Question 1

Circular 230 requires that a tax preparer provide training for the tax staff as to the latest changes in the tax law.

Accepted Answer

Circular 230 requires that tax preparers provide ongoing education and training for themselves and their tax staff to stay up-to-date with the latest changes in tax law and regulations.

Question 2

The Statements on Standards for Tax Services apply to members of the AICPA, a state bar association, and all Enrolled Agents.

Accepted Answer

The answer of The Statements on Standards for Tax Services...

Question 3

Circular 230 requires that a paid tax preparer apply a thorough quality review system in preparing tax returns for her clients.

Accepted Answer

Circular 230 outlines guidelines for paid tax preparers, including the requirement to have a quality review system in place to ensure the accuracy of tax returns prepared for clients. Failure to comply with these guidelines can result in penalties and disciplinary actions.

Question 4

Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $4,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.

Accepted Answer

The statement is true. The penalty for undervaluation only applies if the tax understatement is substantial, which generally means it exceeds a certain percentage of the tax due or a certain dollar amount. In this case, the tax understatement is only $4,000, which is not substantial enough to trigger the penalty.

Question 5

In a criminal tax fraud case, the burden is on the taxpayer to show that he or she was innocent "beyond the shadow of any reasonable doubt."

Accepted Answer

In a criminal tax fraud case, as in any other criminal case, the burden is on the prosecution to prove the defendant's guilt beyond a reasonable doubt. The defendant is presumed innocent until proven guilty.

Question 6

Fiona, a VITA volunteer for her college's tax clinic, is not a tax preparer as defined by the Code. Thus, Fiona is exempted from the Code's tax preparer penalties.

Accepted Answer

The Code defines a tax preparer as someone who prepares for compensation all or a substantial portion of a tax return. Since Fiona is a volunteer and not compensated for her services, she is exempted from the Code's tax preparer penalties.

Question 7

Jenny prepared Steve's income tax returns for no compensation for 2013 and 2014. Jenny is Steve's mother. In 2016, the IRS notifies Steve that it will audit his returns for 2013 and 2014. Jenny cannot represent Steve during the audit of the returns, as she is not a "registered tax return preparer."

Accepted Answer

Jenny can represent Steve during the audit because she is his mother and family members are allowed to represent each other before the IRS without being a registered tax return preparer.

Question 8

Under Circular 230, Burke cannot complete a client's original Form 1040 and charge a fee equal to one-third of the resulting refund.

Accepted Answer

Circular 230 prohibits tax practitioners from charging a contingent fee based on a percentage of the refund for preparing an original tax return.

Question 9

Latrelle prepares the tax return for Whitehall Corporation. Latrelle includes a $5,000 deduction on the return. This type of deduction previously has been disallowed by the Tax Court, although there is a 15% chance that the holding will be reversed on an appeal by Whitehall. The return does not make any special disclosure that the deduction is being claimed. Whitehall paid Latrelle a fee of $8,000 for preparing the Form 1120. Latrelle will be assessed a preparer penalty of $4,000 for taking an unreasonable position on the Whitehall return.

Accepted Answer

Latrelle took an unreasonable position by claiming a deduction that has previously been disallowed by the Tax Court and did not make any special disclosure. The fact that there is a 15% chance of reversal on appeal does not justify taking an unreasonable position. Therefore, Latrelle will be assessed a preparer penalty.

Question 10

Circular 230 applies to all paid tax practitioners. But attorneys, CPAs, and enrolled agents are exempt from the Circular 230 rules, because each of the groups has its own code of professional conduct.

Accepted Answer

Attorneys, CPAs, and enrolled agents are not exempt from Circular 230 rules, but they are subject to their own codes of professional conduct in addition to Circular 230.

Question 11

Jaime's negligence penalty will be waived, under the reasonable cause exception. He told the court, "My taxes were wrong because I couldn't understand the tax law."

Accepted Answer

Jaime's explanation of not understanding the tax law does not qualify as "reasonable cause" under IRS guidelines. Therefore, the penalty would not be waived.

Question 12

In the case of bad debts and worthless securities, the statute of limitations on claims for refund is three years.

Accepted Answer

The statute of limitations for claims for refund related to bad debts and worthless securities is actually seven years from the date the original return was filed or two years from the date the tax was paid, whichever is later.

Question 13

Yang, a calendar year taxpayer, did not file a tax return for 2007 because she honestly believed that no additional tax was due. In 2016, Yang is audited by the IRS and the agent assesses a deficiency of $17,000 for 2007. Yang need not pay this deficiency, since the three-year statute of limitations expired on April 15, 2011, meaning that the IRS no longer can adjust Yang's tax for the 2007 tax year.

Accepted Answer

The statute of limitations for the IRS to assess a deficiency is generally three years, but if no return is filed, the statute of limitations does not begin, allowing the IRS to assess the deficiency at any time.

Question 14

CPA Norma and her client Colin hold a privilege of confidentiality from the IRS, as to their tax planning discussions about completing Colin's tax returns. The IRS cannot successfully subpoena records concerning these discussions.

Accepted Answer

The privilege of confidentiality between a CPA and client in regards to tax planning discussions is protected by the attorney-client privilege and cannot be breached by the IRS without a valid court order.

Question 15

In the context of civil tax fraud litigation, the burden of proof is on the taxpayer to show the court by a "preponderance of the evidence" that he or she was not acting with an intent to evade a tax.

Accepted Answer

In civil tax fraud litigation, the burden of proof is on the IRS (or the taxing authority) to prove by clear and convincing evidence that the taxpayer acted with fraudulent intent to evade taxes.

Question 16

Keepert uses "two sets of books." She only reports one-half of her cash sales on the records that she uses to complete her Federal income tax return. The statute of limitations for Keepert's return is six years.

Accepted Answer

Keepert's use of "two sets of books" and only reporting half of her cash sales on her income tax return is an example of tax evasion. The statute of limitations for income tax returns is generally three years from the filing deadline, but it can be extended to six years in cases of substantial underreporting of income or fraud.

Question 17

The AICPA's Statements on Standards for Tax Services provide principles-based guidelines as to how a tax professional should conduct business.

Accepted Answer

The answer of The AICPA's Statements on Standards for Tax...

Question 18

A CPA can take a tax return position for a client that is contrary to current IRS interpretations of the law.

Accepted Answer

As long as the CPA has a reasonable basis for the position taken and discloses the position to the client, they can take a tax return position that is contrary to current IRS interpretations. However, it is important to note that such positions may increase the likelihood of an audit or dispute with the IRS.

Question 19

As part of a tax return engagement for XYZ Partnership, Enrolled Agent Wang can draft an amendment to the XYZ partnership agreement.

Accepted Answer

As an Enrolled Agent, Wang is authorized to practice before the IRS and can assist in tax return preparation, but he is not authorized to draft or amend legal documents such as partnership agreements. This would require the assistance of a licensed attorney.

Question 20

Under Circular 230, tax preparer Winston cannot disclose to a mortgage banker the income level of her client Pickett, or other information acquired by preparing the return, without Pickett's permission.

Accepted Answer

Circular 230 prohibits tax preparers from disclosing any information obtained in the course of preparing a return without the client's consent.

Quiz 17: Tax Practice and Ethics