CPA REG Ethics, professional responsibilities and federal tax procedures: practice questions with answers

Answer: A. Unlimited practice before the IRS is open to attorneys, CPAs and enrolled agents (Circular 230 §10.3). An unenrolled preparer has only limited representation rights. Since 2016, these rights belong only to Annual Filing Season Program record holders. A record holder may represent a client only for a return she prepared and signed, and only before revenue agents, customer service representatives and similar IRS employees, including the Taxpayer Advocate Service. She may not appear before Appeals, revenue officers (collection) or IRS Counsel. Every paid preparer also needs a current PTIN.

Delphine prepared and signed the 2025 return, so she may represent Duarte before the revenue agent examining it.

Answer: C. Contingent fees (Circular 230 §10.27). A practitioner may not charge a contingent fee for services connected with any matter before the IRS, except:
1. services connected with an IRS examination of, or challenge to, an original return (or an amended return or claim filed within 120 days after a written notice of examination);
2. a refund or credit claim filed solely for statutory interest or penalties; and
3. services in a judicial proceeding under the IRC.

A fee based on the penalty reduction won in an examination of an original return falls within exception 1. A percentage of the refund on an original return the practitioner prepares does not.

Other options.
- §10.28 requires the practitioner to return the client's records promptly on request. Where state law does not allow records to be kept in a fee dispute, an unpaid fee is no excuse.
- §10.31 prohibits endorsing or otherwise negotiating a client's federal tax refund. This includes directing the payment into an account the practitioner owns or controls.

Court decisions. In Loving v. IRS (D.C. Cir. 2014) and Ridgely v. Lew (D.D.C. 2014), the courts held that the IRS cannot use Circular 230 to regulate return preparation and ordinary refund claims, so the contingent-fee ban is not currently enforced against preparers for that work. The question asks what the text of §10.27 permits, and the text still prohibits a contingent fee for preparing an original return.

Answer: B. IRC §7216 makes it a crime (a misdemeanor) for a return preparer knowingly or recklessly to disclose or use return information for any purpose other than preparing the return. §6713 adds a civil penalty.

Reg. §301.7216-2 allows certain uses without consent, such as disclosure within the preparer's own firm for preparing returns, or disclosure under a court order. Reg. §301.7216-3 requires the taxpayer's written consent, signed and dated, obtained before the information is used to solicit other services, such as insurance or investment products. An after-the-fact opt-out does not meet this requirement.

Answer: D. The Uniform Accountancy Act lists grounds on which a board may revoke, suspend or refuse to renew a license, or impose lesser sanctions. They include:
- fraud or deceit in obtaining a license;
- dishonesty, fraud or gross negligence in practice;
- violating professional standards or the board's rules;
- conviction of certain crimes; and
- revocation or suspension of the right to practice before any state or federal agency.

A Circular 230 suspension by the IRS is therefore a ground on which the state board may act separately. The other options describe lawful business choices.

Answer: C. IRC §6511(a): a refund claim must be filed by the later of:
- 3 years from the date the return was filed. A return filed early is treated as filed on its due date (§6513(a)), so this period ends on April 15, 2027.
- 2 years from the date the tax was paid. For the October 1, 2026 payment, this period ends on October 1, 2028.

The later date is October 1, 2028.

If the claim is filed under the 2-year rule, the refund is limited to tax paid in the 2 years before the claim (§6511(b)). The whole $9,200 was paid within that window, so all of it can be refunded.

Answer: D. Civil fraud penalty:
- The penalty is 75% of the portion of the underpayment attributable to fraud (IRC §6663(a)).
- The IRS bears the burden of proof (§7454(a)) and must prove fraud by clear and convincing evidence (Tax Court Rule 142(b)).
- Once the IRS proves that any portion of the underpayment is due to fraud, the whole underpayment is treated as fraudulent, except any part the taxpayer proves by a preponderance of the evidence is not (§6663(b)).

Related rules:
- The 20% accuracy-related penalty does not apply to the portion on which the fraud penalty is imposed (§6662(b)).
- For a fraudulent return, there is no statute of limitations on assessment (§6501(c)).
- Criminal tax evasion is a separate offense and must be proved beyond a reasonable doubt.