Question 1

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 charging contingent fees for preparing or filing tax returns, including Form 1040, based on the amount of any refund or credit that may be obtained.

Question 2

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 3

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

The burden of proof in criminal cases, including tax fraud, is on the prosecution to prove guilt beyond a reasonable doubt. The defendant is not required to prove their innocence.

Question 4

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 the client's permission.

Question 5

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 exceeds a certain threshold, which is not the case here since the additional gift taxes owed are only $4,000.

Question 6

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

Jenny can represent Steve during the audit because she prepared the returns and is his mother, which allows her to represent him before the IRS under the family exception, even though she is not a registered tax return preparer.

Question 7

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 or difficulty in understanding the tax law is not considered a reasonable cause for failing to file accurate tax returns. Therefore, Jaime's negligence penalty cannot be waived under the reasonable cause exception in this case.

Question 8

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 provides guidelines for tax professionals to follow, and one of the requirements is to stay up to date with changes in tax laws and regulations. Providing training to the tax staff is one way to ensure compliance with this requirement.

Question 9

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 not considered tax preparers under the Code and are therefore exempted from tax preparer penalties.

Question 10

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 11

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 tax return position for a client that is contrary to current IRS interpretations of the law as long as there is a reasonable basis for the position and the client has disclosed the position to the IRS. However, the CPA should inform the client of the potential consequences and risks associated with taking a position contrary to the IRS interpretation.

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

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 has the authority to provide tax-related services such as preparing tax returns, representing clients before the IRS, and providing tax advice. However, drafting amendments to partnership agreements falls outside the scope of an Enrolled Agent's authority and requires legal expertise. This task should be performed by an attorney or a business law specialist.

Question 14

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 specifically to members of the AICPA, not to members of a state bar association or all Enrolled Agents.

Question 15

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

This statement is true because Keepert is not reporting all of her cash sales on her Federal income tax return, which is illegal. The statute of limitations for her return is six years, meaning that the IRS has up to six years to audit and investigate her tax returns.

Question 16

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

CPA-client privilege grants confidentiality to communications made between a CPA and their client for the purpose of providing tax advice. This privilege protects the client from being compelled to disclose confidential communications, and also allows the CPA to refuse to testify about such communications in legal proceedings, including IRS subpoenas.

Question 17

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 still subject to Circular 230 rules, in addition to their own codes of professional conduct.

Question 18

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 19

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 20

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

Accepted Answer

Circular 230 requires that a paid tax preparer apply a quality review system in preparing tax returns for her clients. This is to ensure that the returns are accurate and complete, and that the preparer has taken reasonable steps to identify and correct any errors or omissions before submitting the returns to the IRS. The quality review system must include procedures for reviewing the return for accuracy, ensuring that all necessary forms and schedules are included, verifying the client's identity and contact information, and maintaining a record of the review process. Failure to comply with these requirements can result in penalties, suspension or revocation of the preparer's license to practice before the IRS.

Quiz 26: Tax Practice and Ethics