Question 1

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. They must still comply with Circular 230 in addition to their own code of professional conduct.

Question 2

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

CPAs have a privilege of confidentiality with their clients for tax planning discussions, which means that the IRS cannot successfully subpoena records regarding these conversations. This privilege is protected under Internal Revenue Code Section 7525.

Question 3

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 correct. The penalty for undervaluation only applies if the tax understatement exceeds a certain limit, which is based on the value of the gift and the degree of understatement. In this case, the tax understatement of $4,000 is not significant enough to trigger the penalty.

Question 4

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 5

Jenny prepared Steve's income tax returns for no compensation for 2015 and 2016.Jenny is Steve's mother.In 2018,the IRS notifies Steve that it will audit his returns for 2015 and 2016.Jenny cannot represent Steve during the audit of the returns,as she is not a "registered tax return preparer."

Accepted Answer

The answer of Jenny prepared Steve's income tax returns for...

Question 6

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 7

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, the burden of proof is on the government to prove the taxpayer's guilt beyond a reasonable doubt. The taxpayer is innocent until proven guilty.

Question 8

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

Ignorance of the law is not considered a reasonable cause for the purpose of waiving penalty for negligence. Jaime cannot use his inability to understand the tax law as an excuse for not paying his taxes correctly.

Question 9

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 is engaging in illegal activity by not reporting all of her cash sales and using two sets of books. The statute of limitations for her return is six years, meaning she can be audited and held accountable for any discrepancies within that timeframe.

Question 10

The Statements on Standards for Tax Services 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 specifically to members of the American Institute of Certified Public Accountants (AICPA) and not to members of a state bar association or all Enrolled Agents.

Question 11

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 client information without their permission, including income levels or any other information acquired during the preparation of the tax return.

Question 12

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 is allowed to take a tax return position that may differ from the current IRS interpretations as long as there is a reasonable basis for that position. However, if the position taken by the CPA is deemed to be frivolous or lacks substantial authority, then penalties may be imposed.

Question 13

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

As Fiona is not a tax preparer as defined by the Code, she is exempted from the Code's tax preparer penalties.

Question 14

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 authorized to practice before the IRS and provide tax advice, but they are not authorized to draft legal documents, such as partnership agreements. This would require the services of an attorney.

Question 15

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, which outlines the rules for practicing before the IRS, contains requirements for tax return preparers to have a quality review system in place to ensure the accuracy of tax returns prepared for clients. Failure to comply with these rules can result in penalties and sanctions by the IRS.

Question 16

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 does mandate that tax preparers provide training to their staff on the latest changes in tax law. This ensures that the staff is up-to-date with the latest regulations and guidance, which ultimately benefits clients.

Question 17

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 explicitly prohibits enrolled agents from charging fees that are based on a percentage of a resulting tax refund or tax liability.

Question 18

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 19

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 20

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...

Quiz 26: Tax Practice and Ethics