Area I: Ethics & Tax Procedures — CPA Practice Question 01

Q: What mistakes do candidates make on this CPA question?

Confusing 'substantial authority' (no disclosure needed) with 'reasonable basis' (disclosure needed).

How to approach this question

Recall the hierarchy of confidence levels: Frivolous < Reasonable Basis < Substantial Authority < More Likely Than Not. Reasonable basis positions require disclosure.

Full Answer

B.The CPA must advise the client to disclose the position on the tax return.✓ Correct

B

Under Circular 230 §10.34, a practitioner may not sign a tax return if it contains a position that lacks substantial authority, unless there is a reasonable basis for the position AND the position is adequately disclosed to the IRS.

Common mistakes

Confusing 'substantial authority' (no disclosure needed) with 'reasonable basis' (disclosure needed).

A CPA is preparing an original tax return for a client who is claiming a refund based on a position that has a reasonable basis but does not meet the substantial authority standard. Under Treasury Department Circular No. 230, which of the following actions must the CPA take to avoid a violation?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA REG Practice Exam 3

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