CPA REG key terms

Treasury regulations governing practice before the IRS. They set standards for tax return positions, diligence, conflicts of interest, fees, and sanctions for practitioners who violate professional duties.

The weight-of-authority standard a tax return position generally must meet to avoid the accuracy-related penalty. It is stronger than reasonable basis but weaker than more-likely-than-not support.

A relatively low but genuine standard of support for a return position, stronger than frivolous. It is generally the minimum needed to avoid certain preparer penalties and is below substantial authority.

A civil penalty under Internal Revenue Code Section 6694 imposed on a tax return preparer who takes an undisclosed position lacking substantial authority or who acts with willful or reckless disregard of rules.

A penalty generally equal to 20 percent of the underpayment of tax attributable to negligence, substantial understatement, or valuation misstatement. It applies to the taxpayer and may be reduced by adequate disclosure.

The period during which the IRS may assess additional tax, generally three years from the return due date or filing date, extended to six years for large omissions and unlimited for fraud or failure to file.

An agreement allowing a taxpayer to settle a tax debt for less than the full amount owed, based on doubt as to collectibility, doubt as to liability, or promotion of effective tax administration.

An administrative appeal before an independent IRS appeals officer that a taxpayer may request after receiving a lien or levy notice, allowing challenges to the collection action.

Reporting a return position with enough detail on the return or an attached statement to inform the IRS of the item, which can help avoid the accuracy-related penalty when authority is limited.

A legal arrangement in which one party, the agent, acts on behalf of another, the principal, with authority to bind the principal in dealings with third parties.

Authority that a third party reasonably believes an agent possesses because of the principal's conduct or communications, even if actual authority was never granted.

The legal obligation of an agent or trustee to act in the best interest of the principal, including duties of loyalty, care, and full disclosure of relevant information.

Something of legally sufficient value exchanged between parties to make a promise enforceable, such as money, property, services, or a promise to forbear from an action.

A rule requiring certain contracts, such as those involving land or that cannot be performed within one year, to be in writing and signed to be enforceable.

Uniform Commercial Code rules governing transactions in movable goods, allowing contracts to be formed more flexibly than common law and requiring writing only in limited situations.

A three-party arrangement in which a surety promises to answer for the debt or obligation of a principal debtor to an obligee if the debtor fails to perform.

An injunction that takes effect when a bankruptcy petition is filed, halting most collection actions, lawsuits, and foreclosures against the debtor and the debtor's property.

A court order releasing an individual debtor from personal liability for most prepetition debts, while certain obligations such as taxes and student loans may remain nondischargeable.

The original cost or other basis of property increased by capital improvements and decreased by allowed or allowable depreciation, used to measure gain or loss on disposition.

The total value received on the sale or exchange of property, including cash, fair market value of property received, and debt relief, before subtracting adjusted basis.

The excess of amount realized over the adjusted basis of property sold or exchanged. Realized gain may be recognized or deferred depending on the applicable tax rules.

A transaction in which business or investment real property is exchanged for other real property of like kind, allowing gain to be deferred when requirements such as qualified intermediary use are met.

The compulsory or accidental loss or destruction of property, such as through condemnation or casualty, for which gain may be deferred if replacement property is acquired within the required period.

Depreciable business property and real property used in a trade or business held more than one year. Net gains are treated as capital, while net losses are ordinary.

Property held by a taxpayer that is not inventory, not depreciable business property, and not certain other excluded items. Gain or loss on its sale generally receives capital treatment.

The length of time a taxpayer owns an asset, determining whether gain or loss is short-term or long-term. Long-term treatment generally requires ownership of more than one year.

A deduction subtracted from gross income to arrive at adjusted gross income, available whether or not the taxpayer itemizes, such as certain retirement contributions and self-employment tax amounts.

An expense allowed as a personal deduction, such as mortgage interest, state taxes, or charitable contributions, claimed instead of the standard deduction when it produces a lower taxable income.

A fixed deduction amount set by law based on filing status, age, and blindness, subtracted from adjusted gross income when the taxpayer does not itemize.

The category a taxpayer uses on a return, such as single, married filing jointly, married filing separately, or head of household, which affects rates, deductions, and credits.

A loss from a rental or business activity in which the taxpayer does not materially participate. Such losses are generally limited and may only offset passive income.

Involvement in a trade or business that is regular, continuous, and substantial, as measured by tests such as hours worked, which determines whether losses are treated as passive.

A rule preventing a partner or shareholder from deducting losses in excess of the adjusted basis of the ownership interest, with disallowed amounts carried forward.

A corporation that elects special tax treatment, generally avoiding entity-level federal income tax while passing income, deductions, and credits through to shareholders who report them individually.

The treatment of a partnership as not subject to entity-level income tax, with items of income, gain, loss, and deduction allocated to partners who report them on their own returns.

Transfers of money or property from an entity to its owners. Tax treatment depends on entity type and whether the distribution exceeds the owner's basis, potentially creating gain.

The salary paid to an employee-owner for services that reflects what would be paid in an arm's-length setting. It is required for S corporation shareholder-employees to prevent disguised distributions.

A penalty tax imposed on a corporation that retains earnings beyond the reasonable needs of the business rather than distributing them as dividends, designed to prevent tax avoidance.