Part 3 - Representation, Practices & Procedures - Unit 1 - Questions

Question 1

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 1

B. Must advise the client of the error.

• Treasury Circular 230 requires tax practitioners to promptly inform a taxpayer of any error or omission or other noncompliance that the tax practitioner becomes aware of. The practitioner must also inform that taxpayer of the consequences of such error or omission or other noncompliance.

Question 2

Janet is not an enrolled agent, CPA, attorney, or enrolled actuary. In 2023, the president of Widgets-R-Us engaged Janet to prepare the company’s 2022 Form 1120-S. She prepared the 2022 income tax return for Widgets-R-Us and signed it as the preparer. This is the only return Janet prepared for Widgets-R-Us. In December 2023, the IRS began an examination of Widgets-R-Us’ 2021 and 2022 federal income tax returns. Janet has a power of attorney to represent Widgets-R-Us for 2021 and 2022. Under Circular 230, Janet is permitted to represent Widgets-R-Us during the examination with regard to its:

A. 2021 Form 1120-S only.
B. 2022 Form 1120-S only.
C. 2021 and 2022 Forms 1120-S.
D. None of the answer choices are correct.

Answer 2

B. 2022 Form 1120-S only.

• Pursuant to Publication 947, pages 3 and 4, the following list of individuals qualifies to sign and therefore act as a representative of the taxpayer. The qualifying individuals include an attorney, certified public accountant, and enrolled agent, as well as the following:
  
  • Officer—a bona fide officer of the taxpayer’s organization
  • Full-Time Employee—a full-time employee of the taxpayer
  • Family Member—a member of the taxpayer’s immediate family (i.e., spouse, parent, child, brother, or sister)
• Unenrolled Return Preparer—the authority to practice before the Internal Revenue Service is limited. The unenrolled return preparer must have prepared the return in question and the return must be under examination by the IRS.
• Since Janet is an unenrolled return preparer, she can represent Widgets-R-Us during the examination of the 2022 Form 1120-S only, which is the return that she prepared.

Question 3

What is the penalty if fraud is the reason for failure to timely file?

A. A penalty of 10% per month (with a maximum of 50%) of the deficiency on the tax return (when filed).
B. A penalty of 15% per month (with a maximum of 75%) of the deficiency on the tax return (when filed).
C. A penalty of 20% per month (with a maximum of 50%) of the deficiency on the tax return (when filed).
D. A penalty of 25% per month (with a maximum of 75%) of the deficiency on the tax return (when filed).

Answer 3

B. A penalty of 15% per month (with a maximum of 75%) of the deficiency on the tax return (when filed).

• A penalty of 5% per month (up to a maximum of 25%) is imposed on the amount of tax shown as being due on the return if a taxpayer fails to file a tax return by the due date, including any extension. The minimum penalty amount is the smaller of $450 or 100% of the unpaid tax.
• If fraud is the reason for failure to file on a timely basis, then the penalty is 15% per month (with a maximum of 75%).

Question 4

Which of the following statements is correct concerning the renewal of enrollment by an enrolled agent?

A. An enrolled agent whose Social Security number ends with the number 4 must apply for renewal between November 1, 2023, and January 31, 2024.
B. The renewal of enrollment is effective on April 1 for an individual who properly completes the renewal process.
C. Failure to receive notification from the Internal Revenue Service of the renewal requirement will justify an individual’s failure to satisfy this requirement.
D. All of the answer choices are correct.

Answer 4

B. The renewal of enrollment is effective on April 1 for an individual who properly completes the renewal process.

• Circular 230, Section 10.6(d), provides the rules associated with renewal of enrollment as an enrolled agent or enrolled retirement plan agent. In particular, an enrolled agent whose Social Security number ends with the number 0, 1, 2, or 3 must apply for renewal between November 1, 2024, and January 31, 2025, and thereafter every 3 years. Those with a Social Security number that ends with the number 4, 5, or 6 must apply for renewal between November 1, 2022, and January 31, 2023, and those with a number that ends with the number 7, 8, or 9 must apply for renewal between November 1, 2023, and January 31, 2024.
• In addition, the renewal of enrollment is effective on April 1 of the renewal year (i.e., 2025 for those with a Social Security number that ends with the number 0, 1, 2, or 3) for an individual who properly completes the renewal process. Finally, failure to receive notification from the Internal Revenue Service of the renewal requirement will not justify an individual’s failure to satisfy this requirement.

Question 5

In preparing an Earned Income Credit Worksheet and Form 8867, to meet the due diligence requirements, a return preparer must retain for a certain period all of the following EXCEPT:

A. A record of from whom the information used to prepare the Form 8867 and the worksheets was obtained.
B. A copy of the Form 8867.
C. A record of any questions the taxpayer may have asked the tax preparer about their eligibility for the credits.
D. Copies of documents provided by the taxpayer that the return preparer relied on to determine the eligibility for the credits

Answer 5

C. A record of any questions the taxpayer may have asked the tax preparer about their eligibility for the credits.

• As provided on page 5 of the Instructions for Form 8867, a tax preparer is required to maintain the following records to meet the due diligence requirements:
  
  • A copy of Form 8867;
  • The applicable worksheet(s) or the tax preparer’s own worksheet(s) for any credit claimed by the taxpayer;
  • Copies of any documents provided by the taxpayer on which the tax preparer relied to determine the taxpayer’s eligibility for, and the amount of the credit(s);
  • A record of how, when, and from whom the information used to prepare Form 8867 and the worksheet(s) was obtained, and
  • A record of any additional questions THE TAX PREPARER may have asked to determine eligibility for, and the amount of, the credit(s), and the taxpayer’s answers.
• The due diligence penalty applies to each of the four tax credits independently beginning in 2016. Starting in 2018, head of household is included on the due diligence checklist, which makes five items on the checklist. The penalty is annually adjusted for inflation.
• Therefore, a record of any additional questions the TAX PREPARER (not the taxpayer) may have asked to determine eligibility for, and the amount of, the credit(s), and the taxpayer’s answers is required to be retained.

Question 6

What level of authority is needed for a tax return preparer to avoid an unreasonable position penalty on a tax return if the position was not disclosed and is not a tax shelter or reportable transaction?

A. There is or was substantial authority for the position.
B. There is reasonable basis for the position.
C. The position would more likely than not be sustained on its merits.
D. There is a 1-in-3, or greater, likelihood of being sustained on its merits.

Answer 6

A. There is or was substantial authority for the position.

• A tax return preparer is liable for a penalty under Section 6694(a) (i.e., penalty for understatement due to unreasonable position) unless they satisfy an exception provided for the defined three categories: general, disclosed position, and tax shelter or reportable transaction.

1. The general category exception, which pertains when the position is not disclosed, is satisfied if there is or was substantial authority for the position.
2. The disclosed position category exception is satisfied when the position is disclosed, item 3 below (on the tax shelter or reportable transaction category exception) does not apply, and there is reasonable basis for the position.
3. The tax shelter or reportable transaction category exception is satisfied unless it is reasonable to believe that the position would more likely than not be sustained on its merits.

• In addition, no penalty shall be imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.
• Thus, in this situation, substantial authority for the position must apply to avoid an unreasonable position since the tax return preparer did not disclose the position.

Question 7

Which of the below statements is correct regarding complaints for the sanctioning of a practitioner, employer, firm, appraiser, or other entity for violations of the regulations governing practice before the Internal Revenue Service?

A. A United States Tax Court judge oversees proceedings regarding the complaint.
B. In general, discovery may be permitted at the discretion of an Administrative Law Judge.
C. Within 30 days of receipt of the answer, the presiding judge will notify the parties of the right to request discovery and the timeframe for filing a request.
D. The complaint can only be served on the respondent in person by a designated employee of the Internal Revenue Service.

Answer 7

B. In general, discovery may be permitted at the discretion of an Administrative Law Judge.

• Circular 230 Section 10.71(a) states that “In general. Discovery may be permitted, at the discretion of the Administrative Law Judge, only upon written motion demonstrating the relevance, materiality and reasonableness of the requested discovery and subject to the requirements of §10.72(d)(2) and (3). Within 10 days of receipt of the answer, the Administrative Law Judge will notify the parties of the right to request discovery and the timeframe for filing a request. A request for discovery, and objections, must be filed in accordance with §10.68. In response to a request for discovery, the Administrative Law Judge may order:

1. Depositions upon oral examination; or
2. Answers to requests for admission.

• A United States Tax Court judge does not oversee the proceedings. A copy of the complaint does not have to be served in person.
• The correct answer is that in general, discovery may be permitted at the discretion of an Administrative Law Judge.

Question 8

What action can be taken against an enrolled agent for a materially false or misleading statement that the client decides to make on a document submitted to the IRS?

A. No action can be taken against the agent as long as the client is the one that makes the final decision to submit the document containing the false or misleading statement.
B. The agent can be censured or suspended but not disbarred by the IRS as long as the client is the one that makes the final decision to submit the document containing the false or misleading statement.
C. The agent can be censured but not suspended by the IRS even if the client makes the final decision to submit the document containing the false or misleading statement.
D. The agent can be censured, suspended, or disbarred by the IRS even if it is the client that makes the final decision to submit the document containing the false or misleading statement.

Answer 8

D. The agent can be censured, suspended, or disbarred by the IRS even if it is the client that makes the final decision to submit the document containing the false or misleading statement.

• Circular 230, Section 10.50, provides the general rules for sanctions of a tax practitioner. In particular, the Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may censure, suspend, or disbar any practitioner from practice before the Internal Revenue Service if the practitioner is shown to be incompetent or disreputable (within the meaning of Circular 230, Section 10.51), fails to comply with any regulation in this part, or with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. Censure is a public reprimand.
• Circular 230, Section 10.51, provides that incompetence and disreputable conduct for which a practitioner may be sanctioned under Section 10.50 (i.e., censured, suspended, or disbarred from practice before the Internal Revenue Service) includes, but is not limited to:
  
  • Conviction of any criminal offense under the revenue laws of the United States;
  • Conviction of any criminal offense involving dishonesty or breach of trust;
  • Conviction of any felony under federal or state law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service;
  • Giving false or misleading information, or participating in any way in the giving of false or misleading information, to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon federal tax matters, in connection with any matter pending or likely to be pending before them, knowing such information to be false or misleading.
• In this problem, the enrolled agent may be sanctioned because he or she has participated in the act.

NOTE: The above areas of conduct are but four of the 18 areas listed in Section 10.51.

Question 9

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

A. The greater of $2,000 or 60% of the liability.
B. The greater of $3,000 or 60% of the liability.
C. The greater of $5,000 or 65% of the liability.
D. The greater of $5,000 or 75% of the liability.

Answer 9

D. 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.)

Question 10

A conflict of interest exists if:

1. The representation of one client will be directly adverse to another client.
2. There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client.

A. 1 only
B. 2 only
C. 1 or 2
D. Neither 1 nor 2

Answer 10

C. 1 or 2

• According to Circular 230, Section 10.29(a), a conflict of interest exists if:
  
  • The representation of one client will be directly adverse to another client OR
  • There is a significant risk that the representation of one or more clients 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.

Question 11

Barbara is an enrolled agent who only prepares tax returns. One of her clients was audited by the IRS and a substantial income tax deficiency resulted. Barbara was determined by the IRS to be a tax return preparer and a preparer penalty was assessed. Which of the following actions is available to Barbara?

A. Barbara can contest the validity of the penalty in Tax Court without making any payment of the penalty.
B. Barbara can contest the validity of the penalty in Tax Court by paying at least 15% of the assessed penalty.
C. Barbara can contest the validity of the penalty in District Court by paying at least 15% of the assessed penalty.
D. Barbara can contest the validity of the penalty in District Court without making any payment of the penalty.

Answer 11

C. Barbara can contest the validity of the penalty in District Court by paying at least 15% of the assessed penalty.

• Pursuant to IRC Section 6694(c), a preparer can contest the validity of a preparer penalty if they pay at least 15% of the assessed preparer penalty and fines within 30 days after the day on which notice, and demand of any penalty is made against the tax return preparer. Moreover, the preparer must file his or her claim for refund of the amount paid in the appropriate U.S. District Court.
• Therefore, Barbara can contest the validity of the penalty by filing a claim for refund in the U.S. District Court and by paying at least 15% of the assessed penalty.

Question 12

Which of the following acts are seen under Circular 230 as incompetence and disreputable conduct for which a practitioner may be censured, suspended, or disbarred from practice before the IRS?

A. Conviction of any criminal offense under the revenue laws of the United States.
B. Criminal conviction under state law for embezzlement.
C. Conviction of any criminal offense involving dishonesty or breach of trust.
D. All of the answer choices are acts of incompetence and disreputable conduct.

Answer 12

D. All of the answer choices are acts of incompetence and disreputable conduct.

• Circular 230, Section 10.51, provides a list of actions that fall under the heading of incompetence and disreputable conduct. In general, incompetence and disreputable conduct for which a practitioner may be censured, suspended, or disbarred from practice before the IRS includes but is not limited to acts such as:
  
  1. Conviction of any criminal offense under the federal tax laws,
  2. Conviction of any criminal offense involving dishonesty or breach of trust,
  3. Conviction of any felony under federal or state law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service, or
  4. Giving false or misleading information or participating in any way in the giving of false or misleading information, to the Department of Treasury or any officer or employee thereof.
• Since embezzlement is an offense involving dishonesty or breach of trust, it would be considered disreputable conduct under item 2 above.
• See Circular 230, Section 10.51, for a complete list of all 18 actions.

Question 13

Joseph Smith, an enrolled agent, has represented Stephen Francis before the Internal Revenue Service and also prepared returns for Stephen in each of the last 3 years. Stephen was divorced last year, and his ex-wife, Lindsay, stops by Joseph’s office and asks Joseph to represent her before the Internal Revenue Service with respect to the examination of her return that she filed separately from her husband in a year in which they were separated but not yet divorced. Which of the following actions may Joseph undertake?

A. Because the representation involves a tax return for which Lindsay filed separately, and Lindsay was separated at the time, Joseph may undertake the representation of Lindsay without considering whether a conflict of interest exists between Lindsay and her former spouse.
B. Since Lindsay filed separately, Joseph is free to undertake the representation of Lindsay.
C. Since Lindsay is divorced from Stephen, Joseph is free to undertake the representation of Lindsay.
D. Even though the representation involves a tax return for which Lindsay filed separately, and Lindsay was separated at the time, Joseph may not undertake the representation of Lindsay without considering whether a conflict of interest exists between Lindsay and her former spouse.

Answer 13

D. Even though the representation involves a tax return for which Lindsay filed separately, and Lindsay was separated at the time, Joseph may not undertake the representation of Lindsay without considering whether a conflict of interest exists between Lindsay and her former spouse.

• According to Circular 230, section 10.29(a), a conflict of interest exists if:
  
  • The representation of one client will be directly adverse to another client, OR
  • There is a significant risk that the representation of one or more clients 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.
• In this case, the representation of Stephen’s ex-wife by Joseph before the IRS on a tax return when the couple was not yet divorced could be directly adverse to Joseph, his current client. Hence, a conflict of interest is likely to exist between Lindsay and her former spouse.

Question 14

What is the maximum prison sentence for willful attempt to evade or defeat tax?

A. 3 years.
B. 4 years.
C. 5 years.
D. 10 years.

Answer 14

C. 5 years.

• The maximum penalty for a willful attempt by an individual to evade or defeat tax is a $100,000 fine and/or five years in prison. For a corporation, there is no imprisonment, but the maximum fine is $500,000.

Question 15

If a person is paid to prepare, assist in preparing, or review a tax return, then he or she must:

A. Sign the tax return and decide whether or not to provide the other information in the paid preparer’s area of the tax return.
B. Sign the tax return and provide the other information in the paid preparer’s area of the tax return.
C. Decide whether or not to sign the tax return but must provide the other information in the paid preparer’s area of the tax return.
D. Decide whether or not to sign the tax return and decide whether or not to provide the other information in the paid preparer’s area of the tax return.

Answer 15

B. Sign the tax return and provide the other information in the paid preparer’s area of the tax return.

• IRC Section 6695(c) states that any person who is a tax return preparer with respect to any return or claim for refund and who fails to comply with IRC Section 6109(a)(4) with respect to such return or claim shall pay a penalty of $55 for each failure, with a maximum penalty of $28,000 imposed with respect to each calendar year, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.
• IRC Section 6695(a) provides that any person who is an income tax return preparer with respect to any return or claim for refund who fails to furnish a copy of the tax return to the taxpayer (i.e., comply with IRC Section 6107(a)) shall pay a penalty of $55 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $28,000 for 2023.
• Hence, a tax preparer must sign the tax return and provide the other information in the paid preparer’s area of the tax return.

Question 16

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

A. $105 for each failure, but no more than $5,000 in a return period.
B. $205 for each failure, but no more than $10,000 in a return period.
C. $55 for each failure, but no more than $27,000 in a return period.
D. $55 for each failure, but no more than $28,000 in a return period.

Answer 16

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

• 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 IRC 6695(a), 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.”

Question 17

Annie Holt, an enrolled agent, was issued findings of fact, conclusions of law, and a decision ruling that she committed acts of misconduct, which were violations under Circular 230, and therefore a decision was entered ruling that she should be disbarred. Which of the following statements is correct about Annie Holt?

A. Annie has a right to appeal within 15 days from the date of the Administrative Law Judge’s decision.
B. Annie has a right to appeal within 30 days from the date of the Administrative Law Judge’s decision.
C. Annie has a right to appeal within 45 days from the date of the Administrative Law Judge’s decision.
D. The Administrative Law Judge’s decision is final and thus Annie is not able to appeal the decision.

Answer 17

B. Annie has a right to appeal within 30 days from the date of the Administrative Law Judge’s decision.

• The decision of the Administrative Law Judge may be appealed in accordance with Circular 230, Section 10.77. That is, either party may appeal the decision of the Administrative Law Judge by filing a notice of appeal with the Secretary of the Treasury, or delegate deciding appeals. The notice of appeal must include a brief that states exceptions to the decision of the Administrative Law Judge and supporting reasons for such exceptions.
• The notice of appeal and brief must be filed, in duplicate, with the Secretary of the Treasury, or delegate deciding appeals, at an address for appeals that is identified to the parties with the decision of the Administrative Law Judge. The notice of appeal and brief must be filed within 30 days of the date that the decision of the Administrative Law Judge is served on the parties. The appealing party must serve a copy of the notice of appeal and the brief to any non-appealing party or, if the party is represented, the non-appealing party’s representative.
• Within 30 days of receiving the copy of the appellant’s brief, the other party may file a response brief with the Secretary of the Treasury, or delegate deciding appeals, using the address identified for appeals. A copy of the response brief must be served at the same time on the opposing party or, if the party is represented, the opposing party’s representative.

Question 18

What is the penalty for a taxpayer who fails to timely file a tax return (including extensions)?

A. A penalty of 1% a month (up to a maximum of 5%) of the deficiency on the tax return (when filed).
B. A penalty of 2.5% a month (up to a maximum of 10.0%) of the deficiency on the tax return (when filed).
C. A penalty of 5% a month (up to a maximum of 25%) of the deficiency on the tax return (when filed).
D. A penalty of 7.5% a month (up to a maximum of 20%) of the deficiency on the tax return (when filed).

Answer 18

C. A penalty of 5% a month (up to a maximum of 25%) of the deficiency on the tax return (when filed).

• A penalty of 5% per month (up to a maximum of 25%) is imposed on the amount of tax shown as being due on the return if a taxpayer fails to file a tax return by the due date, including any extension. The minimum penalty amount is the smaller of $450 or 100% of the unpaid tax.

Question 19

Which, if any, of the following could result in penalties imposed on 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 19

D. 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.

Question 20

An enrolled agent may be disbarred or suspended from IRS practice for which of the following conducts?

A. Criminal conviction of an offense under the Internal Revenue Code.
B. Misappropriation of funds received from a client for the purpose of tax payments.
C. Disbarment or suspension from the practice as an attorney, CPA, accountant or actuary.
D. All of the answer choices are correct.

Answer 20

D. All of the answer choices are correct.

• Circular 230, Section 10.50, states that the Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may censure, suspend, or disbar any practitioner from practice before the Internal Revenue Service if the practitioner is shown to be incompetent or disreputable (within the meaning of Section 10.51).
• Pursuant to Circular 230, Section 10.51 provides, in part, that incompetence and disreputable conduct for which a practitioner may be censured, suspended, or disbarred from practice before the Internal Revenue Service includes, but is not limited to:
  
  • Conviction of any felony under federal or state law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service,
  • Misappropriation of, or failure to properly and promptly remit funds received from a client for the purpose of payment of taxes or other obligations due the United States, or
  • Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary by any duly constituted authority of any state, territory, possession of the United States, including a commonwealth, or the District of Columbia, any federal court of record or any federal agency, body, or board.

NOTE: See Circular 230, Section 10.51, for a list of 18 specific items that fall under this category.

Question 21

What can be said about a preparer who is paid to review a tax return?

A. He does not have to sign or fill in the other blanks in the paid preparer’s area of the return.
B. He does not have to sign as long as he fills in the other blanks in the paid preparer’s area of the return.
C. He must sign and fill in the other blanks in the paid preparer’s area of the return.
D. He must sign but is not required to fill in the other blanks in the paid preparer’s area of the return.

Answer 21

C. He must sign and fill in the other blanks in the paid preparer’s area of the return.

• Regulation Section 301.7701-15(a) provides that a tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code. In addition, a signing tax return preparer is the individual tax return preparer who has the primary responsibility for the overall substantive accuracy of the preparation of such return or claim for refund.
• IRC Section 6695(b) states that any person who is a tax return preparer with respect to any return or claim for refund, who is required by regulations prescribed by the Secretary to sign such return or claim, and who fails to comply with such regulations with respect to such return or claim shall pay a penalty of $55 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect.
• If the signing tax return preparer is unavailable for signature, another tax return preparer shall review the entire preparation of the return or claim for refund, and then shall sign the return or claim for refund. The tax return preparer shall sign the return in the manner prescribed by the Commissioner of the IRS in forms, instructions, or other appropriate guidance. (Regulation Section 1.6695-1(b)).
• In this case, a person who reviews the tax return for compensation (i.e., is paid) is a tax preparer and therefore is required to sign the tax return.

Question 22

Which of the following statements is correct about filing Form 8867 with a 2023 tax return concerning the paid preparer’s child tax credit?

A. It does not apply to the child tax credit.
B. It contains a due diligence requirements section.
C. It does not apply to head of household filing status.
D. All of the responses are correct.

Answer 22

B. It contains a due diligence requirements section.

• Form 8867 is a paid preparer’s (not a taxpayer’s) due diligence checklist that should be completed by a tax preparer. Beginning with the filing of 2016 tax returns, Form 8867 is required to be filed with the tax returns claiming the earned income credit, child tax credit/additional child tax credit, and/or American opportunity tax credit. In addition, Form 8867 was expanded to include tax returns claiming head of household filing status.
• In addition, the checklist has six parts:

1. Due Diligence Requirements
2. Due Diligence Questions for Returns Claiming EIC
3. Due Diligence Questions for Returns Claiming CTC/ACTC/ODC
4. Due Diligence Questions for Returns Claiming AOTC
5. Due Diligence Questions for Returns Claiming Head of Household
6. Eligibility Certification

• As a result, the only correct response for this question is that the checklist contains a due diligence requirements section.

Question 23

Under Treasury Circular 230, a practitioner may be:

A. Censured.
B. Suspended.
C. Disbarred.
D. Censured, suspended, or disbarred.

Answer 23

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 the 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 24

An Enrolled Agent (EA) can be sanctioned under Circular 230 in each of the following ways EXCEPT:

A. Monetary penalty.
B. Imprisonment.
C. Censure.
D. Disbarment.

Answer 24

B. Imprisonment.

• Circular 230, Section 10.50, states that the Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may censure, suspend, or disbar any practitioner from practice before the Internal Revenue Service if the practitioner is shown to be incompetent or disreputable (within the meaning of Section 10.51).
• In addition, Circular 230, Section 10.50(c) provides, in part, that the Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may impose a monetary penalty on any practitioner who engages in conduct subject to sanction under this section.
• Therefore, the only recourse that is not available as a sanctionable act is imprisonment.

Question 25

Select the statement below that is correct with respect to the contents of an answer that is filed in rebuttal to a complaint filed by the Internal Revenue Service.

A. The answer must be written and general denials are permitted.
B. The respondent does not have to admit or deny all of the allegations set forth in the complaint and can state they are without sufficient information to admit or deny a specific allegation.
C. The respondent may not deny a material allegation in the complaint that he or she knows to be true, or state that he or she is without sufficient information to form a belief, when the respondent possesses the required information.
D. The respondent does not have to state affirmatively any special matters of defense on which he or she relies.

Answer 25

C. The respondent may not deny a material allegation in the complaint that he or she knows to be true, or state that he or she is without sufficient information to form a belief, when the respondent possesses the required information.

• According to Circular 230, Section 10.64(b), the answer by a respondent must be written and contain a statement of facts that constitute the respondent’s grounds of defense. General denials are not permitted. The respondent must specifically admit or deny each allegation set forth in the complaint, except that the respondent may state that the respondent is without sufficient information to admit or deny a specific allegation. The respondent, nevertheless, may not deny a material allegation in the complaint that he or she knows to be true, or state that he or she is without sufficient information to form a belief, when the respondent possesses the required information. The respondent also must state affirmatively any special matters of defense on which he or she relies.
• Therefore, the only correct statement is the respondent may not deny a material allegation in the complaint that he or she knows to be true, or state that he or she is without sufficient information to form a belief, when the respondent possesses the required information.

Question 26

What is the exception for an unreasonable position on a tax return if the position was disclosed and is not a tax shelter or reportable transaction?

A. There is or was substantial authority for the position.
B. There is reasonable basis for the position.
C. The position would more likely than not be sustained on its merits.
D. There is a 1-in-3, or greater, likelihood of being sustained on its merits.

Answer 26

B. There is reasonable basis for the position.

• A tax return preparer is liable for a penalty under IRC Section 6694(a) (i.e., penalty for understatement due to unreasonable position) unless they satisfy an exception provided for the defined three categories: general, disclosed position, and tax shelter or reportable transaction.

1. The general category exception is satisfied if there is or was substantial authority for the position.
2. The disclosed position category exception, which pertains to this question, is satisfied if item 3 (below) does not apply and there is reasonable basis for the position.
3. The tax shelter or reportable transaction category exception is satisfied unless it is reasonable to believe that the position would more likely than not be sustained on its merits.

• In addition, no penalty shall be imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.

Question 27

A paid preparer must:

1. Give the taxpayer a copy of his or her tax return.
2. Give the taxpayer a copy of his or her tax return that has a claim for refund.
3. Sign the tax return after the taxpayer signs the tax return.

A. 1 and 3.
B. 2 and 3.
C. 1 and 2.
D. 1, 2, and 3.

Answer 27

C. 1 and 2.

• IRC Section 6695(a) provides that any person who is a tax return preparer with respect to any return or claim for refund who fails to furnish a copy of the tax return to the taxpayer (i.e., comply with IRC Section 6107(a)) shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $28,000 (as of 2023). Hence, items 1 and 2 are correct.
• Regulation Section 1.6695-1(b) provides that a tax return preparer shall sign the return or claim for refund after it is completed and before it is presented to the taxpayer for signature. Hence, item 3 is incorrect.

Question 28

What penalty may be asserted by the IRS if an income tax return preparer knows or reasonably should have known that the tax on a return he or she prepared is understated due to a position for which there was not a realistic possibility of being sustained on its merits?

A. A penalty of $250.
B. A penalty of $1,000.
C. A penalty of $1,500.
D. A penalty of $5,000.

Answer 28

B. A penalty of $1,000.

• IRC Section 6694(a) provides that a penalty is assessed against the tax return preparer if the understatement of liability is due to an unreasonable position and the tax preparer knew (or reasonably should have known) of the position. The penalty is the greater of:
  
  • $1,000 or
  • 50% of the income derived by the tax return preparer with respect to the return or claim for refund.
• Pursuant to IRC Section 6694, an unreasonable position is one that in general is a position where there is or was no substantial authority for the position. In addition:
  
  • If the position was disclosed as provided in IRC Section 6662(d)(2)(B)(ii)(I) and it is not a tax shelter or reportable transaction, the position is unreasonable unless there is a reasonable basis for the position; or
  • If the position is with respect to a tax shelter or a reportable transaction to which IRC Section 6662A applies, the position is unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on its merits.
• No penalty shall be imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.