CTA Tax Ethics and Professional Standards 2 — Questions and Answers
Question 1: Tax evasion is best defined as:
- Legal use of tax strategies to minimize tax liability
- Illegal concealment of income or fraudulent deductions to avoid paying taxes (Correct answer)
- Claiming deductions that are later disallowed by the IRS
- Taking an aggressive position on a tax return
Correct answer: Illegal concealment of income or fraudulent deductions to avoid paying taxes
Tax evasion is the illegal, intentional non-payment or underpayment of taxes through concealment or fraud, as opposed to legal tax avoidance.
Question 2: Under Circular 230, written tax advice provided to clients must:
- Always contain a disclaimer that no reliance can be placed on the advice
- Not be based on unreasonable factual or legal assumptions (Correct answer)
- Be filed with the IRS along with the tax return
- Only be given in formal written opinion letters
Correct answer: Not be based on unreasonable factual or legal assumptions
Written tax advice under Circular 230 must not be based on unreasonable factual or legal assumptions or known misleading statements.
Question 3: A tax preparer who recklessly or intentionally disregards IRS rules and regulations on a return may face a preparer penalty of:
- $250 per return
- $1,000 per return or 75% of income from the return, whichever is greater (Correct answer)
- $5,000 per return
- Equal to the tax understatement
Correct answer: $1,000 per return or 75% of income from the return, whichever is greater
Under IRC Section 6694(b), willful or reckless disregard of tax rules carries a penalty of $5,000 or 75% of preparer income from the return, whichever is greater.
Question 4: The taxpayer penalty for substantial understatement of income tax is:
- 5% of the underpayment per month
- 20% of the portion of the underpayment attributable to the substantial understatement (Correct answer)
- 25% of the total tax due
- 75% of the underpayment if fraud is involved
Correct answer: 20% of the portion of the underpayment attributable to the substantial understatement
The accuracy-related penalty for substantial understatement of income tax is 20% of the understatement attributable to the substantial understatement.
Question 5: Which of the following IRS documents provides a legally binding ruling on how the tax law applies to a specific taxpayer's transaction?
- Revenue ruling
- Technical advice memorandum
- Private letter ruling (PLR) (Correct answer)
- IRS publication
Correct answer: Private letter ruling (PLR)
A Private Letter Ruling is issued by the IRS to a specific taxpayer and is legally binding on the IRS with respect to that taxpayer's transaction.
Question 6: An enrolled agent (EA) obtains their license to practice before the IRS by:
- Graduating from an accredited accounting program
- Passing the Special Enrollment Examination (SEE) or working for the IRS for at least 5 years (Correct answer)
- Obtaining a CPA license in any US state
- Completing a 40-hour tax preparation course
Correct answer: Passing the Special Enrollment Examination (SEE) or working for the IRS for at least 5 years
Enrolled agent status is obtained by passing the three-part Special Enrollment Examination or by virtue of working for the IRS in certain technical positions for at least five years.
CTA Tax Ethics and Professional Standards 2
Tax evasion is best defined as: