Ethics and Responsibilities in Tax Practice

Question 1

What is Circular 230?

Answer 1

The Department of Treasury’s rules of practice that cover CPAs and others who practice before the Internal Revenue Service.

Question 2

Identify the elements of an impermissible fee as described in Circular 230.

Answer 2

• Unconscionable
• Contingent (with some exceptions)

Question 3

List the general requirements of Internal Revenue Service (IRS) practitioners as highlighted in Circular 230.

Answer 3

• Furnishing requested information promptly
• Exercising due diligence
• Not unreasonably delaying IRS matters
• Not providing assistance in practicing to persons disbarred or suspended by IRS

Question 4

List the components of the Internal Revenue Service best practices as outlined in Circular 230.

Answer 4

• Communicate clearly with client
• Establish facts
• Relate applicable law
• Advise client regarding consequences

Question 5

List the types of covered opinions outlined in Circular 230.

Answer 5

• Tax avoidance transactions
• Transactions with principal purpose of avoiding tax
• Four categories of transactions with significant purpose of avoiding tax

Question 6

Reasonable basis =

Answer 6

> 20% chance

Question 7

Realistic possibility =

Answer 7

> 33% chance

Question 8

Under what circumstances can a CPA recommend a tax position to a tax client?

Answer 8

• There’s a realistic possibility it will be sustained, or
• A reasonable basis and it is disclosed.

Question 9

What things should a CPA never tell a tax client?

Answer 9

• This isn’t right, but the IRS never checks.
• This isn’t right, but we’ll use it to bargain the IRS down.

Question 10

What format should a tax preparer’s advice to a client be given in?

Answer 10

No standard format required.

Question 11

When are written communications with the client preferable?

Answer 11

Preferable for complicated or important matters.

Question 12

What is the tax preparer’s responsibility to inform the Internal Revenue Service (IRS) of an error in a prepared tax return?

Answer 12

Member need not, and may not, do so without client’s permission, except where required by law.

Question 13

What is the responsibility of a CPA regarding errors contained in a previously filed tax return?

Answer 13

Advise a client of errors contained in a previously filed tax return.

Question 14

In what situations is it impractical for a tax payer to obtain exact data for the preparation of their tax returns?

Answer 14

Examples:

1. Numerous transactions involving very small amounts;
2. Records are missing/precise information unavailable.

Question 15

When are use of estimates permitted on a tax return?

Answer 15

When:

1. Obtaining exact figures would be excessively expensive or impractical;
2. The estimate is reasonable given known facts;
3. The estimates do not imply greater accuracy than exists.

Question 16

List the circumstances in which use of estimates on a tax return must be disclosed.

Answer 16

1. Taxpayer has died/is ill at time of filing;
2. Taxpayer has not received a K-1 for a flow-through entity at time of filing;
3. Litigation bearing on return is pending;
4. Relevant records have been destroyed.

Question 17

In what situation are inquiries by the tax preparer appropriate?

Answer 17

Inquiries should be made if there is a need to determine that a specifically required condition by the Internal Revenue Code or other legislation, such as maintaining books and records or substantiating documentation, has been satisfied and to obtain information when the material furnished appears to be incorrect, incomplete, or inconsistent.

Question 18

What is a preparer’s obligation regarding verifying information provided by the tax payer?

Answer 18

A preparer should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the tax preparer. Further, a member should refer to the taxpayer’s returns for one or more prior years whenever feasible.

Question 19

What does the American Institute of Certified Public Accountants’ Statements on Standards for Tax Services No. 3 state?

Answer 19

A member may in good faith rely without verification upon information furnished by client or third parties provided members’ obligations are met.

Question 20

What is the rationale for the American Institute of Certified Public Accountants’ Statements on Standards for Tax Services No. 2?

Answer 20

1. Omission tends to detract from the quality of the return; and
2. Member must sign the preparer’s declaration stating that the return is true, correct, and complete.

Question 21

What does the American Institute of Certified Public Accountants’ Statements on Standards for Tax Services No. 2 state?

Answer 21

A member should make a reasonable effort to obtain from the taxpayer the information necessary to provide appropriate answers to all questions on a tax return before signing as preparer.

Question 22

List the grounds on which a CPA can omit an answer on a tax return.

Answer 22

1. Information not readily available and answer is not significant in terms of liability;
2. Genuine uncertainty as to meaning of the question in relation to particular return;
3. Answer is voluminous and return states that data will be supplied upon examination.

Question 23

Define “tax return preparer (TRP).”

Answer 23

A person who is paid to prepare or retain employees to prepare a substantial portion of any federal tax return or refund claim.

Question 24

True or false: A tax return preparer (TRP) can prepare tax forms as a fiduciary.

Answer 24

False.

An individual who furnishes typing or other mechanical assistance, prepares forms for his or her employer, or prepares a form as a fiduciary is not classified as a tax preparer.

Question 25

List “unreasonable positions.”

Answer 25

• No “substantial authority” (40% chance) for position
• No “reasonable basis” (20% chance) for disclosed position
• Not “more likely than not” (50% chance) for tax shelter position.