1 Ethics & Professional Responsibilities

Question 1

What is practice before the IRS?

Answer 1

Presentation to the IRS or any of its officers or employees of any matter relating to a client’s rights, privileges, or liabilities under laws or regulations administered by the IRS.

Question 2

What activities are included in practicing before the IRS?

Answer 2

• representing a taxpayer at conferences, hearings, or meetings with the IRS
• preparing necessary documents and filing them with the IRS for a taxpayer
• rendering written advice with respect to any entity, transaction, plan, or arrangement having a potential for tax avoidance or evasion
• corresponding and communicating with the IRS for a taxpayer

Question 3

What activities do not constitute practicing before the IRS?

Answer 3

• preparing less than substantially all of a tax return, an amended return, or a claim for refund
• furnishing information upon request to the IRS
• appearing as a witness for a person

Question 4

When a practitioner for compensation, prepares or assists with the preparation of all, or substantially all of a tax return, an amended return, or claim for refund they must comply with?

Answer 4

• they must have a preparer tax identification number
• be subject to the duties and restrictions relating to practice before the IRS
• be subject to the sanctions for violation of the regulations of circular 230

Question 5

Who is authorized to practice before the IRS?

Answer 5

• attorneys
• CPAs
• Enrolled Agents (EAs)
• Enrolled actuaries, enrolled retirement plan agents, and annual filing season program (AFSP) participants

Question 6

What is an enrolled agent?

Answer 6

An individual, other than an attorney or a CPA, who is eligible, qualified, and certified as authorized to represent a taxpayer before the IRS.

The EA designation is issued by the IRS to individuals passing the EA exam.

Question 7

What must an attorney or CPA do to practice before the IRS?

Answer 7

1. not be suspended or disbarred
2. file a written declaration for each party they represent that they are currently qualified and have been authorized to represent the party

Question 8

What are the nine elements of the rules of conduct before the IRS that tax preparers must adhere to?

Answer 8

1. conflict of interest
2. diligence
3. information or records properly and lawfully requested by a duly authorized officer or employee of the IRS must be promptly submitted
4. a practitioner who knows about a client’s noncompliance is required promptly to advise the client of noncompliance and the consequences of such noncompliance, error, or omission under the Code and regulations.
5. a practitioner must not negotiate, including by endorsement, any income tax refund check issued to a client.
6. a practitioner may not charge an unconscionable fee in connection with any matter before the IRS
7. a practitioner may not charge a contingent fee in relation to any matter before the IRS except in relation to an IRS examination of an original return, an amended return, a claim for refund or credit or a judicial proceeding.
8. a practitioner must return client records on request, regardless of any fee dispute
9. Circular 230 allows advertising and solicitation with the conditions that false or fraudulent claims are not allowed, and specialized expertise may not be claimed except as authorized by federal or stage agencies having jurisdiction over the practitioner.

Question 9

In what conditions does a conflict of interest exist?

Answer 9

• The practitioner’s representation of a client will be directly adverse to another client
• There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another or former client, a third person, or by the practitioner’s personal interests

Question 10

When may a practitioner represent conflicting interests before the IRS?

Answer 10

Only if:

• all directly affected parties provide informed, written consent once the existence of the conflict is known by the practitioner (written consent must be within 30 days of informed consent)
• the representation is not prohibited by law
• the practitioner reasonably believes that they can provide competent and diligent representation to each client

Question 11

Is a practitioner required to disclose the conflict of interest to the IRS?

Answer 11

NO

Question 12

Diligence must be exercised in preparing and in assisting in preparing, approving, and filing returns, documents, and other papers relating to IRS matters. When is diligence presumed?

Answer 12

If the practitioner:
- relies upon the work product of another person
- uses reasonable care in engaging, supervising, training, and evaluating the person

Question 13

When is a practitioner excused from submitting requested information to the IRS?

Answer 13

If a reasonable basis exists for a good-faith belief that the information is privileged or the request is not proper and lawful

Question 14

What is a practitioner required to do if they do not have information or records requested by the IRS?

Answer 14

They are required to provide information about the identity of the person that they reasonably believe may have possession or control of the requested information.

Question 15

What situations are considered noncompliance?

Answer 15

If a client:

• has not complied with the revenue laws of the U.S.
• has made an error or omission

Question 16

Does Circular 230 require the practitioner to notify the IRS of noncompliance?

Answer 16

NO

Question 17

A practitioner must return client records on request, regardless of any fee dispute. May the practitioner retain copies of client records?

Answer 17

Yes

Question 18

What records are deemed returnable?

Answer 18

Those records necessary for a client to comply with their federal tax obligations

Question 19

When are documents not required to be returned to a client?

Answer 19

Documents prepared by the practitioner that they are withholding pending payment of a fee, provided state law permits retention of records in a fee dispute.

Question 20

What items are allowed to be advertised?

Answer 20

• fixed fees for specific routine services
• a range of fees for particular services
• the fee for an initial consultation
• hourly rates
• availability of a written fee schedule

Question 21

What are the four general elements of best practices for tax advisors?

Answer 21

1. Performing the steps needed to support the facts for a tax filing - establish that facts, determine which facts are relevant, evaluate the reasonableness of any assumptions or representations, relate applicable law to the relevant facts, and arrive at a conclusion supported by the law and the facts.
2. Communicating clearly with the client about the terms of the engagement
3. Advising the client regarding the importance of the conclusions reached, including whether a taxpayer may avoid accuracy-related penalties under the Internal Revenue Code (IRC) if a taxpayer acts in reliance on the advice.
4. Acting fairly and with integrity in practice before the IRS

Question 22

What does it mean when a tax advisor has responsibility for overseeing a firm’s practice mean?

Answer 22

• providing advice about federal tax issues
• preparing or assisting in the preparation of submissions to the IRS

Question 23

What should a tax advisor, with responsibility for overseeing a firm’s practice, do regarding best practices?

Answer 23

Take reasonable steps to ensure that the firm’s procedures for all members, associates, and employees are consistent with the best practices.

Question 24

What must a practitioner do when providing written advice about any federal tax matter?

Answer 24

1. base the advice on reasonable assumptions
2. reasonably consider all relevant facts that are known or should be known
3. use reasonable efforts to identify and determine the relevant facts

Question 25

What must a practitioner consider when providing written advice about any federal tax matter?

Answer 25

1. the advice cannot rely upon representations, statements, findings, or agreements that are unreasonable (known to be incorrect, inconsistent or incomplete).
2. the advice must not consider the possibility that either a tax return will not be audited or a matter will not be raised during the audit in evaluating a federal tax matter.
3. a practitioner may rely in good faith on the advice of another practitioner only if that advice is reasonable given all the facts and circumstances
4. a practitioner cannot rely on the advice of a person who either the practitioner knows or should know is not competent to provide the advice or has an unresolved conflict of interest

Question 26

What are sanctions for violations?

Answer 26

Practitioners may be censured (public reprimand), suspended, or disbarred from practice before the IRS for willful violations of any of the regulations contained in Circular 230.

Question 26

What are sanctions for violations?

Answer 26

Practitioners may be censured (public reprimand), suspended, or disbarred from practice before the IRS for willful violations of any of the regulations contained in Circular 230.

Question 27

What issues can cause a practitioner to be censured, suspended or disbarred?

Answer 27

The Secretary of the Treasury may censure, suspend, or disbar from practice before the IRS any practitioner who:

1. is shown to be incompetent or disreputable
2. refuses to comply with the rules and regulations relating to practice before the IRS
3. willfully and knowingly, with intent to defraud, deceives, misleads, or threatens any client

Question 28

What are examples of conduct that may result in suspension or disbarment?

Answer 28

• being convicted of an offense involving dishonesty or breach of trust
• providing false or misleading information to the Treasury Department, including the IRS
• negotiating a client’s refund check for not promptly remitting a refund check
• circulating or publishing matter related to practice before the IRS that is deemed libelous or malicious
• using abusive language
• suspension from practice as a CPA by any state licensing authority, any federal court of record, or any federal agency, body, or board
• conviction of any felony involving conduct that renders the practitioner unfit to practice before the IRS
• attempting to influence the official action of any IRS employee by bestowing a gift, favor, or anything of value
• willfully evading or assisting others to evade any federal tax payments

Question 29

Who receives the notice of disbarment or suspension of a CPA from practice before the IRS?

Answer 29

It is issued to IRS employees, interested departments and agencies of the federal government, and state licensing authorities.

Question 30

What is a tax return preparer?

Answer 30

Any person who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or claim for refund under the Internal Revenue Code (IRC).

Question 31

When is a return or claim for refund deemed substantial?

Answer 31

It is deemed substantial unless a condition for unsubstantiality is satisfied.

Question 32

What are the conditions for unsubstantiality?

Answer 32

An unsubstantial portion is either:

• less than $10,000
• less than $400,000 and also less than 20% of the gross income on the return or claim

Question 33

If more than one schedule, entry or other portion is involved, how is it determined whether a tax preparer has prepared a substantial portion of any return or claim for refund?

Answer 33

All schedules, entries, or other portions shall be combined in determining whether a tax return preparer has prepared a substantial portion of any return or claim for refund.

Question 34

Who is included as tax return preparers provided they are compensated?

Answer 34

• a person who provides a taxpayer or other preparer sufficient information and advice so that completion of the return is simply a mechanical matter
• a nonsigning tax return preparer who prepares all or a substantial portion of a return or claim for refund, including preparers who provide advice that constitutes a substantial portion of the return.

Question 35

What are examples of persons who are not tax return preparers?

Answer 35

• an employee who prepares a return for the employer by whom they are regularly and continuously employed
• a fiduciary who prepares a return or refund for any person (the trust)
• a person who prepares a refund claim in response to a notice of deficiency issued to another
• a person who provides typing, reproducing, or other mechanical assistance (ex- clerical)
• a person who merely gives an opinion about events that have not happened (ex - planning)

Question 36

What are significant aspects of due diligence in respect to return preparation?

Answer 36

• making factual inquiries to ensure clients’ accuracy and truthfulness
• taking a position relative to tax law, in other words, assessing the scenario and appropriately applying tax law to the facts

Question 37

May a tax preparer rely, if in good faith, on information provided by the taxpayer without having to obtain third-party verification?

Answer 37

Yes

Question 38

If a tax preparer relies on information provided by the taxpayer, what must they do in regards to the information?

Answer 38

• they may not ignore the implications of the information
• they must make reasonable inquiries if the information appears inaccurate or incomplete
• they should make appropriate inquiries of the taxpayer about the existence of documentation for deductions

Question 39

What must a tax return preparer do if they discover that a taxpayer has made an error or omission in any document filed with the IRS?

Answer 39

They must notify the taxpayer of the error or omission immediately, and they must advise the taxpayer of the consequences of the error or omission.

Question 40

What are the procedural requirements for a tax preparer?

Answer 40

• they are required to sign the return or claim for refund after it has been completed and before it is presented to the taxpayer
• the preparer is required to provide a completed copy of the return or refund claim to the taxpayer before they allow the client to sign the prepared return
• they are required to retain a completed copy of each return or claim prepared for 3 years after the close of the return period

Question 41

What is an alternative to retaining completed copies of returns or claims prepared for a return preparer?

Answer 41

Keeping a list of returns and claims prepared that includes the following information:

• the taxpayers’ names
• taxpayer identification numbers
• their tax years
• types of returns or claims prepared

Question 42

What is the return period?

Answer 42

The 12-month period beginning on July 1 each year

Question 43

Who is subject to penalties for violations?

Answer 43

Tax return prepares and individuals with overall supervisory responsibility for advice given by a firm.

Question 44

What are unreasonable positions?

Answer 44

Taking an undisclosed position without a reasonable belief that substantial authority exists that it will be sustained on its merits.

Question 45

Do unreasonable positions result in a penalty?

Answer 45

Yes

Question 46

What is required of a disclosed position?

Answer 46

Its tax treatment must have a reasonable basis.

Question 47

When does a penalty not apply to a position?

Answer 47

If the preparer proves that:

• they acted in good faith
• reasonable cause exists for the understatment

Question 48

Are positions relating to tax shelters unreasonable?

Answer 48

Yes, unless reasonable belief exists that such positions would more likely than not be sustained on their merits.

Question 49

What is negligence?

Answer 49

Any failure to make a reasonable attempt to either comply with the provisions of the Internal Revenue laws or exercise ordinary and reasonable care in the preparation of a return.

Question 50

How do penalties apply to willful or reckless conduct?

Answer 50

If the understatement was caused by the preparer’s willful or reckless conduct the penalty is greater.

Question 51

Are frivolous returns penalized?

Answer 51

Yes

Question 52

When is a return considered a frivolous submission?

Answer 52

• It omits information necessary to determine the taxpayer’s tax liability
• It shows a substantially incorrect tax or willful understatement of tax liability
• It is based on a frivolous position (ex - that wages are not income)
• It is based on the taxpayer’s desire to impede the collection of tax

Question 53

What does the tax code provide regarding checks issued to taxpayer with respect to taxes imposed by the IRC?

Answer 53

Any return preparer who endorses or otherwise negotiates a check issued to a taxpayer with respect to taxes imposed by the IRC is subject to a penalty. Furthermore, any tax return preparer wo operates a check cashing agency that cashes, endorses, or negotiates tax refund checks for returns prepared is also subject to a penalty.

Question 54

What is aiding or abetting?

Answer 54

Helping to prepare any document that would result in an understatement of a tax liability if the document is used.

Question 55

Does aiding or abetting in preparation of any document used that results in an understatement of a tax liability subject to a penalty?

Answer 55

Yes

Question 56

How are penalties applied to a preparer regarding aiding or abetting?

Answer 56

Preparers may be subject to only one aiding or abetting penalty per taxpayer, per taxable period (or event when there is no taxable period), however, other types of penalties may still apply.

Question 57

How do penalties apply to preparers regarding aiding or abetting when a subordinate is involved?

Answer 57

Penalties apply even when a subordinate has been ordered to understate the tax liability, or the preparer knows but does not attempt to prevent the subordinate from understating the tax liability.

Question 58

What acts are subject to criminal penalties, including imprisonment?

Answer 58

Any act that constitutes a willful attempt to evade federal tax liability, even that of another person, is subject to criminal penalties, including imprisonment.

Question 59

Who can be found guilty of a felony?

Answer 59

Any person who willfully aids or assists in preparation or presentation of a materially false or fraudulent return.

Question 60

What may result from the violation of rules of aiding or abetting?

Answer 60

Disciplinary action by the director of the IRS, and an injunction may be issued prohibiting the violator from acting as a tax preparer.

Question 61

What are fraud and false statements?

Answer 61

Transactions that ordinarily involve a willful or deliberate action with the intent to obtain an unauthorized benefit.

Question 62

How do penalties apply to fraud and false statements?

Answer 62

Penalties are substantial and may include imprisonment of not more than 3 years.

Question 63

How do penalties apply to disclosure of taxpayer information?

Answer 63

A penalty is imposed on any tax return preparer who discloses or uses any tax return information without the consent of the taxpayer.

Question 64

When are penalties not imposed regarding the disclosure of taxpayer information?

Answer 64

If the disclosure was specifically for preparing, assisting in preparing, or providing services in connection with the preparation of any tax return of the taxpayer.

Question 65

What happens if a preparer is convicted of knowingly or recklessly disclosing taxpayer information?

Answer 65

The preparer is guilty of a misdemeanor and subject to fines and up to a year in prison.

Question 66

When are penalties not imposed for disclosure of taxpayer information?

Answer 66

If the disclosure was made in the following circumstances, the penalty is not imposed:

• in accordance with the IRC
• to a related taxpayer, provided the taxpayer did not expressly prohibit the disclosure
• under a court order (subpoena) or to the tax return preparer’s legal counsel in the event of legal proceedings
• to tax return preparers within the same firm
• for the purpose of a quality or peer review to the extent necessary to accomplish the review
• for use in preparing, assisting in preparing, or providing services in connection with tax return preparation

Question 67

How must a preparer obtain consent to disclose taxpayer information?

Answer 67

Consent must be written, formal consent authorizing the disclosure for a specific purpose.

Question 68

In providing consent to disclose taxpayer information, what must the taxpayer authorize the preparer to do?

Answer 68

The taxpayer must authorize the preparer to:

• use the taxpayer’s information to solicit additional current business from the taxpayer in matters not related to the IRS
• disclose the information to additional third parties
• disclose the information in connection with another person’s return

Question 69

How does confidentiality privilege apply?

Answer 69

The confidentiality privilege is extended to certain nonattorneys

Question 70

When may confidentiality privilege not be asserted?

Answer 70

The privilege may not be asserted to prevent the disclosure of information to any regulatory body other than the IRS.

Question 71

In noncriminal tax proceedings before the IRS, what protections is a taxpayer entitled to?

Answer 71

A taxpayer is entitled to common-law protections of confidentiality with respect to the tax advice given by any federally authorized tax practitioner. They are the same protections a taxpayer would have if the advising individual were an attorney.

Question 72

What is a federally authorized tax practitioner?

Answer 72

Any nonattorney who is authorized to practice before the IRS, such as a CPA.

Question 73

When is tax advice given by an individual?

Answer 73

Tax advice is given by an individual with respect to matters that are within the scope of the individual’s authority to practice before the IRS.

Question 74

What is another situation in which the confidentiality privilege applies?

Answer 74

It applies in any noncriminal tax proceeding in federal court brought by or against the United States.