- Under Circular 230, what is the CPA required to do?
Answer: Promptly advise the client of the omission and the consequences provided by the Code and regulations; the CPA has no separate duty under Circular 230 to report the omission to the IRS.
Circular 230 §10.21 requires a practitioner who knows of a client's noncompliance, error, or omission in a return to advise the client promptly of that fact and of the consequences provided under the Code and regulations. It does not require the practitioner to report the matter to the IRS or to withdraw solely because the client declines to file an amended return. Choice A adds a written-report and return-preparation condition not found in §10.21. Choice C ignores the continuing duty to advise; the return's having been filed and processed does not eliminate the obligation. Choice D misstates the duty by requiring IRS notification and withdrawal, which §10.21 does not impose.
- Under Circular 230 §10.37, this written advice is:
Answer: Prohibited, because written tax advice may not take into account the possibility that the return will not be audited or that the issue will not be raised on audit.
Governing authority: Cir. 230 § 10.37(a)(2)(vi). In giving written advice, a practitioner may not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit. Advice that relies on a low chance of audit violates the rule regardless of the strength of the position. Choice D states the rule. Choice A incorrectly treats audit risk as a permissible factor, even for a disclosed position. Choice B is wrong because a disclaimer cannot cure reliance on a prohibited factor. Choice C is wrong because substantial authority and the absence of a tax shelter do not make the prohibited audit-risk analysis permissible.
- What is required for the enrolled agent to continue representing both spouses?
Answer: Each spouse must give informed consent after full disclosure, confirmed in writing (within a reasonable time, no later than 30 days), and the agent must retain the written confirmations.
Circular 230 §10.29 permits a practitioner to represent clients whose interests conflict only if the practitioner reasonably believes the representation can be competent and diligent, the representation is not prohibited by law, and each affected client waives the conflict and gives informed consent, confirmed in writing, at the time the conflict is known; under § 10.29(b)(3) the written confirmation may follow within a reasonable period, but no later than 30 days, and under § 10.29(c) the practitioner must retain the confirmations for at least 36 months after the representation ends. The facts satisfy the competence condition, but the spouses' oral comfort, given without full disclosure of the conflict and without written confirmation, is not enough. Choice B is correct. Choice A is wrong because it omits informed consent after full disclosure and the written confirmation. Choice C is wrong because the requests arise from the same examination and the spouses' interests are adverse; different procedural labels do not eliminate the conflict. Choice D is wrong because §10.29 does not make this dual representation automatically prohibited; it may proceed with informed consent confirmed in writing.
- Which action does Circular 230 require the enrolled agent to take?
Answer: The agent must promptly advise the client of the error and its consequences, including the need to file an amended return and the interest and penalties that may apply.
Circular 230 §10.21 requires a practitioner who knows of a client's noncompliance, error, or omission in a matter administered by the IRS to advise the client promptly of the fact and of the consequences under the Code and regulations. The duty runs to the client, and the rule does not require the practitioner to report the error to the IRS. Choice B is wrong because disclosure to the IRS is not required, even if the omission appears intentional. Choice C is wrong because §10.21 requires prompt advice, not a 30-day ultimatum, and whether the agent will continue preparing the current return is governed by other standards. Choice D is wrong because wages are includible in the year received; shifting the omitted wages onto the 2025 return would make the current return inaccurate.
- An enrolled agent is asked to prepare and sign a 2025 return. The return contains a taxpayer-favorable position that is not a tax shelter or reportable transaction. The EA determines that the position has a reasonable basis but lacks substantial authority. The client refuses to allow any disclosure of the position on the return. Under Circular 230 §10.34, which statement is correct?
Answer: The EA may not sign the return because the position has only a reasonable basis and is not adequately disclosed to the IRS.
Circular 230 §10.34 prohibits a practitioner from signing or preparing a return with a position that is not supported by substantial authority and is not adequately disclosed to the IRS. Here the position has only a reasonable basis—a standard below substantial authority—and the client refuses disclosure, so the EA may not sign. For a tax shelter or reportable transaction, a more likely than not standard would apply, but that is not the situation on these facts. Choice A is wrong because a client's written acknowledgment or acceptance of a possible penalty does not cure the absence of substantial authority or adequate disclosure. Choice B is wrong because the likelihood that the IRS will select the return for examination is not a permissible factor in determining whether a return position satisfies Circular 230. Choice D is wrong because a position with a reasonable basis is not frivolous, but non-frivolousness alone is insufficient without adequate disclosure when substantial authority is absent.
- Under Circular 230 §10.29, what additional requirement must be satisfied before the EA may continue?
Answer: Each spouse must waive the conflict and give informed consent to the continued representation, with the waiver and consent confirmed in writing by each spouse.
Governing authority: Cir. 230 § 10.29. Under § 10.29(a), a conflict of interest exists when the representation of one client will be directly adverse to another client or there is a significant risk that it will be materially limited by responsibilities to another client. The wife's potential innocent spouse claim is directly adverse to the husband's wish to concede. Section 10.29(b) permits the representation despite the conflict only if the practitioner reasonably believes she can provide competent and diligent representation to each affected client, the representation is not prohibited by law, and each affected client waives the conflict and gives informed consent, confirmed in writing by each affected client (the confirmation may follow within a reasonable time, but no later than 30 days). The facts establish the first two requirements; Choice D states the third. Choice A imposes a joint statement and a waiver of future claims instead of the informed consent of each affected client. Choice B is wrong because both affected clients must consent in writing; consent is not presumed from a request to continue. Choice C is wrong because § 10.29 does not require withdrawal from one spouse when the paragraph (b) conditions are met.
- Under Circular 230 §10.27, which of the following is correct regarding contingent fees?
Answer: A practitioner may charge a contingent fee for services in connection with an IRS examination of an original return or a judicial proceeding under the Internal Revenue Code, but not for preparing the original return.
Governing authority: Cir. 230 § 10.27(b). Section 10.27(b)(1) generally prohibits a contingent fee for services rendered in connection with any matter before the IRS. The exceptions are services in connection with the IRS's examination of, or challenge to, an original return, or an amended return or refund claim filed within 120 days after the taxpayer receives a written notice of examination or challenge of the original return (§ 10.27(b)(2)); a refund claim filed solely for statutory interest or penalties (§ 10.27(b)(3)); and any judicial proceeding arising under the Internal Revenue Code (§ 10.27(b)(4)). Preparing an original return is not excepted. Choice A states the rule. Choice B misstates the definition: under § 10.27(c)(1) a fee based on a percentage of the taxes saved is a contingent fee, so it is barred for preparing an original return. Choice C misstates the timing of the amended-return exception: it covers an amended return or claim filed within 120 days after the taxpayer receives written notice of an examination, not one filed before any notice. Choice D is wrong because client consent cannot override the prohibition outside the listed exceptions.
- Based on these facts, which of the following is correct regarding the EA's representation of the wife?
Answer: The EA may not represent the wife because the husband is an affected former client whose informed written consent to the conflict has not been obtained.
Authority: Cir. 230 § 10.29(a)–(b). A conflict exists when a practitioner's representation of one client would be materially limited by responsibilities to a former client. The EA's duties arising from years of joint representation, including confidentiality concerning the joint return, would materially limit her representation of the wife, and the wife's position would be directly adverse to the husband's position on the same return. The waiver exception permits representation only if each affected client gives informed written consent after the conflict is disclosed. The husband, an affected former client, refused consent, so the conflict was not waived and the EA may not represent the wife. Choice A is wrong because the wife's consent alone does not waive the conflict with the husband. Choice B is wrong because the conflict rule applies to former clients as well as current clients. Choice D is wrong because conflicts arising from a joint representation may be waived by informed written consent; the obstacle is the husband's refusal, not an absolute bar.
- Which statement is correct regarding the enrolled agent's obligations under Circular 230?
Answer: The agent must promptly return the Forms W-2 and 1099 and a copy of the filed 2025 return, although the agent may keep copies for the agent's own files.
Circular 230 § 10.28. At the client's request, a practitioner must promptly return all records of the client that are necessary for the client's federal tax compliance, even in a fee dispute, and may keep copies. Records of the client include documents the client supplied and a return the practitioner prepared that was presented to the client in a prior representation and is needed for current compliance. A practitioner-prepared document may be withheld only while the fee for that document is unpaid. The decisive facts are that the 2025 return was delivered in the return-preparation engagement, its fee was paid, and the couple needs it to finish the notice response; the unpaid fee is for the later notice work. Choice B is correct. Choice A is wrong because state law gives no retention right here, and a fee clause in an engagement letter cannot displace § 10.28. Choice C is wrong because the withholding exception covers only a document whose own fee is unpaid, not any fee the client owes. Choice D is wrong because the § 10.28 duty arises at the client's request and runs to the client; a request from a third party does not trigger it.
- May the enrolled agent charge a contingent fee for these services under Circular 230?
Answer: Yes for both, because the amended return will be filed within 120 days of the notice and the representation concerns the IRS's examination of an original return.
Circular 230 §10.27(b) prohibits contingent fees for services rendered in connection with matters before the IRS, with exceptions: a practitioner may charge a contingent fee for services rendered in connection with the IRS's examination of, or challenge to, an original return, and for services in connection with an amended return or refund claim filed within 120 days of the taxpayer's receipt of a notice of examination or written challenge. Representing the client in the examination falls within the first exception, and the amended return falls within the 120-day exception. Choice A states the general rule and ignores both exceptions. Choice B is wrong because the amended return is a refund claim filed within the 120-day window. Choice C is wrong because representation in an examination of an original return is a permitted contingent-fee matter.
- Under Circular 230 §10.36, which statement is correct?
Answer: The EA may be disciplined because a practitioner with principal authority over a firm's tax practice must take reasonable steps to ensure compliance procedures and must take prompt corrective action after learning of a violation.
Circular 230 §10.36 requires a practitioner with principal authority for overseeing a firm's tax practice to take reasonable steps to ensure the firm has procedures for compliance and to take prompt corrective action when the practitioner knows of a violation by a firm member. The EA's direction to correct, without follow-up or any change in procedures, is not the required reasonable and prompt response; discipline may follow if the failure is willful, reckless, or grossly incompetent. Choice A overstates the effect of a bare instruction. Choice C is wrong because personal preparation or signature is not required for responsibility under §10.36. Choice D is wrong because §10.36 does not impose automatic or strict vicarious discipline; it requires reasonable steps and prompt corrective action.
- Which of the following is correct regarding the EA's obligation to return the records?
Answer: The EA must return the bank statements, the receipts, and a copy of the basis schedule, because the schedule was presented to the client in a prior representation, is needed for the examination, and its fee has been paid.
Circular 230 § 10.28. On request, a practitioner must promptly return all records of the client necessary for the client's federal tax compliance, even in a fee dispute. Records of the client include documents the client supplied and any schedule or other document the practitioner prepared that was presented to the client in a prior representation and is needed for current compliance; a practitioner-prepared document may be withheld only while the fee for that document is unpaid. The basis schedule was given to the client with her 2022 return, that fee was paid, and the schedule is needed now because the examination concerns the gain on the sale. Choice D is correct. Choice A is wrong because a practitioner-prepared document presented to the client in a prior representation can be a record of the client. Choice B is wrong because it treats the qualifying fact, delivery of the schedule in 2022, as a reason to withhold it. Choice C is wrong because the unpaid fee is for the 2024 return, not for the schedule, so the withholding exception does not reach the schedule.
- Under Circular 230 §10.28, which statement is correct?
Answer: Return the W-2s and 1099s; the EA may keep the depreciation schedule, which was never delivered and whose fee is unpaid, and the internal memo, which is not a client record.
Governing authority: Cir. 230 § 10.28. On request, a practitioner must promptly return all records of the client that are necessary for the client to comply with federal tax obligations, and a fee dispute generally does not excuse that duty. Under § 10.28(b), records of the client include everything the client supplied (the W-2s and 1099s). A return, schedule, or other document the practitioner prepared is a client record only if it was presented to the client in a prior representation and is needed for current compliance, and it is not a client record while the practitioner withholds it pending payment of the fee for that document. The depreciation schedule was never delivered and its fee is unpaid, so the EA may keep it. The internal memo was never given to the client and is not a client record. Choice C states this result. Choice A treats the undelivered, unpaid-for schedule as a client record that must be returned. Choice B permits withholding the client's own W-2s and 1099s over the fee, which § 10.28 does not allow. Choice D treats the internal memo, and the unpaid-for schedule, as client records.
- Under Circular 230, which statement is correct regarding the enrolled agent's handling of the refund check?
Answer: The agent must not endorse or negotiate the check, even with client authorization, because Circular 230 prohibits negotiating a client's federal tax refund check.
Circular 230 §10.31 prohibits a practitioner from endorsing or otherwise negotiating any check issued to a client by the government in respect of a federal tax liability; the paper refund check is such a check. A Form 2848 may authorize a representative to receive a refund check, but it does not authorize the representative to endorse or negotiate it, and the client's request does not override the prohibition. Choice A incorrectly treats the authority to receive a refund check as authority to endorse and deposit it. Choice B is wrong because endorsing the check even for the fee amount is a prohibited negotiation. Choice D is wrong because the agent would still be negotiating a check payable to the client, and the deposit destination does not cure the violation.
- Which of the following is correct regarding the EA's acceptance of the proposed fee arrangement?
Answer: The EA may accept a contingent fee for the examination representation, but may not accept a contingent fee for preparing the original return.
Authority: Cir. 230 § 10.27(b). A practitioner may not charge a contingent fee in connection with a matter before the IRS except in the circumstances the regulation enumerates. Preparing an original return is not one of those circumstances, so the fee for the 2025 return may not depend on the amount of the refund shown on the return. One enumerated exception, however, covers services rendered in connection with an IRS examination of, or challenge to, an original return, so the proposed fee for the examination representation is permissible. Choice A correctly separates the two services. Choice B is wrong because it treats the return preparation as covered by an exception. Choice C reverses the rule. Choice D ignores the examination exception and applies the general prohibition to both services.
