Free EA Part 3 practice questions

Answer: B. It provides Janet the right to dispute the liability in Tax Court before the IRS can assess the tax

A Notice of Deficiency (also called a 90-day letter) formally proposes additional tax and gives the taxpayer 90 days (150 days if outside the U.S.) to petition the Tax Court under IRC §6213. This is the taxpayer's last opportunity to dispute the liability in a prepayment forum, meaning Janet can challenge the deficiency without first having to pay it. Once the 90-day period expires without a Tax Court petition, the IRS can assess the tax and begin collection. Option A is wrong because the deficiency cannot be assessed until after the 90-day period expires or Tax Court proceedings conclude. Option C is wrong because a Notice of Deficiency is a civil matter, not criminal. Option D is wrong because it relates to proposed additional tax, not refund denials.

IRS source: IRC §6212; IRC §6213; Publication 594

Answer: C. The power to represent Quinn before the IRS, receive confidential tax information, and perform acts on Quinn's behalf

Form 2848 (Power of Attorney and Declaration of Representative) grants the representative the authority to represent the taxpayer before the IRS, receive and inspect confidential tax information, and perform acts the taxpayer can perform (such as signing agreements, consents, or other documents). Receiving refund checks (Option A) requires specific authorization checked on the form and is not automatic. Signing returns (Option B) requires a separate authorization. Creating binding contracts (Option D) is not a power granted by Form 2848.

IRS source: Form 2848; Circular 230 §10.3

Answer: B. The Taxpayer Advocate Service (TAS), which Walter can contact by filing Form 911

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers experiencing economic harm or those who have been unable to resolve tax problems through normal IRS channels. Walter qualifies for TAS assistance on both counts: he is experiencing economic hardship from the levy and has been unsuccessful through normal channels for 5 months. He should file Form 911 (Request for Taxpayer Advocate Service Assistance). Option A is wrong because ACS is part of the normal collection process, not an advocacy service. Option C is wrong because Appeals handles disputes about proposed adjustments, not systemic problems with collection actions. Option D is wrong because private collection agencies collect debt, not advocate for taxpayers.

IRS source: IRC §7803(c); Form 911

Answer: A. She may represent Bob before the Revenue Agent because she prepared and signed the return

Under Circular 230 §10.7(c)(1)(viii), unenrolled return preparers have limited practice rights allowing them to represent taxpayers before revenue agents, customer service representatives, and similar IRS employees, but only for returns they personally prepared and signed. Since Jennifer prepared and signed Bob's return, she may represent him before the Revenue Agent conducting the office examination. Option B is incorrect because no special certification is required for this limited practice right. Option C is incorrect because office examinations by revenue agents fall within the scope of unenrolled preparer practice rights. Option D is incorrect because Form 2848 is used to authorize representatives but does not expand an unenrolled preparer's limited authority to represent.

IRS source: Circular 230 §10.7(c)(1)(viii)

Answer: B. Margaret can choose whether to sign; refusing may result in the IRS issuing a deficiency notice based on incomplete information

Margaret has the right to refuse to extend the assessment period. However, if she refuses and the statute of limitations is about to expire, the IRS will likely issue a Notice of Deficiency based on the incomplete audit record, which could propose a larger deficiency than if the audit were completed. If Margaret signs the consent (Form 872), she gives the IRS more time to complete the examination, which may result in a more accurate assessment. The decision involves weighing the risk of a premature deficiency notice against allowing more time for audit completion. Option A is wrong because signing is voluntary, not mandatory. Option C is wrong because extending the assessment period does not waive the right to challenge a deficiency in Tax Court or otherwise. Option D is wrong because refund rights are not conditioned on signing an extension.

IRS source: IRC §6501; Form 872

Answer: A. As a per-return penalty calculated at a statutory rate for each unsigned return

Under IRC §6695(b), the penalty for failure to sign a return is assessed on a per-return basis at a rate of $65 per failure, up to a maximum of $32,500 per calendar year. Each unsigned return is a separate violation. The fact that Kevin signed the vast majority of his returns does not eliminate the penalty for the unsigned ones. In Kevin's case, the penalty would be 8 returns × $65 = $520. Option B is wrong because the statute imposes a per-return penalty, not a single aggregated penalty. Option C is wrong because there is no substantial compliance exception; each failure triggers the penalty. Option D is wrong because failure to sign is a civil penalty matter under §6695, not a criminal offense, and while repeated or egregious violations could eventually affect PTIN status through Circular 230 proceedings, a simple failure to sign does not automatically result in PTIN suspension.

IRS source: IRC §6695(b); Publication 4557

Answer: C. No, Robert must return client records necessary for federal tax compliance regardless of the fee dispute

Under Circular 230 §10.28, a practitioner must return all client records necessary for the client to comply with federal tax obligations, regardless of any fee dispute. W-2s and 1099s provided by the client are client records. The practitioner may retain their own work product (such as their own workpapers) pending fee resolution in jurisdictions where permitted, but original client-provided documents must be returned. Option A is wrong because §10.28 explicitly prohibits withholding client records due to fee disputes. Option B is wrong because there is no 90-day waiting period. Option D is wrong because the obligation is to return the records; charging a fee to return the client's own documents is not supported.

IRS source: Circular 230 §10.28

Answer: B. The government must prove allegations by clear and convincing evidence

Under Circular 230 §10.76, in disciplinary proceedings before an Administrative Law Judge (ALJ), the government bears the burden of proving the allegations by clear and convincing evidence. This is higher than the civil preponderance standard (Option A) but lower than the criminal beyond-a-reasonable-doubt standard (Option C). The burden is on the government, not the practitioner (eliminating Options A and D). This protection ensures practitioners are not easily subject to sanctions without strong evidence of misconduct.

IRS source: Circular 230 §10.76

Answer: C. No disciplinary consequence: §10.33 best practices are aspirational, not enforceable

Under Circular 230 §10.33(b), best practices are explicitly stated to be aspirational and NOT enforceable through disciplinary proceedings. This is a critical distinction from mandatory provisions like §10.37 (written advice standards) and §10.36 (firm oversight), which ARE enforceable. Options A, B, and D all describe sanctions that cannot be imposed solely for failure to follow §10.33 best practices. However, practitioners should still follow them as they represent the standard of care expected in the profession.

IRS source: Circular 230 §10.33(b)

Answer: B. He is deficient for the year and must make up the shortfall before year-end

Under Circular 230 §10.6(e), enrolled agents must complete at least 16 hours of continuing education each year during the enrollment cycle, with at least 2 hours in ethics or professional conduct. Even though Mark completed the required 2 ethics hours, his total of 14 hours falls short of the 16-hour annual minimum requirement. He is deficient for the year and must complete the additional hours before the end of the enrollment year to maintain compliance. Option A is incorrect because meeting the ethics requirement does not excuse the overall hour requirement. Option C is incorrect because the CE requirements mandate a minimum per year, not just a cycle total. Option D is incorrect because extensions are not available for CE deficiencies; the hours must simply be completed.

IRS source: Circular 230 §10.6(e)

Answer: B. If the IRS does not act on the claim within a reasonable period, Alan may treat the inaction as a denial and file a refund suit in U.S. District Court or the U.S. Court of Federal Claims

Under IRC §6532(a), if the IRS does not act on a refund claim within a statutory period, the taxpayer may treat the inaction as a denial and file a refund suit in U.S. District Court or the U.S. Court of Federal Claims. This provision prevents indefinite IRS delay from blocking taxpayer access to the courts. Option A is incorrect because taxpayers are not required to wait indefinitely. The statute provides a remedy for inaction. Option C is incorrect because a formal denial is not required. Statutory inaction itself provides the right to proceed to court. Option D is incorrect because refund suits are filed in District Court or Court of Federal Claims, not Tax Court (which generally lacks refund jurisdiction). Alan's EA can explain that his prolonged wait has given him the right to proceed to court if he chooses, rather than waiting indefinitely for IRS action.

IRS source: IRC §6532(a)

Answer: B. Doubt as to collectibility: Rachel's assets and income are insufficient to pay the full liability

Under IRC §7122(c), Rachel's situation fits doubt as to collectibility, which applies when the taxpayer's reasonable collection potential (assets + future income) is less than the full tax liability. Here, Rachel's $30,000 in assets/income cannot cover the $50,000 liability, making this the appropriate ground. Option A (doubt as to liability) is wrong because Rachel does not dispute that she owes the tax. She simply cannot pay it. Option C (effective tax administration) is used only when collection would create exceptional circumstances or be unfair despite the taxpayer's ability to pay. Option D uses informal terminology that does not match the three statutory grounds for an OIC.

IRS source: IRC §7122(c)

Answer: B. Verify the identity of the taxpayer before proceeding with electronic submission

Under Rev. Proc. 2007-40, Electronic Return Originators (EROs) have specific responsibilities to protect the integrity of the e-file system, including verifying the identity of the taxpayer, ensuring the accuracy and completeness of the return, and retaining records for 3 years. When identity documents seem inconsistent, the ERO must verify identity before proceeding with the electronic submission. This responsibility exists to protect taxpayers from identity theft and maintain the integrity of the e-file system. Option A is wrong because the ERO cannot delegate their verification duty to the IRS. Option C is wrong because the ERO should first attempt to verify identity rather than immediately refusing and reporting. Option D is wrong because there is no special flagging system. The ERO must verify identity before filing.

IRS source: Rev. Proc. 2007-40, Section 4.02; IRS Publication 3112

Answer: B. Yes, Marcus meets all the criteria for a guaranteed installment agreement: balance is $10,000 or less, all returns filed, no IA in the prior 5 years, and payable within 36 months

Correct Answer: B. Under IRC §6159(c), the IRS must grant a guaranteed installment agreement when the balance is $10,000 or less, the taxpayer has filed all returns, has not had an IA in the prior 5 years, and can pay within 36 months. Marcus meets all four conditions. A is wrong because the IRS cannot deny a guaranteed IA when all criteria are met. C is wrong because the threshold is $10,000, not $5,000. D is wrong because direct debit is not a requirement for guaranteed IAs.

IRS source: IRC §6159(c); IRM 5.14.5.2

Answer: B. Innocent spouse relief under IRC §6015(b) to relieve Susan of liability for the understatement

B is correct. Innocent spouse relief under IRC §6015(b) applies when a joint return has an understatement of tax due to the other spouse's erroneous items (here, his unreported self-employment income), the requesting spouse did not know and had no reason to know of the understatement, and it would be unfair to hold her liable (IRS Publication 971). Susan's situation fits these conditions. Option A is wrong because injured spouse relief protects a spouse's share of a joint refund from being applied to the other spouse's separate debts; it does not relieve liability for an understatement. Option C is wrong because separation of liability does not split an understatement equally; it allocates the understatement as if the spouses had filed separate returns, so items such as the ex-husband's unreported income are allocated to him. (Because Susan is divorced, correctly described separation of liability relief may also be available to her, but Option C misstates how it works.) Option D is wrong on two counts: the return was not filed correctly (income was omitted, so there is an understatement), and equitable relief under §6015(f) is available only when relief under §6015(b) or (c) is not; when it applies, it can cover understatements as well as unpaid tax.

IRS source: IRC §6015(b)