Free CPA REG (Taxation & Regulation) Ethics, Professional Responsibilities and Federal Tax Procedures Practice Questions
Ethics and federal tax procedures on the CPA REG exam cover Treasury Circular 230 (practitioner standards), preparer penalties, IRS audit procedures, taxpayer rights, and professional responsibilities in tax practice.
Sample Questions
Question 1
Easy
Under Circular 230, a CPA who discovers an error in a client's previously filed tax return is required to:
Solution
C is correct.
Under Treasury Circular 230 Section 10.21, a practitioner who knows that a client has not complied with the revenue laws or has made an error or omission in any return must promptly advise the client of the noncompliance, error, or omission and the consequences under the Code. However, the practitioner is not authorized to file an amended return without the client's consent.
Under Treasury Circular 230 Section 10.21, a practitioner who knows that a client has not complied with the revenue laws or has made an error or omission in any return must promptly advise the client of the noncompliance, error, or omission and the consequences under the Code. However, the practitioner is not authorized to file an amended return without the client's consent.
Question 2
Medium
Which statement most accurately describes the more-likely-than-not standard as it applies to tax return positions?
Solution
More-likely-than-not means the position has a greater than 50% likelihood of being sustained on its merits. This is the highest of the three commonly tested return-position standards: reasonable basis (roughly 20%), substantial authority (roughly 35–40%), and more-likely-than-not (greater than 50%). For tax shelters and reportable transactions under §6662A, more-likely-than-not is the threshold required to avoid an accuracy-related penalty. For preparers under §6694, the standard for an undisclosed tax-shelter position is also more-likely-than-not. The standard does not require a Revenue Ruling on point; weight of authority is judged on the totality of relevant tax authorities including statutes, regulations, court decisions, IRS rulings, and other guidance.
Question 3
Hard
Which of the following best describes the relationship among the three principal common-law rules governing CPA liability to non-privity third parties for ordinary negligence?
Solution
The three rules form a spectrum on how far accountant negligence liability extends to non-privity third parties. Ultramares (narrowest) requires privity or near-privity — the third party must be specifically known to the CPA. Restatement Second § 552 (middle) reaches a limited group of persons whom the CPA knows will receive and rely on the information, even if specific identities are not known. The foreseeability rule (broadest) reaches anyone whose reliance was reasonably foreseeable, regardless of whether the CPA knew of the user. All three rules limit ordinary-negligence liability; fraud and constructive fraud reach all foreseeable third parties under any of the three regimes.