James, a CPA, owns his own firm that prepares roughly 400 tax returns each year. In his office are: two college interns (Kelly and Lily) who screen/interview clients and do various administrative tasks for roughly 6 months of the year; a full-time receptionist who answers the phones (Mike); James wife who keeps the firms books and prepares and signs the firms tax return; and Doug, an accountant who is not a licensed CPA but prepares various IRS forms including draft returns for James review 6 months out of the year. Out of the 400 returns James firm prepares each year, roughly 85 contain claimed Earned Income Tax Credits (EITC). During the most recent tax year, a 16 year-old with $4,000 in earned income and a 2 year-old daughter comes into James firm and states that she lives with her parents. Kelly and Lily first interview the taxpayer and write down her age, stated income, child age, and living arrangements on some paper and hand it to Doug. The taxpayer verbally tells Doug that she wants to treat her daughter as a qualifying child for purposes of the EITC. Doug prepares a draft return, and gives it to James for review. The return is prepared such that James will sign it. Doug spends 1 hour preparing the draft return and James spends 15 minutes reviewing it. James firm charges the taxpayer $1,200 for the return.

a. Who in James firm is practicing before the IRS for purposes of Circular 230? Why or why not?

b. Who in James firm will be considered a tax return preparer under the Internal Revenue Code? Why or why not?

c. What are James and his firms due diligence standards for preparing the 16 year-olds return?

d. Describe what possible penalties (and how each would apply) James may face under the Internal Revenue Code with respect to the 16 year-olds return, and under what circumstance(s) could James avoid them.

e. In addition to preparing the 16 year-olds return, James recommends to her (and to all of his clients for that matter) that she buy a certain whole life insurance policy from InsureCo. James is adamant that InsureCos whole life insurance policy is a great investment and may result in tax-free income in the future. He gives the 16 year-old extensive marketing material on the product, and also gives her name and contact information to an InsureCo sales person, Mark. Mark has agreed to pay James $100 for each client who buys an InsureCo whole life policy. Discuss all ethical and legal issues this arrangement presents and under what circumstances James could accept the $100.