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 its tax consequences✓ Answer
   • B.Immediately prepare and file an amended return to correct the omission
   • C.Withdraw from the engagement before preparing the current-year return
   • D.Notify the IRS in writing of the omission before this year's return is filed

   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 would support the adjustment the examiner has already proposed
   • B.The practitioner reasonably and in good faith believes they are privileged✓ Answer
   • C.The client has instructed the practitioner to hand over nothing to the examiner
   • 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 third-party written verification of each listed contribution
   • B.Use the client's figures as given, relying on good-faith reliance
   • C.Make reasonable inquiries of the client about the contribution figures✓ Answer
   • D.Decline the engagement because the amounts look questionable

   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
   • B.The practitioner must obtain IRS approval before releasing the records
   • C.The practitioner may condition return of the records on a signed liability release
   • D.The practitioner must promptly return the records the client needs to file✓ 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 plans
   • B.Preparing an amended return before any notice of examination is issued
   • C.Representing the client in an IRS examination of an original return✓ Answer
   • D.Preparing an original return for a percentage of the refund shown

   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, because informed consent may be given in any form
   • B.A copy of each signed consent must be filed with the IRS office involved
   • C.Each affected client's informed consent must be confirmed in writing✓ Answer
   • D.The OPR must approve the arrangement in writing before it begins

   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 an expert in tax law"
   • B."Certified Enrolled Agent of the Internal Revenue Service"
   • C."Enrolled Agent and 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 to the client
   • B.No, unless the arrangement is authorized on a signed Form 2848
   • C.Yes, if the client authorizes the arrangement in a signed engagement letter
   • D.No, a practitioner may not endorse or negotiate a taxpayer's refund check✓ 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 help as long as an enrolled agent signs the filings
   • B.The firm may not knowingly accept the individual's help in practice before the IRS✓ Answer
   • C.The firm may not employ the individual in any capacity during the suspension
   • D.The firm may accept the individual's help if the client is told 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 on penalties
    • B.Having the knowledge, skill, thoroughness and preparation the engagement requires✓ Answer
    • C.Communicating clearly with the client about the terms of the engagement
    • D.Establishing firm procedures to ensure that all members 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 the practitioner knows or should know
    • B.Take into account the likelihood that the IRS will examine the matter✓ Answer
    • C.Base the advice on factual and legal assumptions that are reasonable
    • D.Relate the applicable law and authorities to the facts of the matter

    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 disclosure, since reasonable basis suffices
    • 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
    • D.The practitioner may never sign a return taking a position without 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 firm
    • B.It may be imposed on the practitioner, on the employer or firm, or on both✓ Answer
    • C.It may be imposed only in place of censure, suspension, or disbarment
    • D.It is a fixed amount per violation regardless of what the practitioner earned

    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 tax return
    • B.Misappropriating client funds that were received to pay the client's taxes
    • C.Charging a fee the client later considers excessive given the outcome✓ Answer
    • D.Giving false information to the Treasury Department in a pending matter

    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 IRS office that reported the conduct decides the matter itself
    • B.The practitioner has no right to file an answer to the complaint
    • C.The practitioner must prove his fitness to continue practicing
    • D.The IRS must prove its case by clear and convincing evidence✓ 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 needs to have a PTIN
    • B.Whether the employee is a preparer turns on how the return is filed
    • C.The employee is not a preparer because a credentialed EA supervises him
    • D.The employee is a preparer and must obtain and use his own PTIN✓ 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 the preparer failed to sign
    • B.Section 6694(b) requires willfulness or reckless disregard of the rules✓ Answer
    • C.Section 6694(b) is assessed against the taxpayer, not the preparer
    • D.Section 6694(b) applies only if the taxpayer was also penalized

    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 original documents proving each qualifying child's residency✓ Answer
    • B.Complete Form 8867 and file it together with the client's return
    • C.Compute the credit with the applicable worksheet and retain it
    • D.Make reasonable inquiries when the client's information looks inconsistent

    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 allowed if the preparer is not paid by the affiliate
    • B.Disclosure is allowed if clients may opt out after being told
    • C.The preparer must obtain each taxpayer's written consent in advance✓ Answer
    • D.Nothing, because the preparer obtained the information lawfully

    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 before the return has been completed
    • B.The taxpayer must sign Form 8879 after reviewing the completed return✓ Answer
    • C.The ERO must attach Form 8879 to the transmission it sends the IRS
    • D.Form 8453 has replaced Form 8879 as the taxpayer's e-file 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 unless the balance due is paid in full
    • B.The extension postpones only filing; interest and penalty still run✓ Answer
    • C.The extension removes the failure-to-pay penalty but not interest
    • D.The extension postpones both filing and payment, so nothing accrues

    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 →