Federal Tax Research, 11th Edition Page 1-1
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 disciplines: law,
accounting, economics, political science, and sociology. The environment for the tax
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 issues that are examined by
sociologists and political scientists. Finally, attorneys are responsible for the inter-
pretation of the taxation statutes, and accountants ensure that these same statutes are
applied consistently.
Page 4
1-2. The other major categories of tax practice in addition to tax research are:
tax compliance
tax planning
tax litigation
Page 5
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying
that information, and filing any necessary tax returns. Compliance also includes other
functions necessary to satisfy governmental requirements, such as representing a client
during an IRS audit.
Page 5
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled
agents, attorneys, and CPAs. Noncomplex individual, partnership, and corporate tax
returns often are completed by commercial tax preparers. The preparation of more
complex returns usually is performed by enrolled agents, attorneys, and CPAs. The latter
groups also provide tax planning services and represent their clients before the IRS.
An enrolled agent is one who is admitted to practice before the IRS by passing a special
IRS-administered examination, or who has worked 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 they are
in good standing with the appropriate professional licensing board.
,Federal Tax Research, 11th Edition Page 1-2
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 process, and the resulting
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa-
tion, as long as the taxpayer remains within legal bounds. In contrast, tax evasion
constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort
clearly violate 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
practitioner maintains some degree of control over the potential tax liability, and the
transaction may be modified to achieve a more favorable tax treatment. In a closed
transaction however, all of the pertinent actions have been completed, and tax planning
activities may be limited to the presentation of the situation to the government in the most
legally advantageous manner possible.
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 handles tax litigation that progresses beyond 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 pertinent 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
,Federal Tax Research, 11th Edition Page 1-3
1-11. In zaddition zto zCircular z230, zCPAs zmust zfollow zthe zAICPA's zCode zof
zProfessional zConduct zand zStatements zon zStandards zfor zTax zServices. zCPAs
zmust zalso zabide zby zthe zrules zof zthe zappropriate zstate zboard(s) zof zaccountancy.
Page z7
1-12. A zreturn zpreparer zmust zobtain z18 zhours zof zcontinuing zeducation zfrom zan zIRS-
approved zCE zProvider. zThe zhours zmust zinclude za z6 zcredit zhour zAnnual zFederal
zTax zRefresher zcourse z(AFTR) zthat zcovers zfiling zseason zissues zand ztax zlaw
zupdates. zThe zAFTR zcourse zmust zinclude za zknowledge-based zcomprehension ztest
zadministered zat zthe zconclusion zof zthe zcourse zby zthe zCE zProvider.
Limited zpractice zrights zallow zindividuals zto zrepresent zclients zwhose zreturns zthey
zprepared zand zsigned, zbut zonly zbefore zrevenue zagents, zcustomer zservice
zrepresentatives, zand zsimilar zIRS zemployees.
Page z10 zand zIRS.gov
1-13. False. zOnly zcommunication zwith zthe zIRS zconcerning za ztaxpayer's zrights,
zprivileges, zor zliability zis zincluded. zPractice zbefore zthe zIRS zdoes znot zinclude
zrepresentation zbefore zthe zTax zCourt.
Page z7
1-14. Section z10.2 zof zSubpart zA zof zCircular z230 zdefines zpractice zbefore zthe zIRS zas zincluding:
matters zconnected zwith zpresentation zto zthe zInternal zRevenue zService zor zany
zof zits zofficers zor zemployees zrelating zto za zclient's zrights, zprivileges, zor
zliabilities zunder zlaws zor zregulations zadministered zby zthe zInternal zRevenue
zService. zSuch zpresentations zinclude zthe zpreparation zand zfiling zof znecessary
zdocuments, zcorrespondence zwith, zand zcommunications zto zthe zInternal
zRevenue zService, zand zthe zrepresentation zof za zclient zat zconferences,
zhearings, zand zmeetings.
Page z7
1-15. To zbecome zan zEnrolled zAgent zan zindividual zcan z(1) zpass za ztest zgiven zby zthe
zIRS zor z(2) zwork zfor zthe zIRS zfor zfive zyears. zCircular z230, zSubpart zA, zSecs.
z10.4 zto z10.6.
Page z9
1-16. Enrolled zAgents zmust zcomplete z72 zhours zof zContinuing zEducation zevery zthree
zyears z(an zaverage zof z24 zper zyear, zwith za zminimum zof z16 zhours zduring zany
zyear.). zCircular z230, zSubpart zA. z§10.6.
Page z9
1-17. True. zAs za zgeneral zrule, zan zindividual zmust zbe zan zenrolled zagent, zattorney, zor
zCPA zto zrepresent za zclient zbefore zthe zIRS. zThere zare zlimited zsituations zwhere
zothers zmay zrepresent za ztaxpayer; zhowever, zthis zfact zpattern zis znot zone zof zthem.
zSince zLeigh zdid znot zsign zthe zreturn, zshe zcannot zrepresent zthe ztaxpayer, zonly
zRose zcan.
, Federal Tax Research, 11th Edition Page 1-4
Pages z10-11
1-18. The znames zof zorganizations zthat zcan zbe zrepresented zby zregular zfull-time zemployees
zare zfound zin zCircular z230, z§10.7(c). zA zregular zfull-time zemployee zcan zrepresent
zthe zemployer z(individual zemployer). zA zregular zfull-time zemployee zof za zpartnership
zmay zrepresent zthe zpartnership. zAlso, za zregular zfull-time zemployee zof za ztrust,
zreceivership, zguardianship, zor zestate zmay zrepresent zthe ztrust, zreceivership,
zguardianship, zor zestate. zFurthermore, za z regular zfull-time zemployee zof za
zgovernmental zunit, zagency, zor zauthority zmay zrepresent zthe zgovernmental zunit,
zagency, zor zauthority zin zthe zcourse zof zhis zor zher zofficial zduties.
Page z10
1-19. Yes. zCircular z230, zSubpart zA, zSec. z10.7.
Page z10
1-20. True. zA zpractitioner zmay zbe zsuspended zor zdisbarred zfrom zpractice zbefore zthe zIRS
zif zhe zor zshe zknowingly zhelps za zsuspended zor zdisbarred zperson zpractice zindirectly
zbefore zthe zIRS.
Page z12
1-21. A zpractitioner zmay znot zadvise za zclient zto ztake za zposition zon za zdocument, zaffidavit,
zor zother zpaper zsubmitted zto zthe zInternal zRevenue zService zunless zthe zposition zis
znot zfrivolous.
Circular z230 z§10.34(b)
Page z14
1-22. Under zCircular z230, zan zattorney, zcertified zpublic zaccountant z(CPA), zor zenrolled
zagent zmay zuse zmass zmedia z(e.g., zT.V. zand zthe zInternet) zfor zadvertising zpurposes.
zSuch zmedia zmay znot zcontain zfalse, zfraudulent, zunduly zinfluencing, zcoercive, zor
zunfair zstatements zor zclaims. zAttorneys, zCPAs, zand zenrolled zagents zmust zalso
zobserve zany zapplicable zstandards zof zethical zconduct zadopted zby zthe zAmerican zBar
zAssociation z(ABA), zthe zAmerican zInstitute zof zCertified zPublic zAccountants
z(AICPA), zand zthe zNational zAssociation zof zEnrolled zAgents z(NAEA). zAdditional
zstandards zand zlisting zof zitems zthat zmay zbe zincluded zin zmass zmedia zadvertising
zare zdefined zunder zSection z10.30 zof zSubpart zB zin zCircular z230.
Page z19
1-23. Under zSection z10.25 zof zCircular z230, zpartners zof zgovernment zemployees zcannot
zrepresent zanyone zfor zwhich zthe zgovernment zemployee-partner zhas z(or zhas zhad)
zofficial zresponsibility. zFor zinstance, za zCPA zfirm zwith zan zIRS zagent zcould znot
zrepresent zany ztaxpayer zthat zis z(or zwas zin zthe zpast) zassigned zto zthe zIRS zagent-
partner.
Page z12
1-24. Under zSection z10.21 zof zCircular z230, zeach zattorney, zCPA, zenrolled zagent, zor
zenrolled zactuary zwho zknows zthat zthe zclient zhas znot zcomplied zwith zthe zrevenue
zlaws zof zthe zUnited zStates zor zhas zmade zan zerror zin zor zomission zfrom zany zreturn,
zdocument, zaffidavit, zor zother
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 disciplines: law,
accounting, economics, political science, and sociology. The environment for the tax
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 issues that are examined by
sociologists and political scientists. Finally, attorneys are responsible for the inter-
pretation of the taxation statutes, and accountants ensure that these same statutes are
applied consistently.
Page 4
1-2. The other major categories of tax practice in addition to tax research are:
tax compliance
tax planning
tax litigation
Page 5
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying
that information, and filing any necessary tax returns. Compliance also includes other
functions necessary to satisfy governmental requirements, such as representing a client
during an IRS audit.
Page 5
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled
agents, attorneys, and CPAs. Noncomplex individual, partnership, and corporate tax
returns often are completed by commercial tax preparers. The preparation of more
complex returns usually is performed by enrolled agents, attorneys, and CPAs. The latter
groups also provide tax planning services and represent their clients before the IRS.
An enrolled agent is one who is admitted to practice before the IRS by passing a special
IRS-administered examination, or who has worked 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 they are
in good standing with the appropriate professional licensing board.
,Federal Tax Research, 11th Edition Page 1-2
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 process, and the resulting
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa-
tion, as long as the taxpayer remains within legal bounds. In contrast, tax evasion
constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort
clearly violate 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
practitioner maintains some degree of control over the potential tax liability, and the
transaction may be modified to achieve a more favorable tax treatment. In a closed
transaction however, all of the pertinent actions have been completed, and tax planning
activities may be limited to the presentation of the situation to the government in the most
legally advantageous manner possible.
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 handles tax litigation that progresses beyond 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 pertinent 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
,Federal Tax Research, 11th Edition Page 1-3
1-11. In zaddition zto zCircular z230, zCPAs zmust zfollow zthe zAICPA's zCode zof
zProfessional zConduct zand zStatements zon zStandards zfor zTax zServices. zCPAs
zmust zalso zabide zby zthe zrules zof zthe zappropriate zstate zboard(s) zof zaccountancy.
Page z7
1-12. A zreturn zpreparer zmust zobtain z18 zhours zof zcontinuing zeducation zfrom zan zIRS-
approved zCE zProvider. zThe zhours zmust zinclude za z6 zcredit zhour zAnnual zFederal
zTax zRefresher zcourse z(AFTR) zthat zcovers zfiling zseason zissues zand ztax zlaw
zupdates. zThe zAFTR zcourse zmust zinclude za zknowledge-based zcomprehension ztest
zadministered zat zthe zconclusion zof zthe zcourse zby zthe zCE zProvider.
Limited zpractice zrights zallow zindividuals zto zrepresent zclients zwhose zreturns zthey
zprepared zand zsigned, zbut zonly zbefore zrevenue zagents, zcustomer zservice
zrepresentatives, zand zsimilar zIRS zemployees.
Page z10 zand zIRS.gov
1-13. False. zOnly zcommunication zwith zthe zIRS zconcerning za ztaxpayer's zrights,
zprivileges, zor zliability zis zincluded. zPractice zbefore zthe zIRS zdoes znot zinclude
zrepresentation zbefore zthe zTax zCourt.
Page z7
1-14. Section z10.2 zof zSubpart zA zof zCircular z230 zdefines zpractice zbefore zthe zIRS zas zincluding:
matters zconnected zwith zpresentation zto zthe zInternal zRevenue zService zor zany
zof zits zofficers zor zemployees zrelating zto za zclient's zrights, zprivileges, zor
zliabilities zunder zlaws zor zregulations zadministered zby zthe zInternal zRevenue
zService. zSuch zpresentations zinclude zthe zpreparation zand zfiling zof znecessary
zdocuments, zcorrespondence zwith, zand zcommunications zto zthe zInternal
zRevenue zService, zand zthe zrepresentation zof za zclient zat zconferences,
zhearings, zand zmeetings.
Page z7
1-15. To zbecome zan zEnrolled zAgent zan zindividual zcan z(1) zpass za ztest zgiven zby zthe
zIRS zor z(2) zwork zfor zthe zIRS zfor zfive zyears. zCircular z230, zSubpart zA, zSecs.
z10.4 zto z10.6.
Page z9
1-16. Enrolled zAgents zmust zcomplete z72 zhours zof zContinuing zEducation zevery zthree
zyears z(an zaverage zof z24 zper zyear, zwith za zminimum zof z16 zhours zduring zany
zyear.). zCircular z230, zSubpart zA. z§10.6.
Page z9
1-17. True. zAs za zgeneral zrule, zan zindividual zmust zbe zan zenrolled zagent, zattorney, zor
zCPA zto zrepresent za zclient zbefore zthe zIRS. zThere zare zlimited zsituations zwhere
zothers zmay zrepresent za ztaxpayer; zhowever, zthis zfact zpattern zis znot zone zof zthem.
zSince zLeigh zdid znot zsign zthe zreturn, zshe zcannot zrepresent zthe ztaxpayer, zonly
zRose zcan.
, Federal Tax Research, 11th Edition Page 1-4
Pages z10-11
1-18. The znames zof zorganizations zthat zcan zbe zrepresented zby zregular zfull-time zemployees
zare zfound zin zCircular z230, z§10.7(c). zA zregular zfull-time zemployee zcan zrepresent
zthe zemployer z(individual zemployer). zA zregular zfull-time zemployee zof za zpartnership
zmay zrepresent zthe zpartnership. zAlso, za zregular zfull-time zemployee zof za ztrust,
zreceivership, zguardianship, zor zestate zmay zrepresent zthe ztrust, zreceivership,
zguardianship, zor zestate. zFurthermore, za z regular zfull-time zemployee zof za
zgovernmental zunit, zagency, zor zauthority zmay zrepresent zthe zgovernmental zunit,
zagency, zor zauthority zin zthe zcourse zof zhis zor zher zofficial zduties.
Page z10
1-19. Yes. zCircular z230, zSubpart zA, zSec. z10.7.
Page z10
1-20. True. zA zpractitioner zmay zbe zsuspended zor zdisbarred zfrom zpractice zbefore zthe zIRS
zif zhe zor zshe zknowingly zhelps za zsuspended zor zdisbarred zperson zpractice zindirectly
zbefore zthe zIRS.
Page z12
1-21. A zpractitioner zmay znot zadvise za zclient zto ztake za zposition zon za zdocument, zaffidavit,
zor zother zpaper zsubmitted zto zthe zInternal zRevenue zService zunless zthe zposition zis
znot zfrivolous.
Circular z230 z§10.34(b)
Page z14
1-22. Under zCircular z230, zan zattorney, zcertified zpublic zaccountant z(CPA), zor zenrolled
zagent zmay zuse zmass zmedia z(e.g., zT.V. zand zthe zInternet) zfor zadvertising zpurposes.
zSuch zmedia zmay znot zcontain zfalse, zfraudulent, zunduly zinfluencing, zcoercive, zor
zunfair zstatements zor zclaims. zAttorneys, zCPAs, zand zenrolled zagents zmust zalso
zobserve zany zapplicable zstandards zof zethical zconduct zadopted zby zthe zAmerican zBar
zAssociation z(ABA), zthe zAmerican zInstitute zof zCertified zPublic zAccountants
z(AICPA), zand zthe zNational zAssociation zof zEnrolled zAgents z(NAEA). zAdditional
zstandards zand zlisting zof zitems zthat zmay zbe zincluded zin zmass zmedia zadvertising
zare zdefined zunder zSection z10.30 zof zSubpart zB zin zCircular z230.
Page z19
1-23. Under zSection z10.25 zof zCircular z230, zpartners zof zgovernment zemployees zcannot
zrepresent zanyone zfor zwhich zthe zgovernment zemployee-partner zhas z(or zhas zhad)
zofficial zresponsibility. zFor zinstance, za zCPA zfirm zwith zan zIRS zagent zcould znot
zrepresent zany ztaxpayer zthat zis z(or zwas zin zthe zpast) zassigned zto zthe zIRS zagent-
partner.
Page z12
1-24. Under zSection z10.21 zof zCircular z230, zeach zattorney, zCPA, zenrolled zagent, zor
zenrolled zactuary zwho zknows zthat zthe zclient zhas znot zcomplied zwith zthe zrevenue
zlaws zof zthe zUnited zStates zor zhas zmade zan zerror zin zor zomission zfrom zany zreturn,
zdocument, zaffidavit, zor zother
