103 NINJA AND SURGENT MCQ

Question 1

A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except

A Endorsing the check and depositing it into the client’s bank account
B Holding the check for safe keeping and awaiting the client’s return
C Holding the check until the client is billed, then endorsing and depositing the check into the CPA’s account as payment for the bill
D Endorsing the check and depositing it into an escrow account for the client’s benefit

Answer 1

B Holding the check for safe keeping and awaiting the client’s return

According to the Treasury Department Circular 230 a Practitioner who prepares tax returns, cannot endorse or otherwise negotiate any refund check issued to a client by the government. Options (a), (c) & (d) are incorrect as endorsement or negotiation of the client’s refund check by the CPA violates the Treasury Department Circular 230.

§ 10.31 Negotiation of taxpayer checks.
(a) A practitioner may not endorse or otherwise negotiate any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to a client by the government in respect of a Federal tax liability.

§ 10.31 Negotiation of taxpayer checks.

Question 2

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must
A Document the error in the workpapers
B Prepare an amended return within 30 days of the discovery of the error
C Promptly advise the client of the error
D Promptly resign from the engagement and cooperate with the successor accountant

Answer 2

Promptly advise the client of the error

A tax practitioner who knows the client has an error in any return or submitted document must advise the client of the consequences of noncompliance. While prudence suggests the practitioner document the error, this alone is insufficient to comply with the Circular 230 requirements. The practitioner who prepared the return with the error need not be the one preparing the amended return. Likewise, resignation from the engagement is not required; further, resignation and cooperation with a successor—without advising the client of the error—is insufficient to comply with the Circular 230 requirements.

Question 3

A CPA prepares a client’s tax return containing business travel expenses, including the costs of operating an automobile used for business, without inquiring about the existence of documentation for any of the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry in the event of an IRS audit disallowing certain expenses?

The client will not owe an understatement penalty if the return is audited and the expenses disallowed.

The client will not be subject to a fraud penalty.

The CPA may be assessed a tax return preparer penalty.

The CPA may be charged with preparing a fraudulent return.

Answer 3

The CPA may be assessed a tax return preparer penalty.

A tax preparer may in good faith rely on information provided by the client. The preparer should make reasonable inquiries if the information appears to be incorrect, incomplete, or inconsistent on the basis of known facts. Since documentation is required to deduct automobile expenses, the CPA may receive a tax return preparer penalty.

uthorities
SSTS 3
Treasury Circular 230, 10.34(d)

Question 4

A practitioner may represent conflicting interests provided that each affected client waives the conflict by:

informed consent.

oral consent.

informed, written consent.

written, notarized consent.

Answer 4

informed, written consent.

(TRP must keep for 36 months)

Generally, a practitioner cannot represent conflicting interests in practice before the IRS. However, if each of the affected clients waives the conflict of interest by informed, written consent, the practitioner may represent the conflicting interests. Section 10.29 of Circular 230 explains that “a conflict of interest exists if (1) The representation of one client will be directly adverse to [the interests of] another client,” or there is significant risk that representing one client will be “materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner.”

The practitioner must retain copies of the written consent for 36 months from the conclusion of the matter for which the consent was given.

Authorities
Treasury Circular 230, 10.29(a)-(b)

Question 5

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% probability the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?

The tax preparer has no responsibility for disclosing any potential penalties to the company, because the position will probably be sustained on audit.

The tax preparer is responsible for disclosing the risk of both penalties to the company.

The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.

The tax preparer is responsible for disclosing only the late-payment penalty to the company.

Answer 5

The tax preparer is responsible for disclosing the risk of both penalties to the company.

A practitioner must inform a client of any and all penalties that might to apply to the client with respect to a position taken on a tax return.

Circular 230, Section 10.34(c)(1)

Authorities
Treasury Circular 230, 10.34

Question 6

A tax preparer filed a return for a taxpayer and used the taxpayer’s detailed check register containing both business and personal expenses. If the tax preparer knowingly included personal expenses as deductible business expenses on the taxpayer’s business, then the:

taxpayer will be liable for penalties attributable to transactions lacking economic substance.

taxpayer will be liable for penalties for taking an unreasonable position that led to an understatement.

tax preparer will be liable only for penalties for taking an unreasonable position that led to an understatement.

tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.

Answer 6

tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.

A compensated tax return preparer can be liable for civil and criminal penalties for negligently or intentionally understating a taxpayer’s liability. A compensated preparer can be liable for the greater of $1,000 or a 50% penalty of income derived (first-tier penalty) for each tax return or claim for refund that understates the taxpayer’s liability due to unreasonable positions. There is a second-tier penalty of $5,000 or 75% penalty of income derived if the preparer willfully or recklessly understated the liability.

Authorities
IRC 6694

Question 7

According to the AICPA Statements on Standards for Tax Services, which of the following identifies the requirements for a tax advisor who believes that a taxpayer penalty might be assessed related to a position on a tax return?

A The tax advisor may not sign a return if the possibility of a penalty exists and the tax position is not disclosed.
B The tax advisor should advise the taxpayer to disclose the position on the tax return, but the taxpayer is responsible for deciding whether and how to disclose.
C The tax advisor should not recommend a position that could possibly result in a taxpayer penalty.
D The tax advisor is responsible for disclosing the position on the tax return, with or without the taxpayer’s permission.

Answer 7

The tax advisor should advise the taxpayer to disclose the position on the tax return, but the taxpayer is responsible for deciding whether and how to disclose.

When completing a return with the possibility of a taxpayer penalty being assessed, a tax advisor should inform the taxpayer of potential penalties and advise to disclose the position on the tax return. Note that the final decision of whether or not the position is disclosed on the return rests with the taxpayer, not the tax advisor. This is the extent of the practitioner’s responsibility when it comes to a potential penalty on a tax position.

(A) and (C) are incorrect because the standard specifies that a tax advisor may recommend, prepare or sign a tax return that reflects a position if (i) the member (tax advisor) concludes that there is a reasonable basis for the position and (ii) the position is appropriately disclosed on the return. The existence of a potential penalty is considered, but does not deter a tax advisor from, recommending a position or preparing or signing a tax return.

(D) is incorrect because the final decision of whether or not a position is disclosed on the return rests with the taxpayer and not the tax advisor. However, the tax advisor does have the right to reject the preparation or signing of a return wherein a particular position is not disclosed.

Question 8

According to the standards of the profession, which of the following sources of information should a CPA consider before signing a clients tax return?
I. Information actually known to the CPA from the tax return of another client
II. Information provided by the client that appears to be correct based on the clients returns from prior years
A
I only
B
II only
C
Both I and II
D
Neither I nor II

Answer 8

Both I and II

You are right, The correct answer is: C
Explanation:
According to the standards of the profession, a CPA may consider both information provided by the client that appears to be correct based on prior year filings and information actually known to the CPA from the tax return of another client.

You are correct to question the response regarding the use of information known to a CPA from the tax return of another client. My previous answer may have been overly broad in stating that this information should not be used under any circumstances. Let me clarify:

In practice, a CPA may indeed be aware of information from the tax return of another client that could be relevant to the tax return of the current client. The key ethical and legal issue here is the confidentiality of client information. According to the AICPA Code of Professional Conduct, CPAs are obligated to maintain the confidentiality of client information and cannot disclose this information without the specific consent of the client.

However, in some cases, the information known to the CPA from another client’s tax return could inform their professional judgment or alert them to potential issues or considerations that might be relevant for the current client’s tax return. This doesn’t mean the CPA can or should share or directly use the other client’s specific information. Rather, it means that their broader understanding and insights, gained from their practice including other clients’ cases, can inform their approach to issues that might arise in the current client’s situation.

Question 3

Question 9

According to the profession’s standards, which of the following actions should be taken by a CPA tax preparer who discovers an error in a client’s previously filed tax return?

Correct the error.

Advise the client.

Advise the IRS.

End the relationship with the client.

Answer 9

Advise the client.

When the CPA tax preparer discovers an error in a previously filed tax return, the CPA is under an obligation to so advise the client. The CPA is not obligated to inform the IRS of the error, and (except where required by law) is not permitted to do so without the client’s permission.

Authorities
SSTS 6
TX 162.03

Question 10

According to the profession’s ethical standards, a CPA preparing a client’s tax return may rely on unsupported information furnished by the client, without examining underlying information, unless the information:

is derived from a pass-through entity.

concerns dividends received.

appears to be incorrect or inconsistent on its face.

lists charitable contributions.

Answer 10

appears to be incorrect or inconsistent on its face.

According to Statement on Standards for Tax Services 3, Certain Procedural Aspects of Preparing Returns, “In preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer….” This rule would not be applicable if the information provided “appears to be incorrect, incomplete, or inconsistent on its face or on the basis of other facts known to the CPA.”

Circular 230 10.34(d) states that a preparer “may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.

Authorities
SSTS 3
Treasury Circular 230, 10.34(d)

Question 11

According to the standards of the profession, which of the following statements is correct regarding the action to be taken by a CPA who discovers an error in a client’s previously filed tax return?

Advise the client of the error and recommend the measures to be taken.
Withdraw from the professional relationship regardless of whether or not the client corrects the error.

I only

II only

Both I and II

Neither I nor II

Answer 11

I only

When a CPA discovers an error in a client’s previously filed tax return, the CPA should advise the client of the error and recommend the measures to be taken. If the client refuses to correct the error, the CPA may consider withdrawing from the professional relationship; withdrawal is not required or expected if the client corrects the error.

Question 12

According to Treasury Circular 230, which of the following rules related to the prompt disposition of pending matters before the IRS applies to CPAs?

A Practitioners may request an extension of time of not more than five years related to the disposition of matters pending before the IRS to avoid any preparer penalties.
B Practitioners will be held responsible for any of the client’s interest and penalties related to the unreasonable delay of matters pending before the IRS.
C Practitioners may not unreasonably delay the prompt disposition of matters pending before the IRS.
D Practitioners must ensure that matters are concluded within three years of the date of formal notification concerning any matters pending before the IRS.

Authorities
SSTS 6.4
Treasury Circular 230, 10.21

Answer 12

Practitioners may not unreasonably delay the prompt disposition of matters pending before the IRS.

As per Treasury Circular 230, Tax Practitioners must try and dispose a matter before IRS as soon as possible and should not cause any unreasonably delay in the prompt disposition of any matter before the Internal Revenue Service.
Therefore, Tax Practitioners must respond to clients and IRS personnel without delay and cannot advise a client to submit any document to the IRS for the purpose of delaying or impeding the administration of the Federal tax laws.

§ 10.23 Prompt disposition of pending matters. A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.

Question 13

If a practitioner is disbarred from practice before the IRS, when may a practitioner petition for reinstatement?

After 10 years

After 3 years

After 5 years

After 1 year

Answer 13

After 5 years

A practitioner disbarred or suspended may petition for reinstatement before the Internal Revenue Service after 5 years. Reinstatement is not granted unless the IRS is assured that the petitioner is not likely to repeat the actions that led to the disbarment, and that granting such reinstatement would not be contrary to the public interest.

A practitioner who has been disbarred from practice before the IRS may petition for reinstatement after 5 years from the effective date of disbarment. This rule allows practitioners who have been disbarred for misconduct or other reasons to seek reinstatement into practice before the IRS, provided they can demonstrate that they have rectified the reasons for their disbarment and are fit to practice.

Treasury Circular 230, 10.81

Question 14

In preparing a client’s current-year individual income tax return, a tax practitioner discovers an error in the prior year’s return. Under the rules of practice prescribed in Treasury Circular 230, the tax practitioner.
A Is barred from preparing the current year’s return until the prior-year error is rectified
B Must advise the client of the error
C Is required to notify the IRS of the error
D Must file an amended return to correct the error

Answer 14

Must advise the client of the error

10.21 Knowledge of client’s omission. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

Question 8

Question 15

Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take?

Contact the IRS and discuss courses of action

Discuss the requirements of the IRC with the client and recommend that the client amend the return

Contact the prior CPA and discuss the client’s exposure

Wait for the statute of limitations to expire

Answer 15

Discuss the requirements of the IRC with the client and recommend that the client amend the return

If a CPA discovers an error in an earlier tax return that includes material noncompliance, the CPA should promptly notify the client. The CPA should recommend the client amend the return.

Authorities
Treasury Circular 230, 10.21

Question 16

Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?
A An unrelated party compliance statement
B Taxpayer’s name and identification number or a copy of the tax return
C Workpapers associated with the preparation of each tax return
D A power of attorney

Answer 16

Taxpayer’s name and identification number or a copy of the tax return

The tax return preparer must keep a copy of the return or a list of taxpayer names, identification numbers, and tax years for 3 years following the close of the return period.

Question 4

Question 17

Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?

A The client’s records are to be destroyed upon submission of a tax return.
B The practitioner may retain copies of the client’s records.
C The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.
D The practitioner does not need to return any client records that are necessary for the client to comply with the client’s federal tax obligations

Answer 17

The practitioner may retain copies of the client’s records.

As per the Treasury Department Circular 230, a practitioner must return all client related records and may retain copies of the records returned. Option (a) is incorrect because client’s records are not to be destroyed upon submission of a tax return, instead copies of such records need to be retained. Option (c) is incorrect because the existence of a dispute over fees does not relieve the practitioner of his responsibility to return client records. Option (d) is incorrect because the practitioner must return all of client’s records that are necessary for the client to comply with federal tax obligations. Copies of such records may be retained with the practitioner.

§ 10.28 Return of client’s records.
(a) In general, a practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. The practitioner may retain copies of the records returned to a client. The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable state law allows or permits the retention of a client’s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the taxpayer’s return. The practitioner, however, must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations.
(b) For purposes of this section — Records of the client include all documents or written or electronic

materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client. The term also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation. The term also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. The term does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner’s firm, employees or agents if the practitioner is withholding such document pending the client’s performance of its contractual obligation to pay fees with respect to such document.

Question 18

Starr, CPA, prepared and signed Cox’s 20X1 federal income tax return. Cox informed Starr that Cox had paid doctors’ bills of $20,000 although Cox actually had paid only $7,000 in doctors’ bills during 20X1. Based on Cox’s representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox’s figures and Starr did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox’s 20X1 return, Starr is:

liable to Cox for interest on the underpayment of tax.

not liable to the IRS for any penalty or interest.

liable to the IRS for negligently preparing the return.

not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment of tax.

Answer 18

not liable to the IRS for any penalty or interest.

Starr is not liable to the IRS for any penalty or interest. The key issue addressed by this question is the extent of liability an accountant has in the preparation of tax returns. Here the problem tells you that the CPA had no reason to doubt the client’s assertions. A CPA may be liable for:

• negligence in preparing the return—computational errors, failure to file the return in a timely fashion or just plain erroneous advice. None of these elements are present in this particular case.
• an understatement of liability if the tax preparer knows or should know that the deductions or credits resulting in the understatement have no realistic possibility of being sustained on its merits. Again, the problem tells you that Starr had no reason to doubt the accuracy of Cox’s figures.

Authorities
26 US Code
IRC 6671-6711
SSTS 3

Question 19

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except:

disclose a conflict of interest.

keep a record of returns prepared.

sign a tax return as a preparer.

provide a client with a copy of the tax return.

Answer 19

disclose a conflict of interest.

The tax preparer must sign the tax return and include the preparer’s address and IRS identification number. A copy of the return must be provided to the taxpayer when the return is signed. The tax preparer must maintain a file of returns and log of all returns for three years after the close of the return period. These are all addressed in the Internal Revenue Code; conflict of interest is not.

The rule regarding conflicts of interest is contained in Treasury Circular 230.

The tax preparer is not allowed to represent conflicting interests before the IRS. However, each affected client can give consent and waive the conflict of interest. No penalty is designated for a conflict of interest.

Authorities
IRC 6695(a)-(d)
Treasury Circular 230, 10.29(a)-(b)

Question 20

The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must:

obtain the records from the client and submit them to the IRS.

notify the IRS of the identity of any person the CPA believes could have the records.

contact all third parties associated with the records, such as banks and employers, to obtain the requested records for submission to the IRS.

require the client to submit the records to the IRS or withdraw from the engagement.

Answer 20

notify the IRS of the identity of any person the CPA believes could have the records.

Pursuant to Treasury Circular 230, Section 10.20(a), “A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.”

In addition, “Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information.”

Hence, the CPA must notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.

Authorities
Treasury Circular 230, 10.20(a)

Question 21

To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

Review the accuracy of the taxpayer’s books and records.

Make reasonable inquiries to determine if the taxpayer’s information is incomplete.

Audit the taxpayer’s corresponding business operations.

Examine the taxpayer’s supporting documents.

Answer 21

Make reasonable inquiries to determine if the taxpayer’s information is incomplete.

Tax return preparer penalties are covered in both Circular 230 and 26 CFR 1.6694-1(e). An audit or review is not required and examination of the taxpayer’s supporting documents is only sometimes required. Reasonable inquiries, however, are generally required.

Authorities
26 CFR 1.6694-1(e)
Treasury Circular 230, 10.50(c)(1)

Question 22

Under Circular 230, a practitioner may be:
A. censured.
B. suspended.
C. disbarred.
D. censured, suspended, or disbarred.

Answer 22

D. censured, suspended, or disbarred.

If a practitioner is shown to be incompetent, refuses to comply with the rules of Circular 230, or acts with intent to defraud or willingly and knowingly mislead or threaten a client, then the Secretary of the Treasury can censure, suspend, or even disbar the practitioner

Question 23

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?

A The CPA takes into account the possibility that a tax return will not be audited.
B The CPA reasonably relies upon representations of the client.
C The CPA considers all relevant facts that are known.
D The CPA takes into consideration assumptions about future events related to the relevant facts.

Answer 23

The CPA takes into account the possibility that a tax return will not be audited.

A practitioner’s written advice concerning one or more federal tax issues must be based on the following: (i) Reasonable factual and legal assumption, including assumptions on future events. (ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know. (iii) Reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter. (iv) Not rely on representations, statements, findings or agreements of the taxpayer or any other person if the reliance on them is reasonable. (v) Relate applicable laws and authorities to facts. and (vi) Not in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised in an audit.

*Options (b), (c) and (d) are incorrect because these actions are not prohibited, but required under Treasury Circular 230 for practitioner to provide written advice.

(2) The practitioner must—
(i) Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events);
(ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
(iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter;
(iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
(v) Relate applicable law and authorities to facts; and
(vi) Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

Question 24

Under Treasury Circular 230, a practitioner may be sanctioned for which of the following?

Gross incompetence

Willful violation of the regulations

Prohibited solicitation of employment

All of the answer choices are correct.

Answer 24

All of the answer choices are correct.

A practitioner may be sanctioned for a variety of items, including violating any of the regulations willfully, recklessly, or through gross incompetence (Treasury Circular 230, Section 10.52). The practitioner may also be sanctioned for “solicitation of employment as prohibited under §10.30, the use of false or misleading representations with intent to deceive a client or prospective client in order to procure employment, or intimating that the practitioner is able improperly to obtain special consideration or action from the Internal Revenue Service or any officer or employee thereof.” (Section 10.51(a)(5))

Authorities
Treasury Circular 230, 10.51-.52

Question 25

Under Treasury Circular 230, the IRS requires that certain records be returned to a client by the tax practitioner even though no payment for services has been received. Records of the client for this purpose do not include

A Materials prepared by a client’s actuary and provided to the practitioner with respect to tax preparation
B A schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client’s tax return
C Electronic materials provided to the practitioner that existed before the client retained the practitioner
D Written records given to the practitioner at the beginning of the engagement

Answer 25

A schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client’s tax return

On a client’s request, a tax practitioner must return any client records that are required for the client to comply with his/her tax obligations, even if there is a dispute over fees.

The tax practitioner can keep copies of these records. However, he must return all written or electronic materials provided by client or third party but is not required to provide the client with anything that is a practitioner’s work product such as a schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client’s tax return.

Materials prepared by a client’s actuary and provided to the practitioner with respect to tax preparation, Electronic materials provided to the practitioner that existed before the client retained the practitioner and written records given to the practitioner at the beginning of the engagement are all clients record and must be returned to the client even if there is a dispute over fees.

§ 10.28 Return of client’s records.

(b) For purposes of this section — Records of the client include all documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client. The term also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation. The term also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. The term does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner’s firm, employees or agents if the practitioner is withholding such document pending the client’s performance of its contractual obligation to pay fees with respect to such document.

Circular 230 Page 22

Question 13

§ 10.28 Return of client’s records.

Question 26

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer?

It may be communicated only through the confidential engagement letter between the tax practitioner and the taxpayer.

It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

It must be communicated as an estimate before the engagement begins, with the understanding that the actual amount of the fee will not be determined until the engagement ends.

It may not be communicated by television, radio, or hand-delivered flyers.

Authorities
Treasury Circular 230, 10.30(c)

Answer 26

It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

Pursuant to Treasury Circular 230, Section 10.30(c): “Fee information may be communicated in professional lists, telephone directories, print media, mailings, and electronic mail, facsimile, hand delivered flyers, radio, television, and any other method. The method chosen, however, must not cause the communication to become untruthful, deceptive, or otherwise in violation of this part. A practitioner may not persist in attempting to contact a prospective client if the prospective client has made it known to the practitioner that he or she does not desire to be solicited. In the case of radio and television broadcasting, the broadcast must be recorded and the practitioner must retain a recording of the actual transmission. In the case of direct mail and e-commerce communications, the practitioner must retain a copy of the actual communication, along with a list or other description of persons to whom the communication was mailed or otherwise distributed. The copy must be retained by the practitioner for a period of at least 36 months from the date of the last transmission or use.”

Hence, the communication of fee information may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

Question 27

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

A Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors
B Recommending to the client that the advisor’s tax advice be made orally instead of in a written memorandum
C Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum
D Requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum

Question 6

Answer 27

Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum

Generally, a CPA can rely on information furnished by a client in the preparation of a tax memorandum. If the information seems to be incorrect, inconsistent, or incomplete, the CPA must make reasonable inquiries. When the facts are established, then relevant tax law must be applied accurately to the known facts.

Under Treasury Department Circular 230, a CPA tax advisor’s best practice includes establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum. Option (a) is incorrect because best practice does not require the practitioner to request written evidence from the client’s board of directors approving the fee proposal for tax advice. Option (b) is incorrect because recommending to the client that the advice be made orally instead of written is not a characteristic of best practice in rendering tax advice. Option (d) is incorrect because there is no requirement to get the client to submit a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA.

Circular 230 page 24:
§ 10.33 Best practices for tax advisors.
(a) Best practices. Tax advisors should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the Internal Revenue Service. In addition to compliance with the standards of practice provided elsewhere in this part, best practices include the following:
(1) Communicating clearly with the client

regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered.
(2) Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts.
(3) Advising the client regarding the import of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy-related penalties under the Internal Revenue Code if a taxpayer acts in reliance on the advice.
(4) Acting fairly and with integrity in practice before the Internal Revenue Service.

Question 6

§ 10.33 Best practices for tax advisors.
Authorities
Treasury Circular 230, 10.34(d)

Question 28

Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?

A For preparation of an original tax return
B For preparation of an amended tax return
C For preparation of a claim for tax refund
D If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings

Answer 28

If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings

Under Treasury Circular 230, Section 10.27(b)(1), “Except as provided…a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.” The exceptions provided are for examination of, not preparation of, an original tax return, amended tax return, or claim for a tax refund. Contingent fees are generally not allowed for tax preparation services. Circular 230, Section 10.27(b)(4), states, “A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.”

ET 1.510 (“Contingent Fees”) of the AICPA Professional Standards uses the wording “if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings” to describe contingent fees that a CPA may charge.

Circular 230, Section 10.27(b)(1)
“Except as provided … a practitioner may not charge a contingent fee for
services rendered in connection with any matter before the IRS.”
– Exceptions provided include examination of, not preparation of, an
original tax return, amended return, or claim for tax refund
– Contingent fees are generally not allowed for tax preparation services

An AICPA member in public practice generally shall not offer or render services under an agree­ment whereby the fee is contingent upon the findings or results, including preparation of an original or amended tax return or claim for tax refund.Fees that are fixed by the courts or public authorities or which are determined in tax matters by judicial proceedings or governmental agency findings are not considered contingent and, therefore, are permitted.

§ 10.27 Fees.
(a) In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.
(b) Contingent fees —
(1) Except as provided in paragraphs (b)(2), (3),
and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.
(2) A practitioner may charge a contingent
fee for services rendered in connection with the Service’s examination of, or challenge to —
(i) An original tax return; or
(ii) An amended return or claim for refund or
credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.
(3) A practitioner may charge a contingent fee
for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.
(4) A practitioner may charge a contingent fee
for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.
(c) Definitions. For purposes of this section —
(1) Contingent fee is any fee that is based, in
whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that
is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the eventthat a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect.

Authorities
ET 1.510
Treasury Circular 230, 10.27

Question 29

Vee Corp. retained Water, CPA, to prepare its Year 8 income tax return. During the engagement, Water discovered that Vee had failed to file its Year 4 income tax return. What is Water’s professional responsibility regarding Vee’s unfiled Year 4 income tax return?

A Prepare Vee’s Year 4 income tax return and submit it to the IRS
B Advise Vee that the Year 4 income tax return has not been filed and recommend that Vee ignore filing its Year 4 return since the statute of limitations has passed
C Advise the IRS that Vee’s Year 4 income tax return has not been filed
D Consider withdrawing from preparation of Vee’s Year 8 income tax return until the error is corrected

Answer 29

Consider withdrawing from preparation of Vee’s Year 8 income tax return until the error is corrected

Section 7216(a) prohibits a tax preparer from disclosing, for a purpose unrelated to the preparation of the taxpayer’s tax return, information provided in connection with the preparation of such return.

Section 7216(a) comes from the Internal Revenue Code (IRC) of the United States.

Key points:

-Purpose: It establishes criminal penalties for tax return preparers who knowingly or recklessly disclose or use tax return information for purposes unrelated to tax preparation.
-Protection of taxpayer privacy: It’s a crucial safeguard for taxpayer confidentiality.
-Exceptions: The IRC and Treasury Regulations specify certain permitted disclosures or uses, such as:
-With the taxpayer’s consent
-For quality control or peer review
-To defend against legal claims
-To comply with a court order
-Violations: Violations can result in fines, imprisonment, or both.
Additional Information:

Treasury Regulations: Detailed rules and consent requirements related to Section 7216 are found in Treasury Regulations (specifically, 301.7216).
IRS Guidance: The Internal Revenue Service (IRS) provides further guidance on Section 7216, including:
Revenue Procedures
Frequently Asked Questions (FAQs)

Professional Organizations: Resources and guidance are also available from professional organizations like the American Institute of Certified Public Accountants (AICPA) and the National Association of Enrolled Agents (NAEA).

Question 30

What is the penalty for failure to provide the taxpayer with a copy of her return?

$50 for each failure, but no more than $27,000 in a return period

$55 for each failure, but no more than $28,000 in a return period

$200 for each failure, but no more than $10,000 in a return period

$100 for each failure, but no more than $5,000 in a return period

Answer 30

Compensated tax return preparers must furnish the taxpayer with a copy of the prepared return no later than the time the original return is presented for signing. Under Title 26, in calendar year 2023, the penalty is $55 for each failure, but no more than a total of $28,000 in a return period for this and other “assessable penalties.”

Authorities
IRC 6695(a)-(d)

Question 31

What is the first-tier penalty for which a compensated preparer may be liable for each tax return or claim for refund that understates the taxpayer’s liability due to an unreasonable position?

The sum of $1,000

Fifty percent (50%) of income derived by the taxpayer

The sum of $10,000

The greater of $1,000 or 50% of income derived by the tax return preparer with respect to the return or claim for refund

Answer 31

The greater of $1,000 or 50% of income derived by the tax return preparer with respect to the return or claim for refund

The first-tier penalty is the greater of $1,000 or 50% of income derived by the tax return preparer with respect to the return or claim for refund. (Note that there is also a second-tier penalty of $5,000 or 75% penalty of income derived if the preparer willfully or recklessly understated the liability.)

Authorities
IRC 6694(a)(1)

Question 32

What is the second-tier penalty if a tax preparer willfully or recklessly understated a taxpayer’s liability?

The greater of $2,000 or 60% of the liability

The greater of $3,000 or 60% of the liability

The greater of $5,000 or 65% of the liability

The greater of $5,000 or 75% of the liability

Answer 32

The greater of $5,000 or 75% of the liability

The penalty is the greater of $5,000 or 75% of the liability. (Note that there is also a first-tier penalty of the greater of $1,000 or 50% of income derived by the tax preparer for each tax return or claim for refund that understates the taxpayer’s liability due to unreasonable positions.)

Authorities
IRC 6694(b)

Question 33

2. When must a practitioner exercise due diligence?
   A. In determining the correctness of oral or written representations in any matter admin‐
   istered by the IRS
   B. In preparing, approving, and filing returns
   C. In determining the correctness of oral or written representations by the practitioner of
   the Department of the Treasury
   D. All of the answer choices are correct.

Answer 33

D. All of the answer choices are correct.

– Circular 230, section 10.22 includes:
* A practitioner must exercise due diligence in:
– Determining the correctness of oral or written representations in any matter administered by the IRS
– Preparing, approving, and filing returns
– Determining the correctness of oral or written representations by the practitioner to the Department
of the Treasury

Question 34

When may individuals who are not CPAs, attorneys, or enrolled agents engage in limited practice before the IRS?

An individual may represent himself if he presents satisfactory identification.

An individual may represent a member of her immediate family provided such member is present at any conference or meeting with an agent of the IRS.

Any partner may represent the partnership of which she is a member before the IRS.

A part-time employee of an individual employer may represent the employer provided such part-time employee works for the employer at least 20 hours per week.

Answer 34

An individual may represent himself if he presents satisfactory identification.

An individual may represent a member of their immediate family; the member does not need to be present. A regular, full-time (but not part-time) employee of an individual employer may represent the employer. Only a general partner or a regular full-time employee of a partnership may represent the partnership; they do not need to be a partner. A limited partner may not represent the partnership in matters before the IRS.

Circular 230 allows individuals who are not CPAs, attorneys, or enrolled agents to engage in limited practice before the IRS. As a result, an individual can represent themselves before the IRS provided they present satisfactory identification.

Question #102143

Question 35

When preparing a client’s Form 1040, U.S. Individual Income Tax Return, a CPA determined that there was documentation supporting only $12,000 of the $20,000 travel expenses claimed by the client. Which of the following courses of action taken by the CPA would be in compliance with Treasury Circular 230?

The CPA deducts the $20,000 of expenses as long as the client agrees to disclose on the return that $8,000 of the expenses are undocumented.

The CPA makes reasonable inquiries to obtain the needed documentation if the information as furnished appears to be incorrect or incomplete.

The CPA deducts the $20,000 of expenses since there is a small likelihood that the IRS will audit the tax return.

The CPA relies in good faith, without verification, upon information furnished by the client in deducting the expenses.

Answer 35

The CPA makes reasonable inquiries to obtain the needed documentation if the information as furnished appears to be incorrect or incomplete.

According to section 10.34(d) of Treasury Circular 230, “A practitioner…generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.”

Authorities
Treasury Circular 230, 10.34(d)

Question 36

Which of the following situations would most likely be a violation of the Treasury Circular 230 solicitation guidelines by a CPA, assuming that there are no violations of federal or state laws or other rules?

A The CPA sends unsolicited e-mails to potential clients guaranteeing tax refunds from the Internal Revenue Service.
B The CPA mails solicitation letters, clearly identified as such, to randomly selected business firms from a local directory, disclosing how the firms were selected to be contacted.
C The CPA records a radio advertising broadcast that fails to disclose the fee charged for an initial consultation.
D The CPA advertises in a local newspaper as providing accounting and tax services without disclosing fee information.

Answer 36

Treasury Circular 230 contains rules for CPAs, Attorneys and Enrolled Agents (EA) that represents taxpayers before the IRS.

As per §10.30 of Treasury Circular 230, a tax practitioner cannot make uninvited oral or written solicitations to clients for employment in matters related to the IRS if the solicitation violates federal or state law or another applicable rule. Any lawful solicitation made by or on behalf of a practitioner eligible to practice before the IRS must disclose the source of the information used in choosing the recipient. However, the solicitation should not make any false, fraudulent, misleading, or deceptive statements or claims.

A tax refund guarantee by a CPA in unsolicited e-mails qualifies as a private solicitation that makes a false and deceptive claim. Even though it doesn’t violate the solicitation rules, the advertisement rule is violated and is, therefore, a violation of the Treasury Circular 230.

If the selection of firms to be contacted is disclosed, the CPA is well in line with the circular. Further, the circular does not mandate the disclosure of fees for the services of the practitioner. If such fees are not disclosed in radio or newspaper advertisements, it is, in no way, a violation.

§ 10.30 Solicitation.
(a) Advertising and solicitation restrictions.
(1) A practitioner may not, with respect to any Internal Revenue Service matter, in any way use or participate in the use of any form of public communication or private solicitation containing a false, fraudulent, or coercive statement or claim; or a misleading or deceptive statement or claim. Enrolled agents, enrolled retirement plan agents, or registered tax return preparers, in describing their professional designation, may not utilize the term “certified” or imply an employer/employee relationship with the Internal Revenue Service. Examples of acceptable descriptions for enrolled agents are “enrolled to represent taxpayers before the Internal Revenue Service,” “enrolled to practice before the Internal Revenue Service,” and “admitted to practice before the Internal Revenue Service.” An example of an acceptable description for registered tax return preparers is “designated as a registered tax return preparer by the Internal Revenue Service.”
(2) A practitioner may not make, directly or indirectly, an uninvited written or oral solicitation Treasury Department Circular No. 230 of employment in matters related to the Internal Revenue Service if the solicitation violates Federal or State law or other applicable rule, e.g., attorneys are precluded from making a solicitation that is prohibited by conduct rules applicable to all attorneys in their State(s) of licensure. Any lawful solicitation made by or on behalf of a practitioner eligible to practice before the Internal Revenue Service must, nevertheless, clearly identify the solicitation as such and, if applicable, identify the source of the information used in choosing the recipient. (b) Fee information. (1)(i) A practitioner may publish the availability of a written schedule of fees and disseminate the following fee information — (A) Fixed fees for specific routine services. (B) Hourly rates. (C) Range of fees for particular services. (D) Fee charged for an initial consultation. (ii)Any statement of fee information concerning matters in which costs may be incurred must include a statement disclosing whether clients will be responsible for such costs. (2) A practitioner may charge no more than the rate(s) published under paragraph (b)(1) of this section for at least 30 calendar days after the last date on which the schedule of fees was published. (c) Communication of fee information. Fee information may be communicated in professional lists, telephone directories, print media, mailings, and electronic mail, facsimile, hand delivered flyers, radio, television, and any other method. The method chosen, however, must not cause the communication to become untruthful, deceptive, or otherwise in violation of this part. A practitioner may not persist in attempting to contact a prospective client if the prospective client has made it known to the practitioner that he or she does not desire to be solicited. In the case of radio and television broadcasting, the broadcast must be recorded and the practitioner must retain a recording of the actual transmission. In the case of direct mail and e-commerce communications, the practitioner must retain a copy of the actual communication, along with a list or other description of persons to whom the communication was mailed or otherwise distributed. The copy must be retained by the practitioner for a period of at least 36 months from the date of the last transmission or use. (d) Improper associations. A practitioner may not, in matters related to the Internal Revenue Service, assist, or accept assistance from, any person or entity who, to the knowledge of the practitioner, obtains clients or otherwise practices in a manner forbidden under this section.

Question 37

Which, if any, of the following could result in penalties against an income tax return preparer?

I. Knowing or reckless disclosure or use of tax information obtained in preparing a return
II. A willful attempt to understate any client’s tax liability on a return or claim for refund
A Neither I nor II
B I only
C II only
D Both I and II

Answer 37

Both I and II

Two sections of the Internal Revenue Code (IRC Sections 6713(a) and 7216(a)) impose penalties for the disclosure of information obtained to prepare a tax return.

IRC Section 6694(b) imposes a penalty for an understatement due to willful or reckless conduct.

A tax return preparer shall not disclose any confidential client information outside of the CPA firm without specific consent of the client except when permitted He will incur penalty for disclosing confidential client information without client’s permission. The tax preparer will also be subject to criminal violations (fines and/or imprisonment) if he willfully prepares a false tax return or assists others to evade taxes. Options (a), (b) and (c) are incorrect based on the above explanation.

§ 10.52 Violations subject to sanction.
(a) A practitioner may be sanctioned under §10.50 if the practitioner —
(1) Willfully violates any of the regulations (other than §10.33) contained in this part; or
(2) Recklessly or through gross incompetence (within the meaning of §10.51(a)(13)) violates §§ 10.34, 10.35, 10.36 or 10.37.

§ 10.34 Standards with respect to tax returns and documents, affidavits and other papers.
(a) Tax returns.
(1) A practitioner may not willfully, recklessly, or through gross incompetence —
(i) Sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that —
(A) Lacks a reasonable basis;
(B) Is an unreasonable position as described in section 6694(a)(2) of the Internal Revenue Code (Code) (including the related regulations and other published guidance); or* (C) Is a willful attempt by the practitioner
to understate the liability* for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2) of the Code (including the related regulations and other published guidance).

Authorities
IRC 6694(b)
IRC 6713
IRC 7216

Question 38

Which of the following fee arrangements generally would not be permitted under the ethical standards published in Circular 230?
A. A referral fee paid by a CPA to obtain a client
B. A commission for compiling a client’s internal‐use financial statements
C. A contingent fee for preparing a client’s income tax return
D. A contingent fee for representing a client in tax court

Answer 38

C. A contingent fee for preparing a client’s income tax return

– Circular 230, Section 10.27
* A contingent fee is defined as a fee that is determined based on the outcome of
the services provided
* Contingent fees are prohibited for a CPA’s fee to increase if the tax refund
increases
* Contingent fees are permitted for representing a client in a tax examination or
in tax court

Question 39

Which of the following is not an example of practicing before the IRS as defined in Circular 230?

Corresponding and communicating with the IRS

Preparing and filing documents

Rendering written advice on recent IRS decisions

Representing a client at conferences, hearings, and meetings

Answer 39

Rendering written advice on recent IRS decisions

Practice before the IRS is defined in Treasury Circular 230 as involving all matters connected with a presentation to the IRS, or any of its officers or employees, relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the IRS. This includes preparing and filing documents; corresponding and communicating with the IRS; rendering written advice with respect to any entity, transaction, plan, or arrangement; and representing a client at conferences, hearings, and meetings.

Rendering written advice on recent IRS decisions is not an example of practicing before the IRS.

Authorities
Treasury Circular 230, 10.3(b)

Question 40

Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation?

All forms of advertising and solicitation are prohibited.

A CPA may advertise in any manner that is not false, misleading, or deceptive.

A CPA may only solicit new clients through mass mailings.

There are no prohibitions regarding the manner in which CPAs may solicit new business.

Answer 40

A CPA may advertise in any manner that is not false, misleading, or deceptive.

A quick review of the answers shows key characteristics of questions that often are wrong, “all,” “no” prohibitions, and “may only.” Whenever you see these types of answers, be very careful.

Under the AICPA’s Advertising and Other Forms of Solicitation Rule (ET 1.600.001), “A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited.”

Authorities
ET 1.600.001