- Which of the following is correct under IRC § 6695(f)?
Answer: The agent has negotiated the refund check for purposes of § 6695(f) because it was deposited into an account the agent controls, even though the full amount was remitted to the taxpayers.
Choice A is correct. Authority: IRC § 6695(f). A tax return preparer may not endorse or otherwise negotiate a refund check issued to a taxpayer. Depositing the taxpayers' refund check into an account the preparer controls is negotiating the check; neither the taxpayers' request, the absence of a fee, the agent's later remittance of the full amount, nor a written authorization changes that result. Choice B is incorrect because taxpayer request and lack of compensation are not defenses. Choice C is incorrect because a written authorization cannot authorize what the statute prohibits. Choice D is incorrect because the § 6695(f) prohibition is not limited to arrangements that give the preparer a financial benefit.
- Which of the following is correct regarding the preparer's conduct?
Answer: A knowing or reckless unauthorized disclosure such as this may subject the preparer to the § 6713 civil penalty and to criminal prosecution under § 7216.
IRC §§ 6713 and 7216. Section 6713(a) imposes a civil penalty of $250 for each unauthorized disclosure or use of return information by a tax return preparer, up to $10,000 a year, and states no knowing-or-reckless requirement. Section 7216(a) makes a knowing or reckless unauthorized disclosure a misdemeanor. The preparer deliberately gave the taxpayer's Schedule C profit figure to a lender without consent, and no exception in § 7216(b) or Treas. Reg. § 301.7216-2 covers that disclosure, so the preparer may face both the § 6713 penalty and prosecution under § 7216. Choice C is correct. Choice A is incorrect because a good-faith or beneficial motive is not a statutory exception. Choice B is incorrect on both counts: the knowing disclosure also exposes the preparer to § 7216, and the knowing-or-reckless element belongs to § 7216, not § 6713. Choice D is incorrect because a lender's interest is not a statutory exception and does not remove the need for the taxpayer's consent.
- Which of the following is correct regarding a penalty under IRC § 6694(a)?
Answer: A penalty applies because a tax shelter position requires a reasonable belief that it is more likely than not to be sustained; disclosure and reasonable basis do not protect it.
Choice A is correct. Authority: IRC § 6694(a). For a position with respect to a tax shelter or a reportable transaction, the preparer must reasonably believe the position is more likely than not to be sustained on the merits. Adequate disclosure plus a reasonable basis protects only non-tax-shelter positions. Choice B incorrectly applies the non-tax-shelter disclosure defense. Choice C confuses § 6694(a) with the willful or reckless conduct penalty under § 6694(b). Choice D adds a taxpayer-knowledge and signature requirement that is irrelevant to the preparer penalty.
- Which of the following is correct regarding a penalty against the preparer under IRC § 6701?
Answer: The preparer may be liable if the preparer knew the schedule would be used in a material tax matter and would result in an understatement, even though the preparer did not sign the return.
Choice D is correct. Authority: IRC § 6701. The penalty reaches any person who aids, assists, procures, or advises with respect to the preparation or presentation of any portion of a return or other document, knowing that it will be used in a material tax matter and will result in an understatement. The person need not sign the return and need not be an income tax return preparer under § 7701(a)(36). Choice A misstates the scope of § 6701. Choice C adds a criminal-conviction requirement that the statute does not impose. Choice B makes § 6701 depend on a prior § 6694 assessment, which the statute does not require.
- Under Circular 230, which of the following is correct regarding the monetary penalty that may be imposed on a practitioner in a disciplinary proceeding?
Answer: The penalty may be imposed in addition to or in lieu of censure, suspension, or disbarment, and is limited to the gross income derived, or to be derived, from the conduct giving rise to the penalty.
Cir. 230 § 10.50. A practitioner may be censured, suspended, or disbarred from practice before the IRS, and a monetary penalty may be imposed in addition to or in lieu of those sanctions. The monetary penalty may not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty. Choice D states both the relationship between the penalty and the sanctions and the correct measure of the penalty. Choice A misstates the measure: the cap is the income from the specific conduct, not from the entire representation of the client during the taxable year. Choice B misstates the relationship: the penalty may be imposed in addition to a sanction, not only in lieu of one. Choice C misstates the grounds and the cap: ordinary negligence is not a basis for the sanction, and the penalty is not measured by the income from the entire engagement.
- Under Circular 230, which of the following is correct regarding sanctions that the IRS may impose on an enrolled agent for misconduct?
Answer: A single act of knowingly giving false or misleading information to the IRS is enough to support censure, suspension, or disbarment.
Circular 230 §§ 10.50(a) and 10.51(a)(4). The IRS may censure, suspend, or disbar a practitioner who is shown to be incompetent or disreputable (§ 10.51), who fails to comply with Circular 230 (under the § 10.52 standards), or who, with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. Giving false or misleading information to the Treasury Department, knowing it to be false or misleading, is disreputable conduct under § 10.51(a)(4). Choice B is correct. No criminal conviction, prior suspension, or pattern of misconduct is required. Choice A adds a criminal-conviction prerequisite that the regulation does not contain. Choice C incorrectly requires a pattern before any sanction can be imposed. Choice D incorrectly adds a prior-suspension prerequisite for disbarment.
- What total amount of failure-to-file and failure-to-pay penalties will be imposed on the taxpayer under IRC § 6651?
Answer: $1,560
IRC § 6651(a)(1), (a)(2), and (c)(1). The failure-to-file penalty runs from the extended due date, October 15, 2026, to the filing date, December 1, 2026, which is two months (counting fractions of a month): 2 × 5% × $12,000 = $1,200. The failure-to-pay penalty runs from the original due date, April 15, 2026, because an extension of time to file does not extend the time to pay; the period to December 1, 2026, is eight months (counting fractions of a month): 8 × 0.5% × $12,000 = $480. Because both penalties apply to the same two months, § 6651(c)(1) reduces the failure-to-file penalty by the failure-to-pay penalty for those months (2 × 0.5% = 1% = $120), leaving a failure-to-file penalty of $1,080. Total: $1,080 + $480 = $1,560. The 25% caps are not reached, and the return was filed 47 days after the extended due date, so the minimum penalty for a return filed more than 60 days late does not apply. Choice A ($1,200) treats the extension as also postponing the time to pay. If the failure-to-pay period begins on October 15, it is only two months (2 × 0.5% = 1% = $120), and the § 6651(c)(1) reduction for those same two months removes that $120 from the failure-to-file penalty, for a net total of 10% = $1,200. The extension postpones only the time to file, not the time to pay. Choice C ($1,680) adds $1,200 and $480 without applying the § 6651(c)(1) reduction for the overlapping months. Choice D ($2,160) counts the due-date month and the filing month as full calendar months — three months of failure to file (15%) and nine months of failure to pay (4.5%) — and then applies the reduction (15% + 4.5% − 1.5% = 18% of $12,000).
- Which of the following is correct regarding the penalty under IRC § 6695(g)?
Answer: The enrolled agent is liable for the penalty, and the firm is not liable because it had reasonable procedures and its principal management neither participated in nor knew of the failure.
IRC § 6695(g); Treas. Reg. § 1.6695-2. A paid preparer must meet the due diligence requirements, including completing Form 8867 and making the required eligibility inquiries, for a return claiming the earned income credit, the child tax credit, the American opportunity tax credit, or head-of-household status. A separate penalty applies to each credit claimed for which the requirements are not met (Treas. Reg. § 1.6695-2(a)(1)), so for this return, filed in 2026, the enrolled agent faces two penalties: $650 + $650 = $1,300. Under Treas. Reg. § 1.6695-2(c), the employing firm is also liable only if a member of its principal management participated in or knew of the failure before the return was filed, the firm failed to establish reasonable and appropriate compliance procedures, or the firm disregarded those procedures through willfulness, recklessness, or gross indifference. None of those conditions is met, so only the enrolled agent is liable. Choice C is correct. Choice B reverses the parties: the preparer who fails the requirements is liable, and acting as an employee is no defense. Choice A misstates the firm standard: a firm is not liable merely because it employs and supervises the preparer; one of the three conditions in Treas. Reg. § 1.6695-2(c) must be met. Choice D is wrong because the due diligence requirements are procedural; a return that computes the credits correctly does not excuse the failure to complete Form 8867 and make the eligibility inquiries.
- Which of the following is correct regarding the preparer's negotiation of the check?
Answer: The preparer is liable for a $650 penalty for negotiating the check even though the client authorized it.
IRC § 6695(f). A tax return preparer may not endorse or otherwise negotiate a refund check issued to a taxpayer, and the prohibition applies even when the taxpayer gives written authorization. For a return filed in 2026, the penalty is $650 per check, and § 6695(f) imposes no annual aggregate cap. Choice B is correct. Choice A is wrong because retaining the client's written authorization does not make the negotiation permissible. Choice C misstates the cap: the $32,500 annual maximum applies to the penalties under § 6695(a)–(e), not to the refund-check penalty under § 6695(f), which has no annual limit. Choice D is wrong because cashing the check and applying the proceeds to the fee is itself a prohibited negotiation, and the client's presence and written consent do not create an exception.
- A tax return preparer prepares and e-files a client's 2025 federal income tax return on March 1, 2026. The preparer retains a completed copy of the return. To avoid the penalty under IRC § 6695(d) for failure to retain a copy or list, through which date must the preparer retain the copy?
Answer: June 30, 2029, which is three years after the close of the return period in which the return was prepared.
IRC § 6107(b)(1) and (b)(2)(B); penalty under IRC § 6695(d). A tax return preparer must retain a completed copy of each prepared return, or a list containing each taxpayer's name, identification number, and taxable year, for three years following the close of the return period in which the return was prepared. The return period is the 12-month period beginning on July 1. A return prepared on March 1, 2026, falls in the return period that closes on June 30, 2026, so the copy must be kept through June 30, 2029. Choice B states the correct deadline. Choice A counts three years from the preparation date, Choice C from the return's due date, and Choice D from the close of the calendar year; each misstates the statutory measuring period.
- For returns filed in 2026, which of the following is correct regarding the penalty under IRC § 6695(g) for failure to comply with return-preparer due-diligence requirements?
Answer: The penalty is $650 for each credit and each head-of-household determination on a return for which the due-diligence requirements are not met, and it is not subject to the $32,500 annual caps under § 6695(a)–(e).
IRC § 6695(g); Treas. Reg. § 1.6695-2(a)(1). For returns filed in 2026, the penalty is $650, and a separate penalty applies to each credit (the earned income credit, the CTC/ACTC/ODC, and the American opportunity credit) and to the head-of-household determination on a return for which the due-diligence requirements are not met. The penalty does not count toward the $32,500 annual maximums that apply to each of § 6695(a) through (e). Thus Choice D is correct. Choice A is incorrect because the penalty does not require an actual disallowance; it may apply even if the credit or filing status claimed was proper. Choice C is incorrect because the penalty is assessed for each credit or head-of-household determination on each return, not as a single per-season penalty. Choice B is incorrect because the penalty is not limited to the earned income credit; it also covers the child tax credit, the credit for other dependents, the American opportunity credit, and head-of-household status.
- Which of the following is correct regarding the preparer's liability under IRC § 6694?
Answer: The preparer is liable under §6694(b) because the understatement was due to a willful attempt; the penalty is the greater of $5,000 or 75 percent of the preparer's income from the return.
IRC § 6694(b). Section 6694(b)(2) applies when any part of an understatement is due to a willful attempt in any manner to understate the liability or to a reckless or intentional disregard of rules or regulations. Under § 6694(b)(1), the penalty is the greater of $5,000 or 75 percent of the income derived (or to be derived) by the preparer with respect to the return. A preparer who knowingly claims a deduction the preparer knows is not allowable has willfully attempted to understate the liability, so Choice A is correct. Choice B misstates the measure: a § 6694(a) penalty is the greater of $1,000 or 50 percent of the preparer's income from the return, never a percentage of the client's understatement, and the willful conduct here brings in the larger § 6694(b) penalty (reduced by any § 6694(a) penalty paid, under § 6694(b)(3)). Choice C is wrong because the taxpayer's knowledge or consent is not a defense to the § 6694 penalty. Choice D misstates the rule: § 6694 has no substantial-understatement threshold, and the 20 percent rate belongs to the accuracy-related penalty under § 6662, which is imposed on the taxpayer and measured by the underpayment, not by the preparer's income.
- What is the total penalty the IRS may assess against the preparer under IRC § 6695 for these failures?
Answer: $4,485
IRC § 6695(a), (b), (c), (f), and (g). For returns filed in 2026, each failure to sign a return, to furnish a copy to the taxpayer, or to include the preparer's identifying number is a separate $65 penalty per return: 8 × $65 = $520, 8 × $65 = $520, and 3 × $65 = $195. The due-diligence failure is $650 for each return on which the earned income credit requirements were not met: 4 × $650 = $2,600. Endorsing and cashing a taxpayer's refund check is a separate $650 penalty. The $32,500 annual maximum applies separately to paragraphs (a) through (e) and is not reached; paragraphs (f) and (g) have no annual maximum. Total: $520 + $520 + $195 + $2,600 + $650 = $4,485. Choice A ($3,835) omits the $650 penalty under § 6695(f) for negotiating the client's refund check. Choice B ($3,965) treats the failure to sign a return and the failure to give the taxpayer a copy as a single $65 penalty per return; each paragraph of § 6695 imposes a separate penalty, so both apply to the same return. Choice C ($4,290) omits the three failures to include the PTIN (3 × $65 = $195).
