CTP Ethics & Professional Responsibilities 5 — Questions and Answers
Question 1: A CTP preparing a business return notices that the client's bookkeeper may have embezzled funds. The CTP's professional obligation is to:
- Refuse to complete the return until an audit is done
- Report the suspected embezzlement to law enforcement
- Discuss the matter with the client and continue the engagement appropriately (Correct answer)
- Ignore the issue since it does not affect the tax return
Correct answer: Discuss the matter with the client and continue the engagement appropriately
The CTP's duty is to bring concerns to the client's attention; it is not the practitioner's role to investigate or report to law enforcement absent a specific legal duty.
Question 2: The 'more likely than not' standard in Circular 230 means that a practitioner must believe the position has:
- At least a 33% chance of being upheld
- Greater than a 50% chance of being upheld (Correct answer)
- Been supported by at least two court decisions
- Been approved in a private letter ruling
Correct answer: Greater than a 50% chance of being upheld
The 'more likely than not' standard requires the practitioner to conclude there is greater than a 50% probability that the position will be sustained on its merits.
Question 3: A CTP who prepares a return with an Earned Income Tax Credit (EITC) claim has additional due diligence duties under IRC §6695(g), which include:
- Obtaining a signed declaration from the client that all income is reported
- Completing IRS Form 8867 and keeping records of questions asked (Correct answer)
- Requiring clients to submit original source documents for income verification
- Filing the EITC claim only after receiving IRS pre-approval
Correct answer: Completing IRS Form 8867 and keeping records of questions asked
IRC §6695(g) requires preparers to complete Form 8867 (Due Diligence Checklist), ask required questions, and retain records of the due diligence process for EITC, CTC, AOTC, and HOH claims.
Question 4: If a CTP is disbarred from practice before the IRS, which of the following actions is the practitioner still permitted to take?
- File a Power of Attorney (Form 2848) with the IRS
- Represent a client at an IRS audit
- Advise clients privately on tax matters without direct IRS contact (Correct answer)
- Appear before an IRS Appeals Officer on a client's behalf
Correct answer: Advise clients privately on tax matters without direct IRS contact
Disbarment prohibits practice before the IRS but does not prevent a practitioner from privately advising clients on tax matters that do not involve direct IRS representation.
Question 5: A CTP who knows that the IRS is examining a client's return may NOT:
- Advise the client on legal strategies to minimize tax liability
- Help the client organize and present relevant records to the IRS
- Advise the client to destroy documents that may be requested by the IRS (Correct answer)
- Represent the client in meetings with the IRS examiner
Correct answer: Advise the client to destroy documents that may be requested by the IRS
Advising a client to destroy documents relevant to an IRS examination constitutes obstruction of justice and violates both law and Circular 230 ethical standards.
Question 6: Under Circular 230, a practitioner who associates their name with a tax return or claim for refund is deemed to have:
- Personally verified all deductions claimed on the return
- Represented that the return is accurate to the best of their knowledge (Correct answer)
- Guaranteed that no penalty will be assessed on the return
- Agreed to represent the client in any subsequent IRS audit
Correct answer: Represented that the return is accurate to the best of their knowledge
By signing a return, a practitioner declares under penalties of perjury that the return is true, correct, and complete to the best of their knowledge and belief.
Question 7: A CTP who accepts a Power of Attorney from a client gains the authority to do all of the following EXCEPT:
- Represent the client in an IRS examination
- Receive copies of IRS correspondence on the client's behalf
- Sign an offer in compromise on behalf of the client if Form 2848 so authorizes
- Unilaterally waive the client's right to appeal an IRS determination (Correct answer)
Correct answer: Unilaterally waive the client's right to appeal an IRS determination
A POA grants authority expressly stated on Form 2848; waiving a client's substantive appeal rights requires explicit client consent and cannot be done unilaterally by the practitioner.
CTP Ethics & Professional Responsibilities 5
A CTP preparing a business return notices that the client's bookkeeper may have embezzled funds.
The CTP's professional obligation is to: