CTC Ethical Standards & Professional Conduct 2 — Questions and Answers
Question 1: A CTC practitioner discovers mid-engagement that a client's prior-year returns contain material errors. What is the practitioner's primary obligation?
- Immediately withdraw from the engagement without comment
- Advise the client of the errors and recommend corrective action (Correct answer)
- File amended returns unilaterally without client approval
- Report the errors directly to the IRS without notifying the client
Correct answer: Advise the client of the errors and recommend corrective action
Circular 230 and professional standards require the practitioner to promptly advise the client of discovered errors and recommend corrective measures.
Question 2: Which of the following best describes the concept of 'due diligence' as it applies to a CTC preparing a tax return?
- Accepting client-provided information at face value without any inquiry
- Making reasonable inquiries when information appears incorrect or incomplete (Correct answer)
- Verifying every piece of client data with third-party documentation
- Delegating all data verification to administrative staff
Correct answer: Making reasonable inquiries when information appears incorrect or incomplete
Due diligence requires reasonable inquiry when information appears incorrect, inconsistent, or incomplete — not blind acceptance or exhaustive verification of every item.
Question 3: A tax consultant is approached to represent two business partners in a partnership audit. What ethical concern arises?
- Fee-sharing between practitioners
- Potential conflict of interest if the partners' positions diverge (Correct answer)
- Lack of subject-matter competence in partnership taxation
- Inability to maintain client confidentiality in an audit setting
Correct answer: Potential conflict of interest if the partners' positions diverge
Representing both partners creates a potential conflict of interest because their interests may diverge during the audit, requiring informed consent or separate representation.
Question 4: Under Circular 230, a practitioner who charges a contingent fee for preparing an original tax return is:
- Permitted if the client requests it
- Prohibited, as contingent fees for original returns are generally not allowed (Correct answer)
- Permitted only for returns involving federal refund claims
- Required to disclose the arrangement in writing to the IRS
Correct answer: Prohibited, as contingent fees for original returns are generally not allowed
Circular 230 prohibits contingent fee arrangements for preparing original tax returns because they create incentives to inflate refunds or understate liabilities.
Question 5: A CTC receives a subpoena requesting a client's tax records. What should the practitioner do first?
- Immediately produce all documents to comply with the legal process
- Notify the client and consult legal counsel before producing records (Correct answer)
- Destroy any documents that might harm the client
- Contact the IRS directly to negotiate the scope of production
Correct answer: Notify the client and consult legal counsel before producing records
Before producing any records under a subpoena, the practitioner should notify the client and seek legal guidance, as privileges or client rights may apply.
Question 6: Which action by a CTC would constitute 'disreputable conduct' under Circular 230?
- Requesting a 30-day extension to respond to an IRS inquiry
- Willfully failing to file a personal federal tax return (Correct answer)
- Charging a flat fee for tax preparation services
- Using a standardized engagement letter with all clients
Correct answer: Willfully failing to file a personal federal tax return
Willful failure to file a required federal tax return is explicitly listed as disreputable conduct under Circular 230, which can lead to suspension or disbarment.
Question 7: When a CTC consultant gives a client a written opinion on a tax shelter, what standard governs the quality of that opinion?
- The opinion only needs to reflect the practitioner's personal belief
- The opinion must meet the 'covered opinion' standards of Circular 230, requiring a realistic possibility analysis (Correct answer)
- Written opinions are exempt from Circular 230 if the client waives liability
- The practitioner must guarantee a favorable tax outcome in writing
Correct answer: The opinion must meet the 'covered opinion' standards of Circular 230, requiring a realistic possibility analysis
Tax shelter opinions qualify as 'covered opinions' under Circular 230 and must meet heightened standards, including analysis of whether the position is more likely than not to prevail.
CTC Ethical Standards & Professional Conduct 2
A CTC practitioner discovers mid-engagement that a client's prior-year returns contain material errors.
What is the practitioner's primary obligation?