CTC Ethics, Standards & IRS Representation 2 — Questions and Answers
Question 1: Under Circular 230, which practitioner action constitutes a violation of the duty of confidentiality?
- Disclosing client information to the IRS when legally required
- Sharing client tax information with a third-party marketer without client consent (Correct answer)
- Discussing anonymized case details for professional training purposes
- Responding to a court subpoena for client records
Correct answer: Sharing client tax information with a third-party marketer without client consent
Sharing client tax information with third-party marketers without client consent violates Circular 230's confidentiality requirements and tax privacy rules under IRC §7216.
Question 2: A CTC discovers a client overstated deductions on a prior-year return. What is the practitioner's FIRST obligation?
- File an amended return immediately without telling the client
- Notify the IRS directly of the error
- Advise the client of the error and its potential consequences (Correct answer)
- Withdraw from representation without explanation
Correct answer: Advise the client of the error and its potential consequences
Circular 230 §10.21 requires practitioners to promptly advise the client of errors or omissions on previously filed returns and the consequences of correcting them.
Question 3: Which standard governs the level of confidence a CTC must have before recommending a tax position to a client?
- The position must be virtually certain to prevail
- The position must have a reasonable basis and be disclosed or have substantial authority (Correct answer)
- Any position the client requests may be taken without restriction
- The position only needs to be colorable under the law
Correct answer: The position must have a reasonable basis and be disclosed or have substantial authority
Under Circular 230 §10.34, a practitioner may not sign a return unless the position has substantial authority or a reasonable basis with proper disclosure.
Question 4: An enrolled agent is representing a client in an IRS audit. The agent learns the client has submitted a fraudulent document. What must the agent do?
- Continue representation and say nothing to protect client privilege
- Immediately notify the IRS of the fraud
- Advise the client to correct the submission and withdraw if the client refuses (Correct answer)
- Prepare a supplemental document that contradicts the fraudulent one
Correct answer: Advise the client to correct the submission and withdraw if the client refuses
Circular 230 prohibits assisting in fraud; the practitioner must counsel the client to correct the record and must withdraw if the client refuses.
Question 5: Under IRS Form 2848 (Power of Attorney), how long does a taxpayer's representative authority remain valid for a specific tax year?
- It expires automatically after 12 months
- It remains valid until the tax matter is resolved or the POA is revoked (Correct answer)
- It must be renewed annually regardless of case status
- It expires when the IRS issues a 90-day letter
Correct answer: It remains valid until the tax matter is resolved or the POA is revoked
A Form 2848 POA for a specific tax year stays effective until the matter is resolved, the taxpayer revokes it, or the representative withdraws.
Question 6: Which of the following best describes the 'best practices' standard under Circular 230 §10.33?
- Mandatory rules with specific penalties for non-compliance
- Aspirational guidelines encouraging high-quality, ethical client representation (Correct answer)
- IRS-mandated checklists that must be completed for each return
- Standards that apply only to CPAs and attorneys, not enrolled agents
Correct answer: Aspirational guidelines encouraging high-quality, ethical client representation
Section 10.33 best practices are aspirational—they encourage but do not mandate specific behaviors, unlike the enforceable standards in §§10.20–10.32.
Question 7: A CTC wants to charge a contingent fee for preparing a client's original federal income tax return. Under Circular 230, this is:
- Permitted if the client agrees in writing
- Prohibited for original returns but allowed for amended returns in limited circumstances (Correct answer)
- Permitted because fee arrangements are solely between practitioner and client
- Prohibited under all circumstances for any IRS matter
Correct answer: Prohibited for original returns but allowed for amended returns in limited circumstances
Circular 230 §10.27 prohibits contingent fees for original return preparation but allows them in limited situations such as IRS examination of a previously filed return.
CTC Ethics, Standards & IRS Representation 2
Under Circular 230, which practitioner action constitutes a violation of the duty of confidentiality?