IRS - Internal Revenue Service Certified Ethics and Practice Procedures Questions and Answers 1 — Questions and Answers
Question 1: A tax preparer is completing a return for a new client who is a self-employed consultant. The client provides a spreadsheet listing a high, round number for 'Business Promotion Expenses' but offers no receipts or specific details. According to Treasury Department Circular 230, what is the practitioner's primary responsibility?
- Advise the client to claim a lower, more reasonable amount to avoid scrutiny.
- Refuse to prepare the return and report the client to the IRS for potential non-compliance.
- Make reasonable inquiries to determine if the client has documentation or a factual basis to support the deduction. (Correct answer)
- Prepare the return as requested but have the client sign a liability waiver in case of an audit.
Correct answer: Make reasonable inquiries to determine if the client has documentation or a factual basis to support the deduction.
Circular 230, Section 10.22, mandates that practitioners exercise due diligence. This includes not ignoring the implications of information furnished by the client. If information appears incorrect, incomplete, or inconsistent, the practitioner must make reasonable inquiries.
Question 2: Under which of the following circumstances is a practitioner governed by Circular 230 generally permitted to charge a contingent fee?
- In connection with an IRS examination of an original tax return. (Correct answer)
- For preparing an original income tax return based on a percentage of the refund.
- For advising a client on a tax position to be taken on an original return.
- For any amended return, regardless of the reason it is being filed.
Correct answer: In connection with an IRS examination of an original tax return.
Circular 230, Section 10.27, generally prohibits contingent fees but provides specific exceptions. One key exception is for services rendered in connection with an IRS examination of, or challenge to, an original tax return.
Question 3: A client terminates their relationship with an Enrolled Agent and requests the return of all their records. The client has an outstanding balance for the prior year's tax preparation services. The records consist of the client's original W-2s, 1099s, and brokerage statements that the client provided. What is the Enrolled Agent's ethical obligation under Circular 230?
- The practitioner may retain all records until the outstanding fee is paid in full.
- The practitioner only needs to provide copies of the records but can retain the originals.
- The practitioner may withhold the records if permitted by state law, regardless of their nature.
- The practitioner must promptly return the client-provided records, irrespective of the fee dispute. (Correct answer)
Correct answer: The practitioner must promptly return the client-provided records, irrespective of the fee dispute.
Circular 230, Section 10.28, states that a practitioner must, at the request of a client, promptly return any and all records of the client. The existence of a fee dispute does not relieve the practitioner of this responsibility for client-provided documents.
Question 4: A practitioner is asked to represent a married couple who are divorcing. They have a dispute over the allocation of income and deductions from a jointly owned business that is under IRS examination. According to Circular 230, when may the practitioner represent both clients?
- The practitioner may never represent two parties with a direct conflict of interest.
- The practitioner may represent both if they reasonably believe they can provide competent and diligent representation and both clients provide informed consent, confirmed in writing. (Correct answer)
- The practitioner may represent both as long as they provide a verbal disclosure of the potential conflict to each party.
- The practitioner may represent both only if the amount in dispute is below a certain threshold set by the IRS.
Correct answer: The practitioner may represent both if they reasonably believe they can provide competent and diligent representation and both clients provide informed consent, confirmed in writing.
Circular 230, Section 10.29, addresses conflicts of interest. A practitioner may represent clients with conflicting interests if (1) they reasonably believe they can provide competent and diligent representation to each client, (2) the representation is not prohibited by law, and (3) each affected client waives the conflict and gives informed consent, confirmed in writing.
Question 5: Which of the following forms of advertising or solicitation by a tax practitioner would be a violation of the rules in Circular 230?
- "As a former IRS agent, I have the inside knowledge to get you the best possible outcome." (Correct answer)
- "We offer a free 30-minute consultation for all new business clients."
- "Our firm has specialized in partnership taxation for over 25 years."
- "Fees for individual tax return preparation start at $300."
Correct answer: "As a former IRS agent, I have the inside knowledge to get you the best possible outcome."
Circular 230, Section 10.30, prohibits any form of public communication containing a false, fraudulent, or misleading statement or claim. Claiming that former IRS employment provides an unfair advantage or guarantees a better outcome is considered misleading.
Question 6: An Enrolled Agent is found to have willfully violated the provisions of Circular 230. Which of the following is a potential sanction that the IRS Office of Professional Responsibility (OPR) may impose?
- Mandatory pro-bono tax preparation for five years.
- A requirement to retake the Special Enrollment Examination.
- Suspension or disbarment from practice before the IRS. (Correct answer)
- A fine payable directly to any client harmed by the conduct.
Correct answer: Suspension or disbarment from practice before the IRS.
Circular 230, Section 10.50, grants the Secretary of the Treasury the authority to censure, suspend, or disbar any practitioner from practice before the IRS for violating its provisions. Monetary penalties payable to the Treasury may also be imposed.
IRS - Internal Revenue Service Certified Ethics and Practice Procedures Questions and Answers 1
A tax preparer is completing a return for a new client who is a self-employed consultant.
The client provides a spreadsheet listing a high, round number for 'Business Promotion Expenses' but offers no receipts or specific details.
According to Treasury Department Circular 230, what is the practitioner's primary responsibility?