Tax Consulting Tax Ethics and Professional Standards 1 — Questions and Answers
Question 1: Circular 230 governs the practice of whom before the Internal Revenue Service?
- Only licensed CPAs
- Only attorneys
- Attorneys, CPAs, enrolled agents, and other tax professionals authorized to practice before the IRS (Correct answer)
- Only enrolled agents
Correct answer: Attorneys, CPAs, enrolled agents, and other tax professionals authorized to practice before the IRS
Circular 230 establishes ethical and professional standards for all practitioners authorized to represent taxpayers before the IRS, including attorneys, CPAs, enrolled agents, and enrolled retirement plan agents.
Question 2: Under Circular 230, a practitioner must NOT do which of the following?
- Advise clients on aggressive but legal tax positions
- Charge a reasonable contingent fee for audit representation
- Willfully assist in the preparation of a return with a position lacking a reasonable basis (Correct answer)
- Represent multiple clients with similar but not conflicting interests
Correct answer: Willfully assist in the preparation of a return with a position lacking a reasonable basis
Circular 230 prohibits practitioners from willfully preparing or signing returns with positions that lack a reasonable basis, as this facilitates improper tax reporting.
Question 3: What is the 'reasonable basis' standard for a tax position under IRC Section 6662?
- A roughly 5-10% chance of being sustained if challenged (Correct answer)
- A more than 50% chance of being upheld on the merits
- A less than 5% chance of being sustained
- Absolute certainty the position is correct
Correct answer: A roughly 5-10% chance of being sustained if challenged
A 'reasonable basis' standard is a relatively low bar—approximately a 5-10% chance of being upheld if challenged—sufficient to avoid the negligence penalty but not the substantial understatement penalty.
Question 4: Enrolled Agents (EAs) are authorized to practice before the IRS by:
- Passing the bar exam
- Passing the Special Enrollment Examination or having former IRS employment (Correct answer)
- Obtaining a CPA license
- Registering with the SEC
Correct answer: Passing the Special Enrollment Examination or having former IRS employment
Enrolled Agents earn their status by passing the IRS's Special Enrollment Examination (SEE) covering individual, business, and representation topics, or by virtue of certain prior IRS employment.
Question 5: Under the AICPA Code of Professional Conduct, what is the primary obligation when a CPA discovers a prior year error in a client's tax return?
- Immediately report the error to the IRS without client consent
- Inform the client of the error and its implications, and recommend corrective action (Correct answer)
- Ignore it if the statute of limitations has expired
- Automatically amend the return without client permission
Correct answer: Inform the client of the error and its implications, and recommend corrective action
CPAs must promptly inform their client of the error and its potential consequences, recommend remedial action (such as filing an amended return), but cannot unilaterally disclose to the IRS without client consent.
Question 6: The 'more likely than not' standard for tax positions means the position has what probability of being sustained?
- More than 25% chance of being upheld
- More than 50% chance of being upheld (Correct answer)
- More than 75% chance of being upheld
- Absolute certainty of being upheld
Correct answer: More than 50% chance of being upheld
The 'more likely than not' standard requires that there be greater than a 50% probability that the tax treatment would be upheld by a court if challenged.
Tax Consulting Tax Ethics and Professional Standards 1
Circular 230 governs the practice of whom before the Internal Revenue Service?