21 Circular 230 Ethics & Filing Procedure Practice Questions & Answers

1. 1. While preparing a client's current-year return, an enrolled agent discovers that the client's prior-year return, prepared by a different firm, omitted several thousand dollars of taxable interest income. Under Circular 230, what is the enrolled agent required to do?

   • A.Promptly advise the client of the omission and of the consequences under the Code and regulations✓ Answer
   • B.Immediately prepare and file an amended return to correct the omission
   • C.Withdraw from the engagement, because continuing would associate the practitioner with the error
   • D.Notify the IRS in writing of the omission so that the record can be corrected

   Circular 230 §10.21 imposes a duty running to the client, not to the government: on learning of an error or omission the practitioner must promptly advise the client of it and of the consequences. The practitioner may not disclose the error to the IRS without the client's permission because return information is confidential, and cannot unilaterally file an amended return, which only the taxpayer can authorize and sign. Withdrawal is not automatically required.

   Source: Treasury Circular 230 §10.21Report a problem with this question

2. 2. An IRS officer properly requests records from a practitioner in connection with a client's examination. Which of the following is a proper ground under Circular 230 for the practitioner not to promptly submit those records?

   • A.The records tend to support the adjustment the examiner has proposed
   • B.The practitioner believes in good faith and on reasonable grounds that the records are privileged✓ Answer
   • C.The client has instructed the practitioner not to hand over anything to the IRS
   • D.The client has not paid the practitioner's outstanding fee for the engagement

   Circular 230 §10.20 requires a practitioner to promptly submit records or information properly requested by the IRS, and the only recognized exception is a good-faith, reasonably grounded belief that the material is privileged. A client's instruction, the unhelpfulness of the records, or a fee dispute are not grounds; the same section also forbids interfering with a lawful IRS effort to obtain records.

   Source: Treasury Circular 230 §10.20Report a problem with this question

3. 3. A client hands an enrolled agent a summary of charitable contributions that is far larger than in any prior year and is inconsistent with the client's reported income and bank activity. Which action satisfies the practitioner's due diligence obligation?

   • A.Obtain independent third-party written verification of every contribution before signing the return
   • B.Use the client's figures as given, since a practitioner may rely in good faith on information furnished by the client
   • C.Make reasonable inquiries of the client, because the information appears incorrect, inconsistent, or incomplete✓ Answer
   • D.Decline the engagement, since a practitioner may not prepare a return containing questionable amounts

   Circular 230 §10.34(d) lets a practitioner rely in good faith, without verification, on information furnished by the client, but that reliance ends where the information appears incorrect, inconsistent with another known fact, or incomplete; then reasonable inquiries are mandatory. The rule requires inquiry, not blanket third-party audit of the client, and does not force the practitioner to abandon the engagement.

   Source: Treasury Circular 230 §10.34(d)Report a problem with this question

4. 4. A client who owes the practitioner a disputed fee asks for the return of the records the client gave the practitioner, which the client needs to file the current return. What does Circular 230 require?

   • A.The practitioner may withhold all records until the disputed fee is paid in full
   • B.The practitioner must obtain IRS approval before releasing records while a fee is in dispute
   • C.The practitioner may condition the return of records on the client signing a release of liability
   • D.The practitioner must promptly return the client's records that are necessary for the client to comply with tax obligations, despite the fee dispute✓ Answer

   Circular 230 §10.28 makes the duty to return client records turn on the client's need to comply with tax obligations, not on payment: a fee dispute does not suspend it. Where state law permits a retaining lien for an unpaid fee, the practitioner must still give the client reasonable access to copy the records, and only the practitioner's own work product may be withheld pending payment.

   Source: Treasury Circular 230 §10.28Report a problem with this question

5. 5. Circular 230 generally prohibits contingent fees for services rendered in connection with any matter before the IRS. In which of the following situations is a contingent fee permitted?

   • A.Requesting a private letter ruling on a transaction the client is considering
   • B.Preparing an amended return for a client who has received no notice of examination of the original return
   • C.Representing the client in an IRS examination of, or challenge to, an original return✓ Answer
   • D.Preparing an original return, with the fee set as a percentage of the refund shown on that return

   Circular 230 §10.27 allows a contingent fee only in narrow situations, the clearest being services rendered in connection with an IRS examination of or challenge to an original return. Other exceptions cover an amended return or refund claim filed within 120 days of the taxpayer receiving written notice of examination of the original return, a claim solely for statutory interest or penalties, and a judicial proceeding under the Code; contingent fees for preparing original returns or for ruling requests are not permitted.

   Source: Treasury Circular 230 §10.27Report a problem with this question

6. 6. An enrolled agent wishes to represent two business partners whose interests in an IRS matter conflict. The practitioner reasonably believes competent and diligent representation of each is possible, the representation is not prohibited by law, and both partners have orally given informed consent. What else does Circular 230 require?

   • A.Nothing further; informed consent from each affected client is sufficient in any form
   • B.A copy of the consent must be filed with the IRS office handling the matter
   • C.Each affected client's informed consent must be confirmed in writing and the written consents retained by the practitioner✓ Answer
   • D.Prior written approval of the arrangement from the Office of Professional Responsibility

   Circular 230 §10.29 permits representation despite a conflict only if all three conditions are met and each affected client waives the conflict by giving informed consent that is confirmed in writing. The confirmation must follow within 30 days of the informed consent, and the written consents must be retained for at least 36 months from the conclusion of the representation and produced to the IRS on request; no IRS or OPR pre-approval is involved.

   Source: Treasury Circular 230 §10.29Report a problem with this question

7. 7. Which description of professional status may an enrolled agent properly use in advertising and correspondence?

   • A."Certified by the Internal Revenue Service as a tax expert"
   • B."Certified Enrolled Agent, Internal Revenue Service"
   • C."Enrolled Agent, Internal Revenue Service Tax Specialist"
   • D."Enrolled to represent taxpayers before the Internal Revenue Service"✓ Answer

   Circular 230 §10.30 bars false, fraudulent, coercive, misleading, or deceptive communications, and specifically prohibits an enrolled agent from using the term "certified" or from implying an employment relationship with the IRS. The permitted formulations describe the enrollment itself, such as "enrolled to represent taxpayers before the Internal Revenue Service," "enrolled to practice before the Internal Revenue Service," or "admitted to practice before the Internal Revenue Service."

   Source: Treasury Circular 230 §10.30Report a problem with this question

8. 8. A client with an unpaid balance of fees asks the enrolled agent to have the client's refund check sent to the practitioner's office so the practitioner can deposit it, take the fee, and forward the remainder. Under Circular 230, may the practitioner do this?

   • A.Yes, if the fee withheld is reasonable and fully disclosed
   • B.No, unless the arrangement is authorized on a properly executed Form 2848
   • C.Yes, if the client authorizes the arrangement in writing
   • D.No, a practitioner may not endorse or otherwise negotiate a refund check issued to a taxpayer✓ Answer

   Circular 230 §10.31 flatly prohibits a practitioner who prepares returns from endorsing or otherwise negotiating any refund check issued to a taxpayer, and the prohibition cannot be waived by client consent or cured by disclosure. A Form 2848 lets a representative receive a refund check but never endorse or cash it, and IRC §6695(f) imposes a separate preparer penalty for negotiating a taxpayer's refund check.

   Source: Treasury Circular 230 §10.31Report a problem with this question

9. 9. An individual whose enrollment has been suspended by the IRS is hired by an enrolled agent's firm. Which statement correctly describes the firm's obligations under Circular 230?

   • A.The firm may accept the individual's assistance on IRS matters so long as an enrolled practitioner signs everything that is filed
   • B.The firm may employ the individual for work that is not practice before the IRS, but may not knowingly accept assistance from the individual in matters that constitute practice before the IRS✓ Answer
   • C.The firm may not employ the individual in any capacity while the suspension is in effect
   • D.The firm may accept the individual's assistance on IRS matters if the client is told of the suspension in writing

   Circular 230 §10.24 forbids a practitioner from knowingly accepting assistance from, or assisting, a person who is under disbarment or suspension where the assistance relates to a matter constituting practice before the IRS. The bar is tied to the nature of the work rather than to employment itself, so non-practice functions are not prohibited, and neither client notice nor a supervising signature cures a violation.

   Source: Treasury Circular 230 §10.24Report a problem with this question

10. 10. Which of the following is a mandatory duty enforceable by sanction, rather than an aspirational best practice for tax advisors?

    • A.Advising the client of the import of the conclusions reached, including whether the client may avoid penalties
    • B.Possessing the knowledge, skill, thoroughness and preparation necessary for the engagement, or associating with someone who does✓ Answer
    • C.Communicating clearly with the client about the terms of the engagement and the form of the advice
    • D.Establishing firm procedures to ensure that all members of the firm follow best practices

    Competence under Circular 230 §10.35 is a binding requirement: a practitioner must have the necessary knowledge, skill, thoroughness and preparation, and may become competent by studying the area or by associating with a competent practitioner. The other three items come from §10.33, which is written as aspirational best practices for tax advisors and is not itself a basis for discipline.

    Source: Treasury Circular 230 §10.33 and §10.35Report a problem with this question

11. 11. In giving written advice on a federal tax matter, a practitioner must do all of the following EXCEPT:

    • A.Consider all relevant facts and circumstances the practitioner knows or reasonably should know
    • B.Take into account the likelihood that the matter will be examined by the IRS✓ Answer
    • C.Base the advice on reasonable factual and legal assumptions
    • D.Relate the applicable law and authorities to the facts

    Circular 230 §10.37 expressly forbids a practitioner from taking into account the possibility that a return will not be audited, or that an issue will not be raised on audit, when giving written advice; the so-called audit lottery is not a legitimate input. The other three items are affirmative requirements of the same section, along with using reasonable efforts to ascertain the facts and not relying on unreasonable representations.

    Source: Treasury Circular 230 §10.37Report a problem with this question

12. 12. An enrolled agent concludes that a position a client wants to take has a reasonable basis but does not rise to substantial authority. Under Circular 230 and the preparer penalty rules, how may the practitioner properly sign the return?

    • A.The practitioner may sign without any disclosure, because a reasonable basis is by itself sufficient
    • B.The practitioner may sign if the position is adequately disclosed on the return✓ Answer
    • C.The practitioner may sign only if the position is more likely than not to be sustained on its merits
    • D.The practitioner may never sign a return taking a position that lacks substantial authority

    Circular 230 §10.34(a) bars a practitioner from willfully, recklessly, or through gross incompetence signing a return with a position that is an unreasonable position under IRC §6694(a)(2). A position is not unreasonable if there is substantial authority for it, or if it has a reasonable basis and is adequately disclosed, so disclosure is the mechanism that makes the reasonable-basis position signable; the more-likely-than-not standard applies to tax shelters and reportable transactions.

    Source: Treasury Circular 230 §10.34(a); IRC §6694(a)Report a problem with this question

13. 13. Which statement about a monetary penalty imposed under Circular 230 for practitioner misconduct is correct?

    • A.It may be imposed on the individual practitioner only, never on the employing firm
    • B.It may be imposed on the practitioner, on an employer or firm that knew or reasonably should have known of the conduct, or on both, and may not exceed the gross income derived from the conduct✓ Answer
    • C.It may be imposed only in place of censure, suspension, or disbarment, never in addition to them
    • D.It is a fixed amount per violation set without regard to what the practitioner earned from the conduct

    Circular 230 §10.50(c) authorizes a monetary penalty against the practitioner and, where the practitioner acted on behalf of an employer or firm that knew or reasonably should have known of the conduct, against that employer or firm as well. The amount is capped at the gross income derived or to be derived from the conduct, and the penalty may be imposed in addition to or instead of censure, suspension, or disbarment.

    Source: Treasury Circular 230 §10.50Report a problem with this question

14. 14. All of the following are examples of disreputable conduct for which a practitioner may be censured, suspended, or disbarred EXCEPT:

    • A.Willfully failing to file the practitioner's own federal income tax return
    • B.Misappropriating funds received from a client for payment of the client's taxes
    • C.Charging a fee the client later regards as too high in light of a disappointing outcome✓ Answer
    • D.Giving false or misleading information to the Treasury Department in a matter pending before it

    Circular 230 §10.51 lists disreputable conduct, including willfully failing to file one's own return or evading tax, misappropriating or failing to promptly remit client funds intended for taxes, and giving false or misleading information to Treasury or a tribunal. A client's after-the-fact dissatisfaction with the size of a fee is not itself disreputable conduct; a fee becomes a violation under §10.27 only when it is unconscionable, which is measured objectively rather than by the outcome.

    Source: Treasury Circular 230 §10.51Report a problem with this question

15. 15. In a disciplinary proceeding brought by the Office of Professional Responsibility seeking to disbar an enrolled agent, which statement about the proceeding is correct?

    • A.The matter is decided by the examining IRS office that reported the conduct, with no independent hearing
    • B.The practitioner has no right to file an answer to the complaint before a decision is issued
    • C.The practitioner bears the burden of proving fitness to continue practicing
    • D.The IRS bears the burden of proof and must establish the case by clear and convincing evidence before an Administrative Law Judge✓ Answer

    A Circular 230 disciplinary case is instituted by a complaint and heard by an Administrative Law Judge who is independent of the IRS function that raised the issue, and the government carries the burden of proof, which for disbarment, suspension, or a monetary penalty must be met by clear and convincing evidence. The practitioner is entitled to file an answer, and failure to answer within the time allowed results in a default rather than a shifting of the burden.

    Source: Treasury Circular 230 §10.70Report a problem with this question

16. 16. An employee of a tax firm gathers client documents, makes the substantive determinations, and prepares most of a client's Form 1040 for compensation, but a supervising enrolled agent reviews and signs the return. Which statement is correct?

    • A.Only the enrolled agent who signs the return is a tax return preparer, so only that person needs a PTIN
    • B.Whether the employee is a preparer depends on whether the return is filed electronically or on paper
    • C.The employee is not a preparer because he is supervised by a credentialed practitioner
    • D.The employee is a tax return preparer because he prepared a substantial portion of the return for compensation, and must obtain and use a PTIN even though he does not sign✓ Answer

    IRC §7701(a)(36) defines a tax return preparer as any person who prepares for compensation, or employs others to prepare, all or a substantial portion of a return or refund claim, and that definition covers non-signing as well as signing preparers. IRC §6109 and Circular 230 §10.8 then require anyone who prepares for compensation to obtain and use a preparer tax identification number, applied for on Form W-12; supervision and the filing method are irrelevant to that status.

    Source: IRC §7701(a)(36); IRC §6109Report a problem with this question

17. 17. What principally distinguishes the preparer penalty for willful or reckless conduct under IRC §6694(b) from the penalty for an unreasonable position under IRC §6694(a)?

    • A.Section 6694(b) applies only to returns that the preparer failed to sign
    • B.Section 6694(b) requires a willful attempt to understate the tax or a reckless or intentional disregard of rules and regulations, whereas §6694(a) reaches an unreasonable position taken without that state of mind✓ Answer
    • C.Section 6694(b) is assessed against the taxpayer rather than against the preparer
    • D.Section 6694(b) applies only where the taxpayer has also been penalized for the same understatement

    The two preparer penalties are separated by the preparer's state of mind: §6694(a) addresses an understatement due to an unreasonable position the preparer knew or reasonably should have known of, while §6694(b) requires a willful attempt to understate liability or a reckless or intentional disregard of rules and regulations. The §6694(b) penalty is the larger of the two and is reduced by any §6694(a) penalty paid for the same return, and the reasonable cause and good faith defense available under §6694(a) does not apply to willful or reckless conduct.

    Source: IRC §6694Report a problem with this question

18. 18. A preparer is completing a return that claims the earned income credit and head of household filing status. To satisfy the paid preparer due diligence requirements, the preparer must do all of the following EXCEPT:

    • A.Obtain and retain original documentary proof of residency, such as a birth certificate or school record, for each qualifying child✓ Answer
    • B.Complete Form 8867 and submit it with the return
    • C.Compute the credit using the applicable worksheet or an equivalent computation and keep it
    • D.Make reasonable inquiries when the client's information appears incorrect, inconsistent, or incomplete, and contemporaneously document those inquiries and the answers

    The due diligence rules of IRC §6695(g) and Treas. Reg. §1.6695-2 have four components: file Form 8867 with the return, compute the credit with a worksheet or equivalent, satisfy the knowledge requirement by making and contemporaneously documenting reasonable inquiries, and retain the required records. The preparer is not required to collect original residency documents; if the preparer does rely on documents provided by the taxpayer, a record of them must be kept, but demanding specific proof for every child is not the standard.

    Source: IRC §6695(g); Treas. Reg. §1.6695-2Report a problem with this question

19. 19. A tax preparer wants to give an affiliated financial services company the names, addresses, and income information of clients so the affiliate can market investment products to them. What does federal law require?

    • A.Disclosure is permitted if the preparer receives no compensation from the affiliate
    • B.Disclosure is permitted if clients are notified afterward and given a chance to object
    • C.The preparer must obtain each taxpayer's knowing, written consent before the disclosure or use is made✓ Answer
    • D.Nothing, because the preparer obtained the information lawfully in the course of preparing the returns

    IRC §7216 makes the knowing or reckless unauthorized disclosure or use of tax return information a criminal offense, and IRC §6713 imposes a parallel civil penalty for each unauthorized disclosure or use. Consent must be knowing, voluntary, and in writing, must be obtained before the disclosure or use, and must identify the intended purpose and recipient, so after-the-fact notice or the absence of compensation does not cure the violation.

    Source: IRC §7216; IRC §6713Report a problem with this question

20. 20. An electronic return originator has finished a client's return and is ready to transmit it. Which statement correctly describes the ERO's obligations regarding Form 8879, IRS e-file Signature Authorization?

    • A.The taxpayer may sign Form 8879 in advance of the return being completed so the ERO can transmit as soon as the figures are entered
    • B.The taxpayer must review the completed return and sign Form 8879 before the ERO transmits it, and the ERO retains the form rather than sending it to the IRS unless the IRS requests it✓ Answer
    • C.The ERO must attach Form 8879 to the transmission so the IRS receives it with the return
    • D.Form 8453 has replaced Form 8879 as the taxpayer's electronic signature document

    Form 8879 is the taxpayer's authorization for the ERO to enter or generate the taxpayer's personal identification number on an electronically filed return, so it has meaning only if the taxpayer has first reviewed the completed return; obtaining a signature on a blank or unfinished return is a violation of the e-file rules. The ERO keeps the signed form in its records and provides it to the IRS only on request, while Form 8453 serves the different function of transmitting required paper attachments.

    Source: IRS Publication 1345Report a problem with this question

21. 21. A client cannot pay the balance due on her individual income tax return by the original due date and asks the enrolled agent to file Form 4868. What should the enrolled agent tell her?

    • A.The extension cannot be filed at all unless the balance due is paid in full with the request
    • B.The extension postpones only the deadline to file; interest and the failure-to-pay penalty continue to run on the unpaid balance from the original due date✓ Answer
    • C.The extension eliminates the failure-to-pay penalty but not interest
    • D.The extension postpones both the filing deadline and the payment deadline, so no interest or penalty accrues during the extension period

    An extension obtained under IRC §6081 is an extension of time to file only; IRC §6151 still requires the tax to be paid at the time fixed for filing the return without regard to any extension. Interest on the underpayment and the failure-to-pay penalty therefore continue to accrue from the original due date, although filing the extension does avoid the much larger failure-to-file penalty.

    Source: IRC §6081; IRC §6151Report a problem with this question

Practice questions based on the Internal Revenue Code, Treasury Department Circular No. 230, and the IRS Special Enrollment Examination content outline. Enrolled Agent and the SEE are administered by the IRS; this site is not affiliated with or endorsed by the IRS or Treasury. Questions deliberately avoid inflation-adjusted figures — rates, brackets, standard deductions, contribution and phase-out limits, mileage rates and penalty amounts change every year, so look those up for the tax year you are tested on. This is study material, not tax advice. About the Enrolled Agent exam →