Tax Consulting Tax Ethics and Professional Standards 2 — Questions and Answers
Question 1: Under Circular 230, a tax practitioner must generally respond to IRS requests for records or information within:
- 5 business days
- A reasonable time (Correct answer)
- 30 days
- 60 days
Correct answer: A reasonable time
Circular 230 requires practitioners to promptly submit records or information requested by the IRS unless the practitioner believes in good faith and on reasonable grounds that they are not required to provide the information.
Question 2: What is a 'covered opinion' under Circular 230, and what is its significance?
- Any written legal advice about taxes
- A formal written tax opinion on listed transactions or principal-purpose transactions subject to enhanced standards (Correct answer)
- An oral opinion rendered during an IRS audit
- A standard engagement letter
Correct answer: A formal written tax opinion on listed transactions or principal-purpose transactions subject to enhanced standards
A covered opinion is written advice on listed transactions or principal-purpose transactions that must comply with Circular 230's enhanced requirements for thoroughness, disclosure, and standards of review.
Question 3: Which of the following constitutes a conflict of interest that requires disclosure or withdrawal under professional ethics rules?
- Preparing returns for two unrelated clients in the same industry
- Representing both spouses in a joint return when their interests diverge on allocation of liability (Correct answer)
- Having professional liability insurance
- Charging a flat fee rather than hourly
Correct answer: Representing both spouses in a joint return when their interests diverge on allocation of liability
When spouses have conflicting interests—such as disputes over tax liability allocation—representing both creates a conflict that requires disclosure, consent, or in some cases withdrawal.
Question 4: Under Circular 230, what is a practitioner's obligation when learning that a client has made an error in a previously filed return that resulted in underpayment?
- Immediately file an amended return on the client's behalf
- Promptly advise the client of the error and the potential consequences (Correct answer)
- Report the error directly to the IRS
- Do nothing if the statute of limitations has run
Correct answer: Promptly advise the client of the error and the potential consequences
Circular 230 requires the practitioner to promptly advise the client of the error and its potential consequences, but the decision to file an amended return belongs to the client.
Question 5: The IRS's Office of Professional Responsibility (OPR) can sanction practitioners for Circular 230 violations by:
- Only issuing written warnings
- Imposing monetary penalties, suspension, or disbarment from practice before the IRS (Correct answer)
- Revoking CPA licenses directly
- Filing criminal charges only
Correct answer: Imposing monetary penalties, suspension, or disbarment from practice before the IRS
OPR can sanction practitioners through censure (public or private), suspension for a defined period, disbarment from IRS practice, or monetary penalties for Circular 230 violations.
Question 6: Tax preparers must retain a completed copy of each prepared return or claim for refund for how long?
- 1 year
- 3 years (Correct answer)
- 5 years
- 7 years
Correct answer: 3 years
Under IRC Section 6107, tax return preparers must retain a completed copy of each return or claim for refund (or a list of taxpayers) for 3 years from the later of the return due date or filing date.
Tax Consulting Tax Ethics and Professional Standards 2
Under Circular 230, a tax practitioner must generally respond to IRS requests for records or information within: