CTA Tax Ethics and Professional Standards 1 — Questions and Answers
Question 1: Which Treasury Department circular governs the conduct of practitioners before the IRS?
- Circular 230 (Correct answer)
- Circular 170
- Revenue Procedure 2014-5
- Publication 946
Correct answer: Circular 230
Treasury Circular 230 sets forth the rules and ethical standards governing attorneys, CPAs, enrolled agents, and other practitioners before the IRS.
Question 2: Under Circular 230, a tax practitioner must NOT knowingly:
- Represent a client in an audit without written authorization
- Submit false or misleading documents or information to the IRS (Correct answer)
- Charge a contingent fee for preparing an original tax return
- Request an extension of time for a client
Correct answer: Submit false or misleading documents or information to the IRS
Circular 230 explicitly prohibits practitioners from knowingly submitting false or misleading documents or information to the IRS.
Question 3: The AICPA Statements on Standards for Tax Services (SSTS) provide guidance for CPAs on:
- Audit procedures for tax-exempt entities
- Professional standards for tax practice, including recommendations and return positions (Correct answer)
- How to calculate the alternative minimum tax
- Filing requirements for information returns
Correct answer: Professional standards for tax practice, including recommendations and return positions
The SSTS provide ethical and professional guidance for CPAs in tax practice, covering areas such as return positions, estimates, and departure from prior-year positions.
Question 4: A tax preparer who takes an unreasonable position on a tax return that results in an understatement of tax may be subject to which penalty?
- Civil fraud penalty
- Section 6694 preparer penalty (Correct answer)
- Failure-to-file penalty
- Accuracy-related penalty on the taxpayer only
Correct answer: Section 6694 preparer penalty
IRC Section 6694 imposes penalties on tax return preparers who take unreasonable positions resulting in understatements of tax.
Question 5: What is the standard for a 'more likely than not' tax position in tax practice?
- The position has a 25% or greater chance of being sustained
- The position has greater than a 50% chance of being sustained on the merits (Correct answer)
- The position has been pre-approved by the IRS in a PLR
- The position has been upheld by at least one court
Correct answer: The position has greater than a 50% chance of being sustained on the merits
'More likely than not' means the position has a greater than 50% probability of being sustained upon examination.
Question 6: Which action by a tax practitioner constitutes a conflict of interest under Circular 230?
- Representing two clients in the same industry
- Representing two clients whose tax interests are directly adverse without proper consent (Correct answer)
- Charging different fee rates to different clients
- Declining to represent a client in an audit
Correct answer: Representing two clients whose tax interests are directly adverse without proper consent
Representing clients with directly adverse interests simultaneously is a conflict of interest that requires informed written consent from all affected clients under Circular 230.
CTA Tax Ethics and Professional Standards 1
Which Treasury Department circular governs the conduct of practitioners before the IRS?