P3-U07 · PART 3 · SOURCE CYCLE 2026-2027
Recordkeeping Requirements and Penalties
How to complete this unit
This unit uses 31 source-gated recall cards and 32 admissible practice questions. Complete the sequence in order; the unreleased wiki prose remains outside the learner path.
- 1 · LearnBuild the rule
Answer each recall prompt before opening it. Then learn the exact rule, test the controlling facts through four quick challenges, explore common questions, and finish with one own-words teach-back.
- 2 · ApplyUse it in context
Complete at least 20 mapped questions over two sessions. Review the explanation even when the answer is correct.
- 3 · ProveTest readiness
Use the Part 3 mock under time pressure. Return here for every flagged or missed concept before the next attempt.
Verified recall questions
Only cards whose complete question and answer were checked against exact primary-authority evidence appear here. Stable unit ownership gathers this lesson across 1 textbook collection.
Q1.A client requests records needed to satisfy federal tax obligations while disputing the practitioner's fee. What is the general Circular 230 rule?
Promptly return necessary client records despite the fee dispute.
Q2.After returning a client's records under Circular 230, what may the practitioner generally retain?
Copies of the returned records. Circular 230 permits the practitioner to retain copies of records returned to the client.
Q3.Give the practical federal-tax rule for assessment and appeal procedures for preparer penalties.
A preparer who believes an assessed preparer penalty is erroneous may use the IRS claim-for-refund procedure identified for that penalty.
Q4.What is the key limitation involving types of penalties (e.g., negligence, substantial understatement, overvaluation)?
Preparer penalties distinguish unreasonable positions from willful or reckless conduct, with different statutory computations.
Q5.How should a practitioner handle furnishing a copy of a return to a taxpayer?
A signing return preparer must furnish the taxpayer a completed copy of the return or claim no later than presentation for signature.
Q6.What is the exam-ready rule on signing returns and furnishing identifying numbers?
Separate §6695 rules address failure to sign and failure to furnish the preparer's identifying number.
Q7.What official rule governs keeping copies or lists of returns prepared?
A preparer must retain a completed copy or the prescribed list for the statutory retention period.
Q8.Summarize the correct treatment of employees engaged or employed during a return period (e.g., IRC section 6060).
A person employing return preparers must make the return-period information return required by §6060.
Q9.What official rule governs tax avoidance vs tax evasion?
Tax avoidance uses lawful choices; tax evasion involves willful unlawful conduct to defeat tax.
Q10.What common mistake should be avoided with taxpayer Advocate Service (e.g., criteria for requesting assistance)?
TAS may assist when its case criteria are met, including specified hardship, delay, or systemic circumstances.
Q11.What must an EA remember about trust fund recovery penalty?
The trust fund recovery penalty may be assessed against a responsible person who willfully fails to collect, account for, or pay trust fund taxes.
Q12.Give the practical federal-tax rule for amended returns and claims for refund (e.g., Form 1040X, Form 843, effect on statute of limitations).
An amended return or refund claim must satisfy the applicable filing, form, and limitation-period rules.
Q13.How should a practitioner handle penalties subject to abatement?
Only penalties for which the law provides relief may be abated; the taxpayer must establish the applicable basis.
Q14.What is the exam-ready rule on basis for having penalties abated or refunded?
Reasonable cause, statutory exceptions, administrative waiver, or correction of IRS error can support penalty relief when their requirements are met.
Q15.What official rule governs basis for having interest abated or refunded?
Interest abatement is narrower than penalty relief and generally requires a statutory basis rather than ordinary inability to pay.
Q16.Summarize the correct treatment of interest recalculation.
Interest should be recomputed from the correct tax, payment, assessment, and suspension dates shown in the account history.
Q17.What common mistake should be avoided with procedures for requesting abatement?
A taxpayer requests abatement using the procedure and form appropriate to the penalty or interest at issue and preserves appeal or refund rights.
Q18.Which of the following is NOT a type of accuracy-related penalty under IRC §6662?
Failure to file a tax return
Q19.Gerold self-prepares his own tax return, which is later audited by the IRS. Gerold had claimed a very large deduction for medical expenses, which he could not substantiate. This led to a substantial understatement of income tax. What is the penalty rate for accuracy-related penalties under IRC §6662?
20% of the tax understatement
Q20.Norris was audited during the year, and a large deduction was disallowed on his return. He was assessed a penalty for substantial understatement. What percentage of the understatement of tax must a taxpayer pay if he is liable for this penalty?
20%
Q21.Paulette is married to Ronald, and the couple usually files jointly. Paulette is self-employed, and she files a fraudulent Schedule C, greatly inflating her deductions and underreporting her income. The IRS later discovers that Paulette had been making large cash deposits in a hidden bank account, and none of that income was reported on her return. Ronald only earns wages, and now he is terrified that the IRS will assess fraud penalties against him, too. All of the following statements regarding the fraud penalty are correct except:
The fraud penalty on a joint return will automatically apply to both spouses.
Q22.Suzie hires Gustav to prepare her income tax returns. Gustav has prepared returns for several years, but he is not a CPA, an attorney, or an enrolled agent. Although he knows that Suzie is single and childless, he prepares her tax return based on the head of household filing status with two qualifying children so that Suzie may qualify for the Earned Income Tax Credit, and thus a larger refund. Suzie reviews a copy of the tax return and signs it. Gustav also signs the return and submits it to the IRS for processing. If the IRS detects the fraudulent credit, which of they, if either, will face potential penalties?
Both Gustav and Suzie.
Q23.Accuracy-related penalties in IRC §6662 are imposed for substantial understatement of income tax and also for:
Substantial misstatement of the value of assets.
Q24.All of the following statements about the trust fund recovery penalty are correct except:
The IRS primarily targets employees for this penalty.
Q25.What penalty applies to a "substantial" valuation misstatement?
20%
Q26.What is the primary difference between tax evasion and tax avoidance?
Tax avoidance involves legally reducing taxable income, while tax evasion uses illegal methods.
Q27.An enrolled agent (EA) can be sanctioned under Circular 230 in each of the following ways, EXCEPT:
Imprisonment.
Q28.Which of the following statements is incorrect regarding the statute of limitations on the assessment of additional tax?
If a fraudulent return is filed, the statute of limitations is seven years after the return was filed.
Q29.What is a potential consequence of tax evasion?
A fine, penalty and/or imprisonment.
Q30.Keenan files a tax return that the IRS determined to be a frivolous return. What is the IRS penalty for a frivolous tax return?
$5,000, plus any other penalty provided by law.
Q31.At the end of April, Boris has not yet filed his individual tax return, and he did not file an extension. Boris estimates that he owes $2,000 in unpaid tax, but he doesn't have the money to pay this amount, so he doesn't file at all. Since he missed the filing deadline and did not file an extension, Boris will be subject to penalties for non-filing; which of the following penalties will accrue at a faster rate?
Failure-to-file penalty.
Ready to move on?
- ▸ Explain at least 80% of these 31 rules without opening the answer, twice on different days.
- ▸ Score 80% across 20 or more mapped questions over two sessions, not one memorized round.
- ▸ Complete a timed Part 3 mock and return to this unit if its concepts remain flagged or missed.
Use these checks to choose your next study action. They do not predict a PSI scaled score.