1.0 Ethics, Professional Responsibilities and General Principles AUD Practice Quiz

• A. Willful attempt to understate tax liability; reckless or intentional disregard of rules or regulations; penalty = the greater of $5,000 or 75% of the income derived from the return
• B. Any error on a return triggers §6694(b), all understatements are reckless by definition; penalty = $500
• C. Failure to obtain the client's signature on the return; penalty = $50 per failure
• D. Filing the return late; penalty = $100 per day late

§6694(b) applies when a preparer: (1) willfully attempts in any manner to understate the tax liability on a return; or (2) recklessly or intentionally disregards rules or regulations in preparing a return. The penalty is the greater of $5,000 or 75% of the income derived (or to be derived) by the preparer from the return. This is more severe than §6694(a) and reflects deliberate or grossly negligent misconduct, a fundamentally different level of culpability from the unreasonable position standard.

• A. Failure to include the preparer's Preparer Tax Identification Number (PTIN) on the return, $50 per failure, up to a maximum of $27,000 per year
• B. Failure to answer all questions on the return, $500 per unanswered question
• C. Charging a fee for tax return preparation, preparation fees must be donated to charity under §6695
• D. Using a computer to prepare the return, manual preparation is required under §6695

IRC §6695(b) imposes a $50 penalty (up to $27,000 per calendar year) on a preparer who fails to include a PTIN on a return or claim for refund. Other §6695 penalties include: §6695(a) failure to furnish a copy of the return to the taxpayer ($50/failure, up to $27,000); §6695(c) failure to retain a copy or list of returns prepared ($50/failure); §6695(d) failure to file correct information returns ($50/failure); §6695(e) negotiating a taxpayer's refund check ($500/check); and §6695(f) aiding and abetting understatement of another's tax liability.

• A. Attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and registered tax return preparers who practice before the IRS, including representing taxpayers, preparing and filing documents, and corresponding with the IRS
• B. Only licensed CPAs who prepare federal income tax returns for compensation
• C. Only enrolled agents, since they are the only practitioners licensed directly by the IRS
• D. Any individual who files their own personal tax return, since self-preparation constitutes practice before the IRS

Circular 230 (31 CFR Part 10) governs the practice of attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and other recognized practitioners before the IRS. 'Practice before the IRS' includes preparing and filing documents, communicating with the IRS on behalf of taxpayers, and representing taxpayers in examinations, appeals, and collection proceedings. All such practitioners must meet Circular 230's standards of conduct.

• A. The practitioner reasonably believes the representation will not be adversely affected; each affected client gives informed, written consent; and applicable law permits the representation
• B. The conflict is minor and the practitioner believes it will not affect the quality of representation
• C. The practitioner discloses the conflict verbally to each client and proceeds without written consent
• D. The conflict is between two corporate clients, conflicts between businesses do not require consent procedures

Circular 230 §10.29(b) provides a limited exception allowing a practitioner to represent clients with conflicting interests when: (1) the practitioner reasonably believes the representation will not be adversely affected by the conflict; (2) each affected client gives informed, written consent to the representation; and (3) applicable law does not prohibit the representation. All three conditions must be satisfied simultaneously.

• A. A fixed fee for preparing a tax return, the fee does not depend on the return's outcome
• B. A contingent fee based on the amount of tax refund obtained from an original return filed with the IRS
• C. A contingent fee for reviewing an original return previously prepared by another firm, charging a percentage of any errors identified
• D. A contingent fee for negotiating a settlement of an IRS examination, the fee equals 25% of the tax savings achieved

A fixed fee for return preparation is permissible, it does not depend on the outcome of the return. Fixed fees (and hourly rates) are standard fee arrangements that comply with Circular 230 because they do not create incentives to take aggressive positions to maximize client results.

• A. Acquire the necessary competence by studying the applicable law, associate with a competent practitioner, or refer the client to a competent practitioner, and disclose any limitations to the client
• B. Decline the engagement entirely. Circular 230 prohibits practitioners from taking engagements outside their expertise
• C. Proceed with the engagement without disclosure, using best efforts. Circular 230 does not require competence disclosures
• D. Obtain malpractice insurance before beginning work. Circular 230's competence requirement is satisfied by insurance coverage

Circular 230 §10.35 requires practitioners to possess the necessary competence to engage in practice before the IRS. Competence requires appropriate level of knowledge, skill, thoroughness, and preparation. When competence is lacking, a practitioner must: (1) acquire it by studying the applicable law before beginning; (2) associate with or supervise a competent practitioner; or (3) refer the client to a competent practitioner. The practitioner must disclose any limitations to the client if they proceed.

• A. The CPA believes the position has a 'realistic possibility of being sustained on its merits' if challenged, OR is not frivolous and is adequately disclosed, nondisclosed positions require a reasonable basis
• B. The position is supported by a written legal opinion, verbal research is insufficient
• C. The IRS has issued a Revenue Ruling directly supporting the position, only published authority qualifies
• D. The client specifically requests the position and accepts full responsibility, client instructions override professional standards

SSTS No. 1 establishes that a CPA may recommend or take a tax return position if: (1) there is a realistic possibility that the position will be sustained on the merits if challenged by the IRS or courts ('realistic possibility' is defined as approximately a one-in-three or greater chance); OR (2) the position is not frivolous (has some legal or factual basis) and is adequately disclosed on the return. For undisclosed positions not meeting the realistic possibility standard, the CPA should not recommend or take the position.

• A. Base the written advice on reasonable factual and legal assumptions; exercise reasonable reliance on the representations of others; consider all relevant facts; and not rely on representations, statements, or findings known to be incorrect or incomplete
• B. Base the advice on unreasonable assumptions, practitioners may assume all favorable facts to maximize client benefit
• C. Issue the advice only in a formal 'covered opinion' format with all required disclosures, informal advice is prohibited under Circular 230
• D. Guarantee the tax outcome described in the advice, written advice creates a warranty of accuracy

Circular 230 §10.37 sets minimum standards for written advice: (1) The practitioner must base the advice on reasonable factual and legal assumptions; (2) Must exercise reasonable reliance on representations of others, with appropriate diligence; (3) Must consider all relevant facts that the practitioner knows or should know; (4) Must not rely on representations known to be incorrect or incomplete; and (5) The advice must not be marketed or structured to make it difficult to identify the relationship between the advice and the tax benefits discussed. These standards replaced the prior 'covered opinion' rules for most situations.