REG, Regulation

Sources for Legal Duties and Responsibilities

Last reviewed 2026-09-18

The standards and authorities behind PocketCPA's REG lessons on Legal Duties and Responsibilities. The topic rests on Common law (Ultramares / Credit Alliance / Restatement Sec. 552) / Securities Acts of 1933 and 1934 / IRC Sec. 7525, 7216, 6713 / Circular 230 Sec. 10.28.

About this topic

This group asks one question in many costumes: who can sue this accountant, for what, and what must they prove? Almost every item turns on three axes that move independently, and the exam builds its distractors by mixing a value on one axis with a value on another.

Fix those three before computing anything. A fact pattern that supplies a lender who is not the client, an accountant who was merely careless, and a jurisdiction following Ultramares has already decided itself.

Key points

• Under common law, accountants owe a duty of care to clients (privity) and can be liable for negligence.
• Third-party liability varies by jurisdiction: privity, near-privity (Ultramares), foreseen users (Restatement), and foreseeable users.
• The Securities Act of 1933 (Sec. 11) imposes liability for misstatements in a registration statement with the burden of proof on the accountant.
• The Securities Exchange Act of 1934 (Sec. 10b-5) requires proof of scienter (intent to deceive) for fraud.

What the lessons cover

1. Liability to clients
2. Third parties and privity
3. Negligence versus fraud
4. Workpapers and privilege
5. Section 11 of the 1933 Act
6. Rule 10b-5 and the auditor duties under Section 10A
7. Confidentiality of return information: Sec. 7216 and Sec. 6713
8. Preparer duties: the Sec. 6694 and Sec. 6695 penalties
9. Taxpayer penalties: Sec. 6662, Sec. 6663 and reasonable cause
10. The limitation calendar a practitioner answers for

Authoritative references

Where these duties sit in the sources. Each entry names the provision, then breaks out the subsections that carry separate rules.

• 15 U.S.C. 77k(a) and (a)(4) create the Section 11 action.
  • (a) an untrue statement or omission of a material fact in a registration statement, actionable by any person acquiring the security.
  • (a)(4) names the accountant as a defendant only for the statement, report or valuation purporting to have been prepared or certified by that accountant, and only where the accountant consented to being named.
  • The closing sentence of (a) is the reliance rule: reliance must be proved only where the plaintiff acquired the security after the issuer made generally available an earning statement covering at least twelve months after the effective date, and even then without proof of reading the registration statement.
• 15 U.S.C. 77k(b)(3) carries the due-diligence defense in three forms.
  • (A) for non-expertised portions, reasonable investigation plus reasonable ground to believe and actual belief.
  • (B) for the accountant's own expertised portion, the same showing, or that the registration statement did not fairly represent the accountant's statement.
  • (C) for another expert's portion, only that the defendant had no reasonable ground to believe and did not believe the statements were untrue.
  • 77k(c) measures reasonableness by the standard of a prudent man managing his own property.
• 15 U.S.C. 77k(e), (f)(1) and (g) carry damages, and 15 U.S.C. 77m the outside limit.
  • (e) measures damages as the amount paid, not exceeding the public offering price, less the value at suit or the price of a pre-suit disposition, with a post-suit disposition used where it yields less.
  • The (e) proviso is negative causation, so damages representing anything other than depreciation resulting from the misstatement are not recoverable.
  • (f)(1) joint and several liability, with contribution.
  • (g) caps recovery at the offering price.
  • 77m gives 1 year after discovery, and in no event more than 3 years after the security was bona fide offered to the public.
• 15 U.S.C. 78j(b) and 17 C.F.R. 240.10b-5 are the antifraud pair, reaching three kinds of conduct in connection with the purchase or sale of any security, registered or not.
  • (a) any device, scheme or artifice to defraud.
  • (b) any untrue statement or misleading omission of material fact.
  • (c) any act or practice operating as a fraud.
  • 28 U.S.C. 1658(b) sets the limitation at the earlier of 2 years after discovery or 5 years after the violation.
  • 15 U.S.C. 78t(a) is controlling-person liability with a good-faith defense.
  • 78t(e) gives aiding-and-abetting liability for purposes of a Commission action only.
• 15 U.S.C. 78j-1 is Section 10A, which runs from the procedures an audit must contain through to a report the Commission itself receives.
  • (a) requires each issuer audit to include procedures for detecting illegal acts with a direct and material effect, procedures to identify material related party transactions, and a going-concern evaluation for the ensuing year.
  • (b)(1) requires the firm to determine likelihood, consider effects including contingent monetary effects, and inform management and assure the audit committee is informed unless the act is clearly inconsequential.
  • (b)(2) requires a direct report to the board on material acts left unremedied.
  • (b)(3) and (b)(4) start the 1-business-day sequence ending in resignation or a report to the Commission.
  • (c) immunizes the firm in private actions for those reports.
  • (d) authorizes an SEC civil penalty for willfully failing to make them.
  • (j) is the 5-year audit-partner rotation rule.
  • (l) is the 1-year cooling-off rule for issuer financial officers hired from the audit firm.
• 31 C.F.R. 10.28 (Circular 230 Sec. 10.28) is the return-of-records rule.
  • (a) requires prompt return, on request, of all client records necessary for federal tax compliance, and permits the practitioner to keep copies.
  • (a) also provides that a fee dispute generally does not relieve the practitioner of that duty.
  • (a) narrows the duty where state law permits retention in a fee dispute, to the records that must be attached to the return, plus reasonable access to the rest.
  • (b) defines client records to include materials that preexisted the retention.
  • (b) includes materials prepared by the client or a third party and provided on the subject matter.
  • (b) includes the practitioner's own documents presented in a prior representation, where they are necessary for current compliance.
  • (b) excludes a practitioner-prepared document withheld pending payment of the fees for that document.
• 17 C.F.R. 210.2-06 and 18 U.S.C. 1520 set issuer-audit retention.
  • 210.2-06(a) requires 7 years after the accountant concludes the audit or review, covering workpapers and other documents forming its basis plus memoranda and communications containing conclusions, opinions, analyses or financial data.
  • (b) defines workpapers.
  • (c) requires retention of records inconsistent with the auditor's conclusions on a significant matter, including documentation of resolved differences in professional judgment.
  • 1520(a)(1) sets a 5-year floor from the end of the fiscal period.
  • 1520(b) punishes knowing and willful violation of either the statute or the Commission's rule by up to 10 years.
  • 18 U.S.C. 1519 punishes altering or destroying a record to impede a federal matter, or one in contemplation, by up to 20 years.
• IRC Sec. 7525 is the tax-practitioner privilege.
  • (a)(1) applies the common-law confidentiality protections of the attorney-client privilege to tax advice between a taxpayer and a federally authorized tax practitioner, but only to the extent the communication would be privileged if made to an attorney.
  • (a)(2)(A) and (a)(2)(B) confine assertion to noncriminal tax matters before the IRS and noncriminal federal-court tax proceedings brought by or against the United States.
  • (a)(3)(A) defines the practitioner by reference to 31 U.S.C. 330.
  • (a)(3)(B) defines tax advice.
  • (b) removes the privilege from a written communication in connection with promoting participation in a tax shelter as defined in Sec. 6662(d)(2)(C)(ii).
  • Sec. 7602(a) is the examination and summons power the privilege is asserted against.
• IRC Sec. 7216 and Sec. 6713 are the disclosure pair.
  • 7216(a) makes a knowing or reckless disclosure under (a)(1), or an unauthorized use under (a)(2), of return information a misdemeanor.
  • The 7216(a) fine is not more than 1,000, or not more than 100,000 where Sec. 6713(b) applies.
  • 7216(a) also carries imprisonment of not more than 1 year, or both the fine and imprisonment, plus costs of prosecution.
  • 7216(b) supplies the exceptions: another provision of the title, a court order, use for the same person's state and local returns and estimated-tax declarations, and anything permitted by regulation, which must permit disclosure for quality or peer reviews.
  • 6713(a) imposes 250 per disclosure or use, with a 10,000 calendar-year ceiling and no mental-state element.
  • 6713(b)(1) substitutes 1,000 and 50,000 for identity-theft-related acts.
  • 6713(b)(2) applies the ceilings separately.
  • 6713(c) borrows the 7216(b) exceptions.
  • 6713(d) turns off the deficiency procedures.
• IRC Sec. 6107 and Sec. 6695 carry the mechanical preparer duties, the ones that turn on what was furnished, retained or signed rather than on any position taken.
  • 6107(a) requires a completed copy of the return be furnished to the taxpayer no later than the time it is presented for signature.
  • 6107(b) requires the preparer to retain a copy, or a list of names and taxpayer identification numbers, for 3 years after the close of the return period, and to make it available on request.
  • Sec. 6695 penalizes each of those failures plus failure to sign, failure to furnish an identifying number, and failure to file the Sec. 6060 information returns, at the statutory 50 with ceilings.
  • 6695(f) penalizes negotiating a taxpayer's refund check at the statutory 500 per check.
  • 6695(g) penalizes each failure of due diligence on head of household under Sec. 2(b) and on the Sec. 24, Sec. 25A(a)(1) and Sec. 32 credits, at the statutory 500 per failure.
  • 6695(h)(1) indexes those amounts for inflation.
• IRC Sec. 6694 carries the preparer understatement penalties, and the standard the position had to meet is what decides which tier applies.
  • (a)(1) the greater of 1,000 or 50 percent of the income derived for a position the preparer knew or should have known lacked support.
  • (a)(2)(A) substantial authority, (a)(2)(B) reasonable basis if disclosed, and (a)(2)(C) more likely than not for tax shelters and reportable transactions.
  • (a)(3) a reasonable cause and good faith exception.
  • (b)(1) the greater of 5,000 or 75 percent for a willful attempt to understate or a reckless or intentional disregard of rules or regulations, reduced by any (a) penalty paid under (b)(3).
  • (e) defines understatement of liability.
  • (f) points to Sec. 7701(a)(36).
  • Sec. 7407 authorizes an injunction, and for continual or repeated conduct an order barring the person from acting as a preparer at all.
• IRC Sec. 6662, Sec. 6663 and Sec. 6664 carry the taxpayer penalties.
  • 6662(a) is 20 percent of the portion of the underpayment to which the section applies.
  • 6662(b) lists the ten triggers, among them negligence, substantial understatement, valuation misstatements, economic substance, and the newer items keyed to Sec. 170(p) and Sec. 170(h)(7).
  • The closing sentence of 6662(b) bars Sec. 6662 on any portion carrying the Sec. 6663 penalty.
  • 6662(c) defines negligence and disregard.
  • 6662(d)(1)(A) sets the individual substantial-understatement threshold at the greater of 10 percent of the tax required to be shown or 5,000.
  • (d)(1)(B) sets the corporate threshold at the lesser of 10 percent, or 10,000 if greater, and 10,000,000.
  • (d)(1)(C) substitutes 5 percent for any taxpayer claiming a Sec. 199A deduction.
  • (d)(2)(B) reduces the understatement for substantial authority or for adequate disclosure plus reasonable basis, with (d)(2)(C) withholding that relief from tax shelter items.
  • 6663(a) is 75 percent of the fraudulent portion.
  • 6663(b) presumes the whole underpayment fraudulent once any part is shown, unless the taxpayer proves otherwise by a preponderance.
  • 6663(c) protects a spouse on a joint return absent that spouse's own fraud.
  • 6664(a) defines underpayment.
  • 6664(b) limits the penalties to filed returns.
  • 6664(c)(1) supplies the reasonable cause and good faith exception.
  • (c)(2) carves out economic-substance transactions and Sec. 170(h)(7) disallowances.
  • (c)(3) carves out charitable-deduction valuation overstatements, absent a qualified appraisal and a good-faith investigation of value.
• IRC Sec. 6501 governs assessment, where the ordinary period runs from filing unless a subsection (c) exception removes the limit altogether.
  • (a) 3 years after the return was filed, with "return" meaning the taxpayer's own return.
  • (b)(1) deems an early return filed on the last day prescribed.
  • (c)(1) unlimited for a false or fraudulent return with intent to evade.
  • (c)(3) unlimited where no return was filed.
  • (c)(4)(A) permits written extensions, themselves extendable.
  • (c)(7) adding 60 days for a written document showing additional tax received within 60 days of expiration.
  • (e)(1)(A)(i) giving 6 years where omitted gross income exceeds 25 percent of the gross income stated on the return.
  • (e)(1)(B)(i) measuring a trade or business by amounts received before diminution by cost.
  • (e)(1)(B)(ii) treating a basis overstatement as an omission.
  • (e)(1)(B)(iii) excluding adequately disclosed amounts, except where the omission is an overstatement of unrecovered cost or other basis.
• IRC Sec. 6511 and Sec. 6513 govern refunds, where the deadline for the claim and the cap on the amount recoverable are two separate tests.
  • 6511(a) requires a claim within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later, or 2 years from payment if no return was filed.
  • 6511(b)(1) bars any refund absent a timely claim.
  • 6511(b)(2) caps the amount recoverable, independently of timeliness.
  • (A) tax paid within 3 years plus any filing extension, for a claim filed in the 3-year period.
  • (B) tax paid within 2 years, for a later claim.
  • (C) the same limits measured from the allowance date, where no claim was filed.
  • 6513(a) deems an early return filed and early payment made on the last day prescribed, without regard to extensions.
  • 6513(b)(1) deems withheld tax paid on the 15th day of the fourth month following the close of the taxable year.
  • 6513(b)(2) deems estimated tax paid on the last day prescribed for filing.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.

See also

• Sources for every REG topic
• Free REG sample questions
• The CPA exam glossary