Federal Tax Research, 12th Edition Page 1 -1 Solution Manual Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill CHAPTER 1 INTRODUCTION TO TAX PRACTICE AND ETHICS DISCUSSION QUESTIONS 1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law, accounting, economics, political science, and sociology. The environment for t he ta x system is provided by the principles of economics, sociology, and political science, while the legal and accounting fields are responsible for the system ‘s interpretation and application. Each of these disciplines affects this country ‘s tax system in a unique way. Economists address such issues as how proposed 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 taxpayers are issu es that are examined by sociologists and political scientists. Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants ensure that these same statutes are applied consistently. Page 4 1-2. The other m ajor ca tegories of tax practice in addition to tax research are as follows : Tax compliance Tax planning Tax litigation Page 5 1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that information, and filing a ny necessa ry tax returns. Compliance also includes other functions necessary to satisfy governmental requirements, such as representing a client during an Internal Revenue Service ( IRS) audit. Page 1 -2 SOLUTIONS MANUAL Page 5 1-4. Most of the tax compliance work is performed by commercia l tax preparers, enrolled agents (EAs), attorneys, and certified public accountants ( CPAs ). Noncomplex individual, partnership, and corporate tax returns often are completed by commercial tax preparers. The preparation of more complex returns usu ally is pe rformed by EAs, attorneys, and CPAs. The latter groups also provide tax planning services and represent their clients before the IRS. An EA is one who is admitted to practice before the IRS by passing a special IRS -administered examination, or who has wor ked for the IRS for five years and is issued a permit to represent clients before the IRS. CPAs and attorneys are not required to take this examination and are automatically admitted to practice before the IRS if the y are in good standing with the appropri ate professional licensing board. Page 5 and Circular 230 1-5. Tax planning is the process of arranging one ‘s financial affairs to minimize any tax liability. Much of modern tax practice centers around this p rocess, and the resulting outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannot be co ndoned . Activities of this sort clearly v iolate existing legal constraints and fall outside of the domain of the professional tax practitioner. Page 6 1-6. In an open tax planning situation, the transaction is not yet complete ; therefore, the tax pract itioner maintains some degree of control o ver the potential tax liability, and the transaction may be modi -
fied to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinent actions have been completed, and tax planning a ctivities may be limited to the presentati on of the situation to the government in the most legally advantageous manner possible. Federal Tax Research, 12th Edition Page 1 -3 Page 6 1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax attorney ha ndles tax litigation that progresses beyon d the final IRS appeal. Page 6 1-8. CPAs serve is a support capacity in tax litigation. Page 6 1-9. Tax research consists of the resolution of unanswered taxation questions. The tax research process includes the following: 1. Identification of pertine nt issues; 2. Specification of proper authorities; 3. Evaluation of the propriety of authorities; and, 4. Application of authorities to a specific situation. Page 6 1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS. Page 7 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 appropriate state b oard(s) of accountancy. Page 7 1-12. A return preparer must obtain 18 hours of continuing education from an IRS -approved CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers filing season issues an d tax law updates. The AFTR course must in clude a knowledge -
based comprehension test administered at the conclusion of the course by the CE Provider. Page 1 -4 SOLUTIONS MANUAL Limited practice rights allow individuals to represent clients whose returns they prepared and signed , but only before revenue agents, customer s ervice representatives, and similar IRS employees. Page 10 and IRS.gov 1-13. False. Only communication with the IRS concerning a taxpayer ‘s rights, privileges, or liability is included. Practice before the IRS do es not include representation before the T ax Court. Page 7 1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including : matters connected with presentation to the Internal Revenue Service or any of its officers or empl oyees relating to a client ‘s rights, privi leges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include the preparation and filing of necessary documents, correspondence with, and communications to the Internal Revenue Service, and the rep resentation of a client at conferences, hearings, and meetings. Page 7 1-15. To become an EA an individual can (1) pass a test given by the IRS or (2) work for the IRS for five years. Circular 230 , Subpart A, §§ 10.4 to 10.6 . Page 9 1-16. EAs must c omplete 72 hours of continuing education every three years (an average of 24 per year , with a minimum of 16 hours during any year ). Circular 230, Subpart A. § 10.6. Page 9 1-17. True. As a general rule, an individual must be an EA, attorney, or CPA to represent a client before the IRS. There are limited situations where others may represent a taxpayer; however, this fact pattern is not one of them. Since Leigh did not sign the return, she cannot represent the taxpayer, only Rose can.
fied to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinent actions have been completed, and tax planning a ctivities may be limited to the presentati on of the situation to the government in the most legally advantageous manner possible. Federal Tax Research, 12th Edition Page 1 -3 Page 6 1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax attorney ha ndles tax litigation that progresses beyon d the final IRS appeal. Page 6 1-8. CPAs serve is a support capacity in tax litigation. Page 6 1-9. Tax research consists of the resolution of unanswered taxation questions. The tax research process includes the following: 1. Identification of pertine nt issues; 2. Specification of proper authorities; 3. Evaluation of the propriety of authorities; and, 4. Application of authorities to a specific situation. Page 6 1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS. Page 7 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 appropriate state b oard(s) of accountancy. Page 7 1-12. A return preparer must obtain 18 hours of continuing education from an IRS -approved CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers filing season issues an d tax law updates. The AFTR course must in clude a knowledge -
based comprehension test administered at the conclusion of the course by the CE Provider. Page 1 -4 SOLUTIONS MANUAL Limited practice rights allow individuals to represent clients whose returns they prepared and signed , but only before revenue agents, customer s ervice representatives, and similar IRS employees. Page 10 and IRS.gov 1-13. False. Only communication with the IRS concerning a taxpayer ‘s rights, privileges, or liability is included. Practice before the IRS do es not include representation before the T ax Court. Page 7 1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including : matters connected with presentation to the Internal Revenue Service or any of its officers or empl oyees relating to a client ‘s rights, privi leges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include the preparation and filing of necessary documents, correspondence with, and communications to the Internal Revenue Service, and the rep resentation of a client at conferences, hearings, and meetings. Page 7 1-15. To become an EA an individual can (1) pass a test given by the IRS or (2) work for the IRS for five years. Circular 230 , Subpart A, §§ 10.4 to 10.6 . Page 9 1-16. EAs must c omplete 72 hours of continuing education every three years (an average of 24 per year , with a minimum of 16 hours during any year ). Circular 230, Subpart A. § 10.6. Page 9 1-17. True. As a general rule, an individual must be an EA, attorney, or CPA to represent a client before the IRS. There are limited situations where others may represent a taxpayer; however, this fact pattern is not one of them. Since Leigh did not sign the return, she cannot represent the taxpayer, only Rose can.
