- Which of the following actions by the EA would violate the Circular 230 requirements for written advice?
Answer: Issuing the advice based on the client's statement that the allocation requirement does not apply, without addressing the regulation the EA knows governs the transaction.
Cir. 230 § 10.37(a) prohibits a practitioner from providing written advice based on unreasonable factual or legal assumptions, on unreasonable reliance on a client's representations, or on a failure to consider all relevant facts the practitioner knows or has reason to know. The EA knows that the transaction is covered by the regulation and that the client's contrary premise is unsupported, so issuing the advice on that premise without addressing the regulation violates § 10.37(a). Choice D is correct. Choice A is wrong because telling the client that the position is aggressive and recommending a second opinion is consistent with the practitioner's obligations. Choice B is wrong because limiting written advice to the proposed transaction and relying on the client's factual description of the transaction is not itself prohibited; the defect would be relying on an assumption the practitioner knows is unreasonable. Choice C is wrong because stating that a fee is not contingent on a favorable result and that the EA will not sign the return without disclosure is not a violation of § 10.37.
- An enrolled agent is researching whether an expense is deductible. An IRS Publication says the expense is not deductible. A federal district court decision in the taxpayer's district, on nearly identical facts, holds that it is deductible. There is no statute, regulation, revenue ruling, or appellate decision on point. Which statement is correct for purposes of evaluating these authorities?
Answer: For the substantial authority standard, the district court decision is primary authority and is weighed; the IRS Publication is not an authority.
Treas. Reg. § 1.6662-4(d)(3) lists federal court cases as authorities for the substantial authority standard and excludes IRS Publications from that list. A federal district court decision is primary authority, even though its weight may depend on the court, the jurisdiction, and the facts. An IRS Publication is general educational or explanatory guidance and is not an authority for § 6662 purposes. Choice C is correct. Choice A is wrong because IRS Publications do not carry the weight of revenue rulings. Choice B is wrong because an IRS Publication does not outrank a district court decision; court decisions are primary authority, and the Publication is not an authority for § 6662 purposes. Choice D is wrong because IRS Publications are not binding on taxpayers or courts.
- An enrolled agent signs a client's return using a research memorandum prepared by an administrative assistant who has no tax training. The memorandum misreads a statute and concludes that an item is excludable. The enrolled agent does not check the statute or otherwise review the assistant's work. Under Circular 230 § 10.22, which statement is correct?
Answer: The enrolled agent failed to exercise due diligence because the agent did not use reasonable care in evaluating the assistant's work product, and the error was readily discoverable.
Cir. 230 § 10.22(b) permits a practitioner to rely on the work product of another person only if the practitioner used reasonable care in engaging, supervising, training, and evaluating that person. An unrevised memorandum from an untrained assistant that misreads a statute, without any check of the underlying authority, is not reasonable reliance. Choice D is correct. Choice A is wrong because the standard is objective diligence, not the absence of intent. Choice B is wrong because reliance on another's work product is permitted when reasonable care is exercised. Choice C is wrong because the taxpayer's provision of information does not relieve the practitioner of the duty to see that the position is warranted.
- Based on these facts, which of the following is correct regarding the authorities the Tax Court will apply in the taxpayer's case?
Answer: The Tax Court will follow the Ninth Circuit's decision because an appeal from the Tax Court would lie to that circuit and the circuit has decided the issue.
Golsen v. Commissioner, 54 T.C. 742 (1970), holds that the Tax Court will follow the decision of the court of appeals to which an appeal from the Tax Court would lie when that circuit has squarely addressed the issue. Because the taxpayer resides in the Ninth Circuit and the Ninth Circuit has decided the identical issue in the taxpayer's favor, the Tax Court will apply the Ninth Circuit's position even though prior Tax Court decisions and the revenue ruling are contrary. Choice A is correct. Choice B misstates the rule because the Tax Court follows its own precedent only when the governing circuit has not resolved the issue. Choice C misstates the effect of a revenue ruling, which is the IRS's interpretation of the law and does not bind courts. Choice D misstates the rule because the Tax Court does not follow the majority of circuits; the controlling authority is the circuit to which this taxpayer's appeal would lie.
- Which of the following is correct regarding the IRS's proposed action?
Answer: The IRS generally may not revoke the ruling retroactively because the client relied on it in good faith and the facts and law have not changed.
IRC § 6110(k)(3) provides that a written determination such as a private letter ruling may not be used or cited as precedent, and the IRS's annual ruling procedure (Rev. Proc. 2025-1) provides that a ruling is binding on the IRS for the requesting taxpayer and generally will not be revoked retroactively if the taxpayer made no misstatement or omission of material facts, the facts have not materially changed, the law has not changed, and the taxpayer acted in good faith in reliance on the ruling. All of those conditions are satisfied here, so the IRS may not revoke the ruling retroactively merely because it now believes the legal conclusion was erroneous; any revocation would be prospective. Choice B is correct. Choice A is wrong because legal error alone does not make a ruling void from its date of issuance. Choice C is wrong because a private letter ruling does bind the IRS with respect to the requesting taxpayer when the transaction is carried out as represented. Choice D is wrong because a private letter ruling need not be attached to the return for the taxpayer to rely on it.
- A taxpayer's 2025 return understated tax because the taxpayer followed an enrolled agent's advice that a particular item was excludable. The taxpayer provided the enrolled agent with complete and accurate information, the advice was within the enrolled agent's area of expertise, and the taxpayer reasonably relied on it in good faith. The position was later determined to be wrong. Under Treas. Reg. § 1.6664-4(c), which statement is correct?
Answer: The taxpayer may avoid the penalty if the facts and circumstances show the reliance was reasonable and in good faith; the advice need not have been in writing.
Treas. Reg. § 1.6664-4(c) recognizes that reasonable cause and good faith may be shown by a taxpayer who reasonably relies on the advice of a professional tax adviser after disclosing all material facts, where the advice is within the adviser's expertise and the reliance is reasonable. The regulation does not require written advice or that the advice conclude there was substantial authority. Choice B is correct. Choice A adds requirements that are not in the regulation. Choice C is wrong because such reliance can be a defense. Choice D is wrong because the adviser need not be the return preparer.
- In researching a client's 2025 federal tax return, an enrolled agent locates a Treasury regulation issued as a temporary regulation on April 1, 2025. It was published in the Federal Register without prior notice and comment and has not been finalized. Which statement is correct regarding this temporary regulation?
Answer: It has the same binding force and effect as a final regulation, is also issued as a proposed regulation, and expires automatically within three years.
IRC § 7805(e)(1)–(2) requires that every temporary regulation also be issued as a proposed regulation and provides that a temporary regulation expires within three years after issuance. A temporary regulation is issued without prior notice and comment and, during its effective period, has the same binding effect as a final regulation unless and until it is withdrawn or expires. Choice A is correct. Choice B confuses a temporary regulation with a proposed regulation that has not yet become effective. Choice C is wrong because the regulation applies to taxpayers and the IRS alike. Choice D invents a one-year reissuance requirement not found in § 7805(e).
- Which of the following is correct regarding the effect of the Tax Court decision and the IRS's announcement?
Answer: The decision binds the IRS as to the taxpayer in the decided case, but the IRS may continue to take the contrary position against other taxpayers.
IRS acquiescence and nonacquiescence announcements, published as Actions on Decision in the Internal Revenue Bulletin, state whether the Service will follow a court decision in similar cases. A nonacquiescence operates prospectively: the Service will continue to take the contrary position against other taxpayers, but it cannot undo the judgment for the taxpayer who prevailed, and the decision remains citable as authority. Choice B is correct. Choice A is wrong because the announcement cannot retroactively set aside a decision that has become final. Choice C is wrong because the IRS's decision not to appeal does not make the decision binding on the Service in other taxpayers' cases. Choice D is wrong because a decision does not lose its status as authority merely because the IRS announces its disagreement.
- Which of the following is correct regarding the sources the EA may treat as 'authority' in applying the substantial authority standard?
Answer: The proposed Treasury regulation counts as authority, but the IRS Publication and the law journal article do not count as authority.
Treas. Reg. § 1.6662-4(d)(3)(iii) defines the authorities considered under the substantial authority standard; the list includes the Code, proposed, temporary, and final Treasury regulations, revenue rulings and revenue procedures, tax treaties, court cases, committee reports, and general explanations of tax legislation prepared by the Joint Committee on Taxation. Treatises, legal periodicals, and IRS Publications are not authorities. Because the position is undisclosed and is not a tax shelter, the EA must have substantial authority for it (or disclose the position on Form 8275 and have a reasonable basis) to avoid the IRC § 6694(a) preparer penalty. Choice C is correct. Choice A is wrong because an IRS Publication is not an authority under this standard even though it is an official publication of the Service. Choice B is wrong because peer review and reasoned analysis do not make a periodical an authority. Choice D is wrong because the list is not limited to statutes, regulations, and court decisions.
- Which of the following is correct regarding whether the EA may sign the return?
Answer: The EA may sign only if the EA reasonably believes the position is more likely than not to be sustained on the merits, even though the position will be disclosed.
Cir. 230 § 10.34(a) and IRC § 6694(a) require a preparer to have a reasonable belief that a tax-shelter position is more likely than not to be sustained on the merits; adequate disclosure does not lower that standard. For ordinary positions, substantial authority is required when the position is not disclosed, and a reasonable basis plus adequate disclosure on Form 8275 is sufficient for a disclosed position, but those lower standards do not apply to tax-shelter positions. Because the transaction is a tax shelter, the EA may sign the return only if the more-likely-than-not standard is met. Choice A is correct. Choice B is wrong because substantial authority is not sufficient for a tax-shelter position even with disclosure. Choice C is wrong because disclosure does not reduce the tax-shelter standard to a reasonable basis. Choice D is wrong because obtaining a private letter ruling is not a prerequisite to signing the return.
- Which of the following is correct regarding the small tax case decision?
Answer: The decision is final and may not be reviewed by any other court, and it may not be treated as precedent in any other case.
IRC § 7463(b) provides that a decision entered in a small tax case is not reviewable by any other court and may not be treated as precedent for any other case. The decision is final for the parties, but it carries no precedential weight, so the EA may not rely on it as authority in the protest. Choice D is correct. Choice A is wrong because the statute expressly strips small tax case decisions of precedential effect even though they are entered after a trial. Choice B is wrong because the decision does not require an action on decision to become final. Choice C is wrong because the IRS's inability to appeal affects only the decided case and does not bind the Service in later cases involving the same issue.
- An enrolled agent is asked to give a written opinion on a client's proposed tax treatment. The agent concludes the treatment has a reasonable basis but is not supported by substantial authority. In the written opinion, the agent states that the client should take the position because the client's return is unlikely to be audited and, even if it is, the issue is unlikely to be raised. Under Circular 230, which statement is correct?
Answer: This written advice violates Circular 230 because a practitioner may not consider the possibility that the return will not be audited or that the issue will not be raised on audit.
Cir. 230 § 10.37(a) prohibits a practitioner from providing written advice concerning a federal tax matter if, in evaluating the matter, the practitioner takes into account the possibility that the taxpayer's return will not be audited or that the issue will not be raised on audit. Choice A is correct. Choice B is wrong because a warning and disclosure recommendation do not cure the prohibited audit-risk consideration. Choice C is wrong because the prohibition is not limited to listed transactions or tax shelters; it applies to written advice generally. Choice D is wrong because § 10.37 applies to written advice concerning a federal tax matter even when the practitioner did not prepare or sign the return and the advice concerns a proposed transaction.
- Which of the following is correct regarding the effect of the temporary regulation?
Answer: The temporary regulation is binding on the client for 2025 and has the same force and effect as a final regulation.
Under IRC § 7805(e), a temporary regulation is issued together with a proposed regulation and expires within three years if not finalized, but while in effect it has the same force and effect as a final regulation and is binding on taxpayers within its scope from its stated effective date. The temporary regulation at issue applies to the client's transaction and to the client's 2025 tax year, so it governs the return. Choice C is correct. Choice A is wrong because the comment period does not suspend the effectiveness of a temporary regulation. Choice B is wrong because a taxpayer may not disregard an applicable temporary regulation by filing a return consistent with the statute. Choice D is wrong because the statutory expiration period for a temporary regulation is three years, not 90 days after the comment period.
- An enrolled agent is researching a proposed deduction for a client. The agent finds a private letter ruling issued in 2022 to a different taxpayer that allows the deduction; a page in a commercial tax service that says the deduction is available; a revenue ruling applying the same statute that allows the deduction; and a general counsel memorandum issued in 1986 that reaches the opposite result. No statute, regulation, or court decision is directly on point. Which statement correctly evaluates these materials under the substantial authority standard of IRC § 6662?
Answer: The revenue ruling, the private letter ruling, and the general counsel memorandum are all authorities, with differing weight, while the commercial tax service is not an authority.
Governing authority: Treas. Reg. § 1.6662-4(d)(3)(ii)-(iii). The list of authorities for substantial authority includes revenue rulings and revenue procedures, private letter rulings and technical advice memoranda issued after October 31, 1976, and actions on decisions and general counsel memoranda issued after March 12, 1981. Conclusions in treatises, legal periodicals, legal opinions, and opinions of tax professionals, including commercial tax services, are not authority. Weight differs: a revenue ruling outweighs a private letter ruling on the same issue, and a document more than 10 years old, such as the 1986 memorandum, generally gets very little weight. Choice A is correct. Choice B invents a condition: a private letter ruling counts as authority without any requirement that the facts be substantially identical, although close facts affect its weight. Choice C misstates the regulation, which lists private letter rulings and general counsel memoranda as authorities even for other taxpayers. Choice D wrongly includes the commercial tax service.
- A paid tax return preparer has researched a deduction for a client's 2025 return and concludes that the position has a reasonable basis but not substantial authority. The position is not a tax shelter item or a reportable transaction, and the client agrees to disclose the position on the return. Under IRC § 6694, which statement is correct?
Answer: The preparer may sign the return if the position is adequately disclosed, because an adequately disclosed position with a reasonable basis does not subject the preparer to the § 6694(a) penalty.
IRC § 6694(a) penalizes a preparer for an understatement caused by an unreasonable position. A position that lacks substantial authority is not unreasonable for this purpose if it is adequately disclosed and has a reasonable basis. Choice D is correct. Choice A is wrong because the § 6694 standard for a disclosed, non-shelter position is reasonable basis, not realistic possibility. Choice B is wrong because a reasonable basis alone does not protect an undisclosed position. Choice C is wrong because Form 8275-R is not the general disclosure for a reasonable-basis position, and the stated retention requirement is not the § 6694 rule.
