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Area I: Ethics & Tax ProceduresREGEthicsCircular 230

CPA · Question 01 · Area I: Ethics & Tax Procedures

A CPA is representing a client, TechSolutions Inc., in an IRS examination regarding a large research and development credit claim. The CPA discovers that the client's CFO has omitted material facts in the documentation provided to the IRS, which significantly overstates the credit. The CFO refuses to correct the omission. Under Treasury Department Circular No. 230, which of the following is the CPA's REQUIRED course of action?

Answer options:

A.

Immediately withdraw from the engagement and notify the IRS of the withdrawal and the specific reason for it.

B.

Advise the client of the noncompliance and the consequences of such noncompliance.

C.

Notify the IRS of the error immediately to avoid preparer penalties under IRC §6694.

D.

Continue the representation but sign the tax return with a disclaimer regarding the R&D credit.

How to approach this question

Focus on the specific duties outlined in Circular 230. The duty is to the client first regarding notification of errors.

Full Answer

B.Advise the client of the noncompliance and the consequences of such noncompliance.✓ Correct
Under Circular 230, Section 10.21, if a practitioner knows that the client has not complied with the revenue laws or has made an error in or omission from any return, the practitioner must advise the client promptly of the fact of such noncompliance, error, or omission, and the consequences thereof. The practitioner is NOT required (and generally not permitted due to confidentiality) to notify the IRS.

Common mistakes

Assuming the CPA must 'turn in' the client to the IRS or immediately withdraw without first advising the client.
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