CTP Ethical Standards & Professional Conduct 5 — Questions and Answers
Question 1: Under IRC §6694, a return preparer faces a penalty for an 'unreasonable position' unless the preparer:
- Obtains written client consent to the position
- Had reasonable cause and acted in good faith, or the position met the applicable standard and was adequately disclosed (Correct answer)
- Filed a protective claim with the IRS
- Charged a flat fee rather than a contingent fee
Correct answer: Had reasonable cause and acted in good faith, or the position met the applicable standard and was adequately disclosed
IRC §6694 penalties do not apply if the preparer had reasonable cause and good faith, or if the position met the applicable standard (substantial authority or reasonable basis with disclosure).
Question 2: A tax practitioner who promotes an abusive tax shelter may face which penalty under the Internal Revenue Code?
- Only a criminal penalty under IRC §7201
- A civil penalty under IRC §6700 for promoting abusive tax shelters (Correct answer)
- Only a Circular 230 sanction from the OPR
- No penalty unless the shelter results in actual tax evasion
Correct answer: A civil penalty under IRC §6700 for promoting abusive tax shelters
IRC §6700 imposes civil penalties on persons who organize or sell abusive tax shelters, separate from any Circular 230 sanctions.
Question 3: When a new client presents documents showing a very large charitable deduction, the practitioner notices the documentation appears inconsistent. Under professional standards, the practitioner should:
- Claim the deduction because the client has documentation
- Ask probing questions to resolve the inconsistency before claiming the deduction (Correct answer)
- Refuse to prepare the return without a court order verifying the deduction
- Immediately report suspected fraud to the IRS
Correct answer: Ask probing questions to resolve the inconsistency before claiming the deduction
Practitioners must make reasonable inquiries when information appears inconsistent, per Circular 230 §10.22 due diligence requirements.
Question 4: A practitioner who wishes to represent a client before the IRS but is not a CPA, attorney, or enrolled agent may do so by:
- Obtaining power of attorney Form 2848 signed by the client
- Becoming an unenrolled preparer with unlimited practice rights
- Qualifying as an enrolled retirement plan agent or enrolled actuary for limited matters, or passing the SEE to become an enrolled agent (Correct answer)
- Filing a request with the OPR for special authorization
Correct answer: Qualifying as an enrolled retirement plan agent or enrolled actuary for limited matters, or passing the SEE to become an enrolled agent
To gain full practice rights before the IRS, a non-CPA/non-attorney must pass the Special Enrollment Examination (SEE) to become an enrolled agent.
Question 5: The 'more likely than not' standard for tax return positions means:
- The position has a 30% chance of being sustained
- The position has greater than a 50% likelihood of being sustained on the merits (Correct answer)
- The position has been previously approved by the Tax Court
- The IRS has issued a favorable ruling on the same issue
Correct answer: The position has greater than a 50% likelihood of being sustained on the merits
The 'more likely than not' standard requires that the position has a greater than 50% probability of being sustained if challenged.
Question 6: A practitioner who receives a client referral from another professional and pays that professional a referral fee must:
- Disclose the referral fee on the client's tax return
- Ensure the fee arrangement complies with applicable state law and professional rules, as Circular 230 does not specifically regulate referral fees (Correct answer)
- Report the payment to the IRS on Form 1099-NEC only
- Obtain IRS approval before making the payment
Correct answer: Ensure the fee arrangement complies with applicable state law and professional rules, as Circular 230 does not specifically regulate referral fees
Circular 230 does not specifically address referral fees; practitioners must comply with applicable state professional rules and tax reporting requirements.
Question 7: A tax professional who prepares a return knowing that it includes a fraudulent deduction may be subject to:
- Only a Circular 230 sanction
- Only an IRC §6694 preparer penalty
- Criminal prosecution under IRC §7206 for aiding and assisting in the preparation of a false return (Correct answer)
- Only a civil penalty from the state licensing board
Correct answer: Criminal prosecution under IRC §7206 for aiding and assisting in the preparation of a false return
IRC §7206(2) makes it a felony to willfully aid or assist in the preparation of a false or fraudulent return, with penalties up to 3 years imprisonment.
CTP Ethical Standards & Professional Conduct 5
Under IRC §6694, a return preparer faces a penalty for an 'unreasonable position' unless the preparer: