IRS Ethics and Practice Procedures 2 — Questions and Answers
Question 1: Under Circular 230, a practitioner who discovers a client error on a prior year return must:
- File an amended return immediately without client consent
- 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 representation 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 filing an amended return.
Question 2: Which of the following describes 'willful neglect' as used in Circular 230 penalty provisions?
- An honest mistake made without fraudulent intent
- A conscious, intentional failure or reckless indifference to a known duty (Correct answer)
- Negligence caused by an unusually heavy workload
- Any error that results in an underpayment of tax
Correct answer: A conscious, intentional failure or reckless indifference to a known duty
Willful neglect means a conscious, intentional failure to comply with a legal duty or reckless indifference to it, which is a higher standard than ordinary negligence.
Question 3: A CPA prepares a return and signs it as the paid preparer. The client later asks the CPA to represent them in an examination of that return. Under Circular 230, the CPA:
- Must decline because of the conflict between preparer and representative roles
- May represent the client only after obtaining a waiver from the IRS
- May represent the client because preparing the return does not create a conflict (Correct answer)
- Must first obtain consent from the regional IRS director
Correct answer: May represent the client because preparing the return does not create a conflict
Preparing and signing a return does not disqualify a CPA from representing the same client in an audit of that return; there is no inherent Circular 230 conflict.
Question 4: Under Circular 230, a practitioner is generally prohibited from charging a contingent fee for:
- Representing a client in an IRS examination
- Preparing an original federal tax return (Correct answer)
- Preparing a refund claim for an amended return
- Representing a client before the Tax Court
Correct answer: Preparing an original federal tax return
Circular 230 §10.27 prohibits contingent fees for preparing an original tax return; contingent fees are permitted in limited circumstances such as representation in examination or refund claims.
Question 5: Which Circular 230 section governs the duty to exercise due diligence in preparing tax returns and documents?
- §10.20
- §10.22 (Correct answer)
- §10.35
- §10.51
Correct answer: §10.22
Circular 230 §10.22 imposes the duty of due diligence on practitioners in preparing returns, submissions, and documents for the IRS.
Question 6: An enrolled agent's client insists on claiming a deduction the enrolled agent believes is frivolous. The enrolled agent should:
- Include the deduction because the client's instructions control
- Refuse to prepare the return at all
- Advise the client of the potential penalties and withdraw if the client insists on the frivolous position (Correct answer)
- File the return and attach a disclosure to avoid penalty
Correct answer: Advise the client of the potential penalties and withdraw if the client insists on the frivolous position
A practitioner must advise the client of penalty risks associated with a frivolous position and may withdraw from representation if the client insists on taking it.
Question 7: Which statement about the IRS Office of Professional Responsibility (OPR) is correct?
- OPR can only discipline enrolled agents, not CPAs or attorneys
- OPR enforces Circular 230 standards and can impose censure, suspension, or disbarment (Correct answer)
- OPR issues private letter rulings on practitioner conduct
- OPR operates under the Department of Justice, not the Treasury
Correct answer: OPR enforces Circular 230 standards and can impose censure, suspension, or disbarment
The OPR administers and enforces Circular 230, and its sanctions include reprimand, censure, suspension, and disbarment from practice before the IRS.
IRS Ethics and Practice Procedures 2
Under Circular 230, a practitioner who discovers a client error on a prior year return must: