CTP Ethical Standards & Professional Conduct 4 — Questions and Answers
Question 1: A tax preparer signs a return without reviewing it, relying entirely on the client's word. This behavior may violate which standard?
- The preparer's duty of loyalty to the client
- The due diligence requirements under Circular 230 §10.22 (Correct answer)
- The prohibition on contingent fees
- The rules governing enrolled agent licensing
Correct answer: The due diligence requirements under Circular 230 §10.22
Circular 230 §10.22 requires practitioners to exercise due diligence in preparing, approving, and filing tax returns.
Question 2: Which of the following creates a disqualifying conflict of interest for a tax practitioner under Circular 230?
- Representing two unrelated clients with the same filing status
- Representing both spouses in a joint return when they have adverse financial interests (Correct answer)
- Preparing returns for clients in the same industry
- Charging different fee rates to different clients
Correct answer: Representing both spouses in a joint return when they have adverse financial interests
Representing spouses with conflicting interests (such as in a divorce context) creates a conflict under Circular 230 §10.29.
Question 3: The IRS Office of Professional Responsibility (OPR) has authority over:
- Only CPAs and attorneys
- Only enrolled agents
- All practitioners who practice before the IRS, including CPAs, attorneys, and enrolled agents (Correct answer)
- Only unenrolled preparers who prepare more than 50 returns annually
Correct answer: All practitioners who practice before the IRS, including CPAs, attorneys, and enrolled agents
The OPR has jurisdiction over all practitioners authorized to practice before the IRS, including CPAs, attorneys, enrolled agents, and enrolled actuaries.
Question 4: A tax professional who discovers that a client's return, which the professional prepared, contains a material understatement due to the client's error should first:
- File an amended return without informing the client
- Advise the client of the error and recommend filing an amended return (Correct answer)
- Report the client to the IRS
- Withdraw from the engagement and say nothing
Correct answer: Advise the client of the error and recommend filing an amended return
The practitioner must promptly advise the client of the error and the consequences, as required by Circular 230 §10.21.
Question 5: Which of the following disclosures is required on a tax return when taking a position with only a 'reasonable basis' (not more likely than not)?
- No disclosure is needed for reasonable basis positions
- Form 8275 should be filed to disclose the position (Correct answer)
- The position must be disclosed in an attached letter to the IRS
- A covered opinion must be attached to the return
Correct answer: Form 8275 should be filed to disclose the position
Positions that lack a realistic possibility of being sustained but have at least a reasonable basis must be disclosed on Form 8275 to avoid certain penalties.
Question 6: A practitioner who is an enrolled agent (EA) is required to complete continuing education (CE) to maintain active enrollment. How many CE hours are required per three-year enrollment cycle?
- 30 hours
- 60 hours
- 72 hours (Correct answer)
- 120 hours
Correct answer: 72 hours
Enrolled agents must complete 72 hours of CE per three-year enrollment cycle, with a minimum of 16 hours per year including 2 hours of ethics.
Question 7: A client asks a CTP to help structure a transaction in a way that technically complies with the letter of the law but violates its clear intent. The practitioner should:
- Assist freely since the transaction is technically legal
- Evaluate whether the transaction constitutes an abusive tax shelter and consider ethical obligations before assisting (Correct answer)
- Always assist if the client accepts all risk in writing
- Report the client to the IRS before providing any advice
Correct answer: Evaluate whether the transaction constitutes an abusive tax shelter and consider ethical obligations before assisting
Circular 230 and professional ethics standards require practitioners to consider whether assistance with technically legal but abusive arrangements is permissible.
CTP Ethical Standards & Professional Conduct 4
A tax preparer signs a return without reviewing it, relying entirely on the client's word.
This behavior may violate which standard?