Federal llTax llResearch, ll13th Page ll1-1
Edition
SolutionManual Federal Tax Research
l l l ll
13th Edition by Roby Sawyers, Steven Gill
ll ll ll ll ll ll ll ll
Chapters 1 -13
ll ll ll
,Page ll1-2 SOLUTIONS llMANUAL
CHAPTER 1 ll
INTRODUCTION TO TAX PRACTICE AND ETHICS ll ll ll ll ll
DISCUSSION QUESTIONS
ll
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll accounting, economics, political science, and sociology. The environment for the tax system
ll ll ll ll ll ll ll ll ll ll ll
is provided by the principles of economics, sociology, and political science, while the legal
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll and accounting fields are responsible for the system‘s interpretation and application.
ll ll ll ll ll ll ll ll ll ll
Each of these disciplines affects this country‘s tax system in a unique way. Economists
ll ll ll ll ll ll ll ll ll ll ll ll ll
address such issues as how proposed tax legislation will affect the rate of inflation or
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll economic growth. Measurement of the social equity of a tax and determining whether a tax
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll system discriminates against certain taxpayers are issues that are examined by sociologists
ll ll ll ll ll ll ll ll ll ll ll
ll and political scientists.
ll ll
Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants
ll ll ll ll ll ll ll ll ll ll ll ll
ll ensure that these same statutes are applied consistently.****8880()
ll ll ll ll ll ll ll
Page 4 ll
1-2. The other major categories of tax practice in addition to tax research are as follows:
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
Tax compliance ll
Tax planning ll
Tax litigation ll
ll Page 5 ll
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that
ll ll ll ll ll ll ll ll ll ll
ll information, and filing any necessary tax returns. Compliance also includes other functions
ll ll ll ll ll ll ll ll ll ll ll
ll necessary to satisfy governmental requirements, such as representing a client during an
ll ll ll ll ll ll ll ll ll ll ll
Internal Revenue Service (IRS) audit.
ll ll ll ll ll
,Federal llTax llResearch, ll13th Page ll1-3
Edition
Page 5 ll
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents
ll ll ll ll ll ll ll ll ll ll ll ll ll
ll (EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual,
ll ll ll ll ll ll ll ll
partnership, and corporate tax returns often are completed by commercial tax preparers. The
ll ll ll ll ll ll ll ll ll ll ll ll ll
ll preparation of more complex returns usually is performed by EAs, attorneys, and CPAs. The
ll ll ll ll ll ll ll ll ll ll ll ll ll
latter groups also provide tax planning services and represent their clients before the IRS.
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
An EA is one who is admitted to practice before the IRS by passing a special IRS-administered
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll examination, or who has worked for the IRS for five years and is issued a permit to represent
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll clients before the IRS. CPAs and attorneys are not required to take this examination and are
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll automatically admitted to practice before the IRS if they are in good standing with the
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll appropriate professional licensing board. ll ll ll
Page 5 and Circular 230
ll ll ll ll
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability.
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll Much of modern tax practice centers around this process, and the resulting outcome is tax
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll avoidance.
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll cannot be condoned. Activities of this sort clearly violate existing legal constraints and fall
ll ll ll ll ll ll ll ll ll ll ll ll ll
ll outside of the domain of the professional tax practitioner.
ll ll ll ll ll ll ll ll
Page 6 ll
1-6. In can copen ctax cplanning csituation, cthe ctransaction cis cnot cyet ccomplete; ctherefore, cthe ctax
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll cpractitionercmaintains llcsome llcdegree llcof llccontrol llcover llcthe llcpotential llctax llcliability, llcand llcthe
ll ctransaction llcmay llcbe llcmodi- llcfied llcto llcachieve llca llcmore llcfavorable llctax llctreatment. llcIn llca
ll cclosed llctransaction llchowever, llcall llcof llcthe llcpertinentcactions llchave llcbeen llccompleted, llcand llctax
cplanning llcactivities llcmay llcbe llclimited llcto llcthe llcpresentation llcof llcthe llcsituation llcto llcthe
ll
cgovernment llcin llcthe llcmost llclegally llcadvantageous llcmanner llcpossible.
ll
, Page ll1-4 SOLUTIONS llMANUAL
Page c6 ll
1-7. Tax clitigation cis cthe cprocess cof csettling ca cdispute cwith cthe cIRS cin ca ccourt cof claw.
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll cTypically, llca llctaxcattorneylchandles llctax llclitigation llcthat llcprogresses llcbeyond llcthe llcfinal
ll cIRS llcappeal.
Page c6 ll
1-8. CPAs cserve cis ca csupport ccapacity cin ctax clitigation.
ll ll ll ll ll l ll ll
Page c6 ll
1-9. Tax cresearch cconsists cof cthe cresolution cof cunanswered ctaxation cquestions. cThe ctax
ll ll ll ll ll ll ll ll ll ll ll
ll cresearch llcprocesscincludes llcthe llcfollowing:
1. Identification cof cpertinent cissues; ll ll ll
2. Specification cof cproper cauthorities; ll ll ll
3. Evaluation cof cthe cpropriety cof cauthorities; cand,
ll ll ll l ll ll
4. Application cof cauthorities cto ca cspecific csituation.
ll ll ll ll ll ll
Page c6 ll
1-10. Circular c230 cis cissued cby cthe cTreasury cDepartment cand capplies cto call cwho cpractice
ll ll ll ll l ll l ll ll ll ll ll ll
ll cbefore llcthe llcIRS.cPage llc7
1-11. In caddition cto cCircular c230, cCPAs cmust cfollow cthe cAICPA‘s cCode cof cProfessional
ll ll ll ll ll ll ll ll ll ll ll ll
ll cConduct llcand llcStatements llcon llcStandards llcfor llcTax llcServices. llcCPAs llcmust llcalso llcabide llcby
ll cthe llcrules llcof llcthe llcappropriatecstate llcboard(s) llcof llcaccountancy.
Page c7 ll
1-12. A creturn cpreparer cmust cobtain c18 chours cof ccontinuing ceducation cfrom can cIRS-approved
ll ll ll ll ll ll ll ll ll ll ll ll
ll cCE llcProvider. llcThe llchours llcmust llcinclude llca llc6 llccredit llchour llcAnnual llcFederal llcTax
ll cRefresher llccourse llc(AFTR) llcthat llccovers llcfiling llcseason llcissues llcand llctax llclawllcupdates. llcThe
cAFTR llccourse llcmust llcinclude llca llcknowledge-cbased llccomprehension llctest llcadministered llcat llcthe
ll
cconclusion llcof llcthe llccourse llcby llcthe llcCE llcProvider.
ll
Edition
SolutionManual Federal Tax Research
l l l ll
13th Edition by Roby Sawyers, Steven Gill
ll ll ll ll ll ll ll ll
Chapters 1 -13
ll ll ll
,Page ll1-2 SOLUTIONS llMANUAL
CHAPTER 1 ll
INTRODUCTION TO TAX PRACTICE AND ETHICS ll ll ll ll ll
DISCUSSION QUESTIONS
ll
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll accounting, economics, political science, and sociology. The environment for the tax system
ll ll ll ll ll ll ll ll ll ll ll
is provided by the principles of economics, sociology, and political science, while the legal
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll and accounting fields are responsible for the system‘s interpretation and application.
ll ll ll ll ll ll ll ll ll ll
Each of these disciplines affects this country‘s tax system in a unique way. Economists
ll ll ll ll ll ll ll ll ll ll ll ll ll
address such issues as how proposed tax legislation will affect the rate of inflation or
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll economic growth. Measurement of the social equity of a tax and determining whether a tax
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll system discriminates against certain taxpayers are issues that are examined by sociologists
ll ll ll ll ll ll ll ll ll ll ll
ll and political scientists.
ll ll
Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants
ll ll ll ll ll ll ll ll ll ll ll ll
ll ensure that these same statutes are applied consistently.****8880()
ll ll ll ll ll ll ll
Page 4 ll
1-2. The other major categories of tax practice in addition to tax research are as follows:
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
Tax compliance ll
Tax planning ll
Tax litigation ll
ll Page 5 ll
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that
ll ll ll ll ll ll ll ll ll ll
ll information, and filing any necessary tax returns. Compliance also includes other functions
ll ll ll ll ll ll ll ll ll ll ll
ll necessary to satisfy governmental requirements, such as representing a client during an
ll ll ll ll ll ll ll ll ll ll ll
Internal Revenue Service (IRS) audit.
ll ll ll ll ll
,Federal llTax llResearch, ll13th Page ll1-3
Edition
Page 5 ll
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents
ll ll ll ll ll ll ll ll ll ll ll ll ll
ll (EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual,
ll ll ll ll ll ll ll ll
partnership, and corporate tax returns often are completed by commercial tax preparers. The
ll ll ll ll ll ll ll ll ll ll ll ll ll
ll preparation of more complex returns usually is performed by EAs, attorneys, and CPAs. The
ll ll ll ll ll ll ll ll ll ll ll ll ll
latter groups also provide tax planning services and represent their clients before the IRS.
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
An EA is one who is admitted to practice before the IRS by passing a special IRS-administered
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll examination, or who has worked for the IRS for five years and is issued a permit to represent
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll clients before the IRS. CPAs and attorneys are not required to take this examination and are
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll automatically admitted to practice before the IRS if they are in good standing with the
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll appropriate professional licensing board. ll ll ll
Page 5 and Circular 230
ll ll ll ll
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability.
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll Much of modern tax practice centers around this process, and the resulting outcome is tax
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll avoidance.
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll cannot be condoned. Activities of this sort clearly violate existing legal constraints and fall
ll ll ll ll ll ll ll ll ll ll ll ll ll
ll outside of the domain of the professional tax practitioner.
ll ll ll ll ll ll ll ll
Page 6 ll
1-6. In can copen ctax cplanning csituation, cthe ctransaction cis cnot cyet ccomplete; ctherefore, cthe ctax
ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll cpractitionercmaintains llcsome llcdegree llcof llccontrol llcover llcthe llcpotential llctax llcliability, llcand llcthe
ll ctransaction llcmay llcbe llcmodi- llcfied llcto llcachieve llca llcmore llcfavorable llctax llctreatment. llcIn llca
ll cclosed llctransaction llchowever, llcall llcof llcthe llcpertinentcactions llchave llcbeen llccompleted, llcand llctax
cplanning llcactivities llcmay llcbe llclimited llcto llcthe llcpresentation llcof llcthe llcsituation llcto llcthe
ll
cgovernment llcin llcthe llcmost llclegally llcadvantageous llcmanner llcpossible.
ll
, Page ll1-4 SOLUTIONS llMANUAL
Page c6 ll
1-7. Tax clitigation cis cthe cprocess cof csettling ca cdispute cwith cthe cIRS cin ca ccourt cof claw.
ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll ll
ll cTypically, llca llctaxcattorneylchandles llctax llclitigation llcthat llcprogresses llcbeyond llcthe llcfinal
ll cIRS llcappeal.
Page c6 ll
1-8. CPAs cserve cis ca csupport ccapacity cin ctax clitigation.
ll ll ll ll ll l ll ll
Page c6 ll
1-9. Tax cresearch cconsists cof cthe cresolution cof cunanswered ctaxation cquestions. cThe ctax
ll ll ll ll ll ll ll ll ll ll ll
ll cresearch llcprocesscincludes llcthe llcfollowing:
1. Identification cof cpertinent cissues; ll ll ll
2. Specification cof cproper cauthorities; ll ll ll
3. Evaluation cof cthe cpropriety cof cauthorities; cand,
ll ll ll l ll ll
4. Application cof cauthorities cto ca cspecific csituation.
ll ll ll ll ll ll
Page c6 ll
1-10. Circular c230 cis cissued cby cthe cTreasury cDepartment cand capplies cto call cwho cpractice
ll ll ll ll l ll l ll ll ll ll ll ll
ll cbefore llcthe llcIRS.cPage llc7
1-11. In caddition cto cCircular c230, cCPAs cmust cfollow cthe cAICPA‘s cCode cof cProfessional
ll ll ll ll ll ll ll ll ll ll ll ll
ll cConduct llcand llcStatements llcon llcStandards llcfor llcTax llcServices. llcCPAs llcmust llcalso llcabide llcby
ll cthe llcrules llcof llcthe llcappropriatecstate llcboard(s) llcof llcaccountancy.
Page c7 ll
1-12. A creturn cpreparer cmust cobtain c18 chours cof ccontinuing ceducation cfrom can cIRS-approved
ll ll ll ll ll ll ll ll ll ll ll ll
ll cCE llcProvider. llcThe llchours llcmust llcinclude llca llc6 llccredit llchour llcAnnual llcFederal llcTax
ll cRefresher llccourse llc(AFTR) llcthat llccovers llcfiling llcseason llcissues llcand llctax llclawllcupdates. llcThe
cAFTR llccourse llcmust llcinclude llca llcknowledge-cbased llccomprehension llctest llcadministered llcat llcthe
ll
cconclusion llcof llcthe llccourse llcby llcthe llcCE llcProvider.
ll
