CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresEasy
A tax practitioner is preparing a federal income tax return for a client. The client provides the practitioner with information that appears to be implausible but does not seem intentionally misleading. Under Circular 230, what is the practitioner's primary responsibility regarding this information?
- AMake reasonable inquiries to determine if the information is correct and complete.
- BRefuse to prepare the return unless the client provides independent third-party verification of the information.
- CDisclose the implausible nature of the information in a statement attached to the tax return.
- DAccept the information as provided, as the client is ultimately responsible for the accuracy of their tax return.
Show answer & explanationAnswer & explanation
Correct answer: A. Make reasonable inquiries to determine if the information is correct and complete.
Circular 230 requires tax practitioners to exercise due diligence. If information provided by a client appears implausible, the practitioner cannot simply accept it but must make reasonable inquiries to ensure its accuracy and completeness.
Why the other options are wrong
- B. Refusing to prepare or demanding third-party verification is generally too extreme unless the practitioner believes the information is intentionally misleading or incorrect after inquiry.
- C. Disclosure is not the primary action required for implausible information; investigation is.
- D. Practitioners cannot simply accept implausible information; they have a due diligence obligation.
Circular 230 Due Diligence for Implausible Information
Under Circular 230, a tax practitioner must make reasonable inquiries when client-provided information appears implausible or questionable, even if not intentionally misleading.
- Applies to all information provided by clients.
- Requires reasonable inquiries, not blind acceptance.
- Does not automatically require third-party verification or refusal.
- Aims to ensure accuracy and completeness of tax returns.
Memory trick: Questionable data? Dig for the truth!