CTP Ethical Standards & Professional Conduct 3 — Questions and Answers
Question 1: Which of the following best describes the 'reasonable basis' standard for tax return positions under Circular 230?
- The position will definitely be sustained if audited
- The position has approximately a 5-10% or greater chance of being sustained (Correct answer)
- The position has a greater than 50% chance of being sustained
- The position has been approved in a private letter ruling
Correct answer: The position has approximately a 5-10% or greater chance of being sustained
The reasonable basis standard requires approximately a 5-10% or higher probability that the position would be sustained on its merits.
Question 2: A tax professional receives a subpoena for client records. The appropriate first step is to:
- Immediately turn over all client records to comply with the law
- Notify the client and seek legal counsel before producing any records (Correct answer)
- Destroy sensitive records to protect client confidentiality
- Contact the IRS to determine what must be disclosed
Correct answer: Notify the client and seek legal counsel before producing any records
The practitioner should notify the client and obtain legal counsel to assess privilege claims and proper scope of production.
Question 3: Under Circular 230, a 'covered opinion' is best described as:
- Any written advice given to any client about any tax matter
- Written advice about a listed transaction or a principal purpose transaction marketed to multiple clients (Correct answer)
- Oral advice given during an IRS audit
- Any opinion that includes a disclaimer of accuracy
Correct answer: Written advice about a listed transaction or a principal purpose transaction marketed to multiple clients
Covered opinions under Circular 230 §10.35 include written advice on listed transactions and principal purpose transactions marketed to multiple clients.
Question 4: A practitioner who knows a client is currently under criminal investigation by the IRS should:
- Continue to represent the client without special precautions
- Withdraw from the engagement immediately
- Ensure the client retains criminal defense counsel and consider whether the practitioner can ethically continue (Correct answer)
- Advise the client to cooperate fully with investigators without any legal representation
Correct answer: Ensure the client retains criminal defense counsel and consider whether the practitioner can ethically continue
The practitioner must advise the client to retain criminal defense counsel and assess whether the practitioner can continue without creating conflicts.
Question 5: Which of the following is NOT a permissible sanction under Circular 230 for practitioner misconduct?
- Censure
- Suspension
- Criminal prosecution by the OPR (Correct answer)
- Disbarment from practice before the IRS
Correct answer: Criminal prosecution by the OPR
The OPR (Office of Professional Responsibility) administers civil sanctions; criminal prosecution is handled by the Department of Justice, not the OPR.
Question 6: A client insists on using an unreasonable tax position. After advising the client of the risks, the practitioner decides to withdraw. When should the practitioner notify the IRS of the withdrawal?
- Immediately upon deciding to withdraw
- The practitioner does not notify the IRS; withdrawal is a matter between the practitioner and client (Correct answer)
- Within 30 days of withdrawal
- Only if the return has already been filed with the practitioner's signature
Correct answer: The practitioner does not notify the IRS; withdrawal is a matter between the practitioner and client
Withdrawal from client representation is generally a private matter; practitioners do not independently notify the IRS upon withdrawal.
Question 7: Under Circular 230, a practitioner has a duty to:
- Audit the accuracy of all information provided by the client
- Make reasonable inquiries when client information appears incorrect or incomplete (Correct answer)
- Accept all client representations without question
- Report suspected fraud to the IRS immediately
Correct answer: Make reasonable inquiries when client information appears incorrect or incomplete
Practitioners must make reasonable inquiries when information appears inconsistent or incomplete but are not required to audit or verify all client representations.
CTP Ethical Standards & Professional Conduct 3
Which of the following best describes the 'reasonable basis' standard for tax return positions under Circular 230?