CTP Ethics & Professional Responsibilities 3 — Questions and Answers
Question 1: Circular 230 prohibits practitioners from charging 'unconscionable fees.' Which factor is LEAST relevant in determining whether a fee is unconscionable?
- The complexity of the matter
- The practitioner's normal billing rate compared to competitors
- The result obtained for the client (Correct answer)
- The time and effort required
Correct answer: The result obtained for the client
Circular 230 focuses on the nature of the work and effort involved; while results may be a consideration, a contingent fee based purely on outcome is separately restricted.
Question 2: A client asks their CTP to use an aggressive valuation for donated property that the CTP believes is inflated. Under Circular 230, the CTP may:
- Use the client's valuation if the client provides a written appraisal
- Use the valuation only if there is a reasonable basis for it (Correct answer)
- Never question a client's stated property value
- Use any valuation the client requests as long as it is disclosed
Correct answer: Use the valuation only if there is a reasonable basis for it
Practitioners may take a position only if there is a reasonable basis for it; a client-provided appraisal alone does not override the practitioner's duty of due diligence.
Question 3: Which of the following is a permissible contingent fee arrangement for a CTP under Circular 230?
- A fee contingent on the amount of a tax refund obtained on an original return
- A fee contingent on winning a tax court case
- A fee contingent on the size of a refund generated through an amended return for an IRS examination (Correct answer)
- A fee contingent on avoiding an IRS audit entirely
Correct answer: A fee contingent on the size of a refund generated through an amended return for an IRS examination
Circular 230 §10.27 permits contingent fees in connection with IRS examinations or proceedings, including amended returns filed in response to such examinations.
Question 4: A CTP who solicits a former client's business six months after the representation ended:
- Always violates Circular 230's solicitation rules
- May solicit if the contact is not false, misleading, or coercive (Correct answer)
- Must wait at least one year before any solicitation
- Is prohibited from all direct contact with former clients
Correct answer: May solicit if the contact is not false, misleading, or coercive
Circular 230 §10.30 permits solicitation of former clients as long as it is truthful, not misleading, and not coercive—there is no mandatory waiting period.
Question 5: If a CTP learns that a client has failed to file tax returns for three prior years, the practitioner's primary obligation is to:
- Immediately report the client to the IRS
- Advise the client to file the delinquent returns and explain the consequences of not doing so (Correct answer)
- Refuse to prepare the current year return until all prior returns are filed
- Withdraw from the engagement without any explanation
Correct answer: Advise the client to file the delinquent returns and explain the consequences of not doing so
Under Circular 230 §10.21, the practitioner must promptly advise the client of the noncompliance and its consequences; they cannot unilaterally report the client to the IRS.
Question 6: A tax professional advertises a guaranteed refund for all clients. This advertisement most likely violates Circular 230 because it:
- Charges too high a fee
- Is misleading since refund outcomes depend on individual circumstances (Correct answer)
- Does not list the practitioner's credentials
- Uses language that is not pre-approved by the IRS
Correct answer: Is misleading since refund outcomes depend on individual circumstances
Guaranteeing refunds is misleading advertising under Circular 230 §10.30 because tax outcomes are inherently dependent on each client's unique facts.
Question 7: Under the 'best practices' provisions of Circular 230, a CTP communicating with clients about tax advice should:
- Use technical tax jargon to demonstrate expertise
- Clearly identify the assumptions and limitations of the advice (Correct answer)
- Provide only oral advice to avoid creating written records
- Limit advice to topics the client has specifically asked about
Correct answer: Clearly identify the assumptions and limitations of the advice
Circular 230 §10.33 best practices call for clearly communicating the scope, assumptions, and limitations of advice so clients can make informed decisions.
CTP Ethics & Professional Responsibilities 3
Circular 230 prohibits practitioners from charging 'unconscionable fees.' Which factor is LEAST relevant in determining whether a fee is unconscionable?