Ethics & Responsibility in Tax Practice

Question 1

Under Circular 230, when a tax practitioner becomes aware of a client’s noncompliance with revenue laws OR an error/omission on a filing with IRS, practitioner is required to:

Answer 1

1) Promptly advise the client of the error
2) Advise the client of the potential consequences of that error

Question 2

Tax practitioners cannot charge unconscionable fees/contingent fees for matters before the IRS. HOWEVER, a contingent fee may be charged for:

Answer 2

1) Services related to a claim/refund in connection with statutory interest or penalties charged by the IRS
2) Administrative examination or challenge to an original tax return, amended return, or claim for refund
3) Services related to a judicial proceeding under the IRC

Question 3

Understatement of tax caused by undisclosed position that lacks substantial authority (amount of penalty):

Answer 3

Greater of $1,000 or 50% of return prep fee

Question 4

Understatement caused by reckless or willful disregard of rules (amount of penalty)

Answer 4

greater of $5,000 or 75% of return prep fee

Question 5

• Failure to sign return (amount of penalty)
• Failure to retain a copy of return for 3 years or maintain a list of names and ID numbers of returns prepared (amount of penalty)

Answer 5

$50 per return/up to a significant dollar amount cap, adjusted annually for inflation

Question 6

Improper disclosure of return info (amount of penalty)

Answer 6

• $250 per disclosure, maximum of $10,000
• Criminal penalty of up to $1,000 or 1 year in prison, or both

Question 7

As part of best practices when giving tax advice, a tax practitioner is required by circular 230 to:

Answer 7

• Establish the facts relevant to a tax issue
• Evaluate the reasonableness of any assumption made by the client
• Advise the client of the consequences of relying on the tax advice

Question 8

When giving written advice, a practitioner must not:

Answer 8

• rely on the client’s representations, statements, findings, or documents, AS LONG AS relying on them would be unreasonable
• the practitioner can rely on these only if it is reasonable to do so

Question 9

Tax preparer’s duty to verify taxpayer info

Answer 9

• May rely in good faith and without verification provided by taxpayer
• Must make reasonable inquiries if info appears to be incorrect
• Inquire about appropriate documentation if IRC requires it
• NOT Required to:
  1) Audit the taxpayer
  2) Review or examine books, records, or operations
  3) Copy all underlying documents to independently verify the info

Question 10

Which of the following activities requires the CPA to file a written declaration with the IRS indicating the CPA is currently qualified as a CPA and authorized to represent the party?

Answer 10

• Practice before the IRS
  **The CPA may provide written tax advice without filing a written declaration with the IRS

Question 11

Preparer penalty for endorsing/negotiating a client’s tax refund check

Answer 11

• Preparer may not endorse/negotiate client tax refund checks
• $500 penalty for each improper endorsement

Question 12

Who must be required to register for a PTIN?

Answer 12

A CPA preparing returns in exchange for services but receiving no monetary compensation

Question 13

Can more than 1 person be deemed to be a preparer of a tax return?

Answer 13

YES!

Question 14

Tax return preparer DOES the following:

Answer 14

• Prepare tax returns for compensation (money, barter)
• Employs others to prepare tax returns

Question 15

Tax return preparer DOES NOT do the following:
(in other words, you cannot be called a tax preparer if you do the following)

Answer 15

• Prepare returns for family, friends free of charge
• Provide tax return admin tasks (data entry)
• Prepare entity’s return as an employee of that entity

Question 16

Circular 230 contingent fees are allowed only for specific types of services relating to:

Answer 16

• Refund claims, and original/amended returns that have been challenged by the IRS
• Claims for refund/credit filed to reduce interest and penalties charged by the IRS
• Judicial proceedings under the IRS

Question 17

Can CPAs unreasonably delay the prompt disposition of any matter before the IRS?

Answer 17

NO

Question 18

Penalties are imposed on tax return preparers who understate their client’s tax liabilities due to an unreasonable or reckless tax position. HOWEVER:

Answer 18

There is no penalty if there was reasonable cause for the understatement and the tax practitioner acted in good faith

Question 19

When retaining records of client tax matters, preparers have the option of:

Answer 19

• either retaining copies of completed returns (for 3 years)
• keeping a list of names and SSN for all returns prepared (for 3 years)

Question 20

When the IRS requests client info from a CPA:

Answer 20

Is the info privileged? -> Yes - Do not provide the info
Is the info privileged? -> No–Does CPA possess the info? -> Yes= Provide the info

Does CPA possess the info? -> No: then CPA must
1) notify IRS that the CPA doesn’t possess the info
2) Identify parties who might possess the info
3) Ask client to identify parties that might possess the info

Question 21

Under Circular 230, a CPA rely on info obtained from a client in good faith without verification. HOWEVER:

Answer 21

• If the info furnished by the client appears incorrect, incomplete, the CPA may not ignore it
• CPA must investigate to verify the info

Question 22

Circular 230 solicitation rules

Answer 22

• No false, fraudulent, or coercive statements
• Uninvited solicitations must identify if it is a solicitation and indicate the source of info used to select recipients
• Fee info is not required
• Fee info cannot be misleading

Question 23

A practitioner is in violation of Circular 230 if the practitioner:

Answer 23

• charges a contingent fee for preparing and filing an original tax return

Question 24

Permitted fee communications

Answer 24

• Professional lists
• Phone directories
• Print media
• Mailings
• Email
• Radio
• TV

Question 25

Circular 230 Requirements for a tax practitioner to return client records

Answer 25

General rule
- Must retain all client records when requested by client
- May retain copies

If there is a fee dispute
- May temporarily withhold some records
- Must return records necessary for client to comply with tax obligations and allow access to others

Types of records
- written and electronic documents from client
- Material prepared by client or client’s other representatives
- Prior returns and refund claims
- Other material prepared and used for client’s tax matter

Question 26

Tax return preparer understatement penalties

Answer 26

Unreasonable position
- Penalty is greater of: $1,000 or 50% of return prep fee

Willful or reckless conduct
- Penalty is greater of $5,000 or 75% of the return prep fee

Question 27

What are client records?

Answer 27

• Material given to the tax preparer that existed prior to the tax preparer’s current engagement with the client
• Items prepared by the client or 3rd party
• Anything prepared by the tax preparer and previously provided to the client, that the client needs to file the current year return

Question 28

A PTIN is required for:

Answer 28

Preparing a tax return in exchange for compensation (cash, services)

Question 29

What is a reportable transaction?

Answer 29

It is a transaction in which additional info is required to be included with a federal return because the transaction is of a type, that has the potential for TAX AVOIDANCE OR EVASION