Question 1

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

Under Circular 230, tax preparers are prohibited from disclosing any client information obtained during the course of preparing a tax return without the explicit consent of the client.

Question 2

The AICPA's Statements on Standards for Tax Services (SSTS) 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 3

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

Simply not understanding the tax law is generally not considered a reasonable cause for waiving a negligence penalty. Taxpayers are expected to make a reasonable effort to understand their tax obligations.

Question 4

The Statements on Standards for Tax Services (SSTS) apply to members of the AICPA, a state bar association, and all enrolled agents.

Accepted Answer

The Statements on Standards for Tax Services (SSTS) apply only to members of the American Institute of Certified Public Accountants (AICPA), not to members of a state bar association or all enrolled agents, unless they are also AICPA members.

Question 5

Yang, a calendar year taxpayer, did not file a tax return for 2010 because she honestly believed that no additional tax was due. In 2018, Yang is audited by the IRS and the agent assesses a deficiency of $17,000 for 2010. Yang need not pay this deficiency, since the three-year statute of limitations expired on April 15, 2014, meaning that the IRS no longer can adjust Yang's tax for the 2010 tax year.

Accepted Answer

The three-year statute of limitations for the IRS to assess additional tax does not begin until the taxpayer actually files a return. Since Yang did not file a return for 2010, the statute of limitations did not start, and the IRS can still assess the deficiency.

Question 6

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

Accepted Answer

The statute of limitations is extended to six years if a taxpayer omits more than 25% of their gross income from their tax return.

Question 7

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

Accepted Answer

Circular 230 requires paid tax preparers to implement a quality review system to ensure the accuracy and completeness of tax returns prepared for clients.

Question 8

Latrelle, who prepares the tax return for Whitehall Corporation 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 can be penalized for taking an unreasonable position on a tax return without proper disclosure, especially when the deduction has been previously disallowed by the Tax Court.

Question 9

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

Accepted Answer

Circular 230 requires tax preparers to maintain professional competence, which includes keeping up with the latest changes in the tax law.

Question 10

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 11

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 penalty for undervaluation typically applies when the tax understatement exceeds a certain threshold, which may not be met in this case if the understatement is considered too small.

Question 12

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

Circular 230 applies to attorneys, CPAs, enrolled agents, and other professionals who practice before the IRS, and they are not exempt from its rules despite having their own professional codes of conduct.

Question 13

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 practitioners from charging a contingent fee for preparing an original tax return, such as Form 1040.

Question 14

Jenny prepared Steve's income tax returns for no compensation for 2017 and 2018. She is Steve's mother. In 2020, the IRS notifies Steve that it will audit his returns for 2017 and 2018. Jenny cannot represent Steve during the audit of the returns, because she is not a registered tax return preparer.

Accepted Answer

Jenny can represent Steve during the audit of his returns because the IRS allows family members who prepared the return without compensation to represent the taxpayer during audits for those specific returns, even if they are not registered tax return preparers.

Question 15

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 the United States legal system, the burden of proof in criminal cases, including tax fraud, is on the government or prosecution to prove the defendant's guilt beyond a reasonable doubt, not on the defendant to prove their innocence.

Question 16

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

Accepted Answer

A CPA can take a position contrary to IRS interpretations if the position has a reasonable basis and is adequately disclosed on the tax return.

Question 17

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

Accepted Answer

Enrolled Agents are tax professionals authorized by the U.S. Department of the Treasury to represent taxpayers before the IRS for tax issues including audits, collections, and appeals. Drafting legal documents, such as amendments to partnership agreements, typically falls outside their scope of practice and requires a legal professional, such as an attorney.

Question 18

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 CPA-client privilege protects communications between a CPA and their client from being disclosed to the IRS without the client's consent.

Question 19

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 20

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

VITA volunteers, like Fiona, are generally not considered tax preparers under the IRS definition, and therefore, they are typically exempt from tax preparer penalties.

Quiz 26: Tax Practice and Ethics