CPA REG common mistakes
CPA REG · Understand the traps and how to avoid them.
Treating a CPA's disclosure of client information as permitted whenever the CPA believes the client is doing something wrong, instead of identifying the specific exception (court order/subpoena, peer review, ethics investigation, or the client's own later dispute) that authorizes the disclosure.
Candidates learn 'confidentiality' and 'public interest' as competing slogans and resolve conflicts by intuition rather than by recalling the enumerated exceptions in Circular 230 and the AICPA Code.
What to do instead
Memorize the closed list of disclosure-permitting situations and test each fact pattern against the list; if no listed exception applies, the answer is 'do not disclose.'
Confusing the preparer penalty standard (substantial portion of an understatement due to unreasonable position, with disclosure and reasonable-basis relief) with the taxpayer's own accuracy-related penalty (negligence or substantial understatement with substantial-authority relief), and applying the wrong standard to the wrong party.
Both frameworks use 'substantial' language, and candidates study them back to back without anchoring which party each penalty attaches to.
What to do instead
Before answering, write 'whose penalty?' at the top of scratch work, then recall that standard and the relief threshold for that specific party.
Counting days for the assessment statute of limitations (and refund claims) from the wrong starting point, e.g., from the extended due date when the return was filed early, or ignoring the special rules for omitted income over 25% and for unfiled/fraudulent returns.
Candidates default to 'three years from filing' without checking whether the return was filed before the due date or whether an omission or fraud exception applies.
What to do instead
Apply a decision ladder: was a return filed, when, was it early, is more than 25% of gross income omitted, is fraud alleged - and only then state the period.
Classifying a worker as an employee or independent contractor by weighing the wrong facts, such as focusing on the job title or the presence of a written contract rather than behavioral control, financial control, and the relationship of the parties.
The common-law test is fact-intensive and candidates substitute a single salient fact (contract, title, hours) for the full multi-factor analysis.
What to do instead
For each fact pattern, sort the facts into the three control buckets and let the preponderance of facts, not any single label, drive the conclusion.
Treating a surety or guarantor of a debt as primarily liable, or assuming a guarantor's payment is deductible as a bad debt only after the creditor's remedies are exhausted, when the correct rule is that a guarantor's loss is generally a nonbusiness bad debt (short-term capital loss) upon payment, with subrogation rights considered.
Candidates blur the distinction between a debtor's and a guarantor's position and between business and nonbusiness bad debts.
What to do instead
Identify the party's role first (debtor, guarantor, or purchaser of a debt instrument), then apply the bad-debt classification tied to that role and to whether the loss arose in a trade or business.
Applying the general rule of Section 1031 like-kind treatment to property that is excluded (e.g., inventory, securities, partnership interests, real property held primarily for sale) or ignoring that only real property now qualifies, and failing to compute recognized boot and the substituted basis.
Candidates remember 'like-kind exchange is tax-free' as a slogan and skip the eligibility screen and the boot/basis computation.
What to do instead
Run a three-step check every time: is the property eligible, what boot was received, and what is the basis of the replacement property (carryover basis plus boot recognized minus boot received).
Computing the basis of inherited property as the decedent's adjusted basis, or failing to apply the step-up (or the special rules for income in respect of a decedent and for property subject to the alternate valuation election).
Candidates overgeneralize 'carryover basis' rules from gifts to inheritances and do not separate the gift and death transfer regimes.
What to do instead
At the start of any basis question, label the acquisition as purchase, gift, or inheritance and apply the regime-specific rule before doing any arithmetic.
Taking the standard deduction and also itemizing, or applying the standard deduction to a nonresident alien or to a dependent without checking the limited standard deduction rules and the filing-status constraints.
Candidates treat the standard deduction as universally available and forget that a dependent's standard deduction is limited to earned income plus a threshold, and that some nonresident aliens cannot use it.
What to do instead
Confirm the taxpayer's status (dependent, nonresident alien, married filing separately) before selecting the standard deduction, and never combine it with itemized deductions.
Computing a partner's or S corporation shareholder's basis without tracking the ordering rules (increases for contributions and income first, then distributions, then losses limited to basis), and treating distributions in excess of basis as taxable dividends rather than gain.
Candidates memorize the components of basis but not the sequence in which they are applied, so loss and distribution questions come out wrong even when each component is correct.
What to do instead
Write the basis roll-forward as a vertical column: beginning basis, plus income and contributions, minus distributions, then compare losses to remaining basis; excess distributions are gain, not dividends.
Applying the corporate dividends-received deduction percentage and taxable-income limitation without first confirming the ownership percentage and whether the limitation applies, and forgetting the small-business investment company and affiliated-group exceptions.
Candidates remember the 50%/65%/100% tiers but not the precondition tests or the taxable-income cap computation, so they pick a percentage and stop.
What to do instead
For each DRD question, state the ownership tier, compute the tentative DRD, then compute the taxable-income limitation and take the lesser (unless an exception applies).