Starr, CPA, prepared and signed Cox's current-year federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in doctors' bills during the year. Based on Cox's representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox's figures and did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox's tax return, Starr is

Starr, CPA, prepared and signed Cox's current-year federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in doctors' bills during the year. Based on Cox's representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox's figures and did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox's tax return, Starr is

A. Not liable to the IRS for any penalty or interest.
B. Liable to Cox for interest on the underpayment of tax.
C. Not liable to the IRS for any penalty but is liable to the IRS for interest on the underpayment of tax.
D. Liable to the IRS for negligently preparing the return.

Answer: A

The Secretary of the Treasury can censure, suspend, or disbar a practitioner from practice before the Internal Revenue Service for incompetence and/or disreputable conduct. Which one of the following is considered disreputable conduct?

The Secretary of the Treasury can censure, suspend, or disbar a practitioner from practice before the Internal Revenue Service for incompetence and/or disreputable conduct. Which one of the following is considered disreputable conduct?

A. Giving false or misleading information or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.
B. Conviction of any criminal offense under the revenue laws of the United States.
C. Conviction of any criminal offense involving dishonesty or breach of trust.
D. All of the answers are correct.

Answer: D

Which of the following is considered a tax return preparer?

Which of the following is considered a tax return preparer?

A. A neighbor who assists with preparation of depreciation schedule.
B. A volunteer at a local church who prepares tax returns but accepts no payment.
C. A woman who prepares tax returns in her home during filing season and accepts payment for her services.
D. A son who enters tax return information into a computer program and prints a return.

Answer: C

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer?

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer?

A. It must be communicated as an estimate before the engagement begins, with the understanding that the actual amount of the fee will not be determined until the engagement ends.
B. It may be communicated only through the confidential engagement letter between the tax practitioner and the taxpayer.
C. It may not be communicated by television, radio, or hand-delivered flyers.
D. It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

Answer: D

Which of the following is not a tax return preparer?

Which of the following is not a tax return preparer?

A. Someone who prepares a substantial portion of a return or claim for refund under Title 26 of the Code.
B. Someone who employs one or more persons to prepare for compensation, other than for the employer, all or a substantial portion of any tax return under Title 26 of the Code.
C. The preparer of another return with entries directly related to a substantial portion of this second return.
D. Someone who prepares, as a fiduciary, a return or claim for refund for any person.

Answer: D

According to the accounting profession's standards, which of the following statements is true regarding the standards a member of the AICPA should follow when recommending tax return positions and preparing tax returns?

According to the accounting profession's standards, which of the following statements is true regarding the standards a member of the AICPA should follow when recommending tax return positions and preparing tax returns?

A. A member may recommend a position if (s)he has a good faith belief that the position has a realistic possibility of being sustained if challenged.
B. A. A member may recommend a position if (s)he has a good faith belief that the position has a realistic possibility of being sustained if challenged.
C. A member may recommend a position that (s)he concludes is frivolous if the position is adequately disclosed on the return.
D. A member may recommend a position that (s)he concludes is frivolous if the position is adequately disclosed on the return.

Answer: A

During an interview conducted by the tax return preparer, the client stated that he had paid $1,500 for deductible travel expenses and $3,000 for charitable contributions. The preparer asked if documentation existed in support of the deductions and was assured by the client that adequate documentation did exist. When the client's return was later examined by the IRS, a tax deficiency resulted due to the client's lack of supporting documentation for the travel expenses. Which of the following statements best describes this situation?

During an interview conducted by the tax return preparer, the client stated that he had paid $1,500 for deductible travel expenses and $3,000 for charitable contributions. The preparer asked if documentation existed in support of the deductions and was assured by the client that adequate documentation did exist. When the client's return was later examined by the IRS, a tax deficiency resulted due to the client's lack of supporting documentation for the travel expenses. Which of the following statements best describes this situation?

A. The preparer is subject to a penalty under Sec. 6694 because she did not verify the existence of the documentation and a tax deficiency resulted from the examination.
B. The preparer is not subject to a penalty under Sec. 6694 because the understatement was not substantial.
C. The preparer is not subject to a penalty under Sec. 6694 because she is not required to examine or review the client's books and records in order to verify the client's information.
D. The preparer is subject to a penalty under Sec. 6694 because she did not verify that her client had supporting documentation.

Answer: C

A tax return preparer may disclose or use tax return information without the taxpayer's consent to

A tax return preparer may disclose or use tax return information without the taxpayer's consent to

A. Be evaluated by a quality or peer review organization.
B. Facilitate a supplier's or lender's credit evaluation of the taxpayer.
C. Solicit additional non tax business.
D. Accommodate the request of a financial institution that needs to determine the amount of taxpayer's debt to it to be forgiven.

Answer: A

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?

A. The CPA takes into account the possibility that a tax return will not be audited.
B. The CPA takes into consideration assumptions about future events related to the relevant facts.
C. The CPA reasonably relies upon representations of the client.
D. The CPA considers all relevant facts that are known.

Answer: A

Under the Statements on Standards for Tax Services, what is a CPA's responsibility for verifying information furnished by the taxpayer or third parties?

Under the Statements on Standards for Tax Services, what is a CPA's responsibility for verifying information furnished by the taxpayer or third parties?

A. Under the Statements on Standards for Tax Services, what is a CPA's responsibility for verifying information furnished by the taxpayer or third parties
B. Under the Statements on Standards for Tax Services, what is a CPA's responsibility for verifying information furnished by the taxpayer or third parties?
C.Under the Statements on Standards for Tax Services, what is a CPA's responsibility for verifying information furnished by the taxpayer or third parties?
D. A CPA need not make additional inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent with other facts known to the CPA.

Answer: C

Sam, a CPA, is representing Fred before the Examination Division of the Internal Revenue Service. The Internal Revenue Service is questioning Fred on his Schedule C gross income that is listed on the 2014 tax return. While reviewing the documentation Fred provided, Sam discovers income that was omitted from the tax return. What is the appropriate action for Sam to take?

Sam, a CPA, is representing Fred before the Examination Division of the Internal Revenue Service. The Internal Revenue Service is questioning Fred on his Schedule C gross income that is listed on the 2014 tax return. While reviewing the documentation Fred provided, Sam discovers income that was omitted from the tax return. What is the appropriate action for Sam to take?

A. Sam must immediately advise the Internal Revenue Service examiner of the omitted income.
B. Sam must advise Fred promptly of the omission and the consequences provided by the Internal Revenue Code and regulations for such omission.
C. Sam must notify the Internal Revenue Service that he is no longer representing Fred by withdrawing his Form 2848.
D. Sam must advise Fred on how to keep the omission from being discovered by the Internal Revenue Service.

Answer: B

Which of the following is false regarding the filing of information returns concerning employees who prepare tax returns?

Which of the following is false regarding the filing of information returns concerning employees who prepare tax returns?

A. The period for which the information return is required is a 12-month period beginning July 1 of each year.
B. Information returns of income tax return preparers must be maintained by the preparer for 2 years.
C. Annual listings of preparers, identification numbers, and place of work are required for preparers who employ others to prepare returns.
D. No information return is actually required to be submitted; a list is made and kept by the employing preparer.

Answer: B

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must

A. Promptly resign from the engagement and cooperate with the successor accountant.
B. Prepare an amended return within 30 days of the discovery of the error.
C. Promptly advise the client of the error.
D. Document the error in the work papers.

Answer: C

Frank, a certified public accountant, has the right to make the following solicitations of employment involving IRS matters:

Frank, a certified public accountant, has the right to make the following solicitations of employment involving IRS matters:

A. Communicating with a family member.
B. Seeking new business from a former client.
C. Targeting mailings.
D. All of the answers are correct

Answer: D

Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?

Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?

A. Les, a return preparer, obtained information from Tom while selling Tom life insurance. The information was identical to tax return information that had been furnished to him previously. Les discussed this information with Mary, his wife, who was not an employee of any of his businesses.
B. In the course of preparing a return for Duck Company, Jan obtained information indicating the existence of illegal kickbacks. Jan gave the information to Bill, an auditor in her firm, who was performing a financial audit of the company. Bill confirmed illegal kickbacks were occurring and brought the information to the attention of Duck Company officers.
C. Ron died after furnishing tax return information to his tax return preparer. Ron's tax return preparer disclosed the information to Jerry, Ron's nephew, who is not the fiduciary of Ron's estate.
D. Glade informed the proper federal officials of actions he mistakenly believed to be illegal.

Answer: C

Penalties may be imposed on a tax return preparer for an understatement of tax liability because of a position for which there is not a reasonable belief that there is substantial authority that the position will be sustained on its merits. But the penalties may be excused if

Penalties may be imposed on a tax return preparer for an understatement of tax liability because of a position for which there is not a reasonable belief that there is substantial authority that the position will be sustained on its merits. But the penalties may be excused if

A. The preparer knew or should have known of the position.
B. The understatement was unintentional.
C. The position was disclosed.
D. There is reasonable cause and good faith.

Answer: D

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

A. Substantial authority.
B. Not frivolous.
C. Realistic possibility.
D. More likely than not.

Answer: C

Statements on Standards for Tax Services (SSTSs) have been issued by the Tax Executive Committee of the AICPA. The SSTSs

Statements on Standards for Tax Services (SSTSs) have been issued by the Tax Executive Committee of the AICPA. The SSTSs

A. Apply only to federal income tax engagements
B. Are enforceable under the AICPA Code of Professional Conduct
C. Also have been approved by the Council of the AICPA.
D. Are applicable to all CPAs, not just members of the AICPA.

Answer: B

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company?

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company?

A. The tax preparer has no responsibility for disclosing any potential penalties to the company because the position will probably be sustained on audit.
B. The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.
C. The tax preparer is responsible for disclosing both penalties to the company.
D. The tax preparer is responsible for disclosing only the late-payment penalty to the company.

Answer: C