Gleim CPA Review Updates to Regulation · The preparer’s second business meets the definition of a bank. Answer (C) is incorrect. A preparer may receive checks provided (s)he does

Page 1 of 4

Copyright © 2020 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].

Gleim CPA Review Updates to Regulation 2020 Edition, 1st Printing

February 2020

NOTE: Sections with changes are indicated by a vertical bar in the left margin. Text that should be deleted is displayed with a line through it. New text is shown with blue underlined font. Study Unit 1 – Ethics and Professional Responsibility

Pages 17 and 19, Subunit 1.2, Items 5.g. and 7.: These edits update the penalty amounts for tax return preparers.

g. The tax code provides that any tax return preparer who endorses or otherwise negotiates any check issued to a taxpayer with respect to taxes imposed by the IRC is subject to a penalty of $520530.

[ . . . ]

7. The following penalties may be imposed on tax return preparers:

Act Fine Imprisonment

Understatement:

Due to unreasonable positions Greater of a) $1,000 or b) 50% of income to be derived

N/A

Due to willful or reckless conduct Greater of a) $5,000 or b) 75% of income to be derived

N/A

Preparing tax returns for other persons:

Failure to furnish copy to taxpayer $50 each, limited to $26,00026,500 per year N/A

Failure to sign return $50 each, limited to $26,00026,500 per year N/A

Failure to furnish identifying number $50 each, limited to $26,00026,500 per year N/A

Failure to retain copy or list $50 each, limited to $26,00026,500 per year N/A

Failure to file correct information returns $50 each, limited to $26,00026,500 per year N/A

Endorses or negotiates checks made to taxpayer in respect of taxes imposed $520 530 each, unlimited N/A

Failure to be diligent in determining credits and head of household status (for the best benefit of taxpayer)

$520 530 each, unlimited N/A

Page 2 of 4


Pages 26 and 27, Subunit 1.2, Questions 13 and 15: These edits update the penalty amounts for tax return preparers.

13. Which of the following persons would be subject to the penalty for improperly negotiating a taxpayer’s refund check?

A. A tax return preparer who operates a check cashing agency that cashes, endorses, or negotiates tax refund checks for returns he prepared.

B. A tax return preparer who operates a check cashing business and cashes checks for her clients as part of a second business.

C. The firm that prepared the tax return and is authorized by the taxpayer to receive a tax refund but not to endorse or negotiate the check.

D. A business manager who prepares tax returns for clients who maintain special checking accounts against which the business manager is authorized to sign certain checks on their behalf. The clients’ federal tax refunds are mailed to the business manager, who has the clients endorse the checks and then deposits them in the special accounts.

Answer (A) is correct. REQUIRED: A tax return preparer’s obligations and penalty for improperly negotiating a refund check. DISCUSSION: Section 6695(f) provides that any tax return preparer who endorses or otherwise negotiates any check issued to a taxpayer with respect to taxes imposed by the IRC will be subject to a penalty of $520530 for each such check. A tax return preparer who operates a check cashing agency that cashes, endorses, or negotiates tax refund checks for returns that (s)he prepared is subject to the penalty. Answer (B) is incorrect. The preparer’s second business meets the definition of a bank. Answer (C) is incorrect. A preparer may receive checks provided (s)he does not cash it. Answer (D) is incorrect. The clients endorsed the checks.

15. Which of the following acts by a CPA will not result in a CPA’s incurring an IRS penalty?

A. Failing, without reasonable cause, to provide the client with a copy of an income tax return.

B. Failing, without reasonable cause, to sign a client’s tax return as preparer.

C. Understating a client’s tax liability as a result of an error in calculation.

D. Negotiating a client’s tax refund check when the CPA prepared the tax return.

Answer (C) is correct. REQUIRED: The act that will not result in a CPA’s incurring an IRS penalty. DISCUSSION: Understating a client’s tax liability as a result of an error in calculation will not result in imposition of an IRS penalty unless it is the result of gross negligence or a willful attempt to avoid tax liability. Answer (A) is incorrect. A CPA is required to provide his or her client with a copy of the tax return. Answer (B) is incorrect. A tax preparer is required to sign the return. Answer (D) is incorrect. Any tax return preparer who endorses or otherwise negotiates a refund check issued to a taxpayer is liable for a $520530 penalty.

Study Unit 5 – Self-Employment

Page 130, Subunit 5.1, Item 6.a.: This update corrects the statement due to a TCJA change.

6. Business Meals

a. Business meals include food and beverages provided to a customer or a member of his or her family.

Page 3 of 4


Study Unit 8 – Property Transactions: Basis and Gains

Page 237, Subunit 8.3, Item 11.: This update expands our coverage of short sales, including the addition of two examples. Subsequent examples were renumbered accordingly.

11. Short Sales

a. Property held long-term substantially identical to property sold short (at that time) results in any loss on the short sale being treated as long-term.A short sale occurs when a taxpayer sells property the taxpayer does not own (or owns but does not wish to sell). The sale is made in two steps.

1) The taxpayer borrows property and delivers it to a buyer.

2) At a later date, the taxpayer either buys substantially identical property and delivers it to the lender or makes delivery out of property the taxpayer held at the time of the sale.

a) The taxpayer does not recognize gain or loss until delivery of property to close the short sale.

b) The character of the gain or loss is dependent upon the character of the property used to close the sale.

b. The holding period of the property used in the short sale runs from the date the seller originally purchased the property to the date the property is delivered to close out the sale (i.e., when the borrowed shares are returned).

1) If, prior to the short sale, the taxpayer owns identical property (e.g., stock-for-stock sale), then the holding period ends on the date of the short sale.

Page 4 of 4


Study Unit 11 – Corporate Tax Computations

Page 316, Subunit 11.6, Example 11-10: This update corrects an amount in the example.

EXAMPLE 11-10 Accumulated Earnings Credit

ABC Corporation, a C corporation, has $200,000 in current-year accumulated (undistributed) taxable income before inclusion of the credit. In addition, ABC has $100,000 in accumulated (undistributed) prior-year earnings. With the $250,000 accumulated earnings credit, ABC will be subject to an AET of $11,50010,000 [($300,000 total accumulated earnings – $250,000 credit) × 20% tax rate]. To avoid the AET entirely, ABC would require a reasonable business need for the entire $300,000 accumulation.

Study Unit 19 – Sales and Secured Transactions

Page 563, Subunit 19.5, Item 3.a.2): This update corrects and clarifies the example in the statement.

3. Seller’s Breach of Contract

a. The following actions constitute a breach by the seller:

1) Repudiating (renouncing) all or part of the contract,

2) Making a nonconforming tender of delivery (e.g., aswithout reasonable notice that shipment is only an accommodation and not an acceptance), and

3) Failing to deliver conforming goods.

Documents

Gleim CPA Review Updates to Regulation · The preparer’s second business meets the definition of a bank. Answer (C) is incorrect. A preparer may receive checks provided (s)he does