Ethics, Professional Responsibilities and
Federal Tax Procedures UPDATED Exam
Questions and CORRECT Answers
Who is a tax return preparer (TRP)? - CORRECT ANSWER - 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 or any claims for refund of tax (This provision covers not
only federal income tax returns but also federal estate and gift tax returns, employment tax
returns, and excise tax returns)
People are TRPs if they - CORRECT ANSWER - 1.Are paid
2.To prepare, or retain employees to prepare,
3.A substantial portion
4.Of any federal tax return or refund claim.
Signing TRPs - CORRECT ANSWER - individual TRPs who bear "primary responsibility"
for the overall accuracy of the return or claim for refund
Nonsigning TRPs - CORRECT ANSWER - other than the signing TRP who prepare all or a
substantial portion of a return or claim for refund
What qualifies as a substantial portion for TRP? - CORRECT ANSWER - The signing TRP is
always responsible for a substantial portion of the return.
Nonsigning TRPs:
1. Less than $10,000, or
2. Less than $400,000, which is also less than 20% of the gross income indicated on the return.
Who is not a TRP - CORRECT ANSWER - People are not TRPs merely because they:
1. Furnish typing, reproducing, or other mechanical assistance
,2. Prepare as a fiduciary a return or claim for refund for any person
3. Prepare taxes as part of a Volunteer Income Tax Assistance (VITA) or a Low Income Tax
Clinic (LITC) program, but only for returns prepared as part of that program
4. Prepare a return with no explicit or implicit agreement for compensation, even if the person
receives an insubstantial gift, return service, or favor
5. Prepare a return or claim for refund of the employer (or of an officer or employee of the
employer) by whom he or she is regularly and continuously employed
Who license and remove CPAs - CORRECT ANSWER - It is only STATE BOARDS that can
grant CPA licenses and only state boards that can take them away.
While the AICPA and state societies of CPAs cannot grant or take away CPA licenses, they can
grant membership, take away membership, and punish members by suspensions, etc.
The IRC imposes (in Section 6662) a 20% penalty on various types of underpayments, including
- CORRECT ANSWER - A. Underpayments attributable to negligence or disregard of rules or
regulations.
B. Any substantial understatement of income tax.
1. An "understatement" in this category is reduced by the amount attributable to any item where:
a. The relevant facts affecting the tax treatment are adequately disclosed (typically on a Form
8275 or 8275R), and
b. There is a "reasonable basis" (≥20% chance of being sustained) for the tax treatment.
Disclosure is important here because an undisclosed position must be supported by "substantial
authority," which requires a ≥40% chance of being sustained.
Reasonable Cause and Good Faith Defense (For Under Payment) - CORRECT ANSWER -
No Section 6662 penalty is imposed if (a) there was "reasonable cause" for the underpayment
and (b) the taxpayer acted with "good faith."
, Reasonable Cause - CORRECT ANSWER - 1. The exercise of ordinary care
2. Judged objectively
Examples of reasonable cause:
a. Reliance on tax adviser and/or
b. Reliance on advice of IRS employee.
Standards of belief:
Undisclosed position—"Substantial authority" (≥40% chance of being sustained)
Disclosed position—"Reasonable basis" (≥20% chance of being sustained)
Good Faith - CORRECT ANSWER - 1. Honesty of purpose
2. Judged subjectively
Disclosure and Substantiation - CORRECT ANSWER - Taxpayers have to pay penalties
under Section 6662 because of their negligent conduct or because they have taken positions that
are inappropriate.
1. Disclosure can help avoid liability by demonstrating that the taxpayer was acting in good faith
and not trying to pull a fast one or otherwise sneak a position past the IRS.
2. Substantiation can help avoid liability by establishing entitlement to a claimed position and
also indicating good faith by a taxpayer who is trying to get things right.
Federal Tax Procedures UPDATED Exam
Questions and CORRECT Answers
Who is a tax return preparer (TRP)? - CORRECT ANSWER - 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 or any claims for refund of tax (This provision covers not
only federal income tax returns but also federal estate and gift tax returns, employment tax
returns, and excise tax returns)
People are TRPs if they - CORRECT ANSWER - 1.Are paid
2.To prepare, or retain employees to prepare,
3.A substantial portion
4.Of any federal tax return or refund claim.
Signing TRPs - CORRECT ANSWER - individual TRPs who bear "primary responsibility"
for the overall accuracy of the return or claim for refund
Nonsigning TRPs - CORRECT ANSWER - other than the signing TRP who prepare all or a
substantial portion of a return or claim for refund
What qualifies as a substantial portion for TRP? - CORRECT ANSWER - The signing TRP is
always responsible for a substantial portion of the return.
Nonsigning TRPs:
1. Less than $10,000, or
2. Less than $400,000, which is also less than 20% of the gross income indicated on the return.
Who is not a TRP - CORRECT ANSWER - People are not TRPs merely because they:
1. Furnish typing, reproducing, or other mechanical assistance
,2. Prepare as a fiduciary a return or claim for refund for any person
3. Prepare taxes as part of a Volunteer Income Tax Assistance (VITA) or a Low Income Tax
Clinic (LITC) program, but only for returns prepared as part of that program
4. Prepare a return with no explicit or implicit agreement for compensation, even if the person
receives an insubstantial gift, return service, or favor
5. Prepare a return or claim for refund of the employer (or of an officer or employee of the
employer) by whom he or she is regularly and continuously employed
Who license and remove CPAs - CORRECT ANSWER - It is only STATE BOARDS that can
grant CPA licenses and only state boards that can take them away.
While the AICPA and state societies of CPAs cannot grant or take away CPA licenses, they can
grant membership, take away membership, and punish members by suspensions, etc.
The IRC imposes (in Section 6662) a 20% penalty on various types of underpayments, including
- CORRECT ANSWER - A. Underpayments attributable to negligence or disregard of rules or
regulations.
B. Any substantial understatement of income tax.
1. An "understatement" in this category is reduced by the amount attributable to any item where:
a. The relevant facts affecting the tax treatment are adequately disclosed (typically on a Form
8275 or 8275R), and
b. There is a "reasonable basis" (≥20% chance of being sustained) for the tax treatment.
Disclosure is important here because an undisclosed position must be supported by "substantial
authority," which requires a ≥40% chance of being sustained.
Reasonable Cause and Good Faith Defense (For Under Payment) - CORRECT ANSWER -
No Section 6662 penalty is imposed if (a) there was "reasonable cause" for the underpayment
and (b) the taxpayer acted with "good faith."
, Reasonable Cause - CORRECT ANSWER - 1. The exercise of ordinary care
2. Judged objectively
Examples of reasonable cause:
a. Reliance on tax adviser and/or
b. Reliance on advice of IRS employee.
Standards of belief:
Undisclosed position—"Substantial authority" (≥40% chance of being sustained)
Disclosed position—"Reasonable basis" (≥20% chance of being sustained)
Good Faith - CORRECT ANSWER - 1. Honesty of purpose
2. Judged subjectively
Disclosure and Substantiation - CORRECT ANSWER - Taxpayers have to pay penalties
under Section 6662 because of their negligent conduct or because they have taken positions that
are inappropriate.
1. Disclosure can help avoid liability by demonstrating that the taxpayer was acting in good faith
and not trying to pull a fast one or otherwise sneak a position past the IRS.
2. Substantiation can help avoid liability by establishing entitlement to a claimed position and
also indicating good faith by a taxpayer who is trying to get things right.
