CTRS Ethical and Professional Responsibilities 3 — Questions and Answers
Question 1: A CTRS practitioner charges a contingency fee based on the amount of tax saved for a client whose case is before the IRS Appeals Office. Under Circular 230, this fee arrangement is:
- Permitted because Appeals is an administrative proceeding
- Permitted only if the client consents in writing
- Generally prohibited for matters before the IRS (Correct answer)
- Permitted for tax resolution matters involving balances over $50,000
Correct answer: Generally prohibited for matters before the IRS
Circular 230 generally prohibits contingency fees for matters before the IRS, including representation in Appeals proceedings.
Question 2: When is a CTRS practitioner permitted to charge a contingency fee for federal tax matters?
- When representing a client in an IRS audit
- When the client cannot afford a flat fee
- When the claim is for a refund filed solely for a return already filed and not under examination (Correct answer)
- When the IRS has issued a Notice of Deficiency
Correct answer: When the claim is for a refund filed solely for a return already filed and not under examination
Contingency fees are permitted for refund claims for returns already filed that are not currently under IRS examination.
Question 3: A practitioner's client confides that they committed tax fraud in a prior year that is not currently under examination. What is the practitioner's obligation?
- Immediately report the fraud to the IRS
- Advise the client of the potential consequences and the option to file amended returns (Correct answer)
- Withdraw from all representation of the client
- Do nothing, as the statute of limitations may have run
Correct answer: Advise the client of the potential consequences and the option to file amended returns
The practitioner should advise the client of consequences and options, including amended returns, but is not required to unilaterally report past fraud not currently under examination.
Question 4: Which of the following actions by a CTRS practitioner would constitute a violation of the duty of competence?
- Referring a complex international tax issue to a specialist
- Accepting representation in an area outside their expertise without adequate preparation (Correct answer)
- Charging a higher fee for urgent matters
- Asking a client clarifying questions about their financial situation
Correct answer: Accepting representation in an area outside their expertise without adequate preparation
Accepting representation in an area where one lacks expertise without taking steps to become competent violates the duty of competence under Circular 230.
Question 5: A CTRS practitioner learns that a colleague at their firm has been submitting returns with fabricated deductions. The practitioner's responsibility is to:
- Report the colleague directly to the IRS Criminal Investigation division
- Take immediate steps to stop the conduct and correct any noncompliance within their authority (Correct answer)
- Ignore the issue since it does not involve their own clients
- Notify the state bar association only
Correct answer: Take immediate steps to stop the conduct and correct any noncompliance within their authority
A practitioner who becomes aware of a colleague's noncompliance must take reasonable steps to stop the conduct and correct it within the scope of their authority.
Question 6: Under Circular 230, a practitioner must promptly submit client documents to the IRS unless:
- The client has not paid the practitioner's fees
- The practitioner believes submission would not be in the client's best interest
- The documents are subject to a valid legal privilege or withholding is otherwise authorized by law (Correct answer)
- The documents are more than three years old
Correct answer: The documents are subject to a valid legal privilege or withholding is otherwise authorized by law
Practitioners may withhold documents from the IRS only when they are subject to a valid legal privilege or another legal basis for withholding exists.
Question 7: A CTRS practitioner advertises that they can 'guarantee' a specific tax debt reduction for any client. This advertising claim is:
- Acceptable if based on past client results
- A violation of Circular 230 because guarantees of outcomes are prohibited (Correct answer)
- Permitted for resolution amounts under $10,000
- Acceptable if accompanied by a disclaimer
Correct answer: A violation of Circular 230 because guarantees of outcomes are prohibited
Circular 230 prohibits misleading advertising, including guarantees of specific outcomes, because tax resolution results depend on individual facts and IRS discretion.
CTRS Ethical and Professional Responsibilities 3
A CTRS practitioner charges a contingency fee based on the amount of tax saved for a client whose case is before the IRS Appeals Office.
Under Circular 230, this fee arrangement is: