CTP Ethical Standards & Professional Conduct 2 — Questions and Answers
Question 1: Under Circular 230, a tax practitioner who discovers a client made an error on a prior year return must:
- Immediately correct the return without client consent
- Promptly notify the client of the error and its consequences (Correct answer)
- Report the error directly to the IRS
- Withdraw from the engagement
Correct answer: Promptly notify the client of the error and its consequences
Circular 230 §10.21 requires practitioners to promptly advise the client of the error and the consequences of not correcting it.
Question 2: A CTP is approached by a client who wants to claim a deduction the practitioner believes has no legal basis. The practitioner should:
- Claim the deduction to avoid losing the client
- Explain the lack of legal basis and decline to claim it unless there is at least a reasonable basis (Correct answer)
- File the return and let the IRS decide
- Charge a higher fee to offset the risk
Correct answer: Explain the lack of legal basis and decline to claim it unless there is at least a reasonable basis
Practitioners may not claim positions that lack at least a reasonable basis, per Circular 230 §10.34.
Question 3: Which action constitutes 'practice before the IRS' under Circular 230?
- Preparing a tax return without representing the taxpayer
- Corresponding with the IRS on behalf of a taxpayer (Correct answer)
- Filing a return electronically
- Providing general tax education to the public
Correct answer: Corresponding with the IRS on behalf of a taxpayer
Communicating or corresponding with the IRS on behalf of a taxpayer constitutes practice under Circular 230.
Question 4: A tax professional who charges a contingent fee for preparing an original tax return is:
- Permitted if the fee is disclosed on Form 8867
- Permitted for returns with complex transactions
- Prohibited under Circular 230 (Correct answer)
- Permitted only for corporate clients
Correct answer: Prohibited under Circular 230
Circular 230 §10.27 generally prohibits contingent fees for preparing original tax returns.
Question 5: A practitioner's duty of confidentiality under IRC §7525 applies to:
- All tax advice given by any tax preparer
- Tax advice given by practitioners authorized to practice before the IRS in non-criminal proceedings (Correct answer)
- All communications including criminal tax matters
- Tax advice given only by licensed attorneys
Correct answer: Tax advice given by practitioners authorized to practice before the IRS in non-criminal proceedings
IRC §7525 extends a limited privilege to federally authorized tax practitioners for non-criminal tax advice proceedings.
Question 6: Under the AICPA's Statements on Standards for Tax Services, a tax practitioner should:
- Always recommend the position most favorable to the client regardless of law
- Use judgment to ensure positions have at least a realistic possibility of being sustained (Correct answer)
- Defer all tax position decisions to the client
- Only recommend positions that are certain to be sustained
Correct answer: Use judgment to ensure positions have at least a realistic possibility of being sustained
AICPA SSTS require practitioners to use professional judgment and recommend positions with a realistic possibility of being sustained.
Question 7: A CTP who is suspended from practice before the IRS may still:
- Represent clients in Tax Court with special permission
- Prepare tax returns (but not represent taxpayers before the IRS) (Correct answer)
- Advise clients on IRS audit strategy
- Sign returns as the paid preparer
Correct answer: Prepare tax returns (but not represent taxpayers before the IRS)
Suspension bars representation before the IRS but does not automatically prevent preparing tax returns.
CTP Ethical Standards & Professional Conduct 2
Under Circular 230, a tax practitioner who discovers a client made an error on a prior year return must: