AN INTRODUCTION TO TAX PRACTICE AND ETHICS
TEST BANK, Chapter 1
Multiple Choice
Choose the best answer for each of the following questions:
1. Tax compliance is the process of:
a. filing necessary tax returns
b. gathering the financial information necessary to report taxable income
c. representing a taxpayer at an IRS audit
d. all of the above
Answer: d
Rationale:
Tax compliance encompasses various activities, including filing necessary tax returns,
gathering financial information for reporting taxable income, and representing taxpayers
during IRS audits. Each of the options (a, b, and c) contributes to fulfilling tax
compliance obligations.
2. Tax evasion is:
a. a fraudulent act involving illegal nonpayment of taxes
b. one of the objectives of tax planning
c. an act of deferring tax payments to future periods
d. the same as tax avoidance as both of them result in nonpayment of taxes
Answer: a
Rationale:
Tax evasion involves intentionally avoiding paying taxes through fraudulent means, such
as underreporting income or overstating deductions, which is illegal. It is distinct from
tax planning, which aims to minimize taxes within the boundaries of the law.
3. Tax litigation is a process of:
a. participating in an administrative audit
b. settling tax-related disputes in a court of law
c. filing amended tax returns as prescribed by tax laws
d. arranging a taxpayer’s affairs to minimize tax liabilities
Answer: b
Rationale:
Tax litigation involves resolving disputes related to taxes through legal proceedings in a
court of law. It occurs when taxpayers and tax authorities cannot reach an agreement
through administrative processes like audits or appeals.
4. Regarding open transactions, which of the following statements is INCORRECT?
a. the transaction is not yet completed
b. the practitioner can suggest changes to achieve a better tax result
c. a tax practitioner has some degree of control over the client’s tax liability
d. the practitioner can fix the problem by amending the client’s tax return
Answer: d
Rationale:
In open transactions, which are not yet completed, practitioners can suggest changes to
improve tax outcomes. However, they cannot fix problems by amending tax returns since
the transaction is still ongoing and not yet finalized.
5. Which of the following statements best describes Circular 230?
a. Circular 230 has been adopted by the AICPA as its set of rules of practice for CPAs.
b. Circular 230 is a set of Treasury Department ethical and legal standards for those
engaging in practice before the IRS.
c. Circular 230 is a set of internal rules at the IRS designed to protect tax practitioners
from unfair discipline by the IRS.
d. Circular 230 is a set of ethical rules for taxpayers.
Answer: b
Rationale:
Circular 230 establishes ethical and legal standards for tax practitioners who represent
clients before the IRS. It outlines the duties, restrictions, and penalties for practitioners to
ensure fair and ethical representation.
6. Who can represent a taxpayer before the IRS Appeals Office under Circular 230?
a. A CPA
b. An officer of a corporation may represent the corporation
c. An attorney
d. All of the above
e. Only a and c
Answer: d
Rationale:
Circular 230 allows various professionals, including CPAs, attorneys, and officers of
corporations, to represent taxpayers before the IRS Appeals Office. This includes
representing individuals, partnerships, corporations, estates, trusts, and other entities.
7. In a closed transaction, the scope of tax planning is:
a. more limited as compared to an open transaction
b. limited by the IRS rules of practice
c. limited to presenting the taxpayer’s facts to the government in the most favorable, legal
manner
d. Only a and c
Answer: d
Rationale:
In closed transactions, where the transaction is completed, the scope of tax planning is
more limited compared to open transactions. However, it still involves presenting the
taxpayer's facts to the government in the most favorable, legal manner and optimizing the
tax consequences within those constraints.
8. Circular 230 includes rules on all of the following topics EXCEPT:
a. who is authorized to practice before the IRS
b. standards for “covered opinions”
c. compliance with state ethical requirements
d. a set of best practices to guide practitioners
Answer: c
Rationale:
Circular 230 covers various topics related to tax practice, including who is authorized to
practice before the IRS, standards for written advice, and best practices for practitioners.
However, it does not specifically address compliance with state ethical requirements.
9. Standards for Tax Services (SSTS) contain advisory guidelines for:
a. CPAs
b. enrolled agents
c. attorneys
d. IRS authorities
e. All of the above
Answer: a
Rationale:
The Standards for Tax Services (SSTS) provide CPAs with advisory guidelines for
providing tax services to clients. They cover areas such as competence, due diligence,
confidentiality, and professional conduct.
10. An EA must renew his or her enrollment card on a:
a. 5-year cycle
b. 3-year cycle
c. 2-year cycle
d. Renewal is not required once an EA gets a card
Answer: b
Rationale:
Enrolled Agents (EAs) must renew their enrollment status every three years to maintain
their authorization to practice before the IRS. Renewal ensures that EAs remain up-todate with tax laws and regulations.
11. An unenrolled tax return preparer can make an appearance as the taxpayer’s
representative only before the:
a. Examination Division of the IRS
b. Appeals and Collection Division of the IRS
c. SB/SE Division of the IRS
d. Criminal Investigation Division of the IRS
Answer: a
Rationale:
An unenrolled tax return preparer is generally limited to representing taxpayers before the
Examination Division of the IRS. They are not authorized to represent clients before
other divisions, such as Appeals, Collection, or Criminal Investigation, unless specifically
permitted under certain circumstances.
12. Due diligence, in essence, means a tax practitioner:
a. must be efficient in performing his duties
b. must give due respect to IRS officials
c. should use reasonable effort to comply with the tax laws
d. should charge reasonable fees for work performed for a client
Answer: c
Rationale:
Due diligence for a tax practitioner involves using reasonable efforts to comply with the
tax laws and regulations when preparing tax returns or providing tax advice. It requires
thoroughness, care, and attention to detail to ensure accurate and lawful tax reporting.
13. A contingent fee is:
a. always allowed by Circular 230
b. a fee that is out of line with the value of the service provided
c. a fee based on a percentage of a taxpayer’s refund on a tax return
d. all of the above
Answer: c
Rationale:
A contingent fee is a fee arrangement where the fee is based on a percentage of the
taxpayer's refund on a tax return. It is not always allowed by Circular 230 and can be
considered unethical if it leads to conflicts of interest or encourages aggressive tax
positions.
14. According to Circular 230, the “best practices” rules are:
a. mandatory for all tax practitioners
b. restricted only to attorneys and CPAs
c. aspirational, to act as goals for tax practitioners
d. enforced by disbarment from practice before the IRS
Answer: c
Rationale:
The "best practices" rules outlined in Circular 230 are aspirational and serve as goals for
tax practitioners to maintain high standards of professional conduct. While they are not
mandatory, practitioners are encouraged to adhere to these principles to ensure ethical
representation before the IRS.
15. According to Rule 101 of the AICPA Rules of Professional Conduct, a CPA in public
practice must:
a. comply with Circular 230
b. disclose any conflict of interest with another client
c. keep client information confidential
d. be independent of his or her clients
Answer: d
Rationale:
Rule 101 of the AICPA Rules of Professional Conduct requires CPAs in public practice
to be independent of their clients to maintain objectivity and integrity in their
professional services. Independence is a fundamental ethical principle for CPAs
providing attest or assurance services.
16. Under AICPA Rule 502, which of the following actions would constitute deceptive
advertising?
a. advertising too frequently
b. implying that the CPA had the ability to influence an IRS official
c. promising a favorable result without justification
d. Only b and c
Answer: d
Rationale:
Under AICPA Rule 502, deceptive advertising includes implying that a CPA has the
ability to influence an IRS official or promising a favorable result without justification.
Such actions misrepresent the CPA's capabilities or services and can deceive the public.
17. Under Statements on Standards for Tax Services No. 3, (SSTS No. 3) a CPA
preparing a tax return should perform all of the actions EXCEPT:
a. independently confirm the accuracy of the taxpayer’s information
b. obtain additional information if the taxpayer’s information appears to be incorrect or
incomplete
c. review the prior year’s return when feasible
d. determine when conditions for a deduction have been met
Answer: a
Rationale:
Under SSTS No. 3, a CPA preparing a tax return should perform various actions,
including obtaining additional information if necessary, reviewing prior year returns, and
determining deduction eligibility. However, the CPA is not required to independently
confirm the accuracy of the taxpayer's information; rather, they should rely on the
information provided by the taxpayer unless it appears incorrect or incomplete.
18. Which of the following is CORRECT about a CPA’s responsibility with regard to tax
return positions under Statements on Standards for Tax Services No. 1 (SSTS No. 1):
a. A CPA may not base his or her position on authority that is not approved by the IRS
under Section 6662 (accuracy-related penalty).
b. A CPA may sign a return which has a tax position that has a realistic possibility of
being sustained on the merits.
c. A CPA may not sign a return which has any tax position that is not fully disclosed.
d. All of the above statements are correct.
Answer: b
Rationale:
Under SSTS No. 1, a CPA may sign a return that has a tax position with a realistic
possibility of being sustained on the merits. However, the CPA is not required to base
their position solely on authority approved by the IRS or disclose every tax position on
the return, as long as it meets the realistic possibility standard.
19. The Statements on Standards for Tax Services (SSTS) are issued by:
a. the Internal Revenue Service
b. the FASB
c. the AICPA
d. the American Bar Association
e. the AICPA and the American Bar Association jointly
Answer: c
Rationale:
The Statements on Standards for Tax Services (SSTS) are issued by the American
Institute of Certified Public Accountants (AICPA). They provide guidance and standards
for CPAs providing tax services to clients, ensuring professional competence and ethical
conduct.
20. The Statements on Standards for Tax Services are:
a. part of the ABA Code of Professional Responsibility
b. intended to replace Circular 230
c. intended to supplement the AICPA Code of Professional Conduct and Circular 230
d. none of the above
Answer: c
Rationale:
The Statements on Standards for Tax Services (SSTS) are intended to supplement the
AICPA Code of Professional Conduct and Circular 230. They provide specific guidance
for CPAs on professional standards and ethical conduct in tax practice, working in
conjunction with existing regulatory frameworks.
21. Which of the following statements best explains the need for tax practitioners to
understand nonregulatory ethical models of behavior?
a. Competing ethical solutions must be resolved by the courts.
b. There is more to ethical behavior than just following the rules of professional
organizations.
c. Practitioners must always choose the action with the greatest benefit for their client.
d. Ethical choices are clearly spelled out by IRS regulations.
Answer: b
Rationale:
Understanding nonregulatory ethical models of behavior is essential for tax practitioners
because ethical behavior extends beyond merely following the rules set by professional
organizations or regulatory bodies. It involves considering moral principles, societal
values, and ethical dilemmas that may not be explicitly addressed in regulations.
Therefore, practitioners need a broader understanding of ethics to navigate complex
ethical situations effectively.
22. The primary change made by the Sarbanes-Oxley Act which affects the practice of
public accounting is:
a. Public accounting firms may no longer provide any actuarial services.
b. Accounting firms may no longer offer tax shelters.
c. Auditors may never do tax compliance work for their clients.
d. Public accounting firms may provide some nonaudit services to their audit clients if the
services are approved in advance by an audit committee.
Answer: d
Rationale:
The primary change introduced by the Sarbanes-Oxley Act (SOX) affecting the practice
of public accounting is that public accounting firms are now restricted in providing
nonaudit services to their audit clients. Such services must be pre-approved by the audit
committee to ensure independence and objectivity in audit engagements, addressing
concerns about conflicts of interest and potential impairments to audit quality.
23. The Lowell Bar Association v. Loeb case addressed the issue of:
a. unauthorized practice of law by no attorneys engaged in tax practice
b. legal research by taxpayers
c. attorneys and CPAs working together in a practice
d. all of the above
Answer: a
Rationale:
The Lowell Bar Association v. Loeb case focused on the unauthorized practice of law by
nonattorneys engaged in tax practice. It addressed the boundaries between tax preparation
services provided by nonattorneys and activities that constitute the practice of law,
highlighting the importance of defining the scope of permissible activities for
nonattorneys in tax practice.
24. In which of the following situations would a CPA be engaged in the unauthorized
practice of law?
a. The CPA drafts a contract for his small business client.
b. The CPA files a client’s state tax return.
c. The CPA answers estate tax questions for his client.
d. The CPA represents his client before the IRS.
Answer: a
Rationale:
The unauthorized practice of law occurs when a nonattorney, such as a CPA, engages in
activities that are considered the practice of law. Drafting legal documents, such as
contracts, typically falls within the domain of legal practice, and unless specifically
allowed by state law, a CPA's involvement in such activities could constitute
unauthorized practice of law.
25. Which of the following statements is CORRECT regarding unauthorized practice of
law?
a. Taxpayers may draft not their own contracts.
b. Taxpayers may not represent themselves in Tax Court.
c. A CPA cannot express a legal opinion on a non-tax matter.
d. A CPA cannot express a legal opinion on a tax matter.
Answer: c
Rationale:
A CPA cannot express a legal opinion on a non-tax matter because providing legal
opinions generally falls within the practice of law, which is reserved for licensed
attorneys. However, CPAs can provide legal opinions on tax matters within the scope of
their expertise, as tax advice is considered part of their professional practice.
True or False
Indicate which of the following statements are true or false by circling the correct answer.
1. Tax avoidance and tax evasion are both illegal.
Answer: False
Rationale:
Tax avoidance is the legitimate object of modern tax practice.
2. Tax research is only required for tax planning, not preparing returns.
Answer: False
Rationale:
Tax research is undertaken by all three types of tax practice--planning, compliance and
litigation.
3. Tax planning has a more likelihood of success when a tax practitioner is dealing with
an open transaction instead of a closed transaction.
Answer: True
Rationale:
Tax planning typically involves strategizing to minimize tax liabilities or maximize tax
benefits for a taxpayer. When dealing with an open transaction, where the terms and
conditions are not yet finalized or completed, tax practitioners have more flexibility to
structure the transaction in a tax-efficient manner. They can explore various options,
suggest changes, and implement strategies that can lead to favorable tax outcomes for the
taxpayer. In contrast, closed transactions have already been completed, limiting the
opportunities for tax planning and making it more challenging to optimize tax
advantages. Therefore, tax planning indeed has a higher likelihood of success when
practitioners are dealing with open transactions.
4. Paid tax return preparers must register with the IRS and obtain a PTIN.
Answer: True
Rationale:
Paid tax return preparers, including CPAs, enrolled agents, and other tax professionals,
are required by the IRS to register and obtain a Preparer Tax Identification Number
(PTIN) before preparing federal tax returns for compensation. This registration process
helps the IRS maintain oversight of tax preparers and ensure compliance with tax laws
and regulations. It also allows the IRS to track and monitor tax return preparers'
activities, promoting accuracy and integrity in tax return preparation.
5. Enrolled actuaries are allowed to practice before the IRS.
Answer: True
Rationale:
Enrolled actuaries, who have successfully completed the requirements set by the Joint
Board for the Enrollment of Actuaries, are authorized to practice before the IRS. This
authorization allows enrolled actuaries to represent taxpayers in matters involving
actuarial issues, such as retirement plan calculations, compliance, and audits. By granting
enrolled actuaries the authority to practice before the IRS, the agency ensures that
taxpayers have access to qualified professionals who can provide expertise and assistance
in complex actuarial matters related to taxation.
6. Under Circular 230, “covered opinions” include oral advice on tax avoidance
transactions.
Answer: False
Rationale:
The term ‘covered opinions’ includes written advice concerning one or more Federal tax
avoidance transactions.
7. Circular 230 bans tax practitioners from giving written advice on a Federal tax issue
based on the likelihood of an audit.
Answer: True
Rationale:
Circular 230, which outlines the standards of practice for tax practitioners, indeed
prohibits tax practitioners from giving written advice on a Federal tax issue if the
principal purpose of the advice is to avoid penalties or if the advice is based on the
likelihood of an audit. This provision aims to uphold the integrity of tax advice and
discourage practitioners from promoting aggressive or abusive tax positions solely to
avoid penalties or audit scrutiny. By enforcing this prohibition, Circular 230 ensures that
tax advice provided by practitioners is based on sound legal and ethical principles rather
than on the potential consequences of an IRS audit.
8. CPAs may never disclose confidential taxpayer information under the AICPA rules.
Answer: False
Rationale:
CPAs may disclose confidential taxpayer information with the taxpayer’s consent or in
response to a subpoena or summons or if there is a review or investigation by the AICPA
or a state CPA society.
9. A member of the AICPA is not allowed to prepare tax returns that involve the use of
the taxpayer’s estimates.
Answer: False
Rationale:
A member may prepare tax returns that involve the use of the taxpayer’s estimates if it is
impractical to obtain exact data and if the estimated amounts appear reasonable to the
member.
10. State Boards of Accountancy are the organizations with responsibility to license
public accountants in each state.
Answer: True
Rationale:
State Boards of Accountancy are indeed the regulatory bodies responsible for licensing
and regulating public accountants within their respective states. These boards establish
and enforce standards for licensure, oversee professional conduct, and handle disciplinary
actions against licensed accountants to ensure public protection and maintain the integrity
of the accounting profession. By licensing public accountants, State Boards of
Accountancy help uphold professional standards and ensure that individuals practicing as
accountants meet the necessary qualifications and adhere to ethical and professional
guidelines.
11. The Sarbanes-Oxley Act addresses issues of corporate governance as well as the
independence of auditors.
Answer: True
Rationale:
The Sarbanes-Oxley Act (SOX) is a comprehensive piece of legislation enacted in
response to corporate accounting scandals such as Enron and WorldCom. One of its
primary objectives is to enhance corporate governance and accountability by establishing
stringent standards for financial reporting and internal controls within publicly traded
companies. Additionally, SOX includes provisions aimed at improving the independence
of auditors, such as restrictions on providing certain non-audit services to audit clients
and requirements for audit committee oversight. By addressing both corporate
governance and auditor independence, SOX aims to restore investor confidence in
financial markets and promote transparency and integrity in corporate practices.
12. The ABA Model Code of Professional Responsibility has the force of law and covers
all attorneys practicing in the United States.
Answer: False
Rationale:
The ABA Model Code of Professional Responsibility does not have the force of law
itself. It serves as a set of guidelines and ethical standards for attorneys but must be
adopted by each state's licensing authority before becoming mandatory for attorneys
practicing within that state. While many states have adopted provisions of the ABA
Model Code or similar codes, its enforcement and applicability vary from state to state.
13. An attorney, CPA, or enrolled agent may use advertising to obtain clients under
Circular 230.
Answer: True
Rationale:
Circular 230, which outlines the standards of practice for tax practitioners, permits
attorneys, CPAs, enrolled agents, and other tax professionals to use advertising to obtain
clients. However, such advertising must comply with the rules and regulations set forth in
Circular 230, which include requirements related to accuracy, truthfulness, and
professional standards. Tax practitioners are allowed to advertise their services to attract
clients, but they must ensure that their advertising practices adhere to ethical and legal
standards outlined in Circular 230 to maintain the integrity of the profession.
14. If a CPA becomes aware of an error in a tax return, he or she must immediately notify
the IRS.
Answer: False
Rationale:
A CPA member is neither obligated to inform the IRS of the situation, nor may he or she
do so without the taxpayer’s permission, except as provided by law.
15. A CPA can rely without verification on information given to the CPA by a taxpayer
unless the information appears to be incorrect.
Answer: True
Rationale:
A CPA may indeed rely on information provided by a taxpayer without verification
unless the information appears to be incorrect. CPAs are typically not required to verify
every detail provided by a taxpayer, especially if the information seems reasonable and
consistent with the taxpayer's circumstances. However, if the CPA has reason to believe
that the information provided by the taxpayer is incorrect or incomplete, it is their
professional responsibility to exercise due diligence and obtain additional information or
clarification to ensure the accuracy of the tax return or advice provided. Therefore, while
reliance on taxpayer-provided information is common practice, CPAs must remain
vigilant for signs of inaccuracies or inconsistencies that warrant further investigation.
16. An ethical dilemma occurs when someone is faced with a situation for which there
are no clearly defined answers.
Answer: True
Rationale:
An ethical dilemma does indeed arise when an individual is confronted with a situation in
which there are no clear-cut or straightforward answers or solutions. Ethical dilemmas
often involve conflicting moral principles, values, or obligations, making it challenging
for individuals to determine the right course of action. In such situations, individuals may
experience moral distress as they grapple with the complexities and implications of their
decisions. Ethical dilemmas require careful consideration, critical thinking, and ethical
reasoning to navigate effectively while balancing competing interests and ethical
principles. Therefore, the statement that an ethical dilemma occurs when there are no
clearly defined answers is accurate, reflecting the inherent complexity and ambiguity
often associated with ethical decision-making.
17. The three categories of modern tax practice include tax planning, tax compliance, and
tax research.
Answer: False
Rationale:
The three types of tax practice include tax planning, tax compliance and tax litigation.
18. To become an enrolled agent, a person must either pass a special IRS examination or
must work for the IRS for at least five years.
Answer: True
Rationale:
To become an enrolled agent, an individual must meet one of two requirements: passing a
special IRS examination called the Special Enrollment Examination (SEE) or having at
least five years of experience working for the IRS in a position that regularly interprets
and applies the tax code and regulations. These requirements are established by the
Internal Revenue Service (IRS) to ensure that enrolled agents possess the necessary
knowledge and expertise to represent taxpayers before the IRS effectively. Passing the
SEE demonstrates a comprehensive understanding of federal tax laws and regulations,
while substantial experience working for the IRS provides practical knowledge and
insight into tax administration and enforcement. Therefore, the statement that to become
an enrolled agent, a person must either pass a special IRS examination or work for the
IRS for at least five years is accurate and reflects the dual pathways available for
individuals seeking enrollment as an enrolled agent.
19. Drafting wills is a part of a CPA’s professional duties.
Answer: False
Rationale:
Drafting wills by a CPA would give rise to the issue of unauthorized practice of law.
20. Tax practice can be defined as the application of the tax laws to specific accounting
situations.
Answer: True
Rationale:
Tax practice does indeed involve the application of tax laws to specific accounting
situations. Tax practitioners, including CPAs, tax attorneys, and enrolled agents, assist
individuals, businesses, and other entities in navigating the complexities of tax laws and
regulations to ensure compliance and optimize tax outcomes. This involves interpreting
tax laws, analyzing financial data, and providing advice and guidance tailored to the
unique circumstances of clients. Whether preparing tax returns, providing tax planning
strategies, or representing clients in tax-related matters, tax practitioners must apply their
understanding of tax laws and regulations to address clients' needs effectively. Therefore,
the statement that tax practice can be defined as the application of tax laws to specific
accounting situations accurately captures the essence of tax practice and the role of tax
professionals in assisting clients with their tax obligations and objectives.
Short Answer
1. Who may represent a taxpayer before the IRS in cases which go beyond the
examination of the return?
Answer: Under Circular 230, the following individuals may represent taxpayers before
the IRS beyond the examination stage:
Attorneys
CPAs
Enrolled agents
Enrolled actuaries
The above individuals must be in good standing and have a current license. Also, certain
authorized individuals may represent taxpayers in special situations under the “limited
practice without enrollment rules” of Section 10.7.
2. Taxation and tax practice are comprised of the interaction of several disciplines. What
are those disciplines? Briefly discuss their impact on the tax system.
Answer: Tax practice involves a blend of accounting and law. The tax law itself is a
product of economics, political science, and sociology. Each of these disciplines
influences taxation in a different way. Economics provides input about how the tax law
will affect the economy. Political science is the process by which laws are made, and
sociology provides the framework to determine the equity and societal goals of the tax
law.
3. What standard must tax practitioners meet under Section 6694 (preparer penalties) of
the Internal Revenue Code with respect to undisclosed positions taken on tax returns?
Answer: Tax return positions which are not disclosed on the tax return must meet the
standard of “substantial authority” to avoid the penalties under Code Section 6694,
relating to understatement of taxpayer's liability by tax return preparer.
4. Does the IRS regulate unenrolled tax preparers? Explain your answer.
Answer: Yes, unenrolled preparers are now regulated by the IRS under proposed
amendments to Circular 230 and recent IRS regulations. Tax return preparers who
prepare returns for compensation and sign the return are authorized to conduct “limited
practice” before the IRS. The tax return preparer may only make an appearance before
the Examination Division of the IRS. All paid preparers must register for a Preparer Tax
Identification Number (PTIN) and include that number on all returns submitted to the
IRS. In addition, tax return preparers are subject to competency testing and are required
to take continuing professional education courses. They also are subject to the Circular
230 ethical standards.
Essay Questions
1. Explain the AICPA guidelines under SSTS No. 3 for relying without verification on
taxpayer or third party information when preparing a tax return.
Answer: In preparing or signing a return, an AICPA member ordinarily may rely without
verification on information that the taxpayer or a third party has provided, unless such
information appears to be incorrect, incomplete, or inconsistent. A more formal, auditlike review of documents or supporting evidence is generally not required for a member
to sign the tax return. Where material provided by the taxpayer appears to be incorrect or
incomplete, however, the member should obtain additional information from the
taxpayer. In situations where the tax law requires that specific conditions be met, the
member should determine, by inquiry, whether the conditions have been met. For
example, the Code and Regulations impose substantiation requirements for the deduction
of certain expenditures. In such a case, the member has an obligation to make appropriate
inquiries regarding the client’s recordkeeping.
Although members are not required to examine supporting documents, they should
encourage the taxpayer to provide such documents when deemed appropriate; for
example, in the case of deductions or income from a pass-through entity, such as a
partnership, the entity’s documents might be useful in preparing the owner’s tax returns.
The member should make proper use of the prior year’s tax return when feasible to gather
information about the taxpayer and to help avoid omissions and errors with respect to
income, deductions, and credit computations.
2. What should an AICPA member do upon learning about an error in a prior year’s tax
return?
Answer: A member must advise the taxpayer promptly, regardless of whether the
member prepared or signed the return in question, when he or she learns of an error in a
previously filed tax return, an error in a return that is the subject of an administrative
proceeding, or a taxpayer’s failure to file a required return. Such advice should include a
recommendation for appropriate measures the taxpayer should take. However, the
member is neither obligated to inform the IRS of the situation, nor may he or she do so
without the taxpayer’s permission, except as provided by law.
The term “error” includes any position, omission, or method of accounting that, at the
time the return is filed, fails to meet the standards set out in SSTS No. 1. An error also
includes a position taken on a prior year’s return that no longer meets these standards due
to legislation, judicial decisions, or administrative pronouncements having retroactive
effect. However, an error does not include an item that has an insignificant effect on the
taxpayer’s tax liability.
If the member is requested to prepare the current year’s return, and the taxpayer has not
taken action to correct an error in a prior year’s return, the member should consider
whether to proceed with the preparation of the current year’s return. If the current year’s
return is prepared, the member should take reasonable steps to ensure that the error is not
repeated. A member should advise a taxpayer, either orally or in writing, as to the
correction of errors in the prior year’s return. In a case where there is a possibility that the
taxpayer may be charged with fraud, the taxpayer should be referred to an attorney.
3. Explain which types of services a CPA can and cannot provide to avoid engaging in
the unauthorized practice of law.
Answer: Frequently, legal and accounting questions are so intertwined in tax practice that
they are difficult to distinguish. Over the years, a number of court cases have addressed
the issue of unauthorized practice of law by accountants and other tax preparers. Though
state and federal court cases have some inconsistent results, the current belief is that
CPAs and other nonattorneys who practice law before the IRS do not engage in the
unauthorized practice of law if they are careful not to provide any general legal services.
Thus, the following types of general law activities should be avoided by nonattorneys:
Expressing a legal opinion on any non-tax matter.
Drafting wills or trust instruments.
Drafting contracts.
Drafting incorporation papers.
Drafting partnership agreements.
As long as CPAs and other nonattorneys stay within the practice of tax and do not cross
over into the practice of general law, they can avoid the problem of unauthorized practice
of law.
4. Explain the concept of “limited practice without enrollment” under Circular 230 and
list several of the special situations in which the IRS allows this type of representation.
Answer: Under Section 10.7 of Circular 230, certain individuals are authorized to
represent a taxpayer before the IRS without being an attorney, CPA, or enrolled agent.
These special situations include the following types of representation:
An individual may represent a member of his or her immediate family.
A regular, full-time employee of an individual employer may represent the employer.
A general partner or a regular, full-time employee of a partnership may represent the
partnership.
A bona fide officer or a regular full-time employee of a corporation (including a parent,
subsidiary, or other affiliated corporation), association, or organized group may represent
the corporation, association, or organized group.
A regular, full-time employee of a trust, receivership, guardianship, or estate may
represent the trust, receivership, guardianship, or estate.
An officer or a regular employee of a governmental unit, agency, or authority may
represent the governmental unit, agency, or authority in the course of his or her official
duties.
An individual may represent any individual or entity, who is outside the United States,
before personnel of the Internal Revenue Service when such representation takes place
outside the United States.
An individual who prepares and signs a taxpayer's tax return as the preparer, or who
prepares a tax return but is not required (by the instructions to the tax return or
regulations) to sign the tax return, may represent the taxpayer during an examination of
the taxable year or period covered by that tax return, but this right does not permit such
individual to represent the taxpayer before Appeals Officers, Revenue Officers, Counsel
or similar officers or employees of the Internal Revenue Service or the Department of
Treasury.
5. Explain the standards for professional services that involve tax return positions under
SSTS No.1. What is the level of authority for disclosed or undisclosed positions and what
types of authority can be relied upon?
Answer: Under SSTS No. 1, a member should determine and comply with the standards,
if any, that are imposed by the applicable taxing authority with respect to recommending
a tax return position, or preparing or signing a tax return. If the applicable taxing
authority has no written standards with respect to recommending a tax return position or
preparing or signing a tax return, or if its standards are lower than the standards set forth
in the SSTSs, then the standard in SSTS No. 1 applies. This standard provides that, in
providing professional services that involve tax return positions, a member should have a
good-faith belief that the position has at least a realistic possibility of being sustained
administratively or judicially on its merits if challenged. In addition, a member may
recommend a tax return position if the member concludes that there is a reasonable basis
for the position and advises the taxpayer to appropriately disclose that position. Thus, a
member may prepare or sign a tax return that reflects a position if a member has a
reasonable basis for the position and that position is appropriately disclosed.
A member may reach a conclusion that a position is warranted based on a well-reasoned
construction of the applicable statute, well-reasoned articles or treatises, or
pronouncements issued by the applicable taxing authority, regardless of whether such
sources would be treated as authority under Internal Revenue Code Section 6662 (the
accuracy-related penalty on underpayments). A position would not fail to meet these
standards merely because it is later abandoned for practical or procedural considerations
during an administrative hearing or in the litigation process.
In cases where the member believes that the taxpayer may have some exposure to a
penalty, the statement suggests that the member advise the taxpayer of such risk. Where
disclosure of a position on the tax return may mitigate the possibility of a taxpayer
penalty under the Internal Revenue Code, the member should consider recommending
that the taxpayer disclose the position on the return. Additionally, a member should not
recommend a tax return position or prepare or sign a tax return reflecting a position that
the member knows could exploit the audit selection process of a taxing authority, or
serves as a mere arguing position advanced solely to obtain leverage in a negotiation with
a taxing authority.
Test Bank for Federal Tax Research
Roby B. Sawyers, Steven Gill, Debra Sanders, William A. Raabe, Gerald E. Whittenburg
9781111221645, 9781337282987, 9781285439396
