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
, Page 1-2
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.
, Page n1-3
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
, Page n1-4
1-11. In naddition nto nCircular n230, nCPAs nmust nfollow nthe nAICPA's nCode nof nProfessional
nConduct nand nStatements non nStandards nfor nTax nServices. nCPAs nmust nalso nabide nby
nthe nrules nof nthe nappropriate nstate nboard(s) nof naccountancy.
Page n7
1-12. A nreturn npreparer nmust nobtain n18 nhours nof ncontinuing neducation nfrom nan nIRS-
approved nCE nProvider. nThe nhours nmust ninclude na n6 ncredit nhour nAnnual nFederal nTax
nRefresher ncourse n(AFTR) nthat ncovers nfiling nseason nissues nand ntax nlaw nupdates. nThe
nAFTR ncourse nmust ninclude na nknowledge-based ncomprehension ntest nadministered nat
nthe nconclusion nof nthe ncourse nby nthe nCE nProvider.
Limited npractice nrights nallow nindividuals nto nrepresent nclients nwhose nreturns nthey
nprepared nand nsigned, nbut nonly nbefore nrevenue nagents, ncustomer nservice nrepresentatives,
nand nsimilar nIRS nemployees.
Page n10 nand nIRS.gov
1-13. False. nOnly ncommunication nwith nthe nIRS nconcerning na ntaxpayer's nrights, nprivileges,
nor nliability nis nincluded. nPractice nbefore nthe nIRS ndoes nnot ninclude nrepresentation
nbefore nthe nTax nCourt.
Page n7
1-14. Section n10.2 nof nSubpart nA nof nCircular n230 ndefines npractice nbefore nthe nIRS nas nincluding:
matters nconnected nwith npresentation nto nthe nInternal nRevenue nService nor nany nof
nits nofficers nor nemployees nrelating nto na nclient's nrights, nprivileges, nor nliabilities
nunder nlaws nor nregulations nadministered nby nthe nInternal nRevenue nService. nSuch
npresentations ninclude nthe npreparation nand nfiling nof nnecessary ndocuments,
ncorrespondence nwith, nand ncommunications nto nthe nInternal nRevenue nService,
nand nthe nrepresentation nof na nclient nat nconferences, nhearings, nand nmeetings.
Page n7
1-15. To nbecome nan nEnrolled nAgent nan nindividual ncan n(1) npass na ntest ngiven nby nthe nIRS nor
n(2) nwork nfor nthe nIRS nfor nfive nyears. nCircular n230, nSubpart nA, nSecs. n10.4 nto n10.6.
Page n9
1-16. Enrolled nAgents nmust ncomplete n72 nhours nof nContinuing nEducation nevery nthree nyears
n(an naverage nof n24 nper nyear, nwith na nminimum nof n16 nhours nduring nany nyear.). nCircular
n230, nSubpart nA. n§10.6.
Page n9
1-17. True. nAs na ngeneral nrule, nan nindividual nmust nbe nan nenrolled nagent, nattorney, nor nCPA nto
nrepresent na nclient nbefore nthe nIRS. nThere nare nlimited nsituations nwhere nothers nmay
nrepresent na ntaxpayer; nhowever, nthis nfact npattern nis nnot none nof nthem. nSince nLeigh ndid
nnot nsign nthe nreturn, nshe ncannot nrepresent nthe ntaxpayer, nonly nRose ncan.
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
, Page 1-2
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.
, Page n1-3
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
, Page n1-4
1-11. In naddition nto nCircular n230, nCPAs nmust nfollow nthe nAICPA's nCode nof nProfessional
nConduct nand nStatements non nStandards nfor nTax nServices. nCPAs nmust nalso nabide nby
nthe nrules nof nthe nappropriate nstate nboard(s) nof naccountancy.
Page n7
1-12. A nreturn npreparer nmust nobtain n18 nhours nof ncontinuing neducation nfrom nan nIRS-
approved nCE nProvider. nThe nhours nmust ninclude na n6 ncredit nhour nAnnual nFederal nTax
nRefresher ncourse n(AFTR) nthat ncovers nfiling nseason nissues nand ntax nlaw nupdates. nThe
nAFTR ncourse nmust ninclude na nknowledge-based ncomprehension ntest nadministered nat
nthe nconclusion nof nthe ncourse nby nthe nCE nProvider.
Limited npractice nrights nallow nindividuals nto nrepresent nclients nwhose nreturns nthey
nprepared nand nsigned, nbut nonly nbefore nrevenue nagents, ncustomer nservice nrepresentatives,
nand nsimilar nIRS nemployees.
Page n10 nand nIRS.gov
1-13. False. nOnly ncommunication nwith nthe nIRS nconcerning na ntaxpayer's nrights, nprivileges,
nor nliability nis nincluded. nPractice nbefore nthe nIRS ndoes nnot ninclude nrepresentation
nbefore nthe nTax nCourt.
Page n7
1-14. Section n10.2 nof nSubpart nA nof nCircular n230 ndefines npractice nbefore nthe nIRS nas nincluding:
matters nconnected nwith npresentation nto nthe nInternal nRevenue nService nor nany nof
nits nofficers nor nemployees nrelating nto na nclient's nrights, nprivileges, nor nliabilities
nunder nlaws nor nregulations nadministered nby nthe nInternal nRevenue nService. nSuch
npresentations ninclude nthe npreparation nand nfiling nof nnecessary ndocuments,
ncorrespondence nwith, nand ncommunications nto nthe nInternal nRevenue nService,
nand nthe nrepresentation nof na nclient nat nconferences, nhearings, nand nmeetings.
Page n7
1-15. To nbecome nan nEnrolled nAgent nan nindividual ncan n(1) npass na ntest ngiven nby nthe nIRS nor
n(2) nwork nfor nthe nIRS nfor nfive nyears. nCircular n230, nSubpart nA, nSecs. n10.4 nto n10.6.
Page n9
1-16. Enrolled nAgents nmust ncomplete n72 nhours nof nContinuing nEducation nevery nthree nyears
n(an naverage nof n24 nper nyear, nwith na nminimum nof n16 nhours nduring nany nyear.). nCircular
n230, nSubpart nA. n§10.6.
Page n9
1-17. True. nAs na ngeneral nrule, nan nindividual nmust nbe nan nenrolled nagent, nattorney, nor nCPA nto
nrepresent na nclient nbefore nthe nIRS. nThere nare nlimited nsituations nwhere nothers nmay
nrepresent na ntaxpayer; nhowever, nthis nfact npattern nis nnot none nof nthem. nSince nLeigh ndid
nnot nsign nthe nreturn, nshe ncannot nrepresent nthe ntaxpayer, nonly nRose ncan.
