CTC Regulatory Framework & Compliance 2 — Questions and Answers
Question 1: Under Circular 230, which standard governs whether a tax practitioner may rely on information provided by a client without further verification?
- Practitioners must independently verify all client-provided information
- Practitioners may rely on client information unless it appears incorrect, inconsistent, or incomplete (Correct answer)
- Practitioners must obtain third-party corroboration for all material facts
- Practitioners are prohibited from relying solely on client representations
Correct answer: Practitioners may rely on client information unless it appears incorrect, inconsistent, or incomplete
Circular 230 §10.34 allows practitioners to rely on client-furnished information absent reason to believe it is inaccurate or incomplete.
Question 2: A CTC discovers a client made an error on a prior-year return that resulted in a $25,000 underpayment. The client refuses to amend the return. What is the CTC's primary obligation?
- File the amendment on the client's behalf without consent
- Immediately notify the IRS of the client's error
- Advise the client of the consequences and potentially withdraw from the engagement (Correct answer)
- Continue with current-year services without taking any action
Correct answer: Advise the client of the consequences and potentially withdraw from the engagement
Under Circular 230, a practitioner who learns of an uncorrected error must promptly advise the client of the error and its consequences, and may need to withdraw if the client refuses to correct it.
Question 3: Which IRS form must a tax preparer complete to register as an Authorized IRS e-file Provider?
- Form 2848
- Form 8633 (Correct answer)
- Form 8821
- Form 9325
Correct answer: Form 8633
Form 8633 (Application to Participate in the IRS e-file Program) is used to register as an Authorized IRS e-file Provider.
Question 4: The penalty under IRC §6694(b) for a tax preparer who willfully or recklessly understates a taxpayer's liability is:
- $1,000 or 50% of the income derived, whichever is greater
- $5,000 or 75% of the income derived, whichever is greater (Correct answer)
- $10,000 per return
- Suspension of PTIN for one year
Correct answer: $5,000 or 75% of the income derived, whichever is greater
IRC §6694(b) imposes a penalty of the greater of $5,000 or 75% of income derived from the return for willful or reckless understatements.
Question 5: Under the Bank Secrecy Act, which threshold triggers a currency transaction report (CTR) filing requirement?
- Transactions exceeding $5,000
- Transactions exceeding $10,000 (Correct answer)
- Transactions exceeding $25,000
- Transactions exceeding $50,000
Correct answer: Transactions exceeding $10,000
Financial institutions must file a CTR for cash transactions exceeding $10,000 in a single business day.
Question 6: A taxpayer who disagrees with an IRS examination finding and wants to bypass the IRS Appeals Office can petition which court without first paying the disputed tax?
- U.S. District Court
- U.S. Court of Federal Claims
- U.S. Tax Court (Correct answer)
- U.S. Bankruptcy Court
Correct answer: U.S. Tax Court
The U.S. Tax Court is the only federal court where a taxpayer can contest a deficiency without first paying the disputed tax.
Question 7: Which of the following best describes the 'reasonable basis' standard for tax return positions under IRC §6662?
- A position with approximately a 25% or greater likelihood of being sustained (Correct answer)
- A position with approximately a 40% or greater likelihood of being sustained
- A position supported by substantial authority, roughly a 40% threshold
- A position supported by any colorable argument regardless of likelihood
Correct answer: A position with approximately a 25% or greater likelihood of being sustained
Reasonable basis is a relatively low standard—approximately 20-25% probability of success—that avoids the accuracy-related penalty when adequately disclosed.
CTC Regulatory Framework & Compliance 2
Under Circular 230, which standard governs whether a tax practitioner may rely on information provided by a client without further verification?