What are listed transactions?
| Which of the following is NOT a tax return preparer? |
Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any tax return or claim for refund under Title 26. However, a person who prepares a return for his or her regular employer is disqualified as a tax return preparer.
| Which of the following is considered a tax return preparer? | |
Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, all or a substantial portion of any tax return or claim for refund under the IRC.
All of the following constitute frivolous returns EXCEPT
In addition to other penalties that may be imposed, there is a penalty for filing a frivolous return. A frivolous return is one that omits information necessary to determine the taxpayer’s tax liability, shows a substantially incorrect tax, is based upon a frivolous position (e.g., that wages are not income), or is based upon the taxpayer’s desire to impede the collection of tax. A return based on the taxpayer’s altering or striking out the “penalty of perjury” language above the signature line also constitutes a frivolous return. A return showing a substantially correct tax liability is not considered a frivolous return.
| Which of the following persons would be subject to the penalty for improperly negotiating a taxpayer’s refund check? | |
Section 6695(f) provides that any tax return preparer who endorses or otherwise negotiates any check issued to a taxpayer with respect to taxes imposed by the IRC will be subject to a penalty of $545 for each such check. A tax return preparer who operates a check cashing agency that cashes, endorses, or negotiates tax refund checks for returns that (s)he prepared is subject to the penalty.
All of the following constitute frivolous returns EXCEPT
In addition to other penalties that may be imposed, there is a penalty for filing a frivolous return. A frivolous return is one that omits information necessary to determine the taxpayer’s tax liability, shows a substantially incorrect tax, is based upon a frivolous position (e.g., that wages are not income), or is based upon the taxpayer’s desire to impede the collection of tax. A return based on the taxpayer’s altering or striking out the “penalty of perjury” language above the signature line also constitutes a frivolous return. A return showing a substantially correct tax liability is not considered a frivolous return.
Which of the following statements is false with respect to tax return preparer penalties?
| Willie is the owner of an accounting firm. One of Willie’s employees prepares a 2021 income tax return for a client and believes that a deduction can be claimed for a bad debt. If the return is examined and the deduction is disallowed, Willie will NOT be subject to a preparer penalty under which of the following circumstances? |
Section 6694 imposes a penalty of the greater of $1,000 or 50% of income derived by the preparer as to the return on a preparer for substantial underpayment on a tax return. However, the penalty only applies if the preparer knows, or has reason to know, that the position taken has no reasonable belief of being sustained on the merits. A “reasonable belief” has been defined by the courts as having at least a more likely than not chance of being sustained on the merits. A reasonable belief of success is a legal conclusion as to whether substantial authority supporting the position outweighs authority against the position.
Which one of the following would result in a penalty against the tax return preparer for failure to furnish a copy of the 2021 tax return to the taxpayer?
Section 6695(a) provides that a tax return preparer with respect to any return or claim for refund who fails to furnish a copy of the return or claim for refund to the taxpayer when the return is presented for the taxpayer’s signature must pay a penalty of $50 unless the failure is due to reasonable cause and not willful neglect. The copy machine breaking on April 13 could qualify for reasonable cause, but in this case, 4 months had elapsed without the preparer addressing the problem.
Which one of the following individuals would qualify as a tax return preparer under the return preparer regulations?
| Preparer penalties outlined in Sec. 6694(a) and Sec. 6694(b) can apply to enrolled agents when preparing which of the following returns? | |
All of these returns can make a preparer subject to the penalties outlined in Secs. 6694(a) and 6694(b).
What level of evidence must a tax return preparer have in order to take a position?
By what date must a tax return preparer furnish a copy of the original return to a taxpayer?
The person who is a tax return preparer of any return of tax under Title 26 shall furnish a completed copy of the original return or claim for refund to the taxpayer not later than the time the original return or claim for refund is presented for the signature of the taxpayer. The preparer may, if (s)he wishes, request a receipt or other evidence from the taxpayer sufficient to show satisfaction of the requirement.
| Jack, a return preparer, did not retain copies of all returns that he prepared but did keep a list that reflected the taxpayer’s name, identification number, tax year, and type of return for each of his clients. Which of the following statements best describes this situation? |
The person who is an income tax return preparer of any return or claim for refund shall “retain a completed copy of the return or claim for refund; or retain a record by list, card file, or otherwise of the name, taxpayer identification number, and taxable year of the taxpayer for whom the return or claim for refund was prepared and the type of return or claim for refund prepared.” The material shall be retained and kept available for inspection for the 3-year period following the close of the return period during which the return or claim for refund was presented for signature to the taxpayer.
Arnie is a Certified Public Accountant who prepares income tax returns for his clients. One of his clients submitted a list of expenses to be claimed on Schedule C of the tax return. Arnie qualifies as a return preparer and, as such, is required to comply with which one of the following conditions?
A practitioner may rely on information provided by a client without further inquiry or verification. However, if the information so provided appears incorrect, incomplete, or inconsistent, the practitioner must make reasonable inquiries about the information. This requirement includes inquiry about unsubstantiated travel and entertainment expenses (Circular 230).
| Identify the item below that does NOT describe information a preparer must maintain about every return prepared. |
Section 6107(b) requires a tax return preparer to retain a completed copy of each return or claim prepared or a list of the names and taxpayer identification numbers of the taxpayers for whom such returns or claims were prepared. Under Reg. 1.6107-1(b)(1)(i)(B), the list must include the taxable year of the taxpayer and the type of return or claim for refund prepared. This copy or list must be retained by the income tax return preparer for 3 years after the close of the return period.
| What is the statute of limitations for assessing penalties for understatement due to willfulness or reckless conduct under Sec. 6694(b)? |
A 3-year limit applies to assessing the penalties for the Sec. 6695 procedural penalties and the Sec. 6694(a) understatement liability penalty. No period of limitation applies to assessing penalties for understatement due to willfulness or reckless conduct under Sec. 6694(b).
Which of the following is NOT a tax return preparer?
Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any return or refund of tax imposed by the IRC. A fiduciary is specifically excluded from qualifying as a tax return preparer.
| Which action by a tax return preparer would NOT be considered misconduct for which a court may issue an injunction? |
A court has the authority to seek an injunction to enjoin a tax preparer from engaging in certain actions, as specified in Sec. 7407(b). While understating tax liability is one of the actions considered misconduct, understating tax deductions is not. Understating tax deductions results in an overstatement of tax liability, which is not a concern for the IRS.
| A penalty may be assessed against an income tax return preparer who takes an unreasonable position that causes an understatement of liability on a return. For purposes of assessing the penalty, “understatement of liability” means |
Section 6694(e) defines “understatement of liability” for purposes of assessing penalties against return preparers as any understatement of the net amount of tax payable under Title 26 or any overstatement of the net amount creditable or refundable under Title 26. Under Sec. 6694(d), penalties will not be assessed against tax return preparers unless there has been an understatement of liability.
| A penalty of $50 per return may be imposed on a return preparer for failure to comply with all of the following procedural requirements, EXCEPT |
Under Sec. 6695, a penalty of up to $27,000 per year may be imposed on a return preparer at $50 for each failure to comply with each procedural requirement. Applicable requirements with respect to returns, claims, and employees are the following: signing a return or claim, affixing an identifying number, furnishing a copy of a return to the taxpayer, filing a correct information return regarding employed preparers, and retaining records by copies or a list. The retention of a copy of the taxpayer’s Social Security card is not a procedural requirement.
| Which of the following entities must file an employer’s informational return reporting the name, identifying number, and principal place of work of each tax return preparer? | ||||||||||||||||||||||||
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A person who employs one or more tax return preparers is required to file a return setting forth the name, identifying number, and principal place of work of each employed tax return preparer. A partnership is treated as an employer of the partners and thus must maintain a record with respect to the partners. A sole proprietor also must make available a record with respect to himself or herself.
Bernard is a tax return preparer. While preparing a 2021 tax return for a client, Bernard determines the client owes a substantial amount of tax. In order to generate a refund for the client, Bernard substantially overstates itemized deductions and expenses claimed on the Schedule C. Bernard is subject to a penalty of
Section 6694(b) provides for a penalty of the greater of $5,000 or 75% of income derived by the preparer as to the return, to be assessed against a return preparer whose willful or reckless conduct in preparing a tax return causes an understatement of liability. The penalty is applied if the understatement is due either to a willful attempt to understate the tax liability or to any reckless or intentional disregard of rules or regulations by the return preparer. The penalty is assessed against each return containing an understatement of liability caused by the return preparer’s willful or reckless conduct.
| Sam, an enrolled agent, 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 2020 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? |
Circular 230 addresses the possibility of an omission from a taxpayer’s tax return in Section 10.21. It states that, when a practitioner discovers that a client has made an error or omission from any document filed with the IRS, the practitioner must notify the client of the error or omission immediately. In addition, the practitioner must advise the client on the consequences of such an omission as provided by the Internal Revenue Code and regulations.
| Which of the following is a tax return preparer according to the tax return preparer rules? |
Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or claim for refund under Title 26 (IRC).
Matt, an enrolled agent, provided tax advice to XYZ corporation on a federal tax matter. The Securities and Exchange Commission (SEC) is reviewing a required filing of the XYZ corporation and asks to see a copy of Matt’s tax advice. The tax advice is NOT protected by the federally authorized tax practitioner privilege under IRC Sec. 7525 from disclosure to the SEC because
The confidentiality privilege is extended to certain nonattorneys. In noncriminal tax proceedings before the IRS, a taxpayer is entitled to the same common-law protections of confidentiality, with respect to the tax advice given any “federally authorized tax practitioner,” as a taxpayer would have if the advising individual were an attorney [Sec. 7525(a)(1)]. However, tax advice is not protected from disclosure to the SEC because the privilege protects only against disclosure to the IRS, not the SEC.
| In which of the following situations may the tax return preparer disclose the tax return information requested without first obtaining the consent of the taxpayer/client? |
Generally, a preparer is prohibited from disclosing a taxpayer’s information without the client’s consent. However, several exceptions exist, including a disclosure made pursuant to a court order, pursuant to an IRS inquiry, or among partners in a partnership.
| Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty? | |
Section 6713 imposes a $250 penalty (limited to $10,000 per year) on an income tax return preparer who discloses information furnished in connection with preparation of any return or uses the information for any purpose other than to prepare, or assist in preparation of, the return. The preparer is subject to up to $1,000 in fines and up to 1 year in prison if convicted of knowingly or recklessly disclosing the information. This answer choice is such a disclosure described in Sec. 6713 to which no exception applies. Section 7216 imposes criminal penalties for knowingly or recklessly making such disclosure.
Which of the following does NOT describe one of the five major categories of reportable transactions?
| If you are employed as a tax preparer employee by a tax preparation firm, which of the following penalties may be assessed to you as a tax preparer? |
In preparing an Earned Income Credit Worksheet and Form 8867, to meet the due diligence requirements, a return preparer must retain for a certain period all of the following EXCEPT:
The due diligence checklist of Form 8867 requires the retention of the following five records: Form 8867, Paid Preparer’s Due Diligence Checklist; the EIC worksheet(s) or the preparer’s own worksheet(s); copies of any taxpayer documents relied on to determine eligibility for or amount of EIC; a record of how, when, and from whom the information used to prepare the form and worksheet(s) was obtained; and a record of any additional questions the preparer asked and the client’s answers. There is no requirement to retain questions asked by the taxpayer about his or her eligibility for the credit.
| A tax return preparer must complete the paid preparer’s area of the return if |
Answer (D) is correct. Section 7701(a)(36) states that the term “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax imposed by the IRC or any claim for refund of tax imposed by the IRC. |
| Identify the item below that is accurate regarding preparer retention of records. |
Regulation 1.6107-1(b) states that a person who is a tax return preparer of any return or claim for refund shall (1) retain a completed copy of the return or claim for refund; or retain a record by list, card file, or otherwise of the name, taxpayer identification number, and taxable year of the taxpayer (or nontaxable entity) for whom the return or claim for refund was prepared and the type of return or claim for refund prepared; (2) retain a record by retention of a copy of the return or claim for refund, maintenance of a list or card file, or otherwise, for each return or claim for refund presented to the taxpayer (or nontaxable entity) of the name of the individual preparer required to sign the return or claim for refund pursuant to Sec. 1.6695-1(b); and (3) make the copy or record of returns and claims for refund and record of the individuals required to sign available for inspection upon request by the commissioner. Therefore, all of the answers are accurate.
A penalty may be assessed on any preparer or
| For a single calendar year, what is the maximum penalty that can be imposed on a tax preparer for failing to sign the tax return he or she prepares? |
The penalty is $50 for each failure to sign a return, and the maximum penalty that can be imposed for failure to comply with procedural requirements is $27,000 for returns filed in 2021.
| Which of the following statements is false regarding penalties for aiding and abetting the understatement of tax liability? |
The IRC has an integrated penalty structure for preparers. But generally applicable sanctions may also apply to a preparer. One of these sanctions concerns aiding and abetting the understatement of tax liability. Section 6701 imposes a $1,000 penalty for aiding or assisting in the preparation of any document if the person knows or has reason to believe that the document will be used in connection with any material, federal tax matter and that, if it is so used, it will result in an understatement of tax liability. The penalty is $10,000 if the document relates to a corporate taxpayer’s liability.
| Which of the following situations describes a disclosure of tax return information by a tax return preparer that would subject the preparer to a penalty? | |
Disclosing tax information to a granddaughter is permissible provided there has not been a specific prohibition by the grandfather. This rule also applies to a corporation and its shareholders and to a bankrupt and a trustee.
| Ernie is a principal of an international CPA firm. One of the firm’s clients owns seven businesses and is a member of over 100 flow-through entities. Several members of Ernie’s firm assist in the preparation of the client’s individual income tax return. Which one of the following is true with regard to the member of the firm who qualifies as the return preparer? |
A return preparer is required to manually sign the return or claim for refund after it has been completed and before it is presented to the taxpayer. If more than one preparer is involved, the signatory is the preparer with primary responsibility for the overall accuracy of the return or claim for purposes of the signing requirement. The signing requirement may be satisfied with a photocopy of the manually signed return. A valid signature is defined by state law and may be anything that clearly indicates the intent to sign.
| With regard to the reporting requirements for tax return preparers under Sec. 6060, which of the following statements is false? |
Circular 230, Sec. 10.34, discusses standards with respect to tax returns and documents, affidavits, and other papers. Which of the statements below is true?
Significant aspects of return preparation are making factual inquiries and taking a position relative to tax law. A tax return preparer may rely, if in good faith, upon information furnished by the taxpayer without having to obtain third-party verification. However, the preparer may not ignore the implications of the information furnished. The preparer must make reasonable inquiries if the information appears inaccurate or incomplete. The preparer should make appropriate inquiries of the taxpayer to determine the existence of facts and circumstances required by an IRC section or regulations incidental to a deduction, including, e.g., substantiating documentary evidence, even if for a minimal amount.
A return preparer may not take a frivolous position on a return. In addition, the return preparer must inform the taxpayer of the penalties that may apply with the tax position that has been taken.
| If a penalty is proposed against a preparer that the preparer does not agree with, what actions are available to the preparer? |
The first recourse a preparer has is to request a conference with the agent and present additional information and explanations. A return preparer who pays 15% or more of an assessed return preparer penalty after receipt of notice and demand may file a claim for a refund within 30 days of the notice [Sec. 6694(c)].
Which of the following statements is true regarding the confidentiality privilege? The privilege
Answer (C) is correct. The confidentiality privilege is extended to certain nonattorneys. In noncriminal tax proceedings before the IRS, a taxpayer is entitled to the same common-law protections of confidentiality, with respect to tax advice given by any “federally authorized tax practitioner,” as a taxpayer would have if the advising individual were an attorney. A “federally authorized tax practitioner” includes any nonattorney who is authorized to practice before the IRS, such as an enrolled agent, an enrolled actuary, or a CPA. |
Delores is an income tax return preparer. While preparing a return for a client, she knowingly took an unreasonable position that she did not disclose. She also intentionally disregarded rules and regulations. The position Delores took caused an understatement of her client’s liability. With regard to the penalties that may be assessed against Delores, which of the following statements is true?
Section 6694(a) provides a penalty of $1,000 (or 50% of income derived, whichever is greater) to be assessed against a return preparer who takes an unreasonable position that causes an understatement of liability. The penalty is applicable if the preparer knew, or reasonably should have known, that the position was unreasonable and the preparer did not disclose the position, or if the position was frivolous. Section 6694(b) assesses a $5,000 (or 75% of income derived, whichever is greater) penalty against a return preparer whose willful or reckless conduct causes an understatement of liability. The penalty is applicable if the understatement of liability is due to the preparer’s willful attempt to understate the tax liability or his or her reckless or intentional disregard of rules or regulations. Section 6694(b) also states that the $5,000 penalty is to be reduced by the $1,000 penalty assessed under Sec. 6694(a) if the preparer is subject to both. Thus, a preparer who is subject to both the penalty for understatement due to unreasonable positions and the penalty for willful or reckless conduct will pay a total penalty of $5,000.
Which of the following is false regarding the filing of information returns concerning employees who prepare tax returns?
Under Sec. 6060(a), a person who employs one or more tax return preparers to prepare a return or claim for refund must file a return setting forth the name, identifying number, and place of work of each income tax return preparer employed by him or her. Section 6060(b) allows the IRS to approve an alternative method of reporting. Regulation 1.6060-1 states that the requirements of Sec. 6060 are satisfied by retaining a record of the name, identifying number, and principal place of work of each income tax return preparer employed, and making that record available for inspection upon request by the commissioner for the 3-year period following the close of the return period to which that record relates. The return period means the 12-month period beginning July 1 of each year [Reg. 1.6060-1(b)].
Sandra, an enrolled agent, prepares Linda’s income tax return. Linda sold some stock in a corporation and believes the proceeds of the stock are all a return to capital and therefore not included in her gross income. After research, Sandra determines that there is reasonable basis for Linda’s position, but she does not believe there is a reasonable belief of success on the merits. Under what circumstances can Sandra sign Linda’s return if the proceeds are not included in income reported on the return?
A tax return preparer may not adopt a position without a reasonable belief of the position being sustained on the merits [Sec. 6694(a)]. Whether a position has a reasonable belief of success on the merits is essentially a legal question. A frivolous position fails the test. However, disclosure of a position may shield a preparer from liability for nonfrivolous positions without a more likely than not chance of success.
Which of the following statements is false regarding tax return preparers?
The IRS must send a letter to the tax return preparer at least 30 days before the statute of limitations expires.
The claim, which is made on Form 6118, Claim for Refund of Income Tax Return Preparer Penalties, must be filed with the service center that issued the statement of notice and demand to the preparer. Only a minimum of 15% need be paid.
Jane is a Certified Public Accountant who specializes in preparing federal tax returns. Which of the following returns would NOT qualify Jane as a tax return preparer?
A tax return preparer is any person who prepares for compensation any return of tax or claim for refund under the IRC. Estate returns, gift tax returns, excise tax returns, and withholding returns are covered by the IRC.
| Mike is an enrolled agent. For the past 5 years, the information that Anne provided Mike to prepare her return included a Schedule K-1 from a partnership showing significant income. However, Mike did not see a Schedule K-1 from the partnership among the information Anne provided to him this year. What does due diligence require Mike to do? |
A tax return preparer may rely, if in good faith, upon information furnished by the taxpayer without having to obtain third-party verification. However, the preparer may not ignore the implications of the information furnished. The preparer must make reasonable inquiries if the information appears inaccurate or incomplete.
| Frankie is a truck driver who is also a licensed return preparer and specializes in preparing income tax returns claiming the Earned Income Credit (EIC). Frankie will not be subject to a preparer penalty for an erroneously claimed EIC if he complies with which one of the following? |
Frankie will not be subject to a preparer penalty for an erroneously claimed EIC if he meets the four due diligence requirements outlined in Publication 3107, including completion of an eligibility checklist based on information provided by the client, completion of the appropriate computation worksheet for the EIC based on information provided by the client, and no knowledge or reason to know that the information used to determine the client’s eligibility and amount of EIC is incorrect.
A tax return preparer recklessly discloses taxpayer information without the consent of the taxpayer. What is the penalty imposed on the preparer?
A penalty is imposed on any tax return preparer who discloses or uses any tax return information without the consent of the taxpayer, other than for the specific purpose of preparing, assisting in preparing, or providing services in connection with the preparation of any tax return of the taxpayer. The penalty is $250 per disclosure, with a maximum of $10,000 per year. If convicted of knowingly or recklessly disclosing information, a preparer would be guilty of a misdemeanor and subject to up to $1,000 in fines and up to a year in prison.
| The IRS began an examination of Mr. Honeycutt’s Year 1 income tax return. Mr. Honeycutt hired Tyler, an enrolled agent and former IRS employee, to represent him before the IRS. Tyler wrote a memorandum to Mr. Honeycutt outlining the issues that might be raised by the IRS and how to address these issues. Tyler correctly marked this memorandum as confidential and privileged under Sec. 7525 of the Internal Revenue Code. During the examination, the Revenue Officer assigned to the case asked Tyler for a copy of the memorandum. Mr. Honeycutt, invoking the Sec. 7525 privilege, told Tyler not to disclose it to the Revenue Officer. Tyler is not required to provide the Revenue Officer with a copy of the memorandum because |
Mr. K employs X, Y, and Z to prepare income tax returns for taxpayers. X and Y collect the information from taxpayers and apply the tax laws. The return forms are completed by a computer service. One day, when certain returns prepared by X and Y were ready for their signatures, X was out of town for 2 weeks and Y was out of the office for the day. Which one of the following statements is true?
Z may sign the returns prepared by X and Y if Z reviews the information obtained by X and Y from the taxpayers and reviews the preparation of the returns.
| To satisfy the due diligence requirements for various credits and head of household filing status, a preparer must do all of the following EXCEPT |
Under the regulations, the preparer must complete Form 8867. A copy of Form 8867 must be attached to the tax return. The preparer must record how and when the information was obtained by the preparer, including the identity of any person furnishing such information. The retention of a copy of the Social Security cards for the taxpayer and each qualifying child is not required.
Mary is the sole tax preparer at Taxes by Mary. During the current year, she helps Dale to prepare his taxes and discovers that Dale has made several poor investments, all of which are legally questionable. Out of embarrassment, Dale prohibits Mary from discussing his tax returns and poor investments with anyone, including Dale’s wife, who is unaware of the investments and who is not a separate client of Mary’s. Which of the following actions taken by Mary will subject her to an improper disclosure penalty?
A penalty is imposed on any tax return preparer who discloses or uses any tax return information without the consent of the taxpayer, with certain exceptions. Ordinarily, no penalty is imposed if disclosure is made to a related taxpayer, such as a spouse. However, if the taxpayer expressly prohibits the disclosure to the related taxpayer, the return prepare must keep the information confidential. Accordingly, using Dale’s return information to inform Dale’s wife of the bad investments would subject Mary to an improper disclosure penalty.
| In preparing an Earned Income Credit Worksheet and Form 8867, how long should a return preparer retain copies? |
Answer (C) is correct. The earned income credit worksheet and Form 8867 must be retained by a tax return preparer for 3 years following the filing of the return. |
What is the amount of the penalty imposed on a return preparer for negotiating a taxpayer’s refund check?
Tax return preparers are subject to penalties for violations. The degree of severity varies among the penalties. A penalty of $545 is imposed on a return preparer for each taxpayer refund check (s)he negotiates, e.g., by endorsement. Taxpayers may authorize the representative to receive a refund check. However, if the representative is a return preparer, (s)he cannot be authorized to endorse or otherwise cash the check related to taxes.
Who may use Free File through the IRS?
Any individual can use Free File. Individuals or families with adjusted gross income of $73,000 or less can use the Free File software, and those with higher incomes may use Free File Fillable Forms.
| When must a tax return preparer provide a copy of a tax return to a taxpayer? |
Section 6107(a) requires all tax return preparers to furnish a completed copy of the return to the taxpayer not later than the time such return or claim for refund is presented for the taxpayer’s signature.
