Ethical And Professional Responsibilities - CPA Reg

1. A CPA can serve two adverse clients competently. What does Circular 230 still require?
   Answer: Informed written consent Circular 230 allows adverse representation only after each affected client gives informed written consent. Disclosure alone is tempting because it's part of the process, but consent must be in writing; oral consent or a mere disclosure isn't enough.
2. Under the AICPA Code of Professional Conduct, what is the general rule regarding a CPA's contingent fees for tax services?
   Answer: Contingent fees are generally prohibited for preparing original tax returns or amended returns, but are permitted for tax matters that are subject to the IRS examination or appeals process where the outcome is uncertain. Under AICPA Ethics Rule 1.510.001, a CPA in public practice shall not perform for a contingent fee any professional services for a client for whom the CPA also performs attest services. Additionally, contingent fee arrangements for preparation of an original return or an amended return when the original return was not filed are prohibited. However, contingent fees are permissible for representing clients in IRS examinations, appeals, and proceedings where the fee is contingent on the outcome. Answer A is incorrect because significant restrictions apply. Answer B is too broad; contingent fees are permitted in some contexts. Answer C is not the correct statement of the rule.
3. Under Circular 230 Section 10.30, what restrictions apply to a practitioner's advertising and solicitation of clients?
   Answer: Practitioners may not use false, fraudulent, misleading, deceptive, or unfair statements in advertising or solicitation; solicitation - including in-person solicitation - is prohibited when it is false, misleading, coercive, or otherwise violates applicable law or professional rules, but is not categorically banned. Circular 230 Section 10.30 prohibits practitioners from using advertising or solicitation that contains false, fraudulent, misleading, deceptive, or unfair statements. Solicitation - including in-person solicitation - is not categorically banned; rather, it is prohibited when it is false, misleading, coercive, or otherwise violates applicable law or professional rules. Practitioners may truthfully advertise their services and may respond to inquiries from prospective clients. Answer D is correct. Answer A is incorrect because advertising is permitted when truthful and not misleading. Answer B is incorrect because there is no uniform fee requirement under Circular 230. Answer C is incorrect because testimonials and endorsements are not categorically banned; they must simply not be false or misleading.
4. Under the AICPA Code of Professional Conduct, a CPA's independence is impaired when which of the following occurs?
   Answer: The CPA has a direct financial interest in the attest client, such as owning shares of the client's stock. Under the AICPA Code of Professional Conduct (ET Section 1.240), a CPA's independence is impaired when they have a direct financial interest in an attest client, such as owning the client's stock. This is because the CPA has a financial stake in the client's reported results, which could compromise their objectivity. Answer A is incorrect because preparing financial statements for a non-attest client does not impair independence (though it may raise independence questions for attest clients). Answer C is incorrect because fee dependency may raise independence concerns but is not a per se impairment under the rules (the 15% or more threshold under SEC rules is more relevant for public companies). Answer D is incorrect because a social relationship alone does not automatically impair independence.
5. Under the preparer penalty rules of Section 6694, a tax return preparer is subject to a penalty for taking an 'unreasonable position' on a return. What standard must be met to avoid this penalty?
   Answer: The position must meet the 'substantial authority' standard (greater than roughly 40% chance of success), or if disclosed on the return, must have a reasonable basis (greater than roughly 20% chance of success). Under Section 6694(a), a tax return preparer is subject to a penalty if the position does not meet the 'substantial authority' standard. If the position is disclosed on Schedule UTP or otherwise, the lesser 'reasonable basis' standard applies. Substantial authority is generally interpreted as a roughly 40% or greater chance of success; reasonable basis is approximately 20% or greater. The more-likely-than-not (over 50%) standard applies to tax shelters and reportable transactions. Answer A is incorrect; certainty is not required. Answer B (50%) is the more-likely-than-not standard for tax shelters. Answer C alone (disclosure) is not sufficient if the position lacks reasonable basis.
6. The accuracy-related penalty under Section 6662 applies to substantial understatements of income tax. Which of the following correctly describes when the substantial understatement penalty applies?
   Answer: When the understatement of income tax exceeds the greater of 10% of the tax required to be shown on the return or $5,000 ($10,000 for corporations). Under Section 6662(d), a substantial understatement of income tax exists when the amount of the understatement exceeds the greater of: (1) 10% of the tax required to be shown on the return, or (2) $5,000 (for individuals) or $10,000 (for corporations). When a substantial understatement exists, the 20% accuracy-related penalty may apply unless the taxpayer had substantial authority for the position, adequately disclosed the position, or reasonably relied on a qualified advisor. Answer A is incorrect because de minimis understatements do not trigger this penalty. Answer C is incorrect because mathematical errors may be corrected without penalty. Answer D describes a potential reasonable cause defense, not when the penalty applies.
7. Under the AICPA Code of Professional Conduct, the objectivity principle requires CPAs to do which of the following?
   Answer: Be impartial, intellectually honest, and free from conflicts of interest; not subordinating professional judgment to the interests of the client, employer, or third parties. The objectivity principle requires CPAs to be impartial and intellectually honest, free from conflicts of interest that could bias their professional judgment, and not to allow bias, conflict of interest, or undue influence of others to override their professional judgment. Objectivity applies to all CPAs in all engagements, not just attest services. Answer A describes independence, which is a specific and more formal requirement primarily for attest services. Answer B describes a reporting obligation that exists in some contexts but is not the objectivity principle. Answer D describes an aspect of competence.
8. Under Circular 230 Section 10.29, a practitioner who has a conflict of interest must do which of the following to continue representing both clients?
   Answer: The practitioner must reasonably believe they can provide competent and diligent representation to each affected client, and each client must give written informed consent after full disclosure of the conflict. Under Circular 230 Section 10.29, a practitioner may represent a client when a conflict of interest exists if: (1) the practitioner reasonably believes they can provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; and (3) each affected client gives informed written consent. Without these conditions, the practitioner must decline or withdraw from the representation. Answer B is too absolute; the conflict does not automatically require withdrawal if consent is obtained. Answer C is incorrect because disclosure and consent are required. Answer D is too extreme; withdrawal of both is not automatically required.
9. Under Circular 230 Section 10.22, a practitioner has a duty of competence. Which of the following best describes this duty?
   Answer: A practitioner must have the legal, technical, and ethical competence necessary to provide the services undertaken, including keeping current with changes in tax law, and may not act incompetently or negligently in representing clients. Circular 230 Section 10.35 (and competence-related provisions) requires that practitioners only provide competent representation, which means having the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the representation. This includes keeping reasonably current with relevant legal developments. Answer B is incorrect because no annual competency exam is required (though CPE is required for many practitioners). Answer C is incorrect because competence encompasses all relevant areas of tax law applicable to the client's situation. Answer D is incorrect because years of practice alone do not establish competence for all matters.
10. Under Circular 230, when may a CPA rely on client tax data without verifying it?
    Answer: If no obvious red flags exist Under Circular 230, you may rely in good faith on client-provided tax data unless something alerts you that it is incorrect or incomplete. No red flags means no duty to independently verify. The tempting wrong choice is relying solely on a client statement; a signature does not remove your responsibility when the data looks questionable.
11. Under Circular 230, which assumption may a CPA not rely on in written advice?
    Answer: The return will not be audited You may rely on client facts after reasonable inquiry and on legal support or precedent, but you cannot assume the return will not be audited. That assumption would let you ignore the possibility of challenge and penalty standards. The tempting wrong answer is that client facts may not be relied on, but facts are allowed if reasonable; audit avoidance is not.
12. Under Circular 230 Section 10.34, what is the standard for signing a tax return as a paid preparer?
    Answer: The preparer must not sign a return (or advise a position on a return) known to contain a position that lacks a reasonable basis, is contrary to rules or regulations, or is an unreasonable position. Under Circular 230 Section 10.34, a practitioner may not sign a tax return or advise a client to take a position on a return that the practitioner knows: (1) lacks a reasonable basis, (2) is an unreasonable position as defined under Section 6694 penalty standards, or (3) is a willful attempt to understate tax liability or reckless or intentional disregard of rules and regulations. Answer A is incorrect because the client's request does not override the preparer's ethical obligations. Answer B is incorrect because absolute certainty is not required; the reasonable basis standard applies. Answer D is incorrect because no IRS pre-approval is required for signing returns of audit clients.
13. Under the AICPA Code of Professional Conduct, which of the following describes the integrity principle?
    Answer: A CPA must be honest and candid in all professional and business relationships, avoiding subordination of professional judgment and not knowingly misrepresenting facts or subordinating one's judgment to others. The integrity principle in the AICPA Code requires members to be honest and candid within the constraints of client confidentiality. It requires avoiding subordinating professional judgment, not knowingly making misrepresentations of fact or opinion, and maintaining honesty in all professional relationships. Answer A describes competence. Answer B describes the objectivity and independence principles. Answer D is closer to the public interest principle but does not specifically describe integrity.
14. The AICPA Code of Professional Conduct establishes several principles. Which of the following best describes the principle of 'due care'?
    Answer: A CPA must observe professional and technical standards, continually improve competence, and discharge professional responsibilities with diligence and thoroughness. The due care principle in the AICPA Code requires members to observe applicable technical and ethical standards, to continuously develop their competence and knowledge, and to discharge all professional responsibilities with thoroughness and diligence. Due care encompasses both technical competence and the diligence with which work is performed. Answer A describes the independence principle. Answer C describes the responsibilities principle and public interest. Answer D describes an aspect of the confidentiality principle.
15. Under AICPA SSTS No. 3, a CPA who is advising a client on a tax matter where the law is unclear should do which of the following?
    Answer: Advise the client of the relevant uncertainty, the potential consequences of taking various positions, and the applicable standards for tax return positions, allowing the client to make an informed decision. AICPA SSTS No. 3 (Certain Procedural Aspects of Preparing Returns) and SSTS No. 1 address advising on uncertain positions. When the law is unclear, the CPA should identify the uncertainty, explain the potential consequences of different positions, advise the client of the standards that must be met for a position to be recommended, and let the client make an informed decision. The CPA's role is to advise, not to unilaterally choose between aggressive and conservative positions. Answer A ignores the client's risk tolerance and professional standards. Answer B is impractical and not required. Answer D reflects only the preparer's risk preferences, not the client's situation.
16. A CPA is engaged to prepare a tax return and the client provides information that the CPA suspects may be incorrect. Under AICPA SSTS No. 3, what is the CPA's obligation?
    Answer: The CPA must independently verify all items that exceed $10,000. Under AICPA SSTS No. 3, a CPA preparing a tax return may generally rely on information provided by the client without independently verifying it. The CPA is not required to conduct an audit-like verification of all items. However, the CPA must make reasonable inquiries when client-provided information appears incorrect, inconsistent, or incomplete, and should not knowingly use incorrect information. Answer A is incorrect because independent verification of all information is not required. Answer B is incorrect because documented proof for all items is not required. Answer D is incorrect because no specific dollar threshold triggers an independent verification requirement.
17. Under Circular 230 Section 10.37, which of the following requirements applies to a practitioner's written advice on a federal tax matter?
    Answer: Written advice must be based on reasonable factual and legal assumptions, must identify and consider all relevant facts, must not be based on unreasonable factual or legal assumptions, and must not rely on representations of the taxpayer unless the practitioner reasonably believes them. Under Circular 230 Section 10.37, the written advice standard requires that a practitioner: (1) base written advice on reasonable factual and legal assumptions; (2) use reasonable efforts to identify and ascertain relevant facts; (3) not rely on representations of the taxpayer or others that the practitioner knows or should know are incorrect, unreasonable, or incomplete; (4) consider all relevant facts and applicable law; and (5) not give greater weight to the possibility that the position will not be examined than to the technical merits of the position. Answer A is correct. Answer B is incorrect because no specific signatory requirement (such as a partner signature) is mandated by Circular 230. Answer C is incorrect because IRS pre-clearance is not required for written advice. Answer D is incorrect because the Section 10.37 standards apply to written advice regardless of the transaction amount.
18. Client refuses to correct omitted income on a return the CPA signed. What should the CPA do?
    Answer: Tell client; assess withdrawal When you discover a client omitted income from a return you signed, you must inform the client of the error and its consequences. If the client refuses to correct it, you should withdraw from the engagement. You cannot notify the IRS because client information is confidential unless the client consents.
19. A CPA prepares a tax return and takes a position that has a 20% probability of being sustained if challenged by the IRS. Under AICPA Statements on Standards for Tax Services (SSTS), which of the following describes the minimum standard for recommending a tax return position?
    Answer: The position must have a realistic possibility of being sustained on the merits (generally interpreted as at least one-in-three or greater chance), or the position must be disclosed on the return if it meets only the not-frivolous standard. Under AICPA SSTS No. 1 and Circular 230, a practitioner may recommend a return position if the position has a 'realistic possibility of being sustained on its merits' (generally interpreted as approximately a one-in-three or greater chance of success). If the position does not meet this standard but is not frivolous, it may be taken if adequately disclosed on the return. A 20% probability may not meet the realistic possibility standard, requiring disclosure. Answer A (50% or more likely than not) is a higher standard used for opinions, not the minimum for return positions. Answer C has no support in professional standards. Answer D is incorrect because IRS pre-approval is not required.
20. Under Treasury Circular 230, which of the following persons is considered a 'practitioner' who may practice before the IRS?
    Answer: Attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents who are in good standing with their respective licensing authorities. Treasury Circular 230 (31 C.F.R. Part 10) governs practice before the IRS. Practitioners who may practice include: attorneys (licensed to practice law), CPAs (licensed by state boards of accountancy), enrolled agents (passed the Special Enrollment Examination or worked for the IRS), enrolled actuaries, enrolled retirement plan agents, and registered tax return preparers (under certain provisions). Answer B is too broad; mere return preparation is not sufficient to qualify as a practitioner for all IRS practice rights. Answer C is too narrow; attorneys admitted to any bar may practice before the IRS. Answer D is incorrect because educational coursework does not confer practitioner status.

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