Ethics and Procedures: Circular 230, Practice, and Professional Responsibility
The framework of practice
Ethics questions on this exam are grounded in the rules governing practice before the IRS, principally Circular 230, together with the preparer penalty provisions and the standards for return positions. A candidate must know who may practice, what due diligence requires, when a preparer may sign a return, and the difference between a realistic possibility standard and a more likely than not standard for positions. Understand the rules on contingent fees, confidentiality, conflicts of interest, and written advice. Know the preparer penalty structure: penalties attach to unreasonable positions, to willful or reckless conduct, and to failure to furnish information or retain records.
Conduct and disclosure
A practitioner may not sign a return or advise a position the practitioner knows lacks a reasonable basis. Disclosure on the return can cure certain understatement exposure but does not cure a frivolous position. Practitioners must not endorse or negotiate client refund checks, must safeguard client funds, and must return client records on request. Confidentiality protects client information but yields to legal compulsion and to the practitioner's own defense.
Traps
Questions love to blur the line between advocacy and misconduct. Zealous representation is proper; misstating facts is not. Another trap is the contingent fee rule - generally prohibited for return preparation and original returns, but permitted in certain examination or refund-claim contexts. Watch for questions that describe a plausible-sounding shortcut (relying on client representations without inquiry) as acceptable; due diligence requires reasonable inquiry.
Worked example
A client insists on claiming a deduction with no support and says, "Everyone does it." The correct response is neither automatic refusal nor automatic compliance. The practitioner must determine whether a reasonable basis exists, consider disclosure, and decline to sign if the position is frivolous or the practitioner knows it is unsupported. Rule of thumb: if you would be uncomfortable defending the position in writing to the IRS, do not sign it.