CTP Ethics & Professional Responsibilities 2 â 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 file an amended return on the client's behalf
- Promptly advise the client of the error and its consequences (Correct answer)
- Report the error directly to the IRS without notifying the client
- Withdraw from the engagement without explanation
Correct answer: Promptly advise the client of the error and its consequences
Circular 230 §10.21 requires practitioners to promptly advise clients of errors or omissions and the consequences, but does not require the practitioner to file amendments.
Question 2: Which of the following best describes 'due diligence' as required of a CTP when preparing a tax return?
- Accepting all client-provided information without question
- Making reasonable inquiries when information appears incorrect or incomplete (Correct answer)
- Independently verifying every piece of information the client provides
- Limiting review only to documents the client volunteers
Correct answer: Making reasonable inquiries when information appears incorrect or incomplete
Due diligence requires practitioners to make reasonable inquiries when information seems inconsistent or incomplete, not to audit clients but to ensure accuracy.
Question 3: A CTP who signs a tax return as a paid preparer is subject to penalties under IRC §6694 if the return contains an understatement due to:
- An unreasonable position taken without adequate disclosure (Correct answer)
- A position the IRS later disagrees with after audit
- A mathematical error made in good faith
- A position that a court ultimately rules against
Correct answer: An unreasonable position taken without adequate disclosure
IRC §6694 imposes penalties on preparers who take unreasonable positionsâthose lacking substantial authorityâwithout adequate disclosure on the return.
Question 4: When a client insists on claiming a deduction the CTP believes has no legal basis, the CTP should:
- Include the deduction to maintain the client relationship
- Include the deduction if the client signs a written authorization
- Refuse to include it and explain the professional and legal reasons (Correct answer)
- Ask a colleague to prepare the return instead
Correct answer: Refuse to include it and explain the professional and legal reasons
A CTP must not include positions lacking legal basis; the correct action is to refuse and explain the ethical and legal grounds for that refusal.
Question 5: The IRS Office of Professional Responsibility (OPR) has authority to sanction practitioners for all of the following EXCEPT:
- Giving false opinions knowingly
- Charging unconscionable fees
- Making honest mistakes on a return (Correct answer)
- Failing to file their own tax returns
Correct answer: Making honest mistakes on a return
OPR sanctions practitioners for willful or reckless conduct, not for honest mistakes made without negligence or bad intent.
Question 6: A CTP who is also an Enrolled Agent receives a subpoena from a state court seeking client tax records. The practitioner should first:
- Immediately turn over all records to the court
- Consult with an attorney and notify the client (Correct answer)
- Destroy the records to protect client privacy
- Call the IRS for guidance on compliance
Correct answer: Consult with an attorney and notify the client
Receiving a subpoena requires the practitioner to consult legal counsel and inform the client before taking any action on disclosing records.
Question 7: Which action by a tax professional most clearly violates the conflict-of-interest rules under Circular 230?
- Preparing returns for two unrelated clients in the same industry
- Representing both spouses in an audit when their interests diverge (Correct answer)
- Advising multiple clients on the same new tax law change
- Charging different fees to different clients for similar work
Correct answer: Representing both spouses in an audit when their interests diverge
Representing both spouses when their interests conflictâsuch as during a joint return audit where fault may differâis a direct conflict of interest under Circular 230 §10.29.
CTP Ethics & Professional Responsibilities 2
Under Circular 230, a tax practitioner who discovers a client made an error on a prior year return must: