I. Ethics, Professional Responsibilities and Federal Tax Procedures

Question 1

Question 1 (PQ7973)

Tab founded and still controls the Griffindor tax accounting firm. The IRS has determined that several Griffindor accountants induced clients to pay large sums of money to invest in illicit tax shelters. Tab was not one of those accountants, so he is probably not in trouble with the IRS under Circular 230.

• True
• False

Answer 1

False

Question 2

According to Circular 230, a tax practitioner should never

give written tax advice that is based on unreasonable factual or legal assumptions, unreasonably relies on representations of the taxpayer or some other person, fails to consider all relevant facts

, and takes into account the likelihood that the tax return will not be audited.

• True
• False

Answer 2

True

A CPA should never give tax advice turning upon the possibility that the IRS might not audit the client’s tax return.

Question 3

Question 6 (PQ7151)

After researching a tax position of her client, Consuela concluded that there was a 25% chance that the IRS would accept the position. Consuela may prepare and sign a tax return taking this position without disclosing it to the IRS.

• True
• False

Answer 3

False

Less than 40% means there is not substantial authority

Question 4

Question 10 (PQ7150)

Matt was a salesman at a bike shop. His boss knew that Matt had been an accounting major before he dropped out of college. The boss ordered Matt, as part of his regular responsibilities, to file the bike shop’s federal corporate income tax return. Matt is a TRP for purposes of this return.

• True
• False

Answer 4

False

Not a TRP – One is not a TRP merely because he or she:

1. Furnishes typing, reproducing, or other mechanical assistance
2. Prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he or she is regularly and continuously employed

Question 5

Which of the following statements is correct concerning a penalty for a tax return preparer who understates a taxpayer’s liability?

1. No penalty is imposed if the understatement of tax liability is related to a tax shelter and was properly disclosed, and if there was substantial authority for the position.
2. If there is a final judicial decision that there was no understatement of liability, the related tax preparer penalty paid earlier is not refundable.
3. In general, the penalty does not apply unless the understatement of the tax liability is at least $10,000.
4. No penalty is imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.

Answer 5

4

A “reasonable cause” defense exists if the tax return preparer had both “reasonable cause” (an objective standard) for the position taken and acted in “good faith” (a subjective standard).