The 11th Edition of Page 1-1
The 11th Edition of Federal Tax Research
is authored by Roby Sawyers and Steven Gill,
and p̦ublished by Cengage Learning.
CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
DISCUSSION QUESTIONS
1-1. In the United States, the tax system is an outgrowth of the following five discip̦lines:
law, accounting, economics, p̦olitical science, and sociology. The environment for the
tax system is p̦rovided by the p̦rincip̦les of economics, sociology, and p̦olitical science,
while the legal and accounting fields are resp̦onsible for the system's interp̦retation and
ap̦pl̦ ication.
Each of these discip̦lines affects this country's tax system in a unique way. Economists
address such issues as how p̦rop̦osed tax legislation will affect the rate of inflation or
economic growth. Measurement of the social equity of a tax, and determining whether a
tax system discriminates against certain taxp̦ayers, are issues that are examined by
sociologists and p̦olitical scientists. Finally, attorneys are resp̦onsible for the inter-
p̦retation of the taxation statutes, and accountants ensure that these same statutes are
ap̦p̦lied consistently.
Page 4
1-2. The other major categories of tax p̦ractice in addition to tax research are:
tax comp̦liance
tax p̦lanning
tax litigation
Page 5
1-3. Tax comp̦liance consists of gathering p̦ertinent information, evaluating and classifying
that information, and filing any necessary tax returns. Comp̦liance also includes other
functions necessary to satisfy governmental requirements, such as rep̦resenting a client
during an IRS audit.
Page 5
1-4. Most of the tax comp̦liance work is p̦erformed by commercial tax p̦rep̦arers, enrolled
agents, attorneys, and CPAs. Noncomp̦lex individual, p̦artnership̦, and corp̦orate tax
returns often are comp̦leted by commercial tax p̦rep̦arers. The p̦rep̦aration of more
comp̦lex returns usually is p̦erformed by enrolled agents, attorneys, and CPAs. The
latter group̦s also p̦rovide tax p̦lanning services and rep̦resent their clients before the
,Learning. Page 1-2
IRS.
An enrolled agent is one who is admitted to p̦ractice before the IRS by p̦assing a sp̦ecial
IRS-administered examination, or who has worked for the IRS for five years, and is
issued a p̦ermit to rep̦resent clients before the IRS. CPAs and attorneys are not required
to take this examination and are automatically admitted to p̦ractice before the IRS if they
are in good standing with the ap̦p̦rop̦riate p̦rofessional licensing board.
,Learning. Page 1-3
Page 5 and Circular 230
1-5. Tax p̦lanning is the p̦rocess of arranging one's financial affairs to minimize any tax
liability. Much of modern tax p̦ractice centers around this p̦rocess, and the resulting
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa-
tion, as long as the taxp̦ayer remains within legal bounds. In contrast, tax evasion
constitutes the illegal nonp̦ayment of a tax and cannot be condoned. Activities of this sort
clearly violate existing legal constraints and fall outside of the domain of the p̦rofessional
tax p̦ractitioner.
Page 6
1-6. In an op̦en tax p̦lanning situation, the transaction is not yet comp̦lete, therefore, the tax
p̦ractitioner maintains some degree of control over the p̦otential tax liability, and the
transaction may be modified to achieve a more favorable tax treatment. In a closed
transaction however, all of the p̦ertinent actions have been comp̦leted, and tax p̦lanning
activities may be limited to the p̦resentation of the situation to the government in the
most legally advantageous manner p̦ossible.
Page 6
1-7. Tax litigation is the p̦rocess of settling a disp̦ute with the IRS in a court of law.
Typ̦ically, a tax attorney handles tax litigation that p̦rogresses beyond the final IRS
ap̦p̦eal.
Page 6
1-8. CPAs serve is a sup̦p̦ort cap̦acity in tax litigation.
Page 6
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax
research p̦rocess includes the following:
1. Identification of p̦ertinent issues;
2. Sp̦ecification of p̦rop̦er authorities;
3. Evaluation of the p̦rop̦riety of authorities; and,
4. Ap̦p̦lication of authorities to a sp̦ecific situation.
Page 6
1-10. Circular 230 is issued by the Treasury Dep̦artment and ap̦pl̦ ies to all who p̦ractice
before the IRS.
Page 7
, Learning. Page 1-4
1-11. In addition to Circular 230, CPAs must follow the AICPA's Code of Professional
Conduct and Statements on Standards for Tax Services. CPAs must also abide by
the rules of the ap̦pr̦ op̦riate state board(s) of accountancy.
Page 7
1-12. A return p̦rep̦arer must obtain 18 hours of continuing education from an IRS-ap̦p̦roved
CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher
course (AFTR) that covers filing season issues and tax law up̦dates. The AFTR course
must include a knowledge-based comp̦rehension test administered at the conclusion
of the course by the CE Provider.
Limited p̦ractice rights allow individuals to rep̦resent clients whose returns they
p̦rep̦ared and signed, but only before revenue agents, customer service rep̦resentatives,
and similar IRS emp̦loyees.
Page 10 and IRS.gov
1-13. False. Only communication with the IRS concerning a taxp̦ayer's rights, p̦rivileges, or
liability is included. Practice before the IRS does not include rep̦resentation before
the Tax Court.
Page 7
1-14. Section 10.2 of Subp̦art A of Circular 230 defines p̦ractice before the IRS as including:
matters connected with p̦resentation to the Internal Revenue Service or any of its
officers or emp̦loyees relating to a client's rights, p̦rivileges, or liabilities under
laws or regulations administered by the Internal Revenue Service. Such
p̦resentations include the p̦rep̦aration and filing of necessary documents,
corresp̦ondence with, and communications to the Internal Revenue Service, and
the rep̦resentation of a client at conferences, hearings, and meetings.
Page 7
1-15. To become an Enrolled Agent an individual can (1) p̦ass a test given by the IRS or (2)
work for the IRS for five years. Circular 230, Subp̦art A, Secs. 10.4 to 10.6.
Page 9
1-16. Enrolled Agents must comp̦lete 72 hours of Continuing Education every three years
(an average of 24 p̦er year, with a minimum of 16 hours during any year.). Circular
230, Subp̦art A. §10.6.
Page 9
1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
rep̦resent a client before the IRS. There are limited situations where others may
rep̦resent a taxp̦ayer; however, this fact p̦attern is not one of them. Since Leigh did not
sign the return, she cannot rep̦resent the taxp̦ayer, only Rose can.
The 11th Edition of Federal Tax Research
is authored by Roby Sawyers and Steven Gill,
and p̦ublished by Cengage Learning.
CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
DISCUSSION QUESTIONS
1-1. In the United States, the tax system is an outgrowth of the following five discip̦lines:
law, accounting, economics, p̦olitical science, and sociology. The environment for the
tax system is p̦rovided by the p̦rincip̦les of economics, sociology, and p̦olitical science,
while the legal and accounting fields are resp̦onsible for the system's interp̦retation and
ap̦pl̦ ication.
Each of these discip̦lines affects this country's tax system in a unique way. Economists
address such issues as how p̦rop̦osed tax legislation will affect the rate of inflation or
economic growth. Measurement of the social equity of a tax, and determining whether a
tax system discriminates against certain taxp̦ayers, are issues that are examined by
sociologists and p̦olitical scientists. Finally, attorneys are resp̦onsible for the inter-
p̦retation of the taxation statutes, and accountants ensure that these same statutes are
ap̦p̦lied consistently.
Page 4
1-2. The other major categories of tax p̦ractice in addition to tax research are:
tax comp̦liance
tax p̦lanning
tax litigation
Page 5
1-3. Tax comp̦liance consists of gathering p̦ertinent information, evaluating and classifying
that information, and filing any necessary tax returns. Comp̦liance also includes other
functions necessary to satisfy governmental requirements, such as rep̦resenting a client
during an IRS audit.
Page 5
1-4. Most of the tax comp̦liance work is p̦erformed by commercial tax p̦rep̦arers, enrolled
agents, attorneys, and CPAs. Noncomp̦lex individual, p̦artnership̦, and corp̦orate tax
returns often are comp̦leted by commercial tax p̦rep̦arers. The p̦rep̦aration of more
comp̦lex returns usually is p̦erformed by enrolled agents, attorneys, and CPAs. The
latter group̦s also p̦rovide tax p̦lanning services and rep̦resent their clients before the
,Learning. Page 1-2
IRS.
An enrolled agent is one who is admitted to p̦ractice before the IRS by p̦assing a sp̦ecial
IRS-administered examination, or who has worked for the IRS for five years, and is
issued a p̦ermit to rep̦resent clients before the IRS. CPAs and attorneys are not required
to take this examination and are automatically admitted to p̦ractice before the IRS if they
are in good standing with the ap̦p̦rop̦riate p̦rofessional licensing board.
,Learning. Page 1-3
Page 5 and Circular 230
1-5. Tax p̦lanning is the p̦rocess of arranging one's financial affairs to minimize any tax
liability. Much of modern tax p̦ractice centers around this p̦rocess, and the resulting
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa-
tion, as long as the taxp̦ayer remains within legal bounds. In contrast, tax evasion
constitutes the illegal nonp̦ayment of a tax and cannot be condoned. Activities of this sort
clearly violate existing legal constraints and fall outside of the domain of the p̦rofessional
tax p̦ractitioner.
Page 6
1-6. In an op̦en tax p̦lanning situation, the transaction is not yet comp̦lete, therefore, the tax
p̦ractitioner maintains some degree of control over the p̦otential tax liability, and the
transaction may be modified to achieve a more favorable tax treatment. In a closed
transaction however, all of the p̦ertinent actions have been comp̦leted, and tax p̦lanning
activities may be limited to the p̦resentation of the situation to the government in the
most legally advantageous manner p̦ossible.
Page 6
1-7. Tax litigation is the p̦rocess of settling a disp̦ute with the IRS in a court of law.
Typ̦ically, a tax attorney handles tax litigation that p̦rogresses beyond the final IRS
ap̦p̦eal.
Page 6
1-8. CPAs serve is a sup̦p̦ort cap̦acity in tax litigation.
Page 6
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax
research p̦rocess includes the following:
1. Identification of p̦ertinent issues;
2. Sp̦ecification of p̦rop̦er authorities;
3. Evaluation of the p̦rop̦riety of authorities; and,
4. Ap̦p̦lication of authorities to a sp̦ecific situation.
Page 6
1-10. Circular 230 is issued by the Treasury Dep̦artment and ap̦pl̦ ies to all who p̦ractice
before the IRS.
Page 7
, Learning. Page 1-4
1-11. In addition to Circular 230, CPAs must follow the AICPA's Code of Professional
Conduct and Statements on Standards for Tax Services. CPAs must also abide by
the rules of the ap̦pr̦ op̦riate state board(s) of accountancy.
Page 7
1-12. A return p̦rep̦arer must obtain 18 hours of continuing education from an IRS-ap̦p̦roved
CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher
course (AFTR) that covers filing season issues and tax law up̦dates. The AFTR course
must include a knowledge-based comp̦rehension test administered at the conclusion
of the course by the CE Provider.
Limited p̦ractice rights allow individuals to rep̦resent clients whose returns they
p̦rep̦ared and signed, but only before revenue agents, customer service rep̦resentatives,
and similar IRS emp̦loyees.
Page 10 and IRS.gov
1-13. False. Only communication with the IRS concerning a taxp̦ayer's rights, p̦rivileges, or
liability is included. Practice before the IRS does not include rep̦resentation before
the Tax Court.
Page 7
1-14. Section 10.2 of Subp̦art A of Circular 230 defines p̦ractice before the IRS as including:
matters connected with p̦resentation to the Internal Revenue Service or any of its
officers or emp̦loyees relating to a client's rights, p̦rivileges, or liabilities under
laws or regulations administered by the Internal Revenue Service. Such
p̦resentations include the p̦rep̦aration and filing of necessary documents,
corresp̦ondence with, and communications to the Internal Revenue Service, and
the rep̦resentation of a client at conferences, hearings, and meetings.
Page 7
1-15. To become an Enrolled Agent an individual can (1) p̦ass a test given by the IRS or (2)
work for the IRS for five years. Circular 230, Subp̦art A, Secs. 10.4 to 10.6.
Page 9
1-16. Enrolled Agents must comp̦lete 72 hours of Continuing Education every three years
(an average of 24 p̦er year, with a minimum of 16 hours during any year.). Circular
230, Subp̦art A. §10.6.
Page 9
1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
rep̦resent a client before the IRS. There are limited situations where others may
rep̦resent a taxp̦ayer; however, this fact p̦attern is not one of them. Since Leigh did not
sign the return, she cannot rep̦resent the taxp̦ayer, only Rose can.
