CTC Documentation & Legal Requirements 3

Question 1

Under the Circular 230 rules, a tax practitioner who discovers a client's error on a previously filed return must:

Accepted Answer

Promptly advise the client of the error and its potential consequences

Answer

File an amended return immediately without informing the client

Answer

Report the error directly to the IRS without the client's consent

Answer

Withdraw from the engagement without any disclosure

Question 2

A taxpayer with foreign financial accounts totaling more than $10,000 at any point during the year must file which form?

Accepted Answer

FinCEN Form 114 (FBAR)

Answer

Form 8938

Answer

Form 3520

Answer

Form 5471

Question 3

What is the penalty for failure to file a correct information return (e.g., 1099) by the applicable deadline under IRC §6721?

Accepted Answer

The penalty tiers increase from $50 to $290 per return depending on lateness, with annual caps by business size

Answer

$50 per return, capped at $500,000 per year for large businesses

Answer

$100 per return, capped at $250,000 for small businesses

Answer

$1,000 per return with no annual cap

Question 4

A taxpayer claims a charitable contribution deduction of $300 in cash. What is the minimum documentation required?

Accepted Answer

A bank record or written communication from the charity showing the amount and date

Answer

A written acknowledgment from the charity

Answer

No documentation is required for cash donations under $500

Answer

A canceled check and a receipt from the charity

Question 5

Which document establishes a qualified plan's tax-exempt status and outlines its legal structure for IRS compliance purposes?

Accepted Answer

The plan document and adoption agreement

Answer

The plan's annual Form 5500 filing

Answer

The employer's corporate charter

Answer

The summary plan description distributed to employees

Question 6

When must a taxpayer who is claiming the earned income tax credit (EITC) retain documentation of a qualifying child's residency?

Accepted Answer

For at least 3 years from the filing date in case of IRS inquiry

Answer

Only if the IRS audits the return

Answer

Only during the tax year itself

Answer

For 10 years to match the EITC look-back period

Question 7

A tax practitioner prepares a return claiming a large research and development credit. Under IRC §41, what documentation is essential to substantiate the credit?

Accepted Answer

Contemporaneous project records, employee time logs, and supply receipts tied to qualified research activities

Answer

A general description of the company's industry

Answer

The CEO's affidavit describing the research broadly

Answer

Only the company's total R&D budget from its financial statements