Circular 230 and IRS Practice Regulations

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Questions and Answers

Which situation represents a serious violation of Terrance's due diligence requirements in preparing the returns?

Henry used false supporting material provided by George without knowing it was false.

Henry used the dollar amounts provided verbally by George without supporting evidence. (correct)

The expenses appeared valid because George provided detailed receipts and logbooks.

Henry prepared the returns by hand and transcribed some numbers incorrectly.

What is the primary due diligence requirement for Lois when preparing the tax return for her client?

Ensuring all receipts are valid, deductible, and totaling them by calculator. (correct)

Using a calculator to verify the total amount provided by the client.

Accepting the client's word for the total amount provided.

Confirming with the client if he added the receipts correctly.

Which action would demonstrate insufficient due diligence on Lois's part?

Consulting tax guidelines regarding deductible repairs.

Taking the client's verbal total without checking the receipts. (correct)

Calculating the total after reviewing each receipt.

Cross-referencing the receipts to the amounts claimed.

If Henry transcribed numbers incorrectly onto Schedule C, what is the potential consequence?

The tax return may be flagged for inconsistency by the IRS. Signup and view all the answers

What is a critical factor Lois should verify regarding the client’s receipts?

That the receipts correspond to valid and deductible expenses. Signup and view all the answers

Which choice reflects a proper action for Henry to avoid due diligence issues?

Thoroughly reviewing all receipts and verifying calculations. Signup and view all the answers

Why is it problematic for Henry to use verbal amounts provided by George?

Verbal communication is often less reliable than written. Signup and view all the answers

What danger does Henry face if he relies on false information provided by George?

He may unintentionally commit tax fraud. Signup and view all the answers

What constitutes willful representation of a taxpayer before the IRS?

Communicating on behalf of a taxpayer without proper authorization Signup and view all the answers

Which action is NOT a violation of tax preparation regulations?

Claiming the Earned Income Tax Credit with proper documentation Signup and view all the answers

What is the penalty for a paid preparer failing to submit required forms with tax returns in 2021?

$540 per tax benefit claimed Signup and view all the answers

What percentage of Earned Income Tax Credit claims does the IRS estimate are paid in error?

21% to 26% Signup and view all the answers

Which of the following practices is NOT part of the due diligence requirements for tax preparers?

Neglecting to submit necessary forms with returns Signup and view all the answers

What is a common category for Earned Income Tax Credit errors reported by the IRS?

Claiming EIC for a child not meeting qualifying requirements Signup and view all the answers

What is the primary function of a practitioner's PTIN when preparing tax returns?

To identify the practitioner as a legitimate preparer Signup and view all the answers

Which of the following is considered frivolous in tax submissions?

Presenting an argument against the legality of a tax Signup and view all the answers

What is the primary focus of Circular 230?

To define practice and obligations before the IRS Signup and view all the answers

Which of the following is NOT a duty or obligation outlined in Circular 230?

Managing a tax preparation firm Signup and view all the answers

Who is the governing body responsible for interpreting and applying Circular 230 regulations?

The Office of Professional Responsibility (OPR) Signup and view all the answers

Which of the following actions qualifies as 'practice before the Internal Revenue Service'?

Preparing and filing tax returns Signup and view all the answers

Which of the following practitioners is NOT eligible to practice before the IRS?

Tax interns Signup and view all the answers

What consequence can occur for violating the duties outlined in Circular 230?

Sanctions imposed by the OPR Signup and view all the answers

Which subpart of Circular 230 pertains to the authority to practice before the IRS?

Subpart 1 Signup and view all the answers

Which type of communication is considered part of practicing before the IRS?

Corresponding and communicating with the IRS Signup and view all the answers

What is the purpose of Form 8867 for paid tax preparers?

To ensure eligibility criteria for tax credits are considered Signup and view all the answers

Which of the following is NOT a due diligence requirement for tax practitioners preparing EITC claims?

Providing a written guarantee of the refund amount Signup and view all the answers

What is the penalty for failing to comply with EIC due diligence requirements for each refundable credit in the tax year 2023?

$560 per credit Signup and view all the answers

What action can a tax preparer face for filing an incorrect EITC claim?

Loss of tax preparer designation Signup and view all the answers

How long must preparers keep records related to EITC claims?

Three years from the latest specified dates Signup and view all the answers

Which of the following statements is true regarding penalties for incorrect EITC claims?

A tax preparer may be subject to disciplinary action by the IRS. Signup and view all the answers

What is one requirement of the knowledge standard for tax preparers when filing EITC claims?

Asking adequate questions and documenting responses Signup and view all the answers

What could be one consequence of a tax preparer experiencing suspension from the IRS e-file program?

Inability to electronically file tax returns Signup and view all the answers

What is required of a firm to avoid penalties related to due diligence for the EITC?

Establish and follow appropriate compliance procedures Signup and view all the answers

For how long must records related to EITC claims be maintained?

For three years from the later date of the return's due date or when signed Signup and view all the answers

What action should Pat take when a client requests the EITC for children not living with him?

Investigate residency eligibility for the children before proceeding Signup and view all the answers

Which of the following is NOT a reason for the IRS to impose penalties for due diligence failures?

Inadvertently preparing a claim with incorrect information Signup and view all the answers

What constitutes gross indifference in relation to due diligence requirements?

Ignoring information that may lead to further investigation Signup and view all the answers

Which option best describes the impact of a firm's disregard for established compliance procedures?

Can lead to IRS penalties for due diligence failure Signup and view all the answers

What might be a reasonable step for a tax professional if unsure about a client's EITC eligibility?

Consult the IRS guidelines on EITC eligibility Signup and view all the answers

Which scenario exemplifies a failure to meet the residency test for the EITC?

Claiming the EITC for children who reside with an ex-spouse Signup and view all the answers

Study Notes

Circular 230

Defines "practice" before the IRS and who can practice
Outlines tax professionals' duties and obligations when practicing before the IRS
Authorizes sanctions for violating duties and obligations
Defines procedures for administrative proceedings related to disciplinary actions

Subpart of The Circular

Rules regarding the authority to practice before the Internal Revenue Service
The duties and restrictions related to practice before the IRS
Sanctions for violating the IRS regulations
Rules applicable to disciplinary proceedings
General provisions

Office of Professional Responsibility (OPR)

Supports the IRS's strategy to enhance enforcement of tax law
Ensures tax professionals adhere to tax practice standards and laws.
Interprets and applies regulations governing practice before the IRS.

"Practice before Internal Revenue Service"

Includes all matters related to presentations to the Internal Revenue Service
Includes but isn't limited to:
- Preparing documents
- Filing documents
- Corresponding and communicating with the IRS
- Rendering written advice with respect to an entity, transaction, plan, or arrangement with a potential for tax avoidance or evasion
- Representing a client at conferences, hearings and meetings

Eligible Practitioners

Attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and registered tax return preparers can practice before the IRS
These practitioners must not be currently disbarred or suspended

Standards with Respect to Tax Returns, Documents, Affidavit and Other Papers

Tax professionals cannot advise a client to submit any document to the IRS that is frivolous in nature or contains or omits information intentionally disregarding a rule or regulation.

Due Diligence & The Earned Income Tax Credit

Due diligence requirements extend to all parts of the preparation of a tax return by a paid tax preparer.
Tax practitioners must be particularly vigilant in case of the Earned Income Tax Credit (EITC) due to the complexity of regulations and opportunity for fraudulent claims.
The IRS estimates that 21% to 26% of EITC claims are paid in error.
The IRS can assess a penalty against a paid preparer who does not submit the form with returns or claims for refund when required.
The penalty for a return or claim filed in 2021 is 540pertaxbenefitclaimedandupto540 per tax benefit claimed and up to 540pertaxbenefitclaimedandupto2,160 per return.
The form must be submitted to the IRS electronically or attached to each return mailed to the IRS.

EITC Errors

About 60% of EITC errors fall into three key categories:
- Claiming EIC for a child who does not qualify.
- Filing as single or head of household while married.
- Incorrectly reporting income or expenses.

Requirement to Lodge Form 8867 with Tax Return

Paid tax preparers are required to complete Form 8867 to ensure they have considered all applicable eligibility criteria for certain tax credits for each return prepared.

Due Diligence Requirements for EITC Claims

Tax practitioners must meet the knowledge requirement by interviewing the taxpayer and properly documenting questions and answers.
Must complete Form 8867 truthfully and accurately and complete required actions for any applicable credits.
Must submit Form 8867 in the required format.
Must retain records for three years from the latest of the dates specified.

Consequences of Filing an Incorrect EITC Claim

A $560 penalty (per refundable credit) for the tax year 2023 for each failure to comply with EIC due diligence requirements for returns filed.
Penalty of $1,000 or 50% of the income derived by the tax preparer with respect to the return or claim for a refund.
Loss of preparer designation
Suspension or expulsion from the IRS e-file program
Other disciplinary action by the IRS Office of Professional Responsibility (OPR)
Injunctions barring the preparer from preparing tax returns.

Firm

The IRS can also assess due diligence penalties against an employer if an employee fails to comply with the due diligence requirements.
Penalties apply if:
- The firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements.
- The firm establishes appropriate compliance procedures but disregards those procedures through willfulness, recklessness, or gross indifference.

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Description

This quiz covers the key components of Circular 230, focusing on regulations for tax professionals practicing before the IRS. It outlines their duties, obligations, and the sanctions for violations, as well as the role of the Office of Professional Responsibility. Test your knowledge of the standards governing tax practice and the disciplinary procedures in place.