- Under Circular 230, a practitioner who is representing a client before the IRS discovers that the client has made a misrepresentation to the IRS. The practitioner should:
Answer: Promptly advise the client of the misrepresentation and the potential consequences, and recommend corrective action - withdrawing if the client refuses.
Circular 230 requires practitioners to advise clients of misrepresentations and recommend correction, and to withdraw if the client refuses to correct. Answer D is correct. Notifying the IRS without client consent violates confidentiality (A). Withdrawing without advising the client is insufficient (B). Continuing despite a known misrepresentation violates Circular 230 (C).
- Which of the following statements correctly describes the relationship between the AICPA SSTS and Circular 230?
Answer: Both apply to CPAs in tax practice - Circular 230 as a federal regulation governing IRS practice, and SSTS as AICPA professional standards; CPAs must comply with both.
Both sets of standards apply to CPAs in tax practice and must be followed simultaneously - Circular 230 is a federal regulation and SSTS are professional standards. Answer C is correct. Neither supersedes the other for CPAs (A, B). Both apply broadly across tax services (D).
- Under SSTS No. 1, which of the following positions on a tax return would require the CPA to ensure that a disclosure is made on the return?
Answer: A position that has a reasonable basis but does not meet the substantial authority standard, where disclosure would reduce the accuracy-related penalty risk.
SSTS No. 1 requires disclosure on the return for positions that have a reasonable basis but not substantial authority, so the taxpayer is protected from the accuracy-related penalty. Answer C is correct. All income-reducing positions don't require disclosure (A). Year-to-year changes don't require disclosure (B). IRS-challenged positions require more than just disclosure (D).
- Under Circular 230 Section 10.37, which of the following is a requirement for written tax advice provided by a practitioner?
Answer: Written advice must be based on reasonable factual and legal assumptions, must consider all relevant facts and applicable law, and must not give greater weight to the likelihood of non-detection than to the merits of the position.
Circular 230 Section 10.37 sets the standard for written tax advice. Written advice must be based on reasonable factual and legal assumptions, must consider all relevant facts and applicable law, must not rely on representations the practitioner knows are incorrect or unreasonable, and must not give greater weight to the possibility that a position will not be examined than to the technical merits of the position. Answer A is correct. Filing written advice with the IRS is not required (B). Written advice is not automatically privileged; privilege depends on the nature of the communication and applicable law (C). A second CPA review is not required by Circular 230 (D).
- Under SSTS No. 1, which of the following standards is required when a CPA recommends a tax return position?
Answer: The position must have a reasonable basis and the CPA must inform the client of the potential for the accuracy-related penalty and the opportunity to disclose.
SSTS No. 1 requires positions to have a reasonable basis, and the CPA must inform the client of penalty risks and disclosure options when the position does not meet the higher substantial authority standard. Answer C is correct. Greater than 50% (A) is the higher 'more likely than not' standard. Literal Code reading is too narrow (B). Specific IRS guidance is not required (D).
- Under SSTS No. 1, the 'substantial authority' standard is most accurately described as:
Answer: A standard requiring that the weight of authorities supporting a tax position is substantial relative to authorities taking a contrary position - generally interpreted as approximately a 40% probability of success.
Substantial authority requires a substantial weight of authority supporting the position, estimated at approximately 40% probability - higher than reasonable basis but lower than more likely than not. Answer A is correct. More likely than not (B) is a higher standard. Reasonable basis (C) is the lower standard. Court support (D) is not the definition.
- A CPA member violates SSTS No. 1 by taking a position on a client's tax return that lacks a reasonable basis. The most likely consequence under the AICPA's disciplinary framework is:
Answer: Potential disciplinary action by the AICPA, including suspension or termination of AICPA membership.
Violations of SSTS are professional standards enforced by the AICPA - consequences include disciplinary action up to membership termination. Answer A is correct. AICPA violations are not automatically referred to IRS (B). There is no mandatory fine schedule in SSTS (C). Criminal prosecution is an IRC matter, not an AICPA standard violation consequence (D).
- A client informs a CPA that they received $10,000 in cash income from a side job but 'forgot' to report it on prior returns. Under SSTS No. 3 (Knowledge of Error), the CPA's primary obligation is to:
Answer: Advise the client of the error, the potential consequences, and the corrective action available, but the CPA may not notify the IRS without the client's consent.
SSTS No. 3 requires the CPA to notify the client of the error and recommend corrective action, but prohibits notifying the IRS without client consent due to confidentiality. Answer B is correct. The CPA cannot notify the IRS unilaterally (A). Withdrawal may be appropriate if the client refuses correction but state board reporting is not required (C). Filing an amended return without client discussion is inappropriate (D).
- Under SSTS No. 3, a CPA discovers that a client has an error in the current year return the CPA just prepared before it is filed. The CPA's most appropriate course of action is to:
Answer: Discuss the error with the client, correct the return before filing, and obtain client approval of the corrected return.
A discovered error before filing should be corrected by discussing it with the client and amending the return. SSTS No. 3 applies here - prompt correction is appropriate. Answer D is correct. Filing a known erroneous return is inappropriate (A). Notifying the IRS without client consent violates confidentiality (B). Withdrawal is not required for a correctable pre-filing error (C).
- A CPA is preparing a business tax return and realizes the client did not provide documentation for a claimed deduction that appears large relative to the business income. Under SSTS No. 2 (Questions on Returns), the CPA should:
Answer: Make reasonable inquiries if the information furnished appears incorrect, incomplete, or inconsistent with the return.
SSTS No. 2 requires the CPA to make reasonable inquiries when client information appears incorrect, incomplete, or inconsistent - but does not require independent verification of all information. Answer B is correct. Accepting without inquiry when there are red flags violates SSTS (A). Refusing without inquiry is too restrictive (C). Independent verification of all information is not required (D).
- The AICPA Statements on Standards for Tax Services (SSTS) are best described as:
Answer: Enforceable standards of professional conduct that govern CPAs in the performance of tax services, establishing the minimum level of professional responsibility.
The SSTS are enforceable standards for CPAs in tax practice, establishing the minimum conduct required when providing tax services - including return preparation, planning, and advice. Answer A is correct. They are enforceable, not voluntary (B). They apply to CPAs, not all preparers (C), and cover all tax services, not just audits (D).
- A CPA is engaged to provide written tax advice on a complex transaction. Under Circular 230, which of the following is a requirement for the written advice?
Answer: The advice must be based on reasonable factual and legal assumptions, identify the significant tax issues, and not rely on representations known to be incorrect.
Circular 230 Section 10.37 requires written advice to be based on reasonable assumptions, identify significant issues, and not rely on incorrect representations. Answer B is correct. Second CPA review is not required (A). Guarantees of IRS positions are prohibited (C). Filing with OPR is not required (D).
- Which of the following penalties under IRC Section 6695 applies specifically to tax return preparers?
Answer: A penalty for failing to sign the return, failing to furnish the preparer's identifying number, or failing to retain a copy of the return.
IRC Section 6695 imposes specific penalties on preparers for failing to sign, furnish their PTIN, keep copies, or comply with other procedural requirements. Answer B is correct. Lack of substantial authority is a Section 6694 penalty (A). Tax evasion is a criminal matter (C). Estimated tax penalties apply to taxpayers, not preparers (D).
- A client provides a CPA with documentation showing a large charitable contribution deduction. The CPA suspects the documentation may be inflated. Under SSTS No. 2, the CPA must:
Answer: Make reasonable inquiries about the contribution amount and documentation when information furnished appears incorrect, incomplete, or inconsistent.
SSTS No. 2 requires reasonable inquiries when client-provided information appears questionable, but does not require independent verification. Answer C is correct. Blind acceptance when suspicious is improper (A). Independent verification of all documentation is not required (B). A signed statement alone doesn't satisfy SSTS requirements (D).
- A client asks their CPA to sign a return that contains a position the CPA believes has no legal merit. The CPA should:
Answer: Decline to sign the return and advise the client that the CPA cannot sign a return with a position lacking reasonable legal basis.
Under SSTS No. 1 and Circular 230, a CPA cannot sign a return with a position lacking any legal merit. The CPA must decline and explain why. Answer B is correct. A disclaimer does not protect the CPA from professional obligations (A). Client representation does not excuse the CPA's own judgment (C). Filing Form 8275 is for disclosed positions the CPA believes may be challenged - not for meritless ones (D).
- Under IRC Section 6694(a), a tax return preparer is subject to a penalty when:
Answer: An undisclosed position on a return does not have a reasonable basis, or a disclosed position is not reasonably supported by law.
Section 6694(a) penalizes preparers for taking undisclosed positions without a reasonable basis or disclosed positions not reasonably supported by law. Answer C is correct. Failure to sign (A) is a Section 6695 penalty. Fee issues (B) are not a Section 6694 matter. Fault is required - strict liability does not apply (D).
- A CPA who prepares a tax return that contains a position with a reasonable basis but not substantial authority should:
Answer: Advise the client of the potential penalties and the option to disclose the position on Form 8275 to reduce penalty exposure.
When a position meets reasonable basis but not substantial authority, the CPA should advise the client of penalty risks and the option to disclose on Form 8275 to protect against the accuracy-related penalty. Answer B is correct. The position may be included if it meets reasonable basis (A). While inclusion is permissible, advising about disclosure is required (C). The CPA does not report independently (D).
- SSTS No. 3 addresses the use of estimates in tax returns. Under this standard, a CPA may use a taxpayer's estimate when:
Answer: It is impracticable to obtain exact data, the estimate is reasonable, and the return does not imply a greater accuracy than the estimate provides.
SSTS No. 3 permits estimates when exact data is impracticable to obtain and the estimate is reasonable - but not to misrepresent accuracy or avoid research. Answer D is correct. Estimates cannot be used when exact data is available (A, B). Using estimates to reduce taxes is not the standard (C).
- Treasury Department Circular 230 governs:
Answer: The practice of all practitioners - including CPAs, attorneys, enrolled agents, and others - before the IRS, including standards for tax advice and return preparation.
Circular 230 governs all practitioners before the IRS, regardless of professional designation - establishing standards for advice, return preparation, and conduct. Answer D is correct. It applies to all practitioners, not just CPAs and attorneys (A). It governs practice standards, not filing requirements (B). Circular 230 is a Treasury regulation, not an AICPA standard (C).
- A CPA has been asked by a client to take an aggressive tax position that the CPA believes has a reasonable basis but is contrary to a published IRS regulation. Under SSTS and Circular 230, the CPA may:
Answer: Take the position if it has a reasonable basis, but should advise the client of the risks, consider appropriate disclosure, and ensure the position does not violate Circular 230 standards.
CPAs may take positions contrary to IRS guidance if those positions have a reasonable basis under the law (e.g., based on statutory text or case law), provided they advise the client of risks and consider disclosure. Answer D is correct. Indemnification doesn't authorize improper positions (A). Multiple court cases are not required (B). Positions contrary to regulations may be valid if the regulation itself is invalid (C).
