STUDY UNIT ONE ETHICS AND PROFESSIONAL RESPONSIBILITIES

Question 1

A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry?
A The client will not be subject to a fraud penalty.
B The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
C The CPA may be assessed a tax return preparer penalty.
D The CPA may be charged with preparing a fraudulent return.

Answer 1

C The CPA may be assessed a tax return preparer penalty.
This answer is correct.
A tax return preparer penalty may be assessed if a CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses.

Question 2

Which of the following situations describes a disclosure of tax return information by a tax return preparer that would subject the preparer to a penalty?
A A grandfather’s tax information is made available to his granddaughter to inform her that she will be claimed as a dependent on the grandfather’s return.
B An employee of the tax return preparer makes corporate return information available to shareholders.
C After a client files for bankruptcy, the tax return preparer provides a copy of the last return filed to the court-appointed fiduciary without written permission.
D None of the answers are correct.

Answer 2

D None of the answers are correct.
This answer is correct.
Disclosing tax information to a granddaughter is permissible provided there has not been a specific prohibition by the grandfather. This rule also applies to a corporation and its shareholders, and to a bankrupt and a trustee

Question 3

Under its legal authority, the SEC
A May prohibit an accounting firm from accepting SEC clients.
B May prosecute criminal proceedings against accounting firms.
C May not initiate administrative proceedings against an accounting firm.
D May not prohibit an accounting firm from appearing before it because of mere negligence.

Answer 3

A May prohibit an accounting firm from accepting SEC clients.
This answer is correct.
Some SEC administrative proceedings have prohibited not only individuals but also accounting firms from accepting SEC clients. Furthermore, the Sarbanes-Oxley Act of 2002 gave the SEC the explicit power to initiate administrative proceedings against accounting firms. The SEC may, for example, prohibit a firm from appearing before the SEC if it engages in unethical or improper professional conduct. Such misconduct may include negligence.

Question 4

According to Treasury Department Circular 230, preparing all or substantially all of a tax return is practicing before the IRS.
True.
False.

Answer 4

False.
Your answer is correct.
Rules ordering practice before the IRS appear in Treasury Department Circular 230. A person is practicing before the IRS if (s)he

Communicates with the IRS for a taxpayer regarding taxpayer rights under laws and regulations administered by the IRS
Represents a taxpayer at conferences, hearings, or meetings with the IRS
Prepares necessary documents and files them with the IRS for a taxpayer
Renders written advice with respect to any entity, transaction, plan, or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion

Question 5

Attorneys, CPAs, and tax preparers are authorized to practice before the IRS.
True.
False.

Answer 5

False.
Your answer is correct.
Only authorized persons may practice before the IRS. The following persons may practice before the IRS:

Attorneys
CPAs
Enrolled agents and others specifically permitted

Question 6

A CPA must be disbarred from practice before the IRS for willful violations of any of the regulations contained in Circular 230.

True.
False.

Answer 6

False.
Your answer is correct.
An attorney, CPA, or enrolled agent may be censured (public reprimand), suspended, or disbarred from practice before the IRS for willful violations of any of the regulations contained in Circular 230.

Question 7

The AICPA will not fault a member for preparing a tax return when the client does not answer all of the member’s questions.

True.
False.

Answer 7

True.
Your answer is correct.
A member should make a reasonable effort to obtain from the taxpayer appropriate answers to all questions on a tax return before signing as preparer.

Question 8

A person who furnishes to a taxpayer or other preparer sufficient information and advice so that completion of the return is simply a mechanical matter is considered a return preparer.

True.
False.

Answer 8

True.
Your answer is correct.
A person who furnishes to a taxpayer or other preparer sufficient information and advice so that completion of the return is simply a mechanical matter is considered a return preparer

Question 9

The person preparing the tax return must sign the tax return.

True.
False.

Answer 9

False.
Your answer is correct.
A person who has primary responsibility for the overall return or claim for refund is the signing tax return preparer. The tax code states that if more than one tax return preparer is involved in the preparation of a return or a claim for refund, the individual preparer who has the primary responsibility as between or among the preparers for the overall substantive accuracy of the preparation of the return or claim is considered to be the tax return preparer for purposes of determining who is required to sign the return.

Question 10

A frivolous return is a return that is based solely on the taxpayer’s desire to impede the collection of tax, not the omission of information necessary to determine the taxpayer’s tax liability.
True.
False.

Answer 10

False.
Your answer is correct.
A frivolous return is one that omits information necessary to determine the taxpayer’s tax liability, shows a substantially incorrect tax, is based upon a frivolous position (e.g., that wages are not income), or is based upon the taxpayer’s desire to impede the collection of tax.

Question 11

The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must

A. Require the client to submit the records to the IRS or withdraw from the engagement.
B. Obtain the records from the client and submit them to the IRS.
C. Contact all third parties associated with the records, such as banks and employers, to obtain the requested records for submission to the IRS.
D. Notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.

Answer 11

D. Notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.
Answer (D) is correct.
A practitioner is required to provide information regarding the identity of persons that the practitioner reasonably believes may have possession or control of the requested documents if the practitioner does not have possession or control of the documents.
(1.1.27)

Question 12

The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant’s right to practice before it. What is a basis for suspension?

A. Conviction of any misdemeanor.
B. Intentional or unintentional violation of SEC regulations.
C. Conviction of a felony.
D. Being subject to a temporary restraining order regarding securities practice.

Answer 12

C. Conviction of a felony.
Answer (C) is correct.
The SEC may suspend or permanently revoke the right to practice before the SEC, including the right to sign any document filed by a registrant, if the accountant (1) does not have the qualifications to represent others; (2) lacks character or integrity; (3) has engaged in unethical or unprofessional conduct; or (4) has willfully violated, or willfully aided and abetted the violation of, the federal securities laws or their rules and regulations. Suspension by the SEC also may result from (1) conviction of a felony, or a misdemeanor involving moral turpitude; (2) revocation or suspension of a license to practice; or (3) being permanently enjoined from violation of the federal securities acts.
(1.4.107)

Question 13

Jones, a member of the AICPA, prepared Smith’s federal income tax return and appropriately signed the preparer’s declaration. Several months later, Jones learned that Smith improperly altered several figures before mailing the tax return to the IRS. Jones should communicate disapproval of this action to Smith and

A. Inform the IRS of the unauthorized alteration.
B. Take no further action with respect to the current year’s tax return but consider the implications of Smith’s actions for any future relationship.
C. File an amended tax return.
D. Refund any fee collected, return all relevant documents, and refuse any further association with Smith.

Answer 13

B. Take no further action with respect to the current year’s tax return but consider the implications of Smith’s actions for any future relationship.
Answer (B) is correct.
When the member discovers an error, (s)he must inform the taxpayer and recommend the corrective measures to be taken. It is then the taxpayer’s responsibility to correct the error. If the IRS is likely to bring criminal charges, the taxpayer should be advised to seek legal counsel. If the error is not corrected, “the member should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer” (SSTS no. 6).
(1.2.37)

Question 14

Members of the AICPA often provide advice to taxpayers. When subsequent developments affect advice previously provided with respect to significant matters, a member

A. May not communicate this information to the taxpayer unless the taxpayer is a continuing taxpayer.
B. Must communicate this change whether or not (s)he is still employed by the taxpayer.
C. Should withdraw immediately.
D. May communicate this information to the taxpayer whether or not (s)he is still engaged.

Answer 14

D. May communicate this information to the taxpayer whether or not (s)he is still engaged.
Answer (D) is correct.
The member is not obligated to communicate with a taxpayer when subsequent developments affect advice previously provided with respect to significant matters except (1) while assisting in implementing procedures or plans associated with advice provided or (2) in accordance with an obligation undertaken by specific agreement (TS 700, Form and Content of Advice to Taxpayers).
(1.2.40)

Question 15

All of the following are considered examples of disreputable conduct for which a CPA can be disbarred or suspended except

A. Misappropriation or failure to remit funds received from a client for the purpose of payment of taxes or other obligations due the United States.
B. Directly or indirectly attempting to influence the official action of any employee of the Internal Revenue Service by use of threats or false accusations or by bestowing any gift, favor, or thing of value.
C. Knowingly aiding and abetting another person to practice before the Internal Revenue Service during a period of suspension or disbarment.
D. Failure to timely pay personal income taxes.

Answer 15

D. Failure to timely pay personal income taxes.
Answer (D) is correct.
Section 10.51 of Circular 230 lists several examples of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service. Failure to timely pay personal income taxes is not disreputable conduct under Sec. 10.51 of Circular 230.
(1.1.16)

Question 16

Which of the following is considered a tax preparer under the tax preparer regulations?

A. An individual who prepares a return for his or her employer if (s)he is regularly and continuously employed by the employer.
B. An individual who prepares a return for a friend, free of charge, and then receives a gift of gratitude from the friend.
C. Someone who employs another person to prepare, for compensation, a substantial portion of any return of tax under the income tax provisions of the Code.
D. An individual who prepares, as a fiduciary, a return or claim for refund for any person.

Answer 16

C. Someone who employs another person to prepare, for compensation, a substantial portion of any return of tax under the income tax provisions of the Code.
Answer (C) is correct.
Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any tax return or claim for refund under the IRC
(1.3.55)

Question 17

Statements on Standards for Tax Services (SSTSs) have been issued by the Tax Executive Committee of the AICPA. The SSTSs

A. Are enforceable under the AICPA Code of Professional Conduct.
B. Also have been approved by the Council of the AICPA.
C. Apply only to federal income tax engagements.
D. Are applicable to all CPAs, not just members of the AICPA.

Answer 17

A. Are enforceable under the AICPA Code of Professional Conduct.
Answer (A) is correct.
AICPA Conduct Rule 201, General Standards, and Conduct Rule 202, Compliance With Standards, require members to comply with the SSTSs. Members who depart from the standards are required to justify those departures.
(1.2.38)

Question 18

When must a tax return preparer provide a copy of a tax return to a taxpayer?

A. Not later than the time the original return is presented to the taxpayer for signature.
B. Within 48 hours after the taxpayer requests a copy of the tax return.
C. None of the answers are correct.
D. Within 45 days after the return is filed, including extensions.

Answer 18

A. Not later than the time the original return is presented to the taxpayer for signature.
Answer (A) is correct.
Sec. 6107(a) requires all tax return preparers to furnish a completed copy of the return to the taxpayer not later than the time such return or claim for refund is presented for the taxpayer’s signature.
(1.3.67)

Question 19

Which of the following acts, if any, constitute 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. Neither I nor II.
B. I only.
C. II only.
D. Both I and II.

Answer 19

C. II only.
Answer (C) is correct.
A penalty equal to the greater of $1,000 or 50% of the income derived is imposed on a tax return preparer if any part of an understatement of tax liability resulted from a willful attempt to understate the liability or from an intentional disregard of rules or regulations. A penalty will not be imposed if client information is disclosed under a court order.
(1.3.82)

Question 20

Jack, a return preparer, did not retain copies of all returns that he prepared but did keep a list that reflected the taxpayer’s name, identification number, tax year, and type of return for each of his clients. Which of the following statements best describes this situation?

A. Jack is not in compliance with the tax code since he must retain copies of all returns filed.
B. Jack is not in compliance with the tax code since he has not kept all the information required by the Code.
C. Jack is in compliance with the provisions of the tax code, provided he retains the list for a 3-year period after the close of the return period in which the return was signed.
D. Jack is in compliance with the provisions of the tax code if he retains the list for a period of 1 year after the close of the return period in which the return was signed.

Answer 20

C. Jack is in compliance with the provisions of the tax code, provided he retains the list for a 3-year period after the close of the return period in which the return was signed.
Answer (C) is correct.
The person who is an income tax return preparer of any return or claim for refund shall “retain a completed copy of the return or claim for refund; or retain a record by list, card file, or otherwise of the name, taxpayer identification number, and taxable year of the taxpayer for whom the return or claim for refund was prepared and the type of return or claim for refund prepared.” The material shall be retained and kept available for inspection for the 3-year period following the close of the return period during which the return or claim for refund was presented for signature to the taxpayer.
(1.3.70)

Question 21

Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?

A. Glade informed the proper federal officials of actions he mistakenly believed to be illegal.
B. In the course of preparing a return for Duck Company, Jan obtained information indicating the existence of illegal kickbacks. Jan gave the information to Bill, an auditor in her firm, who was performing a financial audit of the company. Bill confirmed illegal kickbacks were occurring and brought the information to the attention of Duck Company officers.
C. Les, a return preparer, obtained information from Tom while selling Tom life insurance. The information was identical to tax return information that had been furnished to him previously. Les discussed this information with Mary, his wife, who was not an employee of any of his businesses.
D. Ron died after furnishing tax return information to his tax return preparer. Ron’s tax return preparer disclosed the information to Jerry, Ron’s nephew, who is not the fiduciary of Ron’s estate.

Answer 21

D. Ron died after furnishing tax return information to his tax return preparer. Ron’s tax return preparer disclosed the information to Jerry, Ron’s nephew, who is not the fiduciary of Ron’s estate.
Answer (D) is correct.
Sec. 6713 imposes a $250 penalty on an income tax return preparer who discloses information furnished in connection with preparation of any return or uses the information for any purpose other than to prepare, or assist in preparation of, the return. This answer is such a disclosure described in Sec. 6713 to which no exception applies. Sec. 7216 imposes criminal penalties for knowingly or recklessly making such disclosure.
(1.3.85)

Question 22

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

A. Understating a client’s tax liability as a result of an error in calculation.
B. Negotiating a client’s tax refund check when the CPA prepared the tax return.
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 22

A. Understating a client’s tax liability as a result of an error in calculation.
Answer (A) is correct.
Understating a client’s tax liability as a result of an error in calculation will not result in imposition of an IRS penalty unless it is the result of gross negligence or a willful attempt to avoid tax liability.
(1.3.80)

Question 23

Ms. Smith hired Tom, a CPA, to prepare her federal income tax return for Year 3. While gathering information to prepare the return, Tom discovered that Ms. Smith failed to file federal income tax returns for the Year 1 and Year 2 tax years. Circular 230 requires that Tom do the following:

A. Inform the IRS that Ms. Smith did not file federal income tax returns for the Year 1 and Year 2 tax years.
B. Refuse to prepare Ms. Smith’s Year 3 federal income tax return unless she files her Year 1 and Year 2 Federal income tax returns.
C. Refuse to prepare Ms. Smith’s Year 3 federal income tax return unless she files her Year 1 and Year 2 Federal income tax returns and inform the IRS that Ms. Smith did not file federal income tax returns for the Year 1 and Year 2 tax years.
D. Promptly advise Ms. Smith that she did not comply with the Internal Revenue laws by failing to file federal income tax returns for the Year 1 and the Year 2 tax years and of the consequences she may face under the Code and regulations.

Answer 23

D. Promptly advise Ms. Smith that she did not comply with the Internal Revenue laws by failing to file federal income tax returns for the Year 1 and the Year 2 tax years and of the consequences she may face under the Code and regulations.
Answer (D) is correct.
According to Circular 230, a CPA who knows that the client has not complied with the revenue laws of the United States is required to promptly inform the client of the noncompliance and must also advise the client of the consequences of the noncompliance under the code and regulations
(1.1.5)

Question 24

If a member of the AICPA prepares a U.S. federal income tax return for another person and receives compensation,
A Treasury Regulations require that the member sign the return.
B The member should not sign the return unless the taxpayer has accepted all the positions recommended by the member.
C The member need not sign the return.
D The Tax Executive Committee of the AICPA requires that the member sign the return.

Answer 24

A Treasury Regulations require that the member sign the return.
This answer is correct.
Treasury Regulations require preparers to sign all the returns they prepare and to include their identification numbers. However, a preparer is defined as a person who prepares (or employs persons to prepare) for compensation any tax return or claim for refund of tax imposed by Subtitle A of the Internal Revenue Code (which covers income taxes on all entities).
View Subunit 1.2 Outline

Question 25

A penalty may be assessed on any preparer or
A Any member of a firm who gives advice (written or oral) to a taxpayer or to a preparer not associated with the same firm.
B Any person who prepares and signs a tax return or claim for refund.
C The individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
D Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.

Answer 25

D Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
This answer is correct.
A penalty may be assessed on any individual who prepares and signs a tax return or claim for a refund. Additionally, an individual with overall supervisory responsibility for advice given by the firm with respect to the return or claim may also be assessed the penalty.
View Subunit 1.3 Outline

Question 26

According to the AICPA Statements on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client?
A The likelihood that current tax litigation will impact the advice.
B Whether the client will seek a second opinion.
C The tax sophistication of the client.
D The client’s business acumen.

Answer 26

C The tax sophistication of the client.
This answer is correct.
Tax advice may be oral, but advice about important, unusual, or complicated transactions preferably should be in writing. Therefore, when determining whether the CPA should provide oral or written advice to a client, the CPA should consider, among other factors, the tax sophistication of the client.
View Subunit 1.2 Outline

Question 27

A CPA who has been suspended in New York but now practices in Wyoming

Answer 27

This would disqualify the professional from practice before the IRS. Circular 230 states that disbarment or suspension from practice as an attorney by any duly constituted authority of any state; possession; territory; commonwealth; the District of Columbia; any federal court of record; or any federal agency, body, or board is considered disreputable conduct for which an individual may also be suspended or disbarred from practice before the IRS.

Question 28

A member of the AICPA in tax practice

A. Is not required to examine or verify data supporting a taxpayer’s tax return.
B. Must promptly inform the taxing authority of any material error (s)he discovers in a taxpayer’s previously filed tax return.
C. May not use estimates in preparing a tax return.
D. May not sign the preparer’s declaration on a taxpayer’s tax return if any question has not been answered.

Answer 28

A. Is not required to examine or verify data supporting a taxpayer’s tax return.
Answer (A) is correct.
A member who prepares a tax return may rely, without verification, on information provided by the taxpayer or by third parties. However, a preparer must make a reasonable inquiry if the information appears to be incorrect, incomplete, or inconsistent on its face or on the basis of other facts known by the member (TS 300).
(1.2.42)

Question 29

Membership in the AICPA is terminated without a hearing for
Conviction of a Felony?
Revocation of the CPA License?
Willful Failure to File a Required Individual Tax Return?

Answer 29

Yes to all
Answer (B) is correct.
Termination of membership without a hearing occurs upon the filing with the AICPA of a final judgment of criminal conviction of the following offenses: (1) a crime punishable by more than one year of imprisonment (a felony), (2) willfully failing to file a legally required individual tax return, (3) filing a fraudulent tax return on the member’s or a client’s behalf, or (4) willfully aiding in preparing a fraudulent tax return for a client. Furthermore, membership is terminated without a hearing if the member’s CPA certificate or license or permit to practice as a CPA or to practice public accounting is revoked as a disciplinary measure by an AICPA-approved governmental agency or other organization. A governmental agency is eligible for approval if it has power to prohibit a member from practicing before it or serving as a director, officer, or trustee of an entity (e.g., the SEC). A nongovernmental organization may be approved if it has authority under a statute or regulation to regulate accountants (e.g., the PCAOB)
(1.4.106)

Question 30

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. Both I and II.
C. II only.
D. I only.

Answer 30

B. Both I and II.
Answer (B) is correct.
A tax return preparer who knowingly or recklessly discloses or uses tax information obtained in preparing a return is subject to criminal penalties. A penalty equal to the greater of $5,000 or 50% of the income derived or to be derived is imposed on the preparer if any part of an understatement of tax liability results from a willful attempt to understate it or from reckless or intentional disregard of rules or regulations.
1.3.91)

Question 31

Which of the following statements is true regarding records required to be maintained by return preparers?

A. Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period and are required to maintain a list of the names, identification numbers, and tax years for whom returns are prepared and to keep this list for 3 years after the return period.
B. Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period, or are required to maintain a list of the names, identification numbers, and tax years for whom returns are prepared and to keep this list for 3 years after the return period.
C. Tax return preparers are required to maintain a list of the names, identification numbers, and tax years for whom returns are prepared and to keep this list for 3 years after the return period.
D. Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period.

Answer 31

B. Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period, or are required to maintain a list of the names, identification numbers, and tax years for whom returns are prepared and to keep this list for 3 years after the return period.
Answer (B) is correct.
A return preparer is required to retain a completed copy of each return or claim prepared for 3 years after the close of the return period [Sec. 6107(b)]. Alternatively, a list may be kept that includes, for the returns and claims prepared, the following information: (1) the taxpayers’ names, (2) taxpayer identification numbers, (3) their tax years, and (4) the types of returns or claims prepared. Additionally, this list must be kept for 3 years after the return period.
(1.3.75)

Question 32

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

A. Realistic possibility.
B. More likely than not.
C. Substantial authority.
D. Not frivolous.

Answer 32

A. Realistic possibility.
Answer (A) is correct.
A member of the AICPA may not recommend a tax return position or prepare or sign a tax return absent a good faith belief that the position “has a realistic possibility of being sustained administratively or judicially on its merits if challenged.” But a member may, in appropriate cases, (1) recommend a position or (2) prepare or sign the return if this standard is not met. These exceptions apply if (1) the position is reasonable and (2) the member advises disclosure [when (s)he has recommended a position], or the position is properly disclosed [when (s)he has prepared or signed the return]. However, a member may never recommend a position that “exploits the audit selection process of a taxing authority” or serves solely as a bargaining position in negotiations with the taxing authority (TS 100).

NOTE: According to the Small Business and Work Opportunity Act of 2007 (as amended), an undisclosed, nonabusive position must be supported by substantial authority. But for tax shelters and reportable transactions, the preparer must have a reasonable belief that the position is more likely than not to be sustained on its merits. If the position is disclosed, its tax treatment must have a reasonable basis.
(1.1.24)

Question 33

In which of the following instances in the preparation of a tax return is the CPA’s signature as preparer required?
A The CPA prepares any return, part of a return, or a claim for refund without compensation.
B The CPA prepares a schedule and transmits it to the taxpayer for inclusion in a client-prepared return.
C In the course of the audit of financial statements, the CPA assembles a small portion of the information used in the preparation of the return by the client.
D The CPA prepares the return at a reduced fee because (s)he also performed a financial audit.

Answer 33

D The CPA prepares the return at a reduced fee because (s)he also performed a financial audit.
This answer is correct.
Treasury Regulations require preparers to sign all the returns they prepare and to include their identification numbers. However, a preparer is defined as a person who prepares (or employs persons to prepare) for compensation any tax return or claim for refund of tax imposed by Subtitle A of the Internal Revenue Code (which covers income taxes on all entities).

Question 34

Kopel was engaged to prepare Riff Raff’s Year 1 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in Year 1. Actually, Raff’s property taxes amounted to only $600. Based on Raff’s word, Kopel deducted the $3,000 on Raff’s return, resulting in an understatement of Raff’s tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff’s representation that Raff had adequate records to support the deduction. Which of the following statements is true?

A. To avoid the preparer penalty for willful understatement of tax liability, Kopel was obligated to examine the underlying documentation for the deduction.
B. To avoid the preparer penalty for willful understatement of tax liability, Kopel should obtain Raff’s representation in writing.
C. Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff’s representation.
D. Kopel is not subject to the preparer penalty for willful understatement of tax liability because the deduction that was claimed was more than 25% of the actual amount that should have been deducted.

Answer 34

C. Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff’s representation.
Answer (C) is correct.
A tax return preparer may rely, without verification, on information provided by the taxpayer when the preparer is reasonably justified in relying upon the taxpayer’s representations. However, a preparer must make a reasonable inquiry if the information appears to be incorrect or incomplete
(1.2.35)

Question 35

In accordance with the AICPA’s Statements on Standards for Tax Services (SSTSs), when a reasonable basis exists for omission of an answer to an applicable question on a tax return,

A. The question should be marked as nonapplicable.
B. A note on the return should state that the answer will be provided if the information is requested.
C. A brief explanation of the reason for the omission must be provided on the return.
D. The member-preparer need not provide an explanation for the omission on the return.

Answer 35

D. The member-preparer need not provide an explanation for the omission on the return.
Answer (D) is correct.
According to SSTS no. 2, Answers to Questions on Returns, a member of the AICPA should sign the preparer’s declaration when a question has not been answered only if the member has made “a reasonable effort to obtain from the taxpayer the information necessary to provide appropriate answers to all questions on a tax return.” A possible disadvantage to the taxpayer does not justify omission of an answer. However, given reasonable grounds for the omission, the taxpayer is not required to provide an explanation on the return, although the member must consider whether the omission may cause the return to be incomplete.
(1.2.34)

Question 36

According to Statements on Standards for Tax Services, a member of the AICPA in tax practice

A. Has the responsibility to be an advocate for the taxpayer.
B. Has the status of an officer of the court with respect to litigation involving a taxpayer’s tax return.
C. Must be independent in fact.
D. Must be independent in fact and appearance.

Answer 36

A. Has the responsibility to be an advocate for the taxpayer.
Answer (A) is correct.
SSTSs (codified in section TS) contain certain mandatory ethical standards that provide more comprehensive guidance than that furnished by other authorities (e.g., U.S. Treasury Department Circular No. 230). Thus, according to TS 100, a member has the right and responsibility to be an advocate for the taxpayer with regard to any tax return position meeting the standards in TS 100.
(1.2.43)

Question 37

A penalty may be assessed against an income tax return preparer who takes an unreasonable position that causes an understatement of liability on a return. For purposes of assessing the penalty, “understatement of liability” means

A. Any understatement that exceeds 10% of the tax liability shown on the return.
B. Any understatement of tax liability greater than $100.
C. Any overstatement of the amount refundable that exceeds 10% of the amount refundable shown on the claim for refund.
D. Any understatement of the tax liability or overstatement of the amount to be refunded or credited.

Answer 37

D. Any understatement of the tax liability or overstatement of the amount to be refunded or credited.
Answer (D) is correct.
Sec. 6694(e) defines “understatement of liability” for purposes of assessing penalties against return preparers as any understatement of the net amount of tax payable under Title 26 or any overstatement of the net amount creditable or refundable under Title 26. Under Sec. 6694(d), penalties will not be assessed against tax return preparers unless there has been an understatement of liability.
(1.3.79)