CTC Regulatory Framework & Compliance 3 — Questions and Answers
Question 1: A tax professional who is not an attorney, CPA, or enrolled agent may represent taxpayers before the IRS only:
- In all proceedings if they hold a PTIN
- During an examination of a return they prepared, before the examining agent only (Correct answer)
- Before the IRS Appeals Office with written client consent
- In Tax Court proceedings under a special admission
Correct answer: During an examination of a return they prepared, before the examining agent only
Unenrolled preparers with limited practice rights may represent taxpayers only in examinations of returns they signed, and only before the IRS examination division.
Question 2: Which IRS program allows qualifying low-income taxpayers and those with English as a second language to obtain free tax representation?
- Taxpayer Advocate Service (TAS)
- Low Income Taxpayer Clinic (LITC) (Correct answer)
- Volunteer Income Tax Assistance (VITA)
- Tax Counseling for the Elderly (TCE)
Correct answer: Low Income Taxpayer Clinic (LITC)
Low Income Taxpayer Clinics (LITCs) represent qualifying taxpayers in disputes with the IRS and provide education on taxpayer rights.
Question 3: Under the 'return of client records' provisions of Circular 230, a practitioner who is discharged before completing services must:
- Retain all records until the statute of limitations expires
- Return only documents the client originally provided, but may withhold work product
- Promptly return all records needed by the client to comply with tax obligations (Correct answer)
- Transfer all records to the successor practitioner after obtaining client consent
Correct answer: Promptly return all records needed by the client to comply with tax obligations
Circular 230 §10.28 requires that upon termination, a practitioner must return all client records necessary for compliance, regardless of any fee dispute.
Question 4: The Foreign Account Tax Compliance Act (FATCA) requires U.S. persons to report foreign financial accounts exceeding what threshold on Form 8938?
- $5,000 at any time during the year
- $10,000 aggregate at any time
- $50,000 at year-end or $75,000 at any point during the year (single filers) (Correct answer)
- $100,000 at any time during the year
Correct answer: $50,000 at year-end or $75,000 at any point during the year (single filers)
For single filers living in the U.S., Form 8938 is required when foreign financial assets exceed $50,000 at year-end or $75,000 at any time during the year.
Question 5: An IRS Notice of Deficiency (statutory notice) gives a taxpayer how many days to petition the Tax Court?
- 30 days
- 60 days
- 90 days (Correct answer)
- 180 days
Correct answer: 90 days
A taxpayer has 90 days from the date of a Notice of Deficiency (150 days if addressed outside the U.S.) to petition the Tax Court.
Question 6: Which ethical violation under Circular 230 can result in permanent disbarment from practice before the IRS on the first offense?
- Failing to timely respond to IRS correspondence
- Willful misappropriation of client funds (Correct answer)
- Charging an unconscionable fee
- Failing to maintain required client records
Correct answer: Willful misappropriation of client funds
Willful misappropriation of client funds is among the most serious violations and can result in immediate permanent disbarment under Circular 230.
Question 7: Under the economic substance doctrine codified in IRC §7701(o), a transaction must have:
- Only a meaningful change in economic position to be respected
- Both meaningful economic substance and a substantial non-tax purpose (Correct answer)
- Only a substantial non-tax business purpose to avoid penalties
- Either meaningful economic substance or a substantial non-tax purpose
Correct answer: Both meaningful economic substance and a substantial non-tax purpose
IRC §7701(o) requires a transaction to have both meaningful economic substance (objective test) and a substantial non-tax purpose (subjective test) to be respected.
CTC Regulatory Framework & Compliance 3
A tax professional who is not an attorney, CPA, or enrolled agent may represent taxpayers before the IRS only: