CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresEasy
A tax preparer is engaged by a client to prepare their federal income tax return. During the preparation, the client informs the preparer about significant cash income from a side business that was not recorded in their accounting software. The client insists on not reporting this income, stating it's 'too small' for the IRS to notice. Under Circular 230, what is the preparer's MOST appropriate course of action?
- APrepare the return omitting the income, but document the client's instruction in the preparer's work papers.
- BPrepare the return as instructed by the client, but include a disclosure statement about the omission.
- CReport the income on the return but advise the client to amend it later if they change their mind.
- DRefuse to prepare the return if the client insists on omitting the income, as it constitutes a violation of tax law.
Show answer & explanationAnswer & explanation
Correct answer: D. Refuse to prepare the return if the client insists on omitting the income, as it constitutes a violation of tax law.
Under Circular 230, a tax preparer cannot prepare a tax return that they know contains a material omission or misstatement. Omitting significant cash income is a violation of tax law, and the preparer must refuse to proceed if the client insists on the omission.
Why the other options are wrong
- A. Documenting the client's instruction does not justify preparing a false return; the preparer still has a duty to comply with tax law.
- B. Disclosing an intentional omission does not absolve the preparer of responsibility for preparing a false return.
- C. Reporting the income and then advising an amendment to remove it is unethical and potentially fraudulent.
Circular 230 Due Diligence
Circular 230 outlines the duties and restrictions for tax practitioners when representing taxpayers before the IRS, including exercising due diligence in preparing tax returns.
- Practitioners must exercise due diligence in preparing and filing tax returns.
- They cannot advise a client to take a frivolous position on a tax return.
- They must inform clients of penalties reasonably likely to apply to tax return positions.
Memory trick: Ethics guide the preparer's path, avoiding IRS wrath.