Chap 5 - Ethics and professional responsibilities in tax services

Question 1

Vee Corp. retained Walter, CPA, to prepare its Year 6 income tax return. During the engagement, Walter discovered that Vee had failed to file its Year 2 income tax return. What is Walter’s professional responsibility regarding Vee’s unfiled Year 2 income tax return?

a. Prepare Vee’s Year 2 income tax return and submit it to the IRS.
b. Consider withdrawing from preparation of Vee’s Year 6 income tax return until the error is corrected.
c. Advise Vee that the Year 2 income tax return has not been filed and recommend that Vee ignore filing its Year 2 return since the statute of limitations has passed.
d. Advise the IRS that Vee’s Year 2 income tax return has not been filed.

Answer 1

Consider withdrawing from preparation of Vee’s Year 6 income tax return until the error is corrected.

Choice “b” is correct. The CPA should consider withdrawing from the preparation of Vee’s Year 6 income tax return until the error (i.e., the non-filing of the Year 2 tax return) has been corrected.

Rule: Upon discovery of an error in a previously filed return or the client’s failure to file a required return, the CPA should promptly notify the client (either orally or in writing) of the error, noncompliance, or omission and advise the client of the appropriate measures to be taken (e.g., advise the client to file the tax return). If the client does not rectify the error, the CPA should consider withdrawing from the engagement.

Choice “a” is incorrect, as the CPA has no responsibility (without a formal client engagement) or the authority to prepare and file a client’s tax return.

Choice “c” is incorrect, as a CPA cannot advise a client to disobey the law because it violates a CPA’s ethical responsibilities.

Choice “d” is incorrect, as a CPA has no responsibility to advise the IRS of any client wrongdoing.

Question 2

A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate return information, if the disclosure is made:

a. For peer review.
b. Under an administrative order by a state agency that registers tax return preparers.
c. To enable the tax processor to electronically compute the taxpayer’s liability.
d. To enable a third party to solicit business from the taxpayer.

Answer 2

To enable a third party to solicit business from the taxpayer.

Choice “d” is correct. Use of a taxpayer’s return information to assist a third party to solicit business subjects a return preparer to penalty.

Choice “c” is incorrect. Disclosure can properly be made in this case by a return preparer without penalty.

Choice “a” is incorrect. Disclosure can properly be made in this case by a return preparer without penalty.

Choice “b” is incorrect. Disclosure can properly be made in this case by a return preparer without penalty.

Question 3

A tax return preparer may disclose or use tax return information without the taxpayer’s consent to:

a. Solicit additional nontax business.
b. Facilitate a supplier’s or lender’s credit evaluation of the taxpayer.
c. Accommodate the request of a financial institution that needs to determine the amount of taxpayer’s debt to it, to be forgiven.
d. Be evaluated by a quality or peer review.

Answer 3

Be evaluated by a quality or peer review.

Choice “d” is correct. A tax return preparer may disclose or use tax return information without the taxpayer’s consent to be evaluated by a quality or peer review.

Choices “b”, “c”, and “a” are incorrect. They would all require the taxpayer’s consent.

Question 4

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 4

Both I and II.

Choice “d” is correct. Both I and II. Knowing or reckless disclosure or use of tax information obtained in preparing a return and a willful attempt to understate any client’s tax liability on a return or claim for refund could both result in penalties against an income tax return preparer.

Question 5

A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to:

a. Examine business operations.
b. Make reasonable inquiries when taxpayer information appears incorrect.
c. Copy all underlying documents.
d. Audit the corporate records.

Answer 5

Make reasonable inquiries when taxpayer information appears incorrect.

Choice “b” is correct. A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to make reasonable inquiries when taxpayer information appears incorrect.

Choices “d”, “a”, and “c” are incorrect. A tax return preparer is not required to:

• Audit the corporate records
• Examine the business operations
• Copy all underlying documents

Question 6

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, the tax practitioner:

a. Is required to notify the IRS of the error.
b. Must file an amended return to correct the error.
c. Is barred from preparing the current year’s return until the prior-year error is rectified.
d. Must advise the client of the error.

Answer 6

Must advise the client of the error.

Choice “d” is correct. Upon discovery of an error in a previously-filed return or the client’s failure to file a required return, the tax practitioner should promptly notify the client (either orally or in writing) of the error, noncompliance, or omission and advise the client of the appropriate measures to be taken (e.g., advise the client to file the tax return). If the client does not rectify the error, the tax practitioner should consider withdrawing from the engagement.

Choice “c” is incorrect. The tax practitioner is not barred from preparing the current year’s return.

Choice “a” is incorrect. The tax practitioner is not required to notify the IRS of the error.

Choice “b” is incorrect. The tax practitioner is not required to file an amended return but should consider withdrawing from the engagement is the client refuses to do so.

Question 7

Which of the following acts by a CPA will not result in a CPA incurring an IRS penalty?

a. Negotiating a client’s tax refund check when the CPA prepared the tax return.
b. Understating a client’s tax liability as a result of an error in calculation.
c. Failing, without reasonable cause, to provide the client with a copy of an income tax return.
d. Failing, without reasonable cause, to sign a client’s tax return as preparer.

Answer 7

Understating a client’s tax liability as a result of an error in calculation.

Choice “b” is correct. The IRS does not impose a penalty on a CPA for making an error in calculating a tax return.

Choice “c” is incorrect. A CPA must give his or her client a copy of the client’s tax return or face imposition of a penalty.

Choice “d” is incorrect. A CPA must sign tax returns that the CPA prepares. Willful violation of this rule can result in imposition of a penalty.

Choice “a” is incorrect. A CPA is prohibited from negotiating a client’s refund check.

Question 8

Clark, a professional tax return preparer, prepared and signed a client’s federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check?

a. Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark’s fee for preparation of the return.
b. Clark will be subject to the penalty if Clark endorses and cashes the check.
c. Clark may not endorse and cash the check, without penalty, because the check is for more than $500.
d. Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service.

Answer 8

Clark will be subject to the penalty if Clark endorses and cashes the check.

Choice “b” is correct. A tax preparer may not endorse and cash a client’s tax refund check.

Question 9

Which of the following professional bodies has the authority to revoke a CPA’s license to practice public accounting?

a. National Association of State Boards of Accountancy.
b. State CPA Society Ethics Committee.
c. Professional Ethics Division of AICPA.
d. State board of accountancy.

Answer 9

State board of accountancy.

Choice “d” is correct. The state board of accountancy is the only body listed that can grant a CPA license and the only body that may revoke such a license.

Choices “a”, “b”, and “c” are incorrect, per the above.

Question 10

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA’s license to practice public accounting?

a. A state CPA society.
b. The AICPA.
c. A state board of accountancy.
d. The SEC.

Answer 10

A state board of accountancy.

Choice “c” is correct. Only a state board of accountancy has the authority to suspend or revoke a CPA’S license to practice public accounting.

Choice “d” is incorrect. The SEC may only suspend or revoke a CPA’S authority to practice before the SEC with respect to public companies.

Choices “b” and “a” are incorrect. The AICPA and a state society may only suspend or revoke a CPA’S membership in the AICPA or the state society, respectively.

Question 11

Which of the following statements concerning an accountant’s disclosure of confidential client data is generally correct?

a. Disclosure may be made to any state agency without subpoena.
b. Disclosure may be made to comply with an SEC audit request.
c. Disclosure may be made to comply with Generally Accepted Accounting Principles.
d. Disclosure may be made to any party on consent of the client.

Answer 11

Disclosure may be made to any party on consent of the client.

Choice “d” is correct. An accountant may disclose confidential client information to any party if the client specifically consents to the release of information.

Choice “a” is incorrect. Generally, confidential client information should not be disclosed to a court unless it is subpoenaed or the client consents.

Choice “b” is incorrect. Generally, confidential client information should not be disclosed to the SEC unless it is subpoenaed or the client consents.

Choice “c” is incorrect. Compliance with GAAP does not require disclosure of client confidences.

Question 12

A CPA is permitted to disclose confidential client information without the consent of the client to:
I. Another CPA who has purchased the CPA’s tax practice.
II. Another CPA firm if the information concerns suspected tax return irregularities.
III. A state CPA society voluntary quality control review board.
a. III only.
b. II and III only.
c. I and III only.
d. II only.

Answer 12

III only.

Choice “a” is correct. The CPA generally cannot give out a client’s confidential information to anyone without the client’s consent. However, exceptions are generally made for court subpoenas and state CPA society quality control panels.

Question 13

A CPA who prepares clients’ federal income tax returns for a fee must:

a. Receive client documentation supporting all travel and entertainment expenses deducted on the return.
b. File certain required notices and powers of attorney with the IRS before preparing any returns.
c. Indicate the CPA’s federal identification number on a tax return only if the return reflects tax due from the taxpayer.
d. Keep a completed copy of each return for a specified period of time.

Answer 13

Keep a completed copy of each return for a specified period of time.

Choice “d” is correct. The CPA must retain a completed copy of each return for three years after the close of the return period (IRC Section 6107).

Choice “b” is incorrect. A tax return preparer is not required to file any notices and powers of attorney with the IRS before preparing any returns.

Choice “a” is incorrect. No such rule. A tax return preparer can take a client at his word.

Choice “c” is incorrect. A tax return preparer is required to indicate her federal identification number on all returns even if they claim a refund.

Question 14

Which of the following acts constitute(s) grounds for a tax preparer penalty?
I. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.
II. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.
a. Both I and II.
b. Neither I nor II.
c. II only.
d. I only.

Answer 14

II only.

Choice “c” is correct. Tax preparer penalties may be assessed for improper use or disclosure of information. Acceptable circumstances for disclosure include:

• Computer processing
• Peer review
• Administrative order (court order)

A tax preparer penalty may be assessed for fraud and accuracy related acts. Intentional disregard of the regulations would be deducting of personal help as a business expense.

Question 15

Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?

a. Workpapers associated with the preparation of each tax return.
b. Taxpayer’s name and identification number or a copy of the tax return.
c. A power of attorney.
d. An unrelated party compliance statement.

Answer 15

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

Choice “b” is correct. For each tax return prepared, a tax preparer must retain either the taxpayer’s name and identification number, or a copy of the return.

Choice “d” is incorrect. This is not an item that a tax preparer is required to retain.

Choice “a” is incorrect. A tax preparer is not required to retain workpapers used in preparing a tax return, although doing so is often a sound business practice. Among other reasons, the workpapers could be beneficial in the event of an audit, or in the preparation of the following year’s tax return for the client.

Choice “c” is incorrect. This is not an item that a tax preparer is required to retain.

Question 16

Which of the following statements is correct for penalties and fines with respect to exercising due diligence for the earned income credit?

a. The penalty for failure to be diligent will not apply if the tax return preparer can demonstrate that the preparer’s normal office procedures were reasonably designed and routinely followed to ensure due diligence compliance.
b. The due diligence requirements address eligibility checklists, computation worksheets, and record retention.
c. The penalty for each failure to be diligent in determining a client’s eligibility for the earned income credit is a minimum of 2 years imprisonment in a designated Federal Correctional Institution.
d. The penalty for each failure to be diligent in determining the amount of the earned income credit is $1,000 for each such failure.

Answer 16

The due diligence requirements address eligibility checklists, computation worksheets, and record retention.

Choice “b” is correct. The due diligence requirements for the earned income credit address eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer.

Choice “c” is incorrect. The penalty for failure to comply with the IRS’ “due diligence” requirements with respect to determining a client’s eligibility for the earned income credit is a penalty of $500 for each such failure, not a minimum of 2 years imprisonment in a designated Federal Correctional Institution.

Choice “d” is incorrect. The penalty for failure to comply with the IRS’ “due diligence” requirements with respect to determining the amount of the earned income credit is a penalty of $500 for each such failure, not $1,000 for each such failure. This is the same penalty as that for failure to comply with the “due diligence” requirements with respect to determining a client’s eligibility for the earned income credit.

Choice “a” is incorrect. The statement is necessary but not sufficient. The penalty for failure to be diligent will not apply if the tax return preparer can demonstrate that the preparer’s normal office procedures were reasonably designed and routinely followed to ensure due diligence compliance and the failure to meet the due diligence requirements was isolated and inadvertent. Both aspects are necessary.

Question 17

With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:

a. The burden of proof shifts to the IRS from the taxpayer.
b. The penalty applies to tax return preparers only.
c. Applies only when the understatement is with the knowledge and consent of the persons authorized or required to file the return.
d. The civil penalty is $10,000 for all taxpayers except corporations and $100,000 for corporations.

Answer 17

The burden of proof shifts to the IRS from the taxpayer.

Choice “a” is correct. With respect to the penalty for aiding and abetting an understatement of tax liability on a tax return, the burden of proof shifts to the IRS from the taxpayer. Unless the law expressly states otherwise, the taxpayer has the burden of proof to establish by the preponderance of the evidence that the law and the evidence do not support the position of the IRS. With respect to any criminal action, the government has the burden of proof to establish by evidence beyond a reasonable doubt that the taxpayer is guilty of the charges. Note that these burdens of proof are different; criminal (beyond a reasonable doubt) is considerably higher than civil (preponderance of the evidence).

Choice “b” is incorrect. The penalty for aiding and abetting an understatement of tax liability on a tax return applies to any person, not just to tax return preparers.

Choice “c” is incorrect. The penalty for aiding and abetting an understatement of tax liability on a tax return applies whether or not the understatement is with the knowledge or consent of the person authorized or required to file the return.

Choice “d” is incorrect. The civil penalty for aiding and abetting an understatement of tax liability on a tax return is $1,000 for all taxpayers except corporations and $10,000 for corporations, not $10,000 and $100,000.

Question 18

Circular 230:

a. Prohibits referral or compensation agreements.
b. Addresses the practice before the IRS of “practitioners”, which includes only Attorneys, Certified Public Accountants, and Enrolled Agents.
c. Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.
d. Prohibits a practitioner from charging a contingent fee.

Answer 18

Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.

Choice “c” is correct. Circular 230 does prohibit a practitioner from endorsing or negotiating refund checks which the IRS has issued to the practitioner’s client.

Choice “b” is incorrect. Circular 230 addresses the practice before the IRS of “practitioners.” However, practitioners do not include just Attorneys, Certified Public Accountants, and Enrolled Agents. Practitioners can also be Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers.

Choice “d” is incorrect. Circular 230 prohibits a practitioner from charging an “unconscionable” fee but does allow contingent fees in the following situations: (1) an IRS examination or audit, (2) a claim solely for a refund of interest and/or penalties, or (3) a judicial proceeding arising under the Internal Revenue Code. An IRS examination or audit is in connection with the IRS’s examination of, or challenge to, an original tax return or an amended return or claim for refund (with certain additional conditions, of course).

Choice “a” is incorrect. Circular 230 does not prohibit referral or compensation agreements. It merely requires that any compensation agreement or referral agreement between the practitioner and a promoter be disclosed.

Question 19

Under Circular 230, for tax returns:

a. A practitioner must return all client records at the request of the client.
b. A practitioner must exercise due diligence in preparing tax returns and other documents, unless such due diligence is waived in writing by the client.
c. A practitioner can advise a client to take a tax return position that is frivolous only if the taxpayer is a member of an officially recognized tax protest organization.
d. A practitioner may rely on client-furnished information under any circumstances. The client is always right.

Answer 19

A practitioner must return all client records at the request of the client.

Choice “a” is correct. A practitioner must return all client records at the request of the client.

Choice “c” is incorrect. A practitioner cannot advise a client to take a tax return position that is frivolous under any circumstances. There is no such thing as an “officially recognized” tax protest organization.

Choice “b” is incorrect. A practitioner must exercise due diligence in preparing tax returns and other documents (and in determining the correctness of any representations to the IRS). There is no waiver of such due diligence, either orally or in writing.

Choice “d” is incorrect. A practitioner may normally rely “in good faith without verification” upon client-furnished information. However, that does not mean “under any circumstances.” The practitioner cannot ignore contradictory information known to the practitioner and must make reasonable inquiries if client-furnished information appears to be questionable or incomplete. The client is not always right.

Question 20

A civil fraud penalty can be imposed on a corporation that underpays tax by:

a. Failing to report income it erroneously considered not to be part of corporate profits.
b. Filing an incomplete return with an appended statement, making clear that the return is incomplete.
c. Omitting income as a result of inadequate recordkeeping.
d. Maintaining false records and reporting fictitious transactions to minimize corporate tax liability.

Answer 20

Maintaining false records and reporting fictitious transactions to minimize corporate tax liability.

Choice “d” is correct. Imposition of the civil fraud penalty requires conduct that transcends negligence or stupidity. Maintaining false records and reporting fictitious transactions is adequate to demonstrate civil fraud, a willful and deliberate attempt to evade taxes.

Choice “c” is incorrect. Negligence such as omitting income as a result of inadequate recordkeeping will support a penalty, but not the civil fraud penalty.

Choice “a” is incorrect. Failing to report income erroneously considered not to be part of corporate profits will support a penalty, but not the civil fraud penalty.

Choice “b” is incorrect. Filing an incomplete tax return will support a penalty, but not the civil fraud penalty.

Question 21

Which of the following statements is correct for the disciplinary power of the state boards of accountancy?

a. The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.
b. The state boards of accountancy have no disciplinary power other than the power to reprimand licensees and refer the situation to the state’s Attorney General for civil prosecution.
c. Negligence, fraud, and dishonesty are types of mis conduct outside the scope of performing accounting services.
d. The failure to file a tax return is an example of misconduct outside the scope of performing accounting services.

Answer 21

The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.

Choice “a” is correct. The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.

Choice “b” is incorrect. The state boards of accountancy have considerable disciplinary power other than the power to reprimand licensees. The Attorney General of the various states will not be interested in civil prosecution.

Choice “c” is incorrect. Negligence, fraud, and dishonesty are types of misconduct while performing accounting services, not types of misconduct outside the scope of performing accounting services.

Choice “d” is incorrect. The failure to file a tax return is an example of a criminal conviction (assuming that a conviction actually occurred), not misconduct outside the scope of performing accounting services.

Question 22

Which of the following statements is correct for penalties that can be imposed by the SEC?

a. The SEC can suspend or permanently revoke a CPA’s right to practice before the SEC only if the accountant has willfully violated the federal securities laws or regulations.
b. The SEC can suspend or permanently revoke an accountant’s license to practice public accounting.
c. The SEC can impose fines of up to $1,000,000 for an individual and $2,000,000 if the accountant is a repeat, or serial, offender.
d. The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.

Answer 22

The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.

Choice “d” is correct. The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.

Choice “b” is incorrect. The SEC cannot suspend or permanently revoke an accountant’s license to practice public accounting. Only a state board of public accountancy can do that.

Choice “c” is incorrect. The SEC can impose fines of up to $100,000, not $1,000,000, for an individual (and $500,000 for a firm). There is no “repeat offender” or “serial offender” provision.

Choice “a” is incorrect. The SEC can suspend or permanently revoke a CPA’s right to practice before the SEC for a host of reasons, not only if the accountant has willfully violated the federal securities laws or regulations. Other reasons include (1) the accountant lacks the qualifications to represent others, (2) the accountant lacks character or integrity, (3) the accountant acted unethically or unprofessionally, and (4) the accountant was convicted of a felony or a misdemeanor involving moral turpitude, or (5) the accountant’s license to practice public accountancy was suspended or revoked.

Question 23

Which of the following statements is correct for the disciplinary power of the state boards of accountancy?

a. The state board of accountancy must find, by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.
b. The state board of accountancy does not have to provide due process of law.
c. The state board of accountancy can conduct a formal hearing for possible disciplinary action.
d. Adverse state board decisions cannot be reviewed by the courts. The state board’s decision is final.

Answer 23

The state board of accountancy can conduct a formal hearing for possible disciplinary action.

Choice “c” is correct. The state board of accountancy can conduct a formal hearing for possible disciplinary action.

Choice “a” is incorrect. The state board of accountancy must find, by the preponderance of the evidence, not by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.

Choice “b” is incorrect. The state board of accountancy does have to provide due process of law.

Choice “d” is incorrect. Adverse state board decisions can be reviewed by the courts. The state board’s decision is not final.

Question 24

Which of the following statements is correct for disciplinary action by the AICPA and state CPA societies?

a. Membership in the AICPA can be suspended or terminated without a hearing.
b. The AICPA cannot suspend or terminate membership for failure to pay dues but can suspend or terminate membership for failure to meet CPE requirements.
c. The Joint Trial Board of the AICPA can expel a member by majority vote.
d. The AICPA and state CPA societies can sanction their members and, in addition, can suspend or permanently revoke a CPA’s license.

Answer 24

Membership in the AICPA can be suspended or terminated without a hearing.

Choice “a” is correct. Membership in the AICPA can be suspended or terminated without a hearing for certain offenses. These offenses include but are not limited to (1) proof of conviction of a crime punishable by imprisonment for more than one year, (2) proof of conviction for willful failure to file any income tax return, (3) proof of conviction for filing a false or fraudulent income tax return or aiding in the preparation of a false or fraudulent income tax return of a client.

Choice “d” is incorrect. The AICPA and state CPA societies can sanction their members but cannot suspend or permanently revoke a CPA’s license.

Choice “b” is incorrect. The AICPA cannot suspend or terminate membership for failure to pay dues and for failure to meet CPE and other membership retention requirements (such as practice-monitoring).

Choice “c” is incorrect. The Joint Trial Board of the AICPA can expel a member by a two-thirds vote, not a majority vote.

Question 25

Leslie Ponzi has just received written tax advice from her attorney, Dewey H. Cheatem. Which of the following statements is not a requirement of written advice under Circular 230 of the Internal Revenue Service?

a. The practitioner must base written advice on reasonable factual and legal assumptions, including assumptions as to future events.
b. The practitioner may not provide written advice in the form of electronic communications.
c. The practitioner may not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited.
d. The practitioner must not rely on representations, statements, findings, or agreements of the taxpayer if reliance on them would be unreasonable.

Answer 25

The practitioner may not provide written advice in the form of electronic communications.

Choice “b” is correct. Written advice does include electronic communications.

Choices “a”, “d”, and “c” are incorrect. Each one of these statements is a requirement for written advice under Circular 230.

Question 26

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

a. 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.
b. The practitioner may retain copies of the client’s records.
c. The client’s records are to be destroyed upon submission of a tax return.
d. The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.

Answer 26

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

Choice “b” is correct. A tax preparer may retain copies of records returned to the taxpayer.

Choice “c” is incorrect. There is no requirement for the tax preparer to destroy client records upon submission of a tax return.

Choice “d” is incorrect. Generally, at the request of the client, the practitioner must return all client records. An exception is if state law allows the practitioner to retain the records in the case of a fee dispute, the practitioner may do so. However, the practitioner must (1) return to the client those records which must be attached to the tax return, and (2) allow the client to review and copy the practitioner-retained client records related to the client’s federal tax obligation.

Choice “a” is incorrect. The general rule is to return all requested records.

Question 27

Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:

a. He is a member of the board of directors.
b. He is not compensated.
c. The return does not contain a claim for a tax refund.
d. Returns for nonprofit organizations are exempt from the preparer rules.

Answer 27

He is not compensated.

Choice “b” is correct. The term “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any tax return required under the IRC or any claim for refund of tax imposed by the IRC.

Choice “a” is incorrect. Board status alone does not determine tax preparer status.

Choice “c” is incorrect. Claim for a refund or underpayment is not a factor in determining tax preparer status.

Choice “d” is incorrect. There is no such exception that exists.

Question 28

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?

a. Audit the taxpayer’s corresponding business operations.
b. Make reasonable inquiries if the taxpayer’s information is incomplete.
c. Review the accuracy of the taxpayer’s books and records.
d. Examine the taxpayer’s supporting documents.

Answer 28

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

Choice “b” is correct. A tax preparer must make reasonable inquiries if the taxpayer’s information is incomplete.

Rule: A compensated preparer is liable for a penalty if his understatement of taxpayer liability on a return or claim for refund is due to negligent or intentional disregard of rules and regulations. A preparer is not required to obtain supporting documentation unless he has reason to suspect the accuracy of the taxpayer’s figures; however, the preparer must make reasonable inquiries if the taxpayer’s information appears incorrect or incomplete.

Choices “a”, “c”, and “d” are incorrect, per the above rule.

Question 29

Which of the following is not considered a primary authoritative source when conducting tax research?

a. Internal Revenue Code.
b. IRS publications.
c. Treasury regulations.
d. Tax Court cases.

Answer 29

IRS publications.

Choice “b” is correct. IRS publications are not considered a primary authoritative source when one is conducting tax research

Choices “a”, “d”, and “c” are incorrect. The Internal Revenue Code, tax court cases, and Treasury regulations, respectively, are considered primary authoritative sources when one is conducting tax research; hence they are incorrect choices (the question asks which item is not considered a primary authoritative source).

Question 30

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. 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.
b. Recommending to the client that the advisor’s tax advice be made orally instead of in a written memorandum.
c. Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.
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.

Answer 30

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.

Choice “a” is correct. Characteristic of a best practice in rendering tax advice is establishing in a tax memorandum relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts.

Choice “c” is incorrect. Circular 230’s “Best Practices” do not include the tax advisor’s requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.

Choice “b” is incorrect. Circular 230’s “Best Practices” do not include the tax advisor’s recommending to the client that the advisor’s tax advice be made orally instead of in a written memorandum.

Choice “d” is incorrect. Circular 230’s “Best Practices” do not include the tax advisor’s 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.