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Taxation and Regulation/Blueprint/1.D

Legal duties and responsibilities

Area 1: Ethics, Professional Responsibilities, and Federal Tax Procedures (10-20%)

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Topics

  • Privileged communications in tax
  • Tax preparer penalties (Section 6694)

Lessons

  • Legal Duties and Responsibilities

Study Frameworks

Is the Communication Privileged? — Tax Practitioner Analysis

Is the practitioner an attorney (with attorney-client privilege)?
Yes
Attorney-client privilege applies in both civil and criminal tax matters (broadest protection)
No
Is the practitioner a CPA, enrolled agent, or enrolled actuary (federally authorized)?
Yes
Does the communication involve tax advice (not merely return preparation)?
Yes
Is the matter a noncriminal tax proceeding (before IRS or in federal court)?
Yes...
No
Section 7525 privilege does NOT apply — criminal matters and state proceedings are excluded
No
Section 7525 privilege does NOT apply — only tax advice is protected, not return preparation activities
No
No practitioner privilege available — only attorneys and federally authorized practitioners have privilege protections

Preparer Penalty Summary — Sections 6694 and 6695

PenaltyTriggerAmountDefense
§6694(a)Unreasonable position (undisclosed: fails substantial authority ~40%)Greater of $1,000 or 50% of preparer incomeReasonable cause and good faith
§6694(a) — disclosedDisclosed position fails reasonable basis (~20%)Greater of $1,000 or 50% of preparer incomeReasonable cause and good faith
§6694(a) — tax shelterTax shelter position fails more likely than not (>50%)Greater of $1,000 or 50% of preparer incomeReasonable cause and good faith
§6694(b)Willful or reckless conductGreater of $5,000 or 75% of preparer income (reduced by 6694(a))No defense available
§6695 — adminFailure to sign, furnish PTIN, provide copy, retain records$55 per failure (max $28,000/year per category)Reasonable cause
§6695(g) — due diligenceFailure to meet EIC/CTC/AOTC/HOH due diligence$600 per credit per returnReasonable cause
Practice These Topics(45 questions)