ExpertHard1 markMultiple Choice
CPA · Question 01 · Area I: Ethics & Tax Procedures
A CPA is representing a client in an IRS examination regarding a complex tax shelter transaction. The CPA discovers that the client had omitted a significant amount of income related to the transaction on the filed return. Under Treasury Department Circular No. 230, which of the following actions must the CPA take?
A CPA is representing a client in an IRS examination regarding a complex tax shelter transaction. The CPA discovers that the client had omitted a significant amount of income related to the transaction on the filed return. Under Treasury Department Circular No. 230, which of the following actions must the CPA take?
Answer options:
A.
Immediately withdraw from the engagement and notify the IRS of the withdrawal.
B.
Advise the client of the noncompliance and the consequences of such noncompliance.
C.
Notify the IRS of the omission immediately to avoid preparer penalties.
D.
File an amended return on behalf of the client immediately.
How to approach this question
Recall the specific duties under Circular 230 regarding knowledge of client omissions.
Full Answer
B.Advise the client of the noncompliance and the consequences of such noncompliance.✓ Correct
Under Circular 230 §10.21, if a practitioner knows that a client has not complied with the revenue laws or has made an error or omission in any return, the practitioner must advise the client of the noncompliance, error, or omission and the consequences of such act. The practitioner is not required to notify the IRS (which would violate confidentiality) or withdraw immediately, nor can they file an amended return without client approval.
Common mistakes
Thinking the CPA must report the error to the IRS (confidentiality breach) or must immediately withdraw.
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