SEE - Special Enrollment Exam Quiz: Preparer Due Diligence And Filing Conduct

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Preparer Due Diligence And Filing ConductQuestion 1 of 13

Malik, a paid preparer, signs three 2025 individual income tax returns, each claiming only the earned income credit. For each client, Malik asked the earned income credit questions, verified the child's age, relationship, and residency from documents, and correctly computed the credit. However, Malik did not complete Form 8867 or retain any worksheets for any of the three returns. The returns are filed in 2026, and each taxpayer was properly eligible for the credit claimed.

Which of the following is correct regarding Malik's exposure under section 6695(g)?

Malik is subject to one penalty of $650 because the three failures arose from a single course of conduct in preparing the returns.

Malik is subject to a separate $650 penalty for each of the three returns, with no annual cap, regardless of whether the clients were ultimately eligible for the credit.

Malik is not subject to the penalty because each client was actually eligible and Malik correctly computed the credit on each return.

Malik is subject to a separate $650 penalty for each return, but the total penalty for the year is capped at $32,500.

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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Preparer Due Diligence And Filing Conduct

Practice Preparer Due Diligence And Filing Conduct in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Preparer Due Diligence And Filing Conduct, giving you a quick way to practice the rules, question types, and explanations that matter most for SEE - Special Enrollment Exam.

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Question 1

Which of the following is correct regarding Malik's exposure under section 6695(g)?

Malik is subject to one penalty of $650 because the three failures arose from a single course of conduct in preparing the returns.
Malik is subject to a separate $650 penalty for each of the three returns, with no annual cap, regardless of whether the clients were ultimately eligible for the credit. (correct answer)
Malik is not subject to the penalty because each client was actually eligible and Malik correctly computed the credit on each return.
Malik is subject to a separate $650 penalty for each return, but the total penalty for the year is capped at $32,500.

Explanation: IRC §6695(g) (see Form 8867 instructions and IRS Pub. 4687) imposes a penalty on a paid preparer who fails to satisfy the due-diligence requirements for the earned income credit — completing Form 8867, completing the credit worksheet, making the required inquiries, and retaining records. For returns filed in 2026, the penalty is $650 for each return or claim with respect to which a requirement is failed, and no annual cap applies. The penalty attaches to the failure of diligence, not to the correctness of the credit, so the fact that each client was eligible does not relieve Malik. Choice B correctly states the per-return rule and the absence of a cap. Choice A misstates the unit of exposure by collapsing the three returns into one penalty for a single course of conduct. Choice C misstates the trigger: a correctly computed, ultimately allowed credit does not cure a missing Form 8867. Choice D imports the $32,500 annual cap that applies to the failures in section 6695(a) through (e), not to the section 6695(g) due-diligence penalty.

Question 2

Rita, a paid preparer, prepared a client's 2023 calendar-year individual return. The client received an extension; Rita presented the completed return to the client for signature on October 10, 2024, signed it as preparer, and filed it on October 15, 2024. Rita kept a list showing the client's name, social security number, tax year, and the type of return (Form 1040), but she did not keep a complete copy of the return. In July 2027, a reviewer asks whether Rita has satisfied the return-retention requirement.

Which of the following is correct under section 6107(b) and section 6695(d) regarding Rita's retention obligation?

Rita has not satisfied the requirement because the list is permitted only for returns filed by the original due date and records must be kept for six years.
Rita has not satisfied the requirement because a list cannot substitute for a complete copy of the return, which must be kept for three years from October 15, 2024.
Rita satisfied the requirement because a list is sufficient, but the retention period ended on April 15, 2027, three years after the return's original due date.
Rita satisfied the requirement because a list with that information is sufficient, and she must keep the list until June 30, 2028. (correct answer)

Explanation: IRC § 6107(b), Treas. Reg. § 1.6107-1(b), and IRC § 6060(c), enforced by the § 6695(d) penalty. A signing preparer must keep either a completed copy of the return or a list showing the taxpayer's name, taxpayer identification number, taxable year, and type of return, for the 3-year period following the close of the return period in which the return was presented to the taxpayer for signature. A return period is the 12-month period beginning July 1. Rita presented the return on October 10, 2024, in the return period ending June 30, 2025, so she must keep the list until June 30, 2028. Choice D is correct. Choice A is wrong because the list is available whenever the return was filed, and the period is three years, not six. Choice B is wrong because a list with the required information is an acceptable substitute for a copy. Choice C is wrong because it measures the period from the unextended due date instead of from the close of the return period.

Question 3

A client asks Denise, a paid preparer, to sign his 2025 return. The return includes a deduction for a home office. Based on the facts the client has given her, Denise believes the position is supported by a reasonable basis but would not be supported by substantial authority if the IRS challenged it. The client tells Denise he will not allow a Form 8275 disclosure on the return because the disclosure 'invites an audit.'

Under Circular 230 section 10.34 and IRC section 6694, which of the following is correct?

Denise may not sign the return as presented, because an undisclosed position must be supported by substantial authority and the client has refused to allow disclosure. (correct answer)
Denise may not sign the return unless the position is 'more likely than not' correct, because that is the standard for a disclosed position.
Denise may sign the return without disclosure if she believes the position has a realistic possibility of being sustained on the merits.
Denise may sign the return because a position supported by a reasonable basis satisfies the signing standard even when it is not disclosed.

Explanation: Circular 230 §10.34(a) and IRC §6694(a) require that a position on a return be adequately disclosed and have at least a reasonable basis, or be undisclosed and supported by substantial authority; a frivolous position is never acceptable. Denise believes the home-office position has only a reasonable basis, and the client refuses disclosure, so the position is not supported by substantial authority and Denise may not sign the return as presented. Choice A states this rule. Choice D is wrong: without adequate disclosure, a reasonable basis alone is not enough. Choice B is wrong: 'more likely than not' is not the standard for a disclosed, non-tax-shelter position; adequate disclosure plus a reasonable basis is sufficient. Choice C is wrong: a realistic possibility of being sustained on the merits is not the standard that permits an undisclosed position; substantial authority is required.

Question 4

Omar, a paid preparer, files a 2025 return for an unmarried client using head of household status. Omar completes Form 8867 and checks the head-of-household certification based only on the client's statement that she paid more than half the cost of keeping up the home. Omar asks no questions about the household expenses and keeps no record of the information supporting the head-of-household determination.

Which of the following is correct regarding Omar's exposure under section 6695(g)?

Omar is subject to the penalty because head of household status is covered by section 6695(g), regardless of whether the taxpayer was in fact eligible for the status. (correct answer)
Omar is subject to the penalty only if the IRS disallows the head of household status or a related credit upon examination of the return.
Omar is not subject to the penalty because the head-of-household questions are the same as the earned income credit questions, which Omar completed.
Omar is not subject to the penalty because the client was in fact entitled to head of household status and the return reported the correct tax.

Explanation: IRC §6695(g) and the Form 8867 instructions extend the preparer due-diligence penalty to head of household filing status in addition to the earned income credit, the child tax credit/credit for other dependents, and the American opportunity credit. A preparer must ask the required head-of-household questions (including whether the taxpayer paid more than half the cost of keeping up the home) and must retain records of the information used; the penalty applies when the diligence is deficient without regard to the taxpayer's actual eligibility. Choice A states this rule. Choice D makes the penalty depend on the return's correctness, which is not the test. Choice B adds an examination-disallowance condition the statute does not contain. Choice C is wrong because the head-of-household requirements are separate from the earned income credit requirements and must be satisfied independently.

Question 5

A new client asks Priya, an enrolled agent, to prepare her 2025 return. The client's Form W-2 shows wages of $58,000 and federal income tax withholding of $5,900. The client tells Priya that the W-2 is wrong because, after a pay dispute, the employer 'inflated' the amount, and that she actually received only $41,000 in cash during the year. The client asks Priya to report $41,000. Priya has no other information about the client's wages.

Under Circular 230 and section 6694, which of the following is Priya required to do before signing the return?

Sign the return reporting $41,000, because a preparer may rely in good faith on information furnished by the client without verification.
Sign the return reporting $41,000 and attach Form 8275, because adequate disclosure permits a position the preparer has reason to believe is false.
Make a reasonable inquiry into the discrepancy, and not sign the return reporting $41,000 if the discrepancy remains unresolved after the inquiry. (correct answer)
Advise the client that the return must be corrected, and report the discrepancy to the IRS as a suspected false return.

Explanation: Circular 230 §10.34(d) permits a practitioner to rely in good faith on information furnished by the client, but only when the information does not appear to be incorrect, inconsistent, or incomplete; when it does, the practitioner must make reasonable inquiries. The W-2 and the client's oral account conflict, so Priya may not sign a return reporting $41,000 unless the conflict is resolved, and section 6694(a) and Circular 230 §10.34(a) bar signing a return the preparer knows or has reason to know contains a false position. Choice C states this two-step duty. Choice A states the general reliance rule but ignores its exception for inconsistent information. Choice B misuses disclosure: attaching Form 8275 cannot cure a position the preparer has reason to know is false because the position must still have at least a reasonable basis. Choice D invents a duty to report the taxpayer to the IRS; neither the IRC nor Circular 230 requires a preparer to report a client's suspected underreporting to the IRS.

Question 6

Nora, a return preparer, prepared a client's 2025 federal income tax return. The refund check, issued jointly to the client and her spouse, was mailed to Nora's office because the client used Nora's address on the return. The client is traveling abroad and asks Nora to deposit the check into Nora's business account and then send her the funds by wire transfer. The client provides Nora with a signed, notarized authorization directing the deposit.

Under IRC § 6695(f), which of the following is correct?

Nora may deposit the check if the authorization is signed by both payees and notarized, because the clients have consented to the arrangement.
Nora may not deposit the check into her business account, but she may cash it and hold the proceeds for the client until the client returns.
Nora may not endorse or deposit the refund check, even with the signed authorization, and should return the check to the taxpayers. (correct answer)
Nora may deposit the check because a signed, notarized authorization from the payees makes the deposit a permissible accommodation by the preparer.

Explanation: IRC § 6695(f) prohibits a return preparer from endorsing or otherwise negotiating a taxpayer's refund check, whether for a fee or not, and a taxpayer's signed, notarized authorization does not make the act permissible. The correct course is to return the check to the taxpayers. Choice C states this rule. Choice A errs in treating the payees' consent and notarization as curative. Choice B errs in distinguishing cashing from depositing: cashing the check necessarily requires endorsing or otherwise negotiating it, which is also prohibited. Choice D errs in treating a signed authorization as a permissible accommodation; the prohibition applies without regard to consent.

Question 7

Which of the following is correct regarding the penalty under IRC § 6695(g) for a 2025 return filed in 2026?

A single $650 penalty is imposed for the entire return, regardless of how many credits are claimed on the return or how many due-diligence requirements were not satisfied.
The section 6695(g) penalty may be asserted only once per return preparer per filing season, and the total for the season is capped at $32,500.
A separate $650 penalty applies for each credit or head of household determination on the return that fails the requirements, and § 6695(g) penalties have no annual cap. (correct answer)
The penalty is $650 for each return that fails the due-diligence requirements, but the total is capped at $32,500 per firm for each filing season.

Explanation: Governing authority: IRC § 6695(g); Treas. Reg. § 1.6695-2(a); Instructions for Form 8867. For a return filed in 2026 the penalty is $650, and a separate penalty applies for each credit (EITC, CTC/ACTC/ODC, AOTC) and for the head of household determination on the return for which the requirements were not met. The Form 8867 instructions illustrate a $2,600 penalty on one return: $650 for each of four benefits. The number of individual requirements failed for a credit does not multiply the penalty. Choice C is correct. Choice A misstates the unit: the penalty is not a single amount per return when several benefits are claimed. Choice B misstates the frequency and the cap: the penalty is not limited to once per filing season, and the $32,500 annual maximum applies to the § 6695(a) through (e) penalties, not to § 6695(g). Choice D misstates the cap for the same reason and also counts one penalty per return.

Question 8

Which of the following is correct regarding IRC § 6695(f) as it applies to a paid tax return preparer and a client's federal refund check?

A paid preparer may endorse a client's refund check with the client's written consent if the endorsement is made solely to collect the preparation fee shown on the return.
A paid preparer may not endorse or negotiate a client's federal refund check, and a written power of attorney from the client does not make such an endorsement permissible. (correct answer)
A paid preparer may deposit a client's refund check into the preparer's trust account under a power of attorney and later remit the proceeds to the client, because the attorney-in-fact stands in the taxpayer's shoes.
The prohibition applies only to refund checks the preparer receives directly from the IRS, and not to a check the client endorses over to the preparer after receiving it in the mail.

Explanation: IRC § 6695(f) and Treas. Reg. § 1.6695-1(f) prohibit a tax return preparer from endorsing or otherwise negotiating a federal refund check issued to a client. An IRS power of attorney (Form 2848) authorizes representation before the IRS, not endorsement or negotiation of a refund check, and § 6695(f) applies regardless of state-law agency authority. Choice A misstates the rule: collecting the preparation fee by endorsing the client's refund check is exactly the abuse the statute prohibits. Choice C misstates the attorney-in-fact role: Form 2848 does not authorize negotiation of a refund check, and a preparer may not use a trust account to circumvent § 6695(f). Choice D misstates the conduct covered: the prohibition reaches any endorsement or negotiation of the check, including a check the client first receives and then endorses over to the preparer.

Question 9

Which of the following is correct regarding the knowledge standard that applies to the due-diligence requirements of IRC § 6695(g)?

A preparer has reason to know that information is incorrect or incomplete when a reasonable and well-informed preparer familiar with the facts would conclude that it is, and the preparer must make reasonable inquiries rather than rely solely on a taxpayer's statement. (correct answer)
A preparer may satisfy the knowledge requirement by relying on a commercial tax software program's eligibility interview, because the software, not the preparer, is responsible for asking every required question.
A preparer is subject to the penalty only if the preparer actually knew the information was false, because reason to know is an audit standard and not a standard for imposing the penalty under section 6695(g).
A preparer satisfies the knowledge requirement by obtaining a signed statement from the taxpayer affirming that the information is true and complete, even if the statement conflicts with documents already in the preparer's files, because the signed statement establishes the preparer's good faith.

Explanation: Treas. Reg. § 1.6695-2(b) sets the knowledge standard: a preparer may not claim the EITC, the CTC/ACTC/ODC, the AOTC, or Head of Household status when the preparer knows or has reason to know that the information used is incorrect or incomplete. Reason to know exists when a reasonable and well-informed preparer familiar with the facts would conclude so, and the preparer must make reasonable inquiries rather than rely on information that appears wrong. Choice A correctly states this standard. Choice B misstates reliance: using software does not shift the preparer's duty; the preparer remains responsible for reviewing the information and making follow-up inquiries. Choice C misstates the knowledge standard: actual knowledge is not required; reason to know is sufficient to support the penalty. Choice D misstates the effect of a signed statement: a taxpayer's affirmation does not cure information that conflicts with documents already in the preparer's possession.

Question 10

Which of the following is correct regarding Form 8867 (Paid Preparer's Due Diligence Checklist) for a 2025 return filed in 2026?

The paid preparer completes Form 8867 and files it with any return claiming the EITC, the CTC/ACTC/ODC, the AOTC, or head of household status; the taxpayer does not sign the form. (correct answer)
Form 8867 must be completed and signed by both the taxpayer and the paid preparer, and a separate form is required for each credit claimed so the IRS can verify each item independently.
Form 8867 is required only when a return claims the EITC or the AOTC, and the preparer must retain the completed form for seven years rather than transmit it with the return.
Form 8867 must be filed whenever a return claims any refundable credit, including the EITC, the premium tax credit, the additional child tax credit, and the refundable portion of the adoption credit, and it must be signed by the taxpayer.

Explanation: Governing authority: IRC § 6695(g); Treas. Reg. § 1.6695-2(b)(1); Instructions for Form 8867. A paid preparer must complete Form 8867 for any return or claim for refund claiming the EITC, the CTC/ACTC/ODC, the AOTC, or head of household filing status, and the form must be filed with the return (e-filed with it, or given to the taxpayer for a paper return). Only paid preparers complete the form; the taxpayer does not sign it, and the form has no signature line. Choice A is correct. Choice B misstates the parties and the form: the taxpayer does not sign Form 8867, and the form covers each of the listed benefits rather than requiring a separate form for each credit. Choice C misstates the scope and the filing rule: the form also covers the CTC/ACTC/ODC and head of household status, and it is filed with the return, not merely retained. Choice D misstates the trigger: the premium tax credit and the refundable adoption credit are not among the benefits covered by § 6695(g), and the taxpayer does not sign the form.

Question 11

Which of the following is correct regarding the signing and preparer tax identification number requirements under IRC § 6695(b) and (c)?

A return prepared by a firm may be signed by any officer of the firm who holds a PTIN, without regard to which individual in the firm actually prepared the return.
The signature and PTIN requirements apply only to paper returns, because an electronically filed return is treated as signed when the taxpayer signs the e-file authorization form.
The individual preparer with primary responsibility for the overall substantive accuracy of the return must sign it and enter that individual's own PTIN, and the same rule applies to a prepared claim for refund. (correct answer)
The requirements are satisfied by entering the firm's name and employer identification number in the 'Paid Preparer Use Only' section and attaching the firm's authorized e-file application.

Explanation: IRC § 6695(b) and (c) and Treas. Reg. § 1.6695-1(b) require the individual preparer with primary responsibility for the overall substantive accuracy of the return to sign the return and to enter that individual's own PTIN; the same requirements apply to prepared claims for refund. Choice A misstates the signer: a firm officer signs only if that officer is the individual with primary responsibility, and the signature cannot be assigned to any PTIN holder in the firm. Choice B misstates the scope: the signature and PTIN requirements apply to electronically filed returns as well as paper returns, and the taxpayer's e-file authorization is not the preparer's signature. Choice D misstates what satisfies the requirements: the firm's name and employer identification number do not replace the individual preparer's signature and PTIN.

Question 12

Which of the following is correct regarding the copy of the return that a paid preparer must give a taxpayer under IRC § 6695(a)?

A one-page summary of adjusted gross income, taxable income, and the refund or balance due satisfies the rule if the preparer makes the full copy available on request.
The copy requirement applies only to returns filed electronically, because a taxpayer who signs a paper return already has the return in hand and needs no further copy.
The preparer may satisfy the copy requirement by mailing the copy within 30 days after the return is filed with the IRS if the taxpayer consented to electronic filing in writing.
The preparer must provide a complete copy of the return or claim for refund, including schedules and attachments, no later than when it is presented for signature. (correct answer)

Explanation: IRC § 6695(a) and Treas. Reg. § 1.6695-1(a) require the preparer to furnish a complete copy of the return or claim for refund to the taxpayer no later than the time it is presented for signature; this includes prepared claims for refund such as Form 1040-X. Choice A misstates the required content: a one-page summary is not a complete copy even if the full copy is later made available on request. Choice B misstates the scope: the copy requirement applies without regard to filing medium, so it applies to paper returns as well as electronically filed returns. Choice C misstates the timing: the copy must be provided at presentation for signature, not mailed within 30 days after filing, and written consent to electronic filing does not extend that deadline.

Question 13

A paid preparer obtains a filing extension for a client's 2025 return and e-files the return, which claims the EITC and the AOTC, on June 30, 2026. The extended due date is October 15, 2026. Until what date must the preparer retain the due-diligence records supporting the credits?

June 30, 2029, because the records must be kept for three years from the later of the unextended due date or the date the preparer e-filed the return. (correct answer)
October 15, 2029, because the records must be kept for three years from the later of the extended due date or the date the return was filed.
April 15, 2029, because the records must be kept for three years from the original unextended due date of the return.
October 15, 2028, because the records must be kept for two years from the extended due date of the return.

Explanation: Governing authority: Treas. Reg. § 1.6695-2(b)(4); Instructions for Form 8867. The preparer must keep Form 8867, the computation worksheets, and the record of inquiries for three years from the latest of the due date of the return, not including extensions; for a signing preparer who e-files, the date the return was filed; or, for a paper return, the date it was presented to the taxpayer for signature. Here the unextended due date is April 15, 2026, and the e-file date is June 30, 2026, which is later, so the records must be kept until June 30, 2029. Choice A is correct. Choice B uses the extended due date, which the rule does not take into account. Choice C uses only the unextended due date and ignores the later e-file date. Choice D uses a two-year period from the extended due date, which is the wrong period and the wrong starting date.