Unit 1: Ethics, Professional Responsibilities, and Federal Tax Procedures

• Topic 01

  AICPA Statements on Standards for Tax Services (SSTS)

  37 questions
• Topic 02

  Circular 230

  41 questions
• Topic 03

  Federal Tax Procedures

  33 questions
• Topic 04

  Tax Filing Requirements

  44 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. Which professionals are subject to Circular 230 regulations when practising before the IRS?

   • A
     Only professionals who have passed the Registered Tax Return Preparer examination.
   • B
     Attorneys, CPAs, enrolled agents, enrolled retirement plan agents, and enrolled actuaries.
     Correct answer
   • C
     Only federal government employees who work on tax matters.
   • D
     All paid tax preparers, including unenrolled preparers who charge a fee.
   Explanation

   Circular 230 governs all 'practitioners' who practise before the IRS, which includes attorneys (licensed in any U.S. jurisdiction), CPAs (licensed in any U.S. jurisdiction), enrolled agents (EA), enrolled retirement plan agents (ERPA), enrolled actuaries, and registered tax return preparers (a currently suspended category). Unenrolled preparers who are not in any of these categories have very limited practice rights. 'All paid tax preparers' is too broad — Circular 230's full practice-right obligations apply to the credentialed categories listed.

2. A preparer charges \$10,000 per year to prepare a complex individual return. The IRS determines that the preparer took an unreasonable position (substantial understatement) that caused a \$500 underpayment. The IRS asserts Section 6694(a). What is the preparer's penalty?

   • A
     \$2,000, which is 20% of the \$10,000 preparer fee.
   • B
     \$250, which is 50% of the \$500 underpayment.
   • C
     \$1,000, which is the greater of \$1,000 or 50% of the income derived from the return. The preparer earned \$500 = 50% × \$10,000 × (50% of fee) — wait, 50% of \$1,000 (half the fee?) No: penalty = max(\$1,000, 50% × \$10,000) — but fee is \$10,000? Re-read: max(\$1,000, 50% × fee). 50% × \$10,000 = \$5,000 > \$1,000. So penalty = \$5,000.
     Correct answer
   • D
     \$50, which is the Section 6695(b) penalty for failure to sign.
   Explanation

   Under IRC Section 6694(a), the penalty for an unreasonable position is the greater of \$1,000 or 50% of the income derived from the return. The preparer earned \$10,000 for preparing the return. 50% × \$10,000 = \$5,000. Since \$5,000 > \$1,000, the penalty is \$5,000. The size of the tax underpayment (\$500) is irrelevant to the Section 6694(a) penalty calculation — it is based on the preparer's fee, not the taxpayer's tax liability. Note: Section 6694(b) (willful/reckless) is not triggered without evidence of willfulness. Section 6662 applies to taxpayer (not preparer) penalties. Section 6695 covers administrative failures. The \$250, which is 50% of the \$500 underpayment, is a distractor — the penalty is based on the preparer's income from the return, not the taxpayer's underpayment. The \$2,000 (20% of the \$10,000 fee) is also a distractor.

3. A paid tax preparer fails to: (1) sign each return, (2) furnish a copy of each return to the taxpayer, and (3) include their PTIN on each return. The preparer prepared 50 returns with all three failures. What is the total Section 6695 penalty?

   • A
     \$7,500, which is 50 returns times \$50 per return for the signing failure; (2) failure to furnish copy to taxpayer — Section 6695(b), \$50 per return. Each failure is a separate penalty. For 50 returns: \$50 × 50 = \$2,500 for signing, \$50 × 50 = \$2,500 for copy, \$50 × 50 = \$2,500 for PTIN = \$7,500 total, assuming the annual caps for each individual failure (\$25,500 each) are not reached.
     Correct answer
   • B
     \$2,500, which is 50 returns times \$50 per return for only the PTIN failure (the other failures are subsumed).
   • C
     \$15,000, which is 50 returns times \$300 per return (the per-return penalty when multiple Section 6695 violations occur simultaneously).
   • D
     \$3,500 because Section 6695 caps total penalties at \$3,500 for preparers with fewer than 100 returns.
   Explanation

   Under IRC Section 6695, each of the following failures carries a separate \$50-per-return penalty with an annual cap of \$25,500: (a) failure to sign; (b) failure to furnish copy to taxpayer; (c) failure to include PTIN. For 50 returns with all three failures: 3 × \$50 × 50 = \$7,500. Each type of failure is an independent penalty (they do not merge or stack into a single amount). The annual \$25,500 cap applies separately to each category. None of the three categories reach their cap here (50 × \$50 = \$2,500 per category, well below \$25,500).