CTP Ethics & Professional Responsibilities 4 — Questions and Answers
Question 1: A CTP who becomes aware that a client is using their tax advice to facilitate tax fraud should:
- Continue the representation since the advice itself was lawful
- Withdraw from the representation promptly (Correct answer)
- Report the client to law enforcement immediately
- Seek a second opinion from a colleague before acting
Correct answer: Withdraw from the representation promptly
When a practitioner learns their services are being used to further fraud, Circular 230 and professional ethics require withdrawal from the representation.
Question 2: Which of the following describes the 'substantial authority' standard under IRC §6662?
- The weight of authorities in support of the position is at least 50%
- The weight of authorities in support exceeds the weight against, at approximately a 40% or more chance of success (Correct answer)
- At least one court case directly supports the taxpayer's position
- The position has been explicitly approved by the IRS in a published ruling
Correct answer: The weight of authorities in support exceeds the weight against, at approximately a 40% or more chance of success
Substantial authority exists when the weight of authorities supporting the position is substantial—often described as roughly a 40% or better chance of being sustained—even if not a majority.
Question 3: A CTP signs a return that understates tax due to a client's intentional omission of income the client told the practitioner was 'not important.' The practitioner is most likely to face penalties because they:
- Had an obligation to independently verify all income sources
- Ignored a red flag that should have prompted further inquiry (Correct answer)
- Failed to charge an adequate fee for the engagement
- Did not require the client to sign a fraud waiver
Correct answer: Ignored a red flag that should have prompted further inquiry
When clients make statements that raise red flags—like dismissing income sources—due diligence requires the practitioner to make further inquiries before signing.
Question 4: An Enrolled Agent (EA) whose IRS enrollment has been suspended may still lawfully:
- Represent clients before the IRS Appeals Office
- Prepare tax returns for compensation (Correct answer)
- Represent clients in Tax Court as a non-attorney
- Sign returns as an EA
Correct answer: Prepare tax returns for compensation
A suspended EA loses the right to practice before the IRS but may still prepare tax returns for compensation, as return preparation does not require Circular 230 authorization.
Question 5: A CTP is asked to provide a 'covered opinion' on a tax shelter. Under Circular 230, a covered opinion must:
- Conclude that the shelter will more likely than not succeed
- Identify and address all significant Federal tax issues (Correct answer)
- Be reviewed and approved by the IRS before issuance
- Carry a disclaimer limiting the opinion to the named client only
Correct answer: Identify and address all significant Federal tax issues
Circular 230 §10.35 requires covered opinions to identify and analyze all significant Federal tax issues presented, ensuring comprehensive disclosure rather than selective analysis.
Question 6: Under the IRC §6695 preparer penalties, a paid preparer who fails to provide the client with a copy of a completed return can be penalized:
- $50 per return, up to $25,000 per calendar year (Correct answer)
- $100 per return with no annual cap
- $500 per return plus interest
- Up to $1,000 for each willful violation
Correct answer: $50 per return, up to $25,000 per calendar year
IRC §6695(a) imposes a $50 penalty per failure to furnish a copy of the return to the taxpayer, with a maximum of $25,000 per calendar year.
Question 7: Which of the following taxpayer rights must a CTP communicate to clients who are under IRS examination?
- The right to receive a refund regardless of examination outcome
- The right to be represented by a qualified practitioner (Correct answer)
- The right to have the examination conducted only in writing
- The right to receive a final determination within 90 days
Correct answer: The right to be represented by a qualified practitioner
Clients have the right under the Taxpayer Bill of Rights to be represented by a qualified practitioner during IRS examinations, and CTPs should inform clients of this right.
CTP Ethics & Professional Responsibilities 4
A CTP who becomes aware that a client is using their tax advice to facilitate tax fraud should: