SEE-3 - Practices and Procedures (31% of the exam) - Section 1.4

Identify disreputable conduct and the sanctions, penalties, and disciplinary procedures the OPR may impose on practitioners, and the preparer penalties under the Internal Revenue Code.

Identify acts constituting incompetence and disreputable conduct under Circular 230 - such as conviction of a tax crime, giving false testimony, or misappropriating client funds - and the OPR sanctions of censure, suspension, disbarment, and monetary penalty. Distinguish these ethics sanctions from the Internal Revenue Code preparer penalties, including the Section 6694 understatement penalty and the Section 6695 failure-to-furnish and signature penalties.

Disreputable conductOffice of Professional ResponsibilityCensure, suspension, disbarmentSection 6694Section 6695

Practice question for this objective

Free samplePractices and Proceduresmedium

Enrolled agent Maria Delgado prepared Victor Cho's 2024 return and took an aggressive deduction based on a position she knew had no reasonable basis, producing an understatement of tax. The Internal Revenue Service now wants to impose a monetary penalty on Maria for the understatement itself. Which regime authorises that particular monetary penalty, and who imposes it?

AA Circular 230 monetary sanction under Section 10.50, imposed by the Office of Professional Responsibility after a disciplinary proceeding before an administrative law judge.
BAn accuracy-related penalty under Section 6662, assessed against Maria as the preparer because the understatement was attributable to the position she advised.
CThe Internal Revenue Code preparer penalty under Section 6694, assessed by the Internal Revenue Service like a tax, separate from any Office of Professional Responsibility sanction. Correct
DA censure imposed by the Office of Professional Responsibility, which carries an automatic monetary fine set by Circular 230 for each understated return.

A monetary penalty on a preparer for an understatement from an unreasonable position is the Section 6694 penalty assessed by the Service, not an OPR sanction. Two regimes can reach a preparer: the Office of Professional Responsibility imposes Circular 230 disciplinary sanctions for misconduct in practice, while the Internal Revenue Service assesses Internal Revenue Code preparer penalties for specified return-preparation failures. A penalty for an understatement caused by an unreasonable position is the Section 6694 preparer penalty, assessed and collected like a tax by the Service, not a Circular 230 sanction.

Why A is wrong: Circular 230 does authorise a monetary penalty under Section 10.50, which makes this tempting, but that disciplinary penalty addresses misconduct in practice and is separate from a penalty assessed for the understatement of tax itself, which is the Section 6694 preparer penalty assessed by the Service.

Why B is wrong: Section 6662 is an accuracy-related penalty, so it sounds relevant to an understatement, but it applies to the taxpayer for the underpayment, not to the return preparer; the preparer-specific penalty for an understatement from an unreasonable position is Section 6694.

Why C is correct: A monetary penalty on the preparer for an understatement arising from an unreasonable position is the Section 6694 preparer penalty, which the Service assesses and collects in the same manner as a tax; it is distinct from the disciplinary sanctions the Office of Professional Responsibility imposes under Circular 230.

Why D is wrong: Censure is a real Circular 230 sanction, so naming it is plausible, but censure is a public reprimand that carries no automatic fine, and the monetary penalty for the understatement itself flows from Section 6694, assessed by the Service rather than ordered as part of a censure.

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Exam traps in Practices and Procedures

Answers that look right on this material and are not. Each one is a distractor from a different question in the SEE-3 bank for this domain.

It is confined to conduct that occurs while the practitioner is actively representing a taxpayer before the Internal Revenue Service, so off-duty acts and a practitioner's own filings are outside its reach entirely.
Why it is wrong: Limiting the rule to active representation feels natural because Circular 230 governs practice, but Section 10.51 reaches enumerated acts such as a practitioner's own willful failure to file, so the narrow scope is wrong.
The Office of Professional Responsibility assesses disbarment unilaterally and collects it in the same manner as a tax, mirroring how the Section 6694 penalty was assessed.
Why it is wrong: It is true the Section 6694 penalty is assessed and collected like a tax, which makes the parallel tempting, but disbarment is not a money assessment collected like a tax; it is a disciplinary sanction that follows an administrative proceeding rather than a unilateral assessment.
Willfully assisting another person to evade the assessment or payment of federal tax, which Section 10.51 lists among the acts that constitute disreputable conduct.
Why it is wrong: This looks like a candidate for the exception because the wrongdoing is the client's, but Section 10.51 expressly lists willfully assisting evasion as disreputable conduct, so it does qualify and is not the correct answer.

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