is not following would be an INCORRECT statement as to the necessary for a client to prove gross negligence or standard of care required of Orth? fraud. All of the other statements are generally correct

A A violation of GAAP or GAAS will be evidence of the accountants negligence unless the accountant qualifies his/her opinion. B An accountant must exercise the skills that an ordinarily prudent accountant would have exercised under the particular circumstances of the audit engagement. C Orth will only be liable for breach of contract if he was grossly negligent. D Orth is NOT required to detect all fraudulent schemes in existence at Palladium Resources, Inc.

with regard to an accountants liability to a client and the standard of acre generally imposed by common law.

With respect to negligence, an accountant is liable to

For a third party to recover against a CPA, the third party must prove

A limited number of states have enacted laws granting varying degrees of

his client and in most jurisdictions, to the intended users of his work product where the users are members of a limited class, such as the case here (several investment bankers who were considering purchasing a controlling interest in Tracy Corporation). In addition, if Javiers wrongdoing was fraudulent or involved gross negligence (constructive fraud) his liability would extend to any third party injured thereby. fraud or gross negligence on the part of the CPA, or, if the CPA is merely negligent, the third party may recover if it can be shown that the CPA knew the third party would be relying on the CPA's work product, and actually did rely. accountant-client privilege, but the privilege is not as broad as the attorney-client privilege. Where such a privilege exists, only the client can wave the privilege.

The Internal Revenue Service Restructuring and Reform Act of 1998 gives taxpayers a privilege regarding written or The correct answer was B. verbal tax advice from a CPA. Which statement would represent an INCORRECT interpretation of the Section 7525 provides: With respect to tax advice, the Restructuring and Reform Act of 1998? same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a A The creation of the new privilege was not intended to taxpayer and any federally authorized tax practitioner modify, but rather to extend the attorney-client common law to the extent the communication would be considered a confidentiality privilege to other practitioners, such as CPAs. privileged communication if it were between a taxpayer B Information disclosed to a CPA for the purpose of and an attorney but only with respect to non criminal preparing a return is privileged under the Reform Act. tax matter before the Internal Revenue Service and non C The preparation of tax accrual work papers is not criminal tax proceedings in Federal court brought by or considered tax advice when developed to evaluate a clients against the United States. In addition, the privilege contingent tax liabilities in connection with financial does not extend to written tax advice to corporate condition disclosures. clients concerning their corporations involvement in D The privilege does not extend to written tax advice to tax shelters. corporate clients concerning their corporations involvement in tax shelters. If the legal action is based upon fraud, or on gross A legal action may be successfully maintained against an negligence which amounts to a reckless disregard for accountant by a person not in privity of contract with the the truth, lack of privity is no defense. Mere negligence accountant only under certain circumstances. by an accountant is actionable by an entity not in

The Sarbanes-Oxley Act requires that

privity with the accountant only if the accounting work was intended for the plaintiff (or for a group which included the plaintiff). financial reports reflect all material correcting adjustments; that offbalance sheet transactions be disclosed; and, that companies disclose to the public on a rapid and current basis additional information concerning material changes in financial condition or operations, in plain English. The Act further requires that each annual report include a discussion stating managements responsibility for establishing effective internal controls and procedures for financial reporting, and provide an assessment of the effectiveness of such controls and procedures. fraud, negligence or reliance in order to prevail.

Pursuant to the 1933 Securities Act, a CPA will be liable for misstatements or omissions in financial statements which are part of a registration statement if the misinformation is material and results in damages. A purchaser need not prove Under Section 11 of the Securities Act of 1933, a CPA may be liable, in connection with his work product, to purchasers of securities if the work product contains material misstatements or omissions, and damages were suffered. Plaintiffs need 1)_____on the part of the CPA, but a CPA can avoid liability by 2)_____ The Securities Act of 1933 requires that, in a public offering exceeding $5,000,000 either

1)not prove negligence 2)proving the exercise of due diligence.

a registration statement must be filed or resale of the securities within two years is restricted. general advertising, limits a sales to not more than 35 Rule 505 of regulation D permits a company to sell up to $5 nonaccredited investors and restricts resale for two million in securities over a 12 month period but years. prohibits______ SO share certificates must be marked with a legend indicating that resale is restricted. The Securities Act of 1933 imposes on companies who seek to raise capital in the marketplace a requirement that they to make an informed investment decision - generally first file a registration statement by which prospective assuring investors are provided information about the company necessary ______ Violations of the Section 17(a) of the Securities Act of 1933, civil penalties,forfeiture of profits, including and Sections 10(b) and 13(b)(5) of the Securities Exchange prejudgment interest, as well as Act of 1934 can result in ___ a permanent injunction prohibiting future violations. Rule 506 of regulation D permits a company to sell an a two year waiting period and if a registration statement unlimited amount of securities to accredited purchasers but is first put into effect. limits immediate resale by imposing material misstatement (or omission) in the financial For a purchaser of original issue securities to hold liable statements, and experts who participated in the preparation of the registration damages. statement, the purchaser must prove the existence of a _____ These are the only elements of 1933 Act fraud, unlike and _______ common law fraud which requires, in addition, scienter (intent to deceive) and reliance. Material misstatements or omissions in connection with a a violation of the anti fraud provisions of the 1933 sale of securities is___ Securities Act.

Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings and employee stock benefit plans. Sale of restricted securities can be made by complying with the mandates of Rule 144. In general, this means

Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related to securities trading, including

The 1934 Act regulates proxy solicitation, which is information that must be given to a corporation's shareholders prior to soliciting votes. Prior to every shareholder meeting, a registered company must provide each shareholder with a proxy statement containing certain material, along with a proxy

SLUSA provides for preclusion of certain securities class actions brought under state law: No covered class action based upon the statutory or common law of any State may be maintained in any State or Federal court by any private party alleging (A) and (B)

Proof reliance or intent are not necessary. There is a critical distinction between disclosing the risk a future event might occur and disclosing actual knowledge the event will occur. Phish's cautionary language only disclosed a risk that the Motor Vehicle Department might leave Marx Place, not his knowledge that it actually planned to do so in the near future. holding the stock for two year before selling, or, holding the stock for one year, then selling in small brokered transactions. If the securities are not held for two years, there must be adequate current information available about the issuer. This generally means the issuer has complied with the periodic reporting requirements of the Securities Exchange Act of 1934. trading on inside information. Mal traded on insider information and as a result is subject to both criminal and civil penalties. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. Mal was not in violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares. form on which the shareholder may vote on each proposal to be presented at the meeting. For securities registered in the names of brokers, a company must attempt to determine the beneficial ownership of the securities and furnish sufficient copies of the proxy statement for distribution to all beneficial owners. Copies of the proxy statement and proxy form must be filed with the SEC when first mailed to shareholders. Under certain circumstances preliminary copies must be filed ten days before mailing. Although a proxy statement does not become "effective" in the same way as a statement registered under the 1933 Act, the SEC may comment on and require changes in the proxy statement before mailing. Proxies for an annual meeting calling for election of directors must include a report containing financial statements covering the previous two fiscal years. Special rules apply when a contest for election or removal of directors is scheduled. (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. SLUSA does not itself displace state law with

federal law but makes some state-law claims nonactionable through the class action device in federal as well as state court. first file with the SEC and furnish to each offeree a statement that includes the background of the person or group; the source of funds used and the purpose of the acquisition; the number of shares owned; and any The Williams Act of 1968 amended many sections of the relevant contracts, arrangements, or understandings. In 1934 Securities Exchange Act to address problems with addition, the offer must be made to all holders of the tender offers. Pursuant to the Williams Act, persons making class of securities sought, and a uniform price must be a tender offer that would result in ownership of more than 5 paid to all tendering shareholders. A shareholder may percent of a class of registered securities must withdraw tendered shares at any time while the tender offer remains open. If the person making the offer seeks fewer than all outstanding shares and the response is oversubscribed, shares will be taken up on a pro rata basis. Companies whose securities are traded on a national securities exchange or whose assets are in excess of register under the Securities Exchange Act of 1934 and $10,000,000 and which have equity securities held by more comply with its provisions. than 500 persons must ___________ The Securities Exchange Act of 1934 prohibits actual fraud in connection with the sale of securities in interstate commerce, as well as fraudulent schemes involving the sale of securities and market manipulation. reasonable reliance No actual fraud is present because the statements by Chute Enterprises' president would not be considered factual since statements regarding FUTURE events are not typically expected to induce_______________ . (the annual 10-K filing and the quarterly 10-Q filing). The filed reports are available to the public through The 1934 Act requires that issuers regularly file material EDGAR. In the event of a material event, the company information with the SEC ____ must timely issue an 8-K filing that reflects these changed conditions. Tender offers for 5% or more of a registered company must be reported. a misstatement or omission of a material fact, To establish a claim for damages under Section 10(b) and knowingly made (or made with reckless disregard for Rule 10b-5 of Securities Exchange Act of 1934 one must the truth), relied upon by the injured party, and prove damages. The plaintiff can be the buyer or seller of securities. a member of the board of directors of the issuer, and shall otherwise be independent; the audit committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer; Section 301 of the Sarbanes-Oxley Act provides: Each the audit committee shall establish procedures for the member of the audit committee shall be "receipt, retention, and treatment of complaints" received by the issuer regarding accounting, internal controls, and auditing; and, each audit committee shall have the authority to engage independent counsel or other advisors, as it determines necessary to carry out its duties.

1. w/papers are subpoenaed and relevant to a court case 2. w/papers must be given to a surviving member of the acct-ts firm 3. a state CPA society review Workpapers belong to the accountant that prepares them, not 4. to defend a lawsuit brought by client the client. The acct-t is prohibited from showing the 5 official investigation of the AICPA workpapers to anyone without the client's permission Except 6. GAAP/GAAS requires disclosure NOTE - a person to whom a CPA sells his or her practice is NOT on the list person in privily if contract with the CPA and intended third party beneficiaries. any person or Limited foreseeable class of persons whom the CPA knows will rely on the CPA's work. Intent negligence privity or reliance 1 Gross negligence 2 Simple negligence Without GOOD FAITH mere negligence is not enough an INTENTIONAL misrepresentation or omission of a material fact failing to timely file a client's TR failing to advise a client of certain tax deductions neglecting to evaluate the option of preparing Joint or Separate returns an act discreditable to the profession FRAUD or GROSS NEGLIGENCE intent to defraud (SCIENTER) or deceive. A good defense would be proof that there was a lack of 'scienter' Government Accountability Office Integrity and Objectivity Accounting and Review Services Committee New legislation Evolution of a new form of business transacrion

A minority of states follow the ULTRAMARES decision, which limits CPA liability to _________ and _________ The majority rule, a CPA's duty to care runs to Section 11 of the 1933 Act Plaintiff need not to prove_________ According to ULTRAMARES, the third party that proves _________ will be successful in reaching the CPA without regard to privity; CPA will NOT be liable to third parties for ___________ Under the provisions of Section 10(b) of the Securities Exchange Act of 1934, an accountant may be held liable if the CPA acted Securities Exchange Act of 1934 provides for liability in the case of _______ in connection with the purchase or sale of any security. A CPA will be liable to a Tax client for damages from (3) if a CPA hasn't file a TR for 3 years , he has committed _______ A CPA may be held liable to Any party who suffered a loss as a result of ___________ The essential element of 'common law fraud' is an _________ Which of the following bodies promulgates standard of audits of federal financial assistance recipients CPAs are required to maintain ___________ even if they are not in public practice. ____________ is the committee designated by the AICPA to promulgate standards in connection with unaudited financial statements of nonpublic entities that are NOT req. to file F/S Which events may justify a departure from a Statement of Financial Accounting Standards

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REG Accountants' legal responsibilities CPAfor free

If Pierce successfully sues Grant, Grant & Wall, CPAs, for damages under Section 11 of the Securities Act of 1933, what will be the measure of Pierces damages? The correct answer was A. A The difference between the price paid for the securities and their value on the date suit was filed. B The difference between the price paid for the securities and their value on the date of trial. C Two times the difference between the price paid for the securities and their value on the date suit was filed. D Two times the difference between the price paid for the securities and their value on the date of trial. A CPA may be liable to a purchaser of securities for certifying financial statements which are included as part of a registration statement and which contain materially false information. Such a purchaser is most likely to recover damages under the provisions of In a suit for damages under Section 11 of the Securities Act of 1933 damages are calculated as the difference between the price paid for the securities and their value on the date suit was filed.

The correct answer was C. A registration statement is used in connection with the issuance of securities. Misstatements contained in a registration are governed by the provisions of the 1933 Securities Act.

A The Sarbanes-Oxley Act. B The Securities Exchange Act of 1934. C The Securities Act of 1933. D Regulation FD (Full Disclosure). Harvest Services Corporation engaged Willet & Fund, CPAs, to conduct an audit of Harvest. Wren, president and CFO of Harvest, knowingly misled Willet & Fund, CPAs, in the course of their audit resulting in material misstatements of to companys profitability. Young, who purchased Harvest common stock in reliance upon the financial statements, has filed suit against Willet & Fund, CPAs, under the anti-fraud provisions of the Securities Exchange Act of 1934 for losses sustained due to the errors contained in the audited financial statements. Which is correct?

The correct answer was B.

Under the provisions of Section 10(b) of the Securities Exchange Act of 1934, an accountant may be held liable for actions which are tantamount to common law fraud, or a slightly lesser standard, gross negligence which amounts to reckless disregard for the truth. There must be evidence of a material misstatement or omission knowingly (or recklessly) made, which the injured party relied upon to his or her detriment. Thus, answer B is correct since reliance is an element which must be proven. With regard to answer A Willet & Fund, CPAs, may be held liable as aiders A, the U. S. Supreme Court, in Central Bank of Denver v. and abettors even if they acted in good faith. First Interstate Bank of Denver (1994), ruled that entities B Young must prove reliance in order to recover. may not be held liable under the provisions of the Securities C Mere negligence on the part of Willet & Fund, CPAs, Exchange Act of 1934 for merely aiding and abetting. in being misled by Wren will result in liability. D Young may recover upon proof that Willet & Fund, CPAs, did not act with due diligence. HHG Enterprises engaged Barrington & Associates, The correct answer was D. CPAs, to prepare financial statements. In reliance upon these financial statements, Folkes purchased 10,000 Under the provisions of Section 10(b) of the Securities shares of HHG Enterprises common stock. Folkes later Exchange Act of 1934, a CPA may be held liable for

filed suit against Barrington & Associates, CPAs, under the provisions of Section 10(b) of the Securities Exchange Act of 1934 claiming that the financial statements prepared and certified by Barrington contained a misstatement as to certain contingent liabilities. For Folkes to succeed in his suit he must prove that

actions which are tantamount to common law fraud, or a slightly lesser standard, gross negligence which amounts to reckless disregard for the truth. That the misstatement (or omission) was material is one of the elements which must be proven. There must be evidence of a material misstatement or omission knowingly (or recklessly) made, which the injured party relied upon to his or her detriment.

A Barrington & Associates, CPAs, failed to follow GAAP. B Barrington & Associates, CPAs, acted negligently. C The financial statements were contained in a registration statement. D The misstatement regarding contingent liabilities was material. Which of the following would constitute a valid defense The correct answer was D. by a CPA in an action for fraud where the plaintiff was NOT in privity of contract with the CPA? To recover in an action for common law fraud, one must prove five elements: a misstatement or omission; of a material fact; knowingly made with an intent to deceive A The engagement was ambiguous as to the CPAs (scienter); relied upon by the complaining party; which responsibilities. results in damages. D is the best answer since proof or B The CPA does not carry malpractice insurance which reliance is a necessary element to proving fraud, and proof covers losses due to fraud. that the reliance was not reasonable may defeat the C The CPA followed the instructions of his client. plaintiffs claim. D The plaintiffs reliance was not reasonable. In a suit by Clem against Price, CPA, for common law The correct answer was B. fraud, Price will prevail even if To recover in an action for common law fraud, one must prove five elements: a misstatement or omission; of a A Clem can only prove negligence on the part of Price. material fact; knowingly made with an intent to deceive B Clem was NOT in privity of contract with Price. (scienter); relied upon by the complaining party; which C Clem did not actually rely on the work product results in damages. Privity of contract may exist, but is not generated by Price. a necessary element. And, proof of mere negligence is not D Prices error, though intentional, was minor in nature. sufficient to establish scienter. One has fulfilled the general standard of care expected of an accountant if The correct answer was C. An accountant must possess the skills that an ordinarily prudent accountant would have, and exercise the degree of care that an ordinarily prudent accountant would exercise. This standard of care, however, is dependent on the particular circumstances existing at the time the work is performed. An accountant is expected to exercise ordinary care and diligence, measured by the particular circumstances. The correct answer was D. Constructive fraud by a CPA means that the CPA was more than merely negligent, but did not act with malice of with a specific intent to deceive, but was reckless or grossly

A the accountant has faithfully follow the standards imposed by GAAP. B the accountant has acted in good faith. C the services provided by the accountant were provided with the level of skill ordinarily exercised under the circumstances. D the accountant has exercised his best efforts in connection with the services provided. With regard to the liability of a CPA in conducting an audit, which of the following statements is INCORRECT?

A A CPA who recklessly departs from the ordinary standard of care would be liable to third parties. B A CPAs failure to carry out the duties expressed in the engagement will result in liability only if the CPA was negligent or grossly negligent. C In an action against the CPA based on constructive fraud, it must be proven that the CPA acted in a grossly negligent manner. D A CPA only has liability to the client. Orth, a CPA, conducted an audit of Palladium Resources, Inc., and rendered an opinion as to the companys financial condition. In a suit by Palladium Resources, Inc., against Orth for breach of contract and negligence, which of the following would be an INCORRECT statement as to the standard of care required of Orth?

negligent. A CPAs failure to carry out the duty expressed in the engagement will result in liability for breach of contract regardless of negligence. (A CPAs failure to carry out the duty expressed in the engagement may or may not have been a product of negligence.) And, CPAs are liable to third parties when they are aware that their work will be relied upon, such as for an extension of credit.

The correct answer was C. An accountant will be liable for breach of contract if negligent in performing the contracted work. It is not necessary for a client to prove gross negligence or fraud. All of the other statements are generally correct with regard to an accountants liability to a client and the standard of acre generally imposed by common law.

A A violation of GAAP or GAAS will be evidence of the accountants negligence unless the accountant qualifies his/her opinion. B An accountant must exercise the skills that an ordinarily prudent accountant would have exercised under the particular circumstances of the audit engagement. C Orth will only be liable for breach of contract if he was grossly negligent. D Orth is NOT required to detect all fraudulent schemes in existence at Palladium Resources, Inc. Javier, CPA, was engaged by Madison to prepare audited financial statements for Tracy Corporation. Javier was made aware at the time of the engagement that Tracy Corporation intended to submit the financial statements to several investment bankers who were considering purchasing a controlling interest in Tracy Corporation. Prime Reserve Fund ultimately purchased a controlling The correct answer was C. interest in Tracy Corporation based in part on the audited financial statements produced by Javier. Which of the With respect to negligence, an accountant is liable to his following statements is correct? client and in most jurisdictions, to the intended users of his work product where the users are members of a limited class, such as the case here (several investment bankers A Javier, CPA, has no duty to any entity other than who were considering purchasing a controlling interest in Tracy Corporation. Tracy Corporation). In addition, if Javiers wrongdoing B In a majority of jurisdictions, Javier, CPA, would be was fraudulent or involved gross negligence (constructive liable for negligence to any foreseeable users of the fraud) his liability would extend to any third party injured audited financial statements. thereby. C Javier, CPA, would be liable, in most jurisdictions, to Prime Reserve Fund for negligence committed in connection with the audits. D Since Javier, CPA, is not in privity of contract with Prime Reserve Fund, Javier would have no liability to Prime for any wrongdoing. Lipton Enterprises, considering a buyout of Moss & Co., The correct answer was C.

demanded it be provided audited financial statements of the company. Lipton was presented with certified For a third party to recover against a CPA, the third party financial statements prepared by Drake & Drake, CPAs. must prove fraud or gross negligence on the part of the The liabilities of Moss & Co. were grossly understated in CPA, or, if the CPA is merely negligent, the third party the financial statements certified by the Drake firm. may recover if it can be shown that the CPA knew the third Lipton Enterprises suffered serious losses as a result of party would be relying on the CPAS work product, and the merger which related the understatement of Moss & actually did rely. Co.s liabilities. To recover against Drake & Drake, CPAs, Lipton Enterprises must prove: I. Drake & Drake CPAs was aware that a third party, such as Litpon Enterprises, would be relying on the financial statements; II. Lipton Enterprises actually relied on the financial statements; III. Drake & Drake, CPAs was negligent.

A I only B I and II only C I, II and III D I and III only BrainTree Investments engaged PPL Associates, CPAs, to audit BrainTrees financial statements. In the course of the audit, PPL Associates discovered an embezzlement scheme involving two of BrainTrees top officers. With regard to a claim of accountant-client The correct answer was B. privilege, A limited number of states have enacted laws granting varying degrees of accountant-client privilege, but the A the accountant-client privilege is virtually identical to privilege is not as broad as the attorney-client privilege. the attorney-client privilege. Where such a privilege exists, only the client can wave the B BrainTree Investments may waive the accountantprivilege. client privilege. C no states have yet enacted an accountant-client privilege. D an accountant-client privilege is only available in federal court. The Internal Revenue Service Restructuring and Reform Act of 1998 gives taxpayers a privilege regarding written The correct answer was B. or verbal tax advice from a CPA. Which statement would represent an INCORRECT interpretation of the Section 7525 provides: With respect to tax advice, the Restructuring and Reform Act of 1998? same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a A The creation of the new privilege was not intended to taxpayer and any federally authorized tax practitioner to the modify, but rather to extend the attorney-client common extent the communication would be considered a privileged law confidentiality privilege to other practitioners, such communication if it were between a taxpayer and an as CPAs. attorney but only with respect to non criminal tax matter B Information disclosed to a CPA for the purpose of before the Internal Revenue Service and non criminal tax preparing a return is privileged under the Reform Act. proceedings in Federal court brought by or against the C The preparation of tax accrual work papers is not United States. In addition, the privilege does not extend to considered tax advice when developed to evaluate a written tax advice to corporate clients concerning their clients contingent tax liabilities in connection with corporations involvement in tax shelters. financial condition disclosures.

D The privilege does not extend to written tax advice to corporate clients concerning their corporations involvement in tax shelters. On February 1, Halsey commenced an action against Pound & Associates, CPAs for damages in connection with certified financial statements prepared by Pound & Associates. Pound & Associates has alleged lack of privity as a defense. Pound & Associates will prevail based on this defense if

The correct answer was D.

A legal action may be successfully maintained against an accountant by a person not in privity of contract with the accountant only under certain circumstances. If the legal action is based upon fraud, or on gross negligence which amounts to a reckless disregard for the truth, lack of privity is no defense. Mere negligence by an accountant is A Halsey is the client of Pound & Associates. actionable by an entity not in privity with the accountant B Halseys suit is based on common law fraud. only if the accounting work was intended for the plaintiff C the evidence presented at trial is of reckless disregard (or for a group which included the plaintiff). Of course, if for the truth on the part of Pound & Associates, CPAs. Halsey is Pound & Associates client (answer A) they are in D Halsey, based on the financial statements, extended privity of contract with one another and alleging lack of credit to Forte Corp. for whom Pound & Associates, privity would be contrary to the facts. CPAs, prepared and certified the financial statements. To comply with the provisions of the Sarbanes-Oxley The correct answer was C. Act, members of an audit committee must ensure which of the following: I. Financial reports reflect all material The Sarbanes-Oxley Act requires that financial reports correcting adjustments; II. Offbalance sheet reflect all material correcting adjustments; that offbalance transactions be disclosed; III. Companies disclose to the sheet transactions be disclosed; and, that companies public on a rapid and current basis information disclose to the public on a rapid and current basis additional concerning material changes in its financial condition. information concerning material changes in financial condition or operations, in plain English. The Act further requires that each annual report include a discussion stating A I only managements responsibility for establishing effective B II and II only internal controls and procedures for financial reporting, and C I, II and III provide an assessment of the effectiveness of such controls D II and III only and procedures. Davidson & Co., CPAs failed to include certain charges against income in the financial statements which it prepared for its client, Bayliss Bros., Inc. Davidson & Co.s unqualified opinion accompanied the financial statements as a part of a registration statement which was filed in connection with a public offering of The correct answer was A. nonvoting common stock by Bayliss Bros., Inc. In a suit by Lake, a purchaser of a significant portion of the initial Pursuant to the 1933 Securities Act, a CPA will be liable public offering, against Davidson & Co., CPAs, for for misstatements or omissions in financial statements losses incurred when the shares dropped in value, Lake which are part of a registration statement if the CANNOT prevail unless he can prove that misinformation is material and results in damages. A purchaser (Lake) need not prove fraud, negligence or reliance in order to prevail. A the omission was material. B he reviewed the financial statements. C the omission was negligent. D Davidson & Co., CPAs, acted with reckless disregard for the accuracy of the financial statements. Brent, a CPA, was a lead accountant in the preparation The correct answer was A. of various financial information which was included in Fausst & Co.'s registration statement filed in connection Under Section 11 of the Securities Act of 1933, a CPA may with an initial public offering by Fausst. Under Section be liable, in connection with his work product, to

11 of the Securities Act of 1933, Brent may be liable to purchasers of Fausst & Co. securities even though

purchasers of securities if the work product contains material misstatements or omissions, and damages were suffered. Plaintiffs need not prove negligence on the part of the CPA, but a CPA can avoid liability by proving the A the purchaser cannot prove negligence by Brent. exercise of due diligence. The necessary element of B Brent is able to prove that he exercised due diligence. materiality is absent in answer C and damages are absent in C the misstatements alleged by the purchasers were not answer D. material. D the value of the stock on the date suit is filed is greater than the price paid by the purchasers. In an initial public offering by McKenny-Rice Management Group, LLC, Rice, a founding member and principal, was granted options to purchase 5% of the shares being offered to the public. Six months later, Rice exercised part of his options, purchasing a 1% stake in the company. McKenny-Rice Management Group, LLC, The correct answer was B. raised $12,000,000 in connection with the stock offering. Rice The Securities Act of 1933 requires that, in a public offering exceeding $5,000,000 either a registration statement must be filed or resale of the securities within A is in violation of SEC regulation 144. two years is restricted. B may resell the shares without restriction if a registration statement was in effect. C holds restricted securities regardless of registration. D holds shares which are exempt from any restrictions since he is not a controlling person. Bastille Iron Works, Inc., wishes to make an offering of securities which will comply with the rules for exemption under Rule 505 of Regulation D of the Securities Act of 1933. To meet these requirements The correct answer was C. A all purchasers must be accredited investors. B a registration statement must be filed with the SEC, but need not be approved. C share certificates must be marked with a legend indicating that resale is restricted. D Bastille Iron Works, Inc., may advertise to the general public the availability of its securities, but may not advertise on the internet. In general, the provisions of the Securities Act of 1933 accomplish the goal of stability in the marketplace for securities by Rule 505 of regulation D permits a company to sell up to $5 million in securities over a 12 month period but prohibits general advertising, limits a sales to not more than 35 nonaccredited investors and restricts resale for two years.

The correct answer was A. A generally assuring that prospective investors are provided information about an issuer of securities necessary to make an informed investment decision. B providing a government guaranty as to the soundness of securities issued by private companies. C establishing the Securities Assurance Fund to which investors may apply for full or partial reimbursement for losses sustained due to fraudulent securities schemes. The Securities Act of 1933 imposes on companies who seek to raise capital in the marketplace a requirement that they first file a registration statement by which prospective investors are provided information about the company necessary to make an informed investment decision.

D guarantying the accuracy of information contained within any registration statement which has been approved by the SEC. Watson along with four other executives of PittWay, Inc., engaged over many years in a fraudulent scheme to grant undisclosed "in-the-money" options to themselves and to others by backdating stock options to coincide with historically low closing prices of PittWay common stock. Among other things, Watson created company records that falsely indicated that PittWay's compensation committee had approved a grant of stock options on a date when, in reality, no such corporate action took place. Pittway, Inc., is a publicly traded company. Watson's actions could result in

The correct answer was D. Violations of the Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 can result in civil penalties,forfeiture of profits, including prejudgment interest, as well as a permanent injunction prohibiting future violations.

A a court order permanently enjoining Watson him from violating the antifraud and securities ownershipreporting provisions of the federal securities laws. B civil monetary penalties. C disgorgement of profits. D all of the above. Countdown Corporation issued $15,000,000 of new securities to finance expansion in overseas markets. The entire block of securities was sold to Magna Insurance and Pension Group without the filing of a registration statement. Resale of the securities by Magna to the The correct answer was C. general public Rule 506 of regulation D permits a company to sell an unlimited amount of securities to accredited purchasers but A is unrestricted. limits immediate resale by imposing a two year waiting B would be unlawful because the original sale to Magna period. was in violation of the Securities Act of 1933. C may be made if a registration statement is first put into effect. D can be made without restriction after one year from the original sale to Magna. Krauss & Co., CPAs, certified the financial statements of Boardwalk Corporation. The financial statements of Boardwalk, which were included in company's registration statement, contained material misstatements. The correct answer was A. Under Section 11 of the Securities Act of 1933, Krauss & Co., CPAs, will NOT be liable to a purchaser of the For a purchaser of original issue securities to hold liable securities experts who participated in the preparation of the registration statement, the purchaser must prove the existence of a material misstatement (or omission) in the A who suffered no damages. financial statements, and damages. These are the only B if the purchaser exercised due diligence. elements of 1933 Act fraud, unlike common law fraud C unless the purchaser can prove intent or reckless which requires, in addition, scienter (intent to deceive) and disregard for the truth on the part of Krauss & Co., reliance. CPAs. D unless there is privity between the purchaser and Krauss & Co., CPAs.

Peter Phish is CEO and 50% owner of Phish & Assoc., a registered broker dealer. Phish served as underwriter for municipal bonds to finance the purchase of Marx Place, an office building. The bonds had a maturity of five years and were sold to buyers in several states. At the time the bonds were offered for sale, the state Motor Vehicle Department (MVD) occupied 70% of Marx Place. At the time he promoted the sale of the bonds, Phish knew that the MVD intended to move to a new location within 18 months. Occupancy of Marx Place by a state agency was critical to the tax exempt status of the bonds. Cautionary statements in the offering documents warned, in boldface capital letters: "Certain leases are scheduled to expire prior to the maturity of the bonds; there is no guarantee that the Motor Vehicle Department will renew its lease." Subsequent to the bond sale, the Department of Motor Vehicles vacated Marx Place and the bonds lost their tax exempt status. An action by purchasers of the bonds against Phish & Assoc. under the anti-fraud provisions of the 1933 Securities Act will

The correct answer was D. Material misstatements or omissions in connection with a sale of securities is a violation of the anti fraud provisions of the 1933 Securities Act. Proof reliance or intent are not necessary. Phish's omissions regarding MVD's known intention to vacate would have been of importance to investors. Phish's cautionary statements were so deficient he must have known investors would be misled by the offering documents. There is a critical distinction between disclosing the risk a future event might occur and disclosing actual knowledge the event will occur. Phish's cautionary language only disclosed a risk that the Motor Vehicle Department might leave Marx Place, not his knowledge that it actually planned to do so in the near future.

A NOT succeed because the cautionary statements negated any possible false representation by Phish relating to the MVD lease. B NOT succeed because there is no evidence of a misstatement in the offering documents. C succeed unless Phish & Assoc. can prove that the purchasers of the bonds did not rely on the offering documents. D succeed because the cautionary statement was insufficient to negate the material omission by Phish that he actually knew that the MVD was vacating before the bond maturity date. Carter owns restricted securities which she received through a Regulation D offering. To sell these securities, Carter may comply with the safe harbor provisions of Rule 144. In general, Carter would be in compliance with Rule 144 if she: I. holds the stock for two year before selling. II. holds the stock for one year, then sells in small brokered transactions after confirming that the company has complied with the periodic reporting requirements of the Securities Exchange Act of 1934.

The correct answer was C.

Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings and employee stock benefit plans. Sale of restricted securities can be made by complying with the mandates of Rule 144. In general, this means holding the stock for two year before selling, or, holding the stock for one year, then selling in small brokered transactions. If the securities are not held for two years, there must be adequate A I only is correct. current information available about the issuer. This B II only is correct. generally means the issuer has complied with the periodic C I and II are both correct. reporting requirements of the Securities Exchange Act of D Neither I nor II is correct. 1934. On April 9 Mal received a telephone call from Glotz, an The correct answer was B. employee of Charter Bank with whom Mal had previously worked at Charter. Glotz's department Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits

performed due diligence on banks which Charter sought to acquire. The day before Glotz called Mal, her supervisor had informed her that she would be conducting due diligence at an acquisition target. While she deliberately was not provided the target's identity, she learned through her own investigations that the due diligence was to take place in Lottsburg and that three banks were based there: Trust Bank, County Branch and A&B Bank. During the next 24 hours Mal purchased of stocks and options in the three banks. It was later disclosed that Charter Bank intended to acquire A&B Bank. Within a week, A&B Bank's stock increased in value significantly allowing Mal to sell his stock and options at a gain of $225,000. With regard to SEC sanctions for violation of insider trading rules

fraud related to securities trading, including trading on inside information. Mal traded on insider information and as a result is subject to both criminal and civil penalties. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. Mal was not in violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits shortswing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares.

A Mal is not in violation of insider trading rules because he was not told the specific identity of Charter's acquisition target, and, in fact, could have lost money in the acquisitions. B The SEC may seek to impose civil penalties against Mal of up to $675,000. C Glotz's activities were in violation of the short swing profit rules of Section 16(b) of the Securities Exchange Act of 1934. D Although Glotz is subject to civil penalties, including disgorgement of all profits, there are no criminal penalties since his gains were less than $250,000. The correct answer was D. Which if the following is correct regarding the 1934 Securities Exchange Act's regulation of proxy solicitations? The 1934 Act regulates proxy solicitation, which is information that must be given to a corporation's shareholders prior to soliciting votes. Prior to every shareholder meeting, a registered company must provide each shareholder with a proxy statement containing certain material, along with a proxy form on which the shareholder may vote on each proposal to be presented at the meeting. For securities registered in the names of brokers, a company must attempt to determine the beneficial ownership of the securities and furnish sufficient copies of the proxy statement for distribution to all beneficial owners. Copies of the proxy statement and proxy form must be filed with the SEC when first mailed to shareholders. Under certain circumstances preliminary copies must be filed ten days before mailing. Although a proxy statement does not become "effective" in the same way as a statement registered under the 1933 Act, the SEC may comment on and require changes in the proxy statement before mailing. Proxies for an annual meeting calling for election of directors must include a report containing financial statements covering the previous two fiscal years. Special rules apply when a contest for election or removal of

A A registered company must provide each stockholder with a proxy statement containing certain material, along with a form of proxy on which the shareholder may vote on each proposal to be presented at a shareholder meeting. B Copies of the proxy statement and proxy form must be filed with the SEC when they are first mailed to security holders. C The SEC may comment on but may not require changes in a proxy statement before mailing. D Proxies relating to an annual meeting calling for election of directors must include a report containing financial statements covering the previous two fiscal years.

directors is scheduled. My-Gen is a defunct corporation whose stock was previously listed on the NASDAQ exchange. Exchange Services, a national securities broker, loaned Cargill, the majority owner of My-Gen, $10,000,000 secured by Cargill's shares in My-Gen which represented over 25% of My-Gen's outstanding shares. Shortly thereafter, Exchange Services called the Cargill loan, then sold all the My-Gen stock which it held as collateral. The stock's price plunged during this time. A class action suit was thereafter filed against Exchange Services in the state court of Redacre alleging civil conspiracy, violation of Redacre's securities laws, and tortious manipulation of markets. If Exchange Services seeks dismissal of the class action claim under Securities Litigation Uniform Standards Act (SLUSA) of 1998 it will

The correct answer was C. SLUSA provides for preclusion of certain securities class actions brought under state law: No covered class action based upon the statutory or common law of any State may be maintained in any State or Federal court by any private party alleging-(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. SLUSA does not itself displace state law with federal law but makes some state-law claims nonactionable through the class action device in federal as well as state court.

A prevail, but only if the class action was based on securities fraud. B lose because SLUSA does not apply to state court class action suits. C prevail since the suit is, in essence, a claim of market manipulation. D lose since the suit did not specifically allege violations ot the Federal Securities laws.

The correct answer was C. Trells has decided to make an offer to purchase the common stock of Tarrington, Inc., a company whose The Williams Act of 1968 amended many sections of the shares are listed on the New York Stock Exchange. 1934 Securities Exchange Act to address problems with Tarrington currently trades at $15.50 per share and Trells tender offers. Pursuant to the Williams Act, persons making intends to offer $18.00 per share. If after the acquisition a tender offer that would result in ownership of more than 5 Trells would own 5% or more of Tarrington, Inc., the percent of a class of registered securities must first file with Securities Exchange Act of 1934 requires all of the the SEC and furnish to each offeree a statement that following EXCEPT includes the background of the person or group; the source of funds used and the purpose of the acquisition; the number of shares owned; and any relevant contracts, A Trells must file a report with the SEC which includes arrangements, or understandings. In addition, the offer must the source of her funds. be made to all holders of the class of securities sought, and B Trells must file a report with the SEC which includes a uniform price must be paid to all tendering shareholders. the purpose of the purchase. A shareholder may withdraw tendered shares at any time C If more shares are tendered than Trells is willing to while the tender offer remains open. If the person making purchase, Trells must withdraw her offer. the offer seeks fewer than all outstanding shares and the D Trells must notify Tarrington, Inc., of her intention. response is oversubscribed, shares will be taken up on a pro rata basis. Rienzi, Act II, LLC, a domestic U.S. company, promotes The correct answer was A. opera performances throughout the world. Which of the following would make Rienzi, Act II, LLC, subject to Companies whose securities are traded on a national the reporting requirements of the Securities Exchange securities exchange or whose assets are in excess of Act of 1934? $10,000,000 and which have equity securities held by more than 500 persons must register under the Securities Exchange Act of 1934 and comply with its provisions. A Rienzi, Act II, LLC, with assets of less than

$1,000,000, is listed on one of the national exchanges. B Rienzi, Act II, LLC, has issued both common and preferred stock. C Rienzi, Act II, LLC, has gross income in excess of $2,000,000 annually. D There are between 350 and 400 shareholders of Rienzi, Act II, LLC. Rake, Comptroller of Gauge Corporation, backdated several million dollars' worth of employee stock option grants at Gauge so that they appeared to have been issued when Gauge's stock price was at a periodic low point. Rake has earned over $300,000 in profits through this scheme. Which of the following is NOT true with The correct answer was B. respect to Rake's activities? Although Rake, the individual who carried out the fraudulent scheme would be subject to criminal sanctions, including prison, a corporation cannot be imprisoned.

A Rake is subject to monetary fines. B Gauge Corporation can be sentenced to more than one year in prison. C Rake's actions constituted a violation of the 1934 Securities Act. D Rake would be liable for securities violations even if he had not profited from the options backdating scheme. On May 1, Sterling purchased 4,000 shares of Chute Enterprises, Inc., for $5,600,000 on one of the national stock exchanges. The shares plunged in value within two months due to a downturn in the economy. Sterling sold the shares on the open market for $4,400,000. Sterling brought an action for her losses alleging fraud under the Securities Exchange Act of 1934 based in part on her assertion that she was misled by assertions by Chute's president that Chute Enterprises, Inc., "was recessionproof" and "anticipates continued profits regardless whether there is a downturn in the economy." Sterling's action will

The correct answer was C.

The Securities Exchange Act of 1934 prohibits actual fraud in connection with the sale of securities in interstate commerce, as well as fraudulent schemes involving the sale of securities and market manipulation. No actual fraud is present here for a variety of reason, but primarily because the statements by Chute Enterprises' president would not be A likely fail since she will be unable to prove reliance on considered factual since statements regarding future events the president's statements. are not typically expected to induce reasonable reliance. B likely fail since the president's statements were not material. C likely fail because the president's statements were not factual. D likely succeed, but her action must be based upon the price of the securities as of the date suit is filed. Puritan Cleaning Products, Inc., is subject to the The correct answer was B. reporting requirements of the Securities Act of 1934. As a result: The 1934 Act requires that issuers regularly file material information with the SEC (the annual 10-K filing and the quarterly 10-Q filing). The filed reports are available to the A Puritan Cleaning Products, Inc., is exempt from the public through EDGAR. In the event of a material event, registration requirements of the 1933 Securities Act. the company must timely issue an 8-K filing that reflects B must file quarterly financial reports with the SEC. these changed conditions. Tender offers for 5% or more of

C is excused from the requirement of filing proxy a registered company must be reported. statements. D must file a report of a tender offer, but only if the offer is for 10% or more of the company. The provisions of Section 10(b) and Rule 10b-5 of Securities Exchange Act of 1934 require that certain The correct answer was D. matters must be proven to hold a CPA or other expert liable. Which of the following does NOT have to be To establish a claim for damages under Section 10(b) and proven to prevail in an action under the 1934 Act? Rule 10b-5 one must prove a misstatement or omission of a material fact, knowingly made (or made with reckless disregard for the truth), relied upon by the injured party, A Scienter and damages. The plaintiff can be the buyer or seller of B Materiality securities. C Damages D Plaintiff was the buyer of the securities The correct answer was B. Section 301 of the Sarbanes-Oxley Act sets forth guidelines for the establishment of public company audit Section 301 of the Sarbanes-Oxley Act provides: Each committees. Which of the following provisions is/are member of the audit committee shall be a member of the contained in Section 301: I. No member of the audit board of directors of the issuer, and shall otherwise be committee shall be a member of the board of directors of independent; the audit committee of an issuer shall be the subject company. II. Each audit committee shall have directly responsible for the appointment, compensation, and the authority to engage independent counsel or other oversight of the work of any registered public accounting advisors as necessary to carry out its duties. firm employed by that issuer; the audit committee shall establish procedures for the "receipt, retention, and treatment of complaints" received by the issuer regarding A I only is correct. accounting, internal controls, and auditing; and, each audit B II only is correct. committee shall have the authority to engage independent C Neither I nor II is correct. counsel or other advisors, as it determines necessary to D Both I and II are correct. carry out its duties.