- Which statement is correct regarding the EA's retention practice?
Answer: The EA complied with IRC § 6107(b), which permits retaining a list of each taxpayer's name, identification number, and taxable year instead of a completed copy of each return.
IRC §§ 6107(b) and 6060(c); Treas. Reg. § 1.6107-1(b); IRC § 6695(d). A return preparer must keep, for 3 years after the close of the return period, either a completed copy of each return or claim for refund prepared, or a list showing each taxpayer's name, taxpayer identification number, taxable year and the type of return or claim prepared. The EA's spreadsheet shows all four required elements: name, Social Security number, tax year and type of return. Her practice therefore complies. Choice C is correct. Choice A is wrong because § 6107(b) expressly permits the list as an alternative to a completed copy of each return. Choice B is wrong because § 6695(d) penalizes a failure to keep the required copy or list; no seven-year rule or transmission-format rule exists for preparers. Choice D is wrong because the retention period had not expired: the return period is the 12-month period beginning July 1, so a return presented on March 18, 2026, falls in the period from July 1, 2025, to June 30, 2026, and the list must be kept through June 30, 2029.
- An enrolled agent completes representation of a client in an IRS examination, and the client requests return of all records. The client has paid for every return and schedule the agent prepared and gave the client in earlier engagements, but has not yet paid the agent's final invoice for the examination. Under Circular 230 § 10.28, which of the following must the enrolled agent return?
Answer: The enrolled agent must return the client-provided documents and any return or schedule the agent prepared and gave the client earlier that the client needs for current federal tax compliance, and may keep copies.
Governing authority: Cir. 230 § 10.28. On request, a practitioner must promptly return all records of the client necessary for the client to comply with federal tax obligations, may keep copies, and generally may not withhold them because of a fee dispute. Records of the client include documents the client supplied and any return, schedule, or other document the practitioner prepared and presented to the client in a prior representation that the client needs for current compliance. A practitioner-prepared document may be withheld only while the fee for that document is unpaid, and these documents are paid for. Choice B is correct. Choice A understates the category because returns and schedules already given to the client are client records. Choice C overstates it: internal memoranda and drafts never given to the client are not client records. Choice D conditions return on payment of an unrelated examination fee and on a receipt, which § 10.28 does not allow.
- A taxpayer files a 2025 Form 1040 on February 10, 2026. The return reports gross income of $80,000, but it omits a $30,000 payment the taxpayer received for consulting services; no Form 1099 was issued for the payment, and no fraud is involved. For how long should the taxpayer retain the records supporting the items on the return?
Answer: At least 6 years after the return is deemed filed, because the omitted consulting income exceeded 25 percent of the gross income stated in the return.
IRC § 6501(e)(1) extends the assessment period to 6 years when the return omits gross income in excess of 25 percent of the gross income stated in the return. Here, $30,000 exceeds 25 percent of $80,000. Because the return was filed before the due date, it is deemed filed on the due date under § 6501(b)(1), so the records should be kept at least through the 6-year period. Choice A misstates the deemed-filing rule. Choice B ignores the 25 percent omission exception; good faith and absence of a Form 1099 do not shorten the period. Choice C treats every omission as fraudulent; the unlimited fraud period does not apply without fraud or a false or fraudulent return.
- What should the EA do?
Answer: Refuse to sign the return unless the client agrees to adequate disclosure, and if she still refuses, advise her of the penalty risk and consider withdrawing from the engagement.
Cir. 230 § 10.34 prohibits a practitioner from preparing or signing a return containing a position the practitioner knows or reasonably should know is unreasonable, and a position supported only by a reasonable basis must be adequately disclosed to avoid being unreasonable; IRC § 6694(a)(2)(B) reflects the same disclosure requirement. Because the client refuses disclosure, the EA may not sign the return with the Schedule C loss, and should advise the client of the penalty risk and consider withdrawal if the client insists. Choice A is wrong because a client's instruction cannot make an undisclosed reasonable-basis position permissible on a return the EA signs. Choice B is wrong because the EA may not attach disclosure the taxpayer rejected, and disclosure does not eliminate every penalty risk. Choice D is wrong because the return belongs to the taxpayer; a preparer who disagrees may decline to sign or withdraw, but may not unilaterally substitute a different position.
- A paid preparer completes Form 8867 and claims both the earned income tax credit and the child tax credit on a taxpayer's 2025 Form 1040. Which statement is correct regarding the preparer's due-diligence record-retention obligation?
Answer: The preparer must retain Form 8867 and the records relied on for 3 years from the latest of the unextended due date, the e-file date, or the presentation date.
Governing authority: Treas. Reg. § 1.6695-2(b)(4); Instructions for Form 8867. The preparer must keep a copy of Form 8867, the credit computation worksheets, and a record of the documents relied on and the inquiries made, for three years from the latest of the due date of the return (not including extensions), the date a signing preparer e-filed it, or the date a paper return was presented to the taxpayer for signature. Form 8867 itself is filed with the return; the worksheets and other records are kept, not submitted. Choice D is correct. Choice A misstates both duties: the worksheets are not submitted, and retention is required even after the IRS accepts the return. Choice B uses the wrong period and wrongly limits the requirement to EITC claims. Choice C keeps the wrong records, drops Form 8867, and measures from the signing date alone.
- Under Circular 230 and IRC § 6694, which action is correct for the enrolled agent?
Answer: Do not sign the return unless the position is disclosed on Form 8275 or the position is removed, because an undisclosed position that has only a reasonable basis is an unreasonable position for a return preparer.
Circular 230 § 10.34(a); IRC § 6694(a). A preparer may not sign a return containing an unreasonable position, and an undisclosed position supported only by reasonable basis—rather than substantial authority—is unreasonable for this purpose. If the client refuses disclosure, the enrolled agent may not sign the return as prepared and should advise the client of the penalty consequences; if the client insists, the enrolled agent should consider withdrawing. Choice A misstates the rule because reasonable basis is sufficient only when the position is adequately disclosed. Choice B is wrong because client consent or a waiver cannot substitute for statutory disclosure. Choice C is wrong because a nonfrivolous position is not enough, and a compensated preparer may not avoid the standard by omitting the required preparer signature.
- An enrolled agent is preparing a taxpayer's 2025 Form 1040. The taxpayer states that she received only wages and provides a Form W-2. The enrolled agent, however, knows from representing the taxpayer earlier in the year that she sold a rental property and should have received a Form 1099-S for the sale. Under Circular 230, which statement best describes the enrolled agent's duty?
Answer: The enrolled agent must make reasonable inquiries about the sale and may not prepare or sign the return if it would omit income the practitioner knows or has reason to believe is taxable.
Circular 230 § 10.34 permits a practitioner to rely in good faith on client-supplied information without verification, but the practitioner may not ignore known facts or implications of information and must make reasonable inquiries when the information appears incorrect, incomplete, or inconsistent. The enrolled agent's actual knowledge of the sale makes the taxpayer's statement incomplete. Choice A overstates the reliance privilege because the agent has actual knowledge of the omitted sale. Choice B is wrong because disclosure on Form 8275 cannot cure a known omission of income. Choice D is wrong because Circular 230 does not require third-party verification of every real estate sale; it requires reasonable inquiry and accuracy.
- What is the correct advice?
Answer: The records should be kept until at least October 15, 2032, because omitting more than 25 percent of stated gross income extends the assessment period to six years.
IRC § 6501(e)(1)(A) extends the assessment period to six years after the return is filed when the taxpayer omits from gross income an amount greater than 25 percent of the gross income stated in the return. The client's return stated gross income of $80,000 and omitted $25,000 of partnership income, more than 25 percent, so the assessment period and the supporting record-keeping obligation run to October 15, 2032, six years after the extended due date on which the return was filed. Choice A applies the general three-year rule of IRC § 6501(a) but ignores the 25-percent omission exception. Choice C borrows the seven-year period of IRC § 6511(d)(1), which applies only to bad-debt and worthless-security claims, not to omitted partnership income. Choice D misstates the fraud rule; the indefinite retention rule applies to fraudulent returns or a failure to file, and the facts show an inadvertent omission, not fraud.
- Which action must the EA take?
Answer: Promptly advise the client of the error and its consequences, including the potential for additional tax, interest, and penalties and the option to file an amended return.
Cir. 230 § 10.21 requires a practitioner who knows that a client has made an error in or omission from a return to promptly advise the client of the noncompliance, error, or omission and its consequences. The EA must therefore tell the client about the omitted IRA distribution, the resulting additional tax, interest, and penalties, and the option to file an amended return; the decision to amend belongs to the client. Choice A is wrong because § 10.21 imposes no duty to report the client's error to the IRS. Choice C is wrong because withdrawing without advising does not satisfy the duty. Choice D is wrong because the practitioner's duty is triggered by knowledge of the earlier error and is not limited to the return being prepared.
- What advice should the EA give about these records?
Answer: They should be kept at least until October 15, 2029, because they support the gain reported on the 2025 return and the assessment period does not expire before then.
IRC § 6001 and Treas. Reg. § 1.6001-1(e) require taxpayers to keep records as long as their contents may be material in the administration of any internal revenue law. Basis records for a sold asset remain material until the period of limitations for the year of sale expires. Because the 2025 return was filed on October 15, 2026, the assessment period under IRC § 6501(a) runs through October 15, 2029, and the client should keep the basis records at least that long. Choice B is wrong because the materiality of basis records is measured by the year of disposition, not the year the records were created. Choice C misapplies the seven-year rule of IRC § 6511(d)(1), which is limited to bad debts and worthless securities. Choice D is wrong because the IRS generally cannot recompute a year after its assessment period has closed; the records remain material only through the open year.
- A paid preparer is advising a taxpayer about a position on a 2025 return that is contrary to a Treasury regulation but has a reasonable basis. The position is not with respect to a tax shelter and is not with respect to a reportable transaction to which § 6662A applies. Which combination of action and standard is correct under IRC §§ 6662 and 6694?
Answer: Attach Form 8275-R to the return; adequate disclosure plus a reasonable basis protects against both the § 6662 and § 6694 penalties for this position.
Treas. Reg. §§ 1.6662-3(c), 1.6662-4(f) and 1.6694-2(d); IRC §§ 6662(d)(2)(B) and 6694(a)(2); Instructions for Form 8275-R. A position contrary to a Treasury regulation is disclosed on Form 8275-R, not Form 8275. For a position that is not a tax shelter and not a reportable transaction to which § 6662A applies, adequate disclosure plus a reasonable basis avoids the substantial-understatement penalty under § 6662(d)(2)(B) and the preparer penalty under § 6694(a)(2). For the disregard-of-regulations penalty, Treas. Reg. § 1.6662-3(c)(1) adds one more condition: the disclosed position must represent a good-faith challenge to the regulation's validity. Choice C is correct. Choice A is wrong because a reasonable basis alone, without disclosure, does not meet either exception; disclosure is required. Choice B is wrong on the form and the standard: Form 8275 is for positions not contrary to a regulation, and the more-likely-than-not standard applies to tax shelters and § 6662A reportable transactions, not to a disclosed reasonable-basis position. Choice D is wrong because § 6694(a)(2)(B) accepts a reasonable basis for a properly disclosed position; there is no requirement of substantial authority in that case.
- Under Circular 230, which statement is correct about the firm's duty to return records?
Answer: The firm must return the client's original receipts and bank statements, as well as a copy of the signed return, but it may keep internal workpapers, research notes, and administrative records.
Circular 230 § 10.28. A practitioner must promptly return, on request, all records of the client 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 (the receipts and bank statements) 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 2025 return was delivered and paid for, and the client needs it to answer the notice; the unpaid invoice is for the later planning work. Internal workpapers, research notes and billing records that were never given to the client are not records of the client, so the firm may keep them. Choice A is correct. Choice B is wrong because state law gives no retention right here, and an engagement letter cannot override § 10.28. Choice C is wrong because the copy of the return is a record of the client that the firm must return; the client's ability to get a transcript or copy from the IRS does not remove that duty, and the bank statements must also be returned. Choice D is wrong because internal workpapers and administrative records never given to the client are not records of the client.
- Which statement is correct?
Answer: The deductions may be disallowed in full, because a later statement is not corroboration of business purpose, and the Cohan rule does not apply to IRC § 274 expenses.
IRC § 274(d) and Treas. Reg. § 1.274-5T require the taxpayer to substantiate the amount, time, place, business purpose, and business relationship for each business meal by adequate records or by sufficient corroborating evidence. The receipts prove only amount, date, and place; nothing corroborates business purpose or business relationship, so the agent may disallow the meals, and the Cohan rule does not permit estimated deductions for § 274 expenses. Choice A is wrong because a self-serving statement prepared after the examination began is not sufficient corroboration for the missing elements. Choice B is wrong because it ignores the business-purpose and relationship elements. Choice D is wrong because Cohan estimates are unavailable for expenses subject to § 274(d).
- A preparer completes a taxpayer's 2025 Form 1040 and presents it to the taxpayer for signature on September 20, 2026, after the taxpayer obtained an extension of time to file. The taxpayer files the return on October 1, 2026. Under IRC § 6107(b), through what date must the preparer keep the completed copy of the return or the required list?
Answer: June 30, 2030, because the period is three years after the close of the July 1 to June 30 return period in which the return was presented for signature.
Governing authority: IRC § 6107(b); IRC § 6060(c); Treas. Reg. § 1.6107-1(b). A signing preparer must keep a completed copy of the return, or a list of taxpayers and returns, for the 3-year period following the close of the return period in which the return was presented to the taxpayer for signature. The return period is the 12-month period beginning July 1. The return was presented on September 20, 2026, which falls in the return period ending June 30, 2027, so the copy or list must be kept through June 30, 2030. Failure is penalized under § 6695(d). Choice C is correct. Choice A runs three years from the presentation date itself and ignores the return-period rule. Choice B applies a later-of-due-date-or-filing-date rule that § 6107(b) does not use. Choice D uses the return period in which the original due date fell; the later return period, the one in which the return was presented, controls here.
- Under IRC § 6694, which of the following is correct regarding a paid preparer's liability for an understatement caused by a tax-shelter position taken on a 2025 return?
Answer: The preparer must reasonably believe the tax-shelter position is more likely than not to be sustained; disclosure does not avoid the § 6694 penalty.
IRC § 6694(a)(2)(C). For a position with respect to a tax shelter, or a reportable transaction to which § 6662A applies, the § 6694(a)(2)(C) standard is met only if it is reasonable to believe that the position would more likely than not be sustained on its merits (apart from the reasonable-cause and good-faith exception in § 6694(a)(3)). The disclosure-plus-reasonable-basis exception of § 6694(a)(2)(B) is not available for those positions. Choice A is correct. Choice B is wrong because it applies the disclosure-plus-reasonable-basis exception, which § 6694(a)(2)(C) makes unavailable for a tax-shelter position. Choice C is wrong because substantial authority plus disclosure is not the § 6694 standard for a tax-shelter position; the preparer must reasonably believe the position is more likely than not to be sustained. Choice D is wrong because § 6694(a)(2)(C) expressly applies a stricter standard to preparers for tax-shelter and § 6662A reportable-transaction positions, so a preparer remains subject to the penalty; no rule shifts that responsibility to the taxpayer.
