Federal f7Tax f7Research, f713th Page f71-1
f7Edition
Solution Manual Federal Tax Research
13th Edition by Roby Sawyers, Steven Gill
Chapters 1 -13
,Page f71-2 SOLUTIONS
f7MANUAL
CHAPTER f71
INTRODUCTION f7TO f7TAX f7PRACTICE f7AND f7ETHICS
DISCUSSION f7QUESTIONS
1-1. In f7the f7United f7States, f7the f7tax f7system f7is f7an f7outgrowth f7of f7the f7following f7five
f7 disciplines: f7law, f7accounting, f7economics, f7political f7science, f7and f7sociology. f7The
f7 environment f7for f7the f7tax f7system f7is7fprovided f7by f7the f7principles f7of f7economics,
f7 sociology, f7and f7political f7science, f7while f7the f7legal f7and f7accounting f7fields f7are
responsible f7for f7 the f7system‘s f7interpretation f7 and f7application.
f7
Each f7of f7these f7disciplines f7affects f7this f7country‘s f7tax f7system f7in f7a f7unique f7way.
f7 Economists f7address7fsuch f7issues f7as f7how f7proposed f7tax f7legislation f7will f7affect f7the f7rate
f7 of f7inflation f7or f7economic f7growth.7fMeasurement f7of f7the f7social f7equity f7of f7a f7tax f7and
f7 determining f7whether f7a f7tax f7system f7discriminates f7against f7certain f7taxpayers f7are f7issues
f7 that f7are f7examined f7by f7sociologists f7and f7political f7scientists.
Finally, f7attorneys f7are f7responsible f7for f7the f7interpretation f7of f7the f7taxation f7statutes, f7and
f7accountants7fensure f7that f7these f7same f7statutes f7are f7applied f7consistently.****8880()
Page f74
1-2. The f7other f7major f7categories f7of f7tax f7practice f7in f7addition f7to f7tax f7research f7are f7as f7follows:
Tax f7compliance
Tax f7planning
Tax
f7 litigation7fPage f75
1-3. Tax f7compliance f7consists f7of f7gathering f7pertinent f7information, f7evaluating f7and
f7 classifying f7that f7information, f7and f7filing f7any f7necessary f7tax f7returns. f7Compliance f7also
f7 includes f7other f7functions f7necessary f7to f7satisfy f7governmental f7requirements, f7such f7as
f7 representing f7a f7client f7during f7an f7Internal7fRevenue f7Service f7(IRS) f7audit.
,Federal f7Tax f7Research, f713th Page f71-3
f7Edition
Page f75
1-4. Most f7of f7the f7tax f7compliance f7work f7is f7performed f7by f7commercial f7tax f7preparers,
f7 enrolled f7agents f7(EAs), f7attorneys, f7and f7certified f7public f7accountants f7(CPAs).
f7 Noncomplex f7individual, f7partnership,7fand f7corporate f7tax f7returns f7often f7are f7completed f7by
f7 commercial f7tax f7preparers. f7The f7preparation f7of f7more f7complex f7returns f7usually f7is
f7 performed f7by f7EAs, f7attorneys, f7and f7CPAs. f7The f7latter f7groups f7also7fprovide f7tax
f7planning f7services f7and f7represent f7their f7clients f7before f7the f7IRS.
An f7EA f7is f7one f7who f7is f7admitted f7to f7practice f7before f7the f7IRS f7by f7passing f7a f7special f7IRS-
administered f7examination, f7or f7who f7has f7worked f7for f7the f7IRS f7for f7five f7years f7and f7is
f7 issued f7a f7permit f7to f7represent f7clients f7before f7the f7IRS. f7CPAs f7and f7attorneys f7are f7not
f7 required f7to f7take f7this f7examination f7and f7are f7automatically f7admitted f7to f7practice f7before
f7 the f7IRS f7if f7they f7are f7in f7good f7standing f7with f7the f7appropriatef7professional f7licensing
f7 board.
Page f75 f7and f7Circular f7230
1-5. Tax f7planning f7is f7the f7process f7of f7arranging f7one‘s f7financial f7affairs f7to f7minimize f7any f7tax
f7 liability. f7Muchf7of f7modern f7tax f7practice f7centers f7around f7this f7process, f7and f7the f7resulting
f7 outcome f7is f7tax f7avoidance.
There f7is f7nothing f7illegal f7or f7immoral f7in f7the f7avoidance f7of f7taxation f7as f7long f7as f7the
f7 taxpayer f7remains f7within f7legal f7bounds. f7In f7contrast, f7tax f7evasion f7constitutes f7the f7illegal
f7 nonpayment f7of f7a f7tax f7and f7cannot7fbe f7condoned. f7Activities f7of f7this f7sort f7clearly f7violate
f7 existing f7legal f7constraints f7and f7fall f7outside f7of f7the f7domain f7of f7the f7professional f7tax
f7practitioner.
Page f76
1-6. In f7an f7open f7tax f7planning f7situation, f7the f7transaction f7is f7not f7yet f7complete; f7therefore, f7the
f7 tax f7practitioner7fmaintains f7some f7degree f7of f7control f7over f7the f7potential f7tax f7liability, f7and
f7 the f7transaction f7may f7be f7modi- f7fied f7to f7achieve f7a f7more f7favorable f7tax f7treatment. f7In f7a
f7 closed f7transaction f7however, f7all f7of f7the f7pertinentf7actions f7have f7been f7completed, f7and f7tax
f7 planning f7activities f7may f7be f7limited f7to f7the f7presentation f7of f7the f7situation f7to f7the
f7 government f7in f7the f7most f7legally f7advantageous f7 manner f7 possible.
, Page f71-4 SOLUTIONS
f7MANUAL
Page f76
1-7. Tax f7litigation f7is f7the f7process f7of f7settling f7a f7dispute f7with f7the f7IRS f7in f7a f7court f7of f7law.
f7 Typically, f7a f7tax7fattorney f7handles f7tax f7litigation f7that f7progresses f7beyond f7the f7final f7IRS
f7 appeal.
Page f76
1-8. CPAs f7serve f7is f7a f7support f7capacity f7in f7tax f7litigation.
Page f76
1-9. Tax f7research f7consists f7of f7the f7resolution f7of f7unanswered f7taxation f7questions. f7 The f7tax
research f7process7fincludes f7the f7following:
f7
1. Identification f7of f7pertinent f7issues;
2. Specification f7of f7proper f7authorities;
3. Evaluation f7of f7the f7propriety f7of f7authorities; f7and,
4. Application f7of f7authorities f7to f7a f7specific f7situation.
Page f76
1-10. Circular f7230 f7is f7issued f7by f7the f7Treasury f7Department f7and f7applies f7to f7all f7who f7practice
f7 before f7the f7IRS.7fPage f77
1-11. In f7addition f7to f7Circular f7230, f7CPAs f7must f7follow f7the f7AICPA‘s f7Code f7of f7Professional
f7 Conduct f7and f7Statements f7on f7Standards f7for f7Tax f7Services. f7CPAs f7must f7also f7abide f7by
f7 the f7rules f7of f7the f7appropriate7fstate f7board(s) f7of f7accountancy.
Page f77
1-12. A f7return f7preparer f7must f7obtain f718 f7hours f7of f7continuing f7education f7from f7an f7IRS-
approved f7CE f7Provider. f7The f7hours f7must f7include f7a f76 f7credit f7hour f7Annual f7Federal f7Tax
f7 Refresher f7course f7(AFTR) f7that f7covers f7filing f7season f7issues f7and f7tax f7law f7updates. f7The
f7 AFTR f7course f7must f7include f7a f7knowledge-f7based f7comprehension f7test f7administered f7at f7the
f7 conclusion f7 of f7the f7course f7by f7the f7CE f7Provider.
f7Edition
Solution Manual Federal Tax Research
13th Edition by Roby Sawyers, Steven Gill
Chapters 1 -13
,Page f71-2 SOLUTIONS
f7MANUAL
CHAPTER f71
INTRODUCTION f7TO f7TAX f7PRACTICE f7AND f7ETHICS
DISCUSSION f7QUESTIONS
1-1. In f7the f7United f7States, f7the f7tax f7system f7is f7an f7outgrowth f7of f7the f7following f7five
f7 disciplines: f7law, f7accounting, f7economics, f7political f7science, f7and f7sociology. f7The
f7 environment f7for f7the f7tax f7system f7is7fprovided f7by f7the f7principles f7of f7economics,
f7 sociology, f7and f7political f7science, f7while f7the f7legal f7and f7accounting f7fields f7are
responsible f7for f7 the f7system‘s f7interpretation f7 and f7application.
f7
Each f7of f7these f7disciplines f7affects f7this f7country‘s f7tax f7system f7in f7a f7unique f7way.
f7 Economists f7address7fsuch f7issues f7as f7how f7proposed f7tax f7legislation f7will f7affect f7the f7rate
f7 of f7inflation f7or f7economic f7growth.7fMeasurement f7of f7the f7social f7equity f7of f7a f7tax f7and
f7 determining f7whether f7a f7tax f7system f7discriminates f7against f7certain f7taxpayers f7are f7issues
f7 that f7are f7examined f7by f7sociologists f7and f7political f7scientists.
Finally, f7attorneys f7are f7responsible f7for f7the f7interpretation f7of f7the f7taxation f7statutes, f7and
f7accountants7fensure f7that f7these f7same f7statutes f7are f7applied f7consistently.****8880()
Page f74
1-2. The f7other f7major f7categories f7of f7tax f7practice f7in f7addition f7to f7tax f7research f7are f7as f7follows:
Tax f7compliance
Tax f7planning
Tax
f7 litigation7fPage f75
1-3. Tax f7compliance f7consists f7of f7gathering f7pertinent f7information, f7evaluating f7and
f7 classifying f7that f7information, f7and f7filing f7any f7necessary f7tax f7returns. f7Compliance f7also
f7 includes f7other f7functions f7necessary f7to f7satisfy f7governmental f7requirements, f7such f7as
f7 representing f7a f7client f7during f7an f7Internal7fRevenue f7Service f7(IRS) f7audit.
,Federal f7Tax f7Research, f713th Page f71-3
f7Edition
Page f75
1-4. Most f7of f7the f7tax f7compliance f7work f7is f7performed f7by f7commercial f7tax f7preparers,
f7 enrolled f7agents f7(EAs), f7attorneys, f7and f7certified f7public f7accountants f7(CPAs).
f7 Noncomplex f7individual, f7partnership,7fand f7corporate f7tax f7returns f7often f7are f7completed f7by
f7 commercial f7tax f7preparers. f7The f7preparation f7of f7more f7complex f7returns f7usually f7is
f7 performed f7by f7EAs, f7attorneys, f7and f7CPAs. f7The f7latter f7groups f7also7fprovide f7tax
f7planning f7services f7and f7represent f7their f7clients f7before f7the f7IRS.
An f7EA f7is f7one f7who f7is f7admitted f7to f7practice f7before f7the f7IRS f7by f7passing f7a f7special f7IRS-
administered f7examination, f7or f7who f7has f7worked f7for f7the f7IRS f7for f7five f7years f7and f7is
f7 issued f7a f7permit f7to f7represent f7clients f7before f7the f7IRS. f7CPAs f7and f7attorneys f7are f7not
f7 required f7to f7take f7this f7examination f7and f7are f7automatically f7admitted f7to f7practice f7before
f7 the f7IRS f7if f7they f7are f7in f7good f7standing f7with f7the f7appropriatef7professional f7licensing
f7 board.
Page f75 f7and f7Circular f7230
1-5. Tax f7planning f7is f7the f7process f7of f7arranging f7one‘s f7financial f7affairs f7to f7minimize f7any f7tax
f7 liability. f7Muchf7of f7modern f7tax f7practice f7centers f7around f7this f7process, f7and f7the f7resulting
f7 outcome f7is f7tax f7avoidance.
There f7is f7nothing f7illegal f7or f7immoral f7in f7the f7avoidance f7of f7taxation f7as f7long f7as f7the
f7 taxpayer f7remains f7within f7legal f7bounds. f7In f7contrast, f7tax f7evasion f7constitutes f7the f7illegal
f7 nonpayment f7of f7a f7tax f7and f7cannot7fbe f7condoned. f7Activities f7of f7this f7sort f7clearly f7violate
f7 existing f7legal f7constraints f7and f7fall f7outside f7of f7the f7domain f7of f7the f7professional f7tax
f7practitioner.
Page f76
1-6. In f7an f7open f7tax f7planning f7situation, f7the f7transaction f7is f7not f7yet f7complete; f7therefore, f7the
f7 tax f7practitioner7fmaintains f7some f7degree f7of f7control f7over f7the f7potential f7tax f7liability, f7and
f7 the f7transaction f7may f7be f7modi- f7fied f7to f7achieve f7a f7more f7favorable f7tax f7treatment. f7In f7a
f7 closed f7transaction f7however, f7all f7of f7the f7pertinentf7actions f7have f7been f7completed, f7and f7tax
f7 planning f7activities f7may f7be f7limited f7to f7the f7presentation f7of f7the f7situation f7to f7the
f7 government f7in f7the f7most f7legally f7advantageous f7 manner f7 possible.
, Page f71-4 SOLUTIONS
f7MANUAL
Page f76
1-7. Tax f7litigation f7is f7the f7process f7of f7settling f7a f7dispute f7with f7the f7IRS f7in f7a f7court f7of f7law.
f7 Typically, f7a f7tax7fattorney f7handles f7tax f7litigation f7that f7progresses f7beyond f7the f7final f7IRS
f7 appeal.
Page f76
1-8. CPAs f7serve f7is f7a f7support f7capacity f7in f7tax f7litigation.
Page f76
1-9. Tax f7research f7consists f7of f7the f7resolution f7of f7unanswered f7taxation f7questions. f7 The f7tax
research f7process7fincludes f7the f7following:
f7
1. Identification f7of f7pertinent f7issues;
2. Specification f7of f7proper f7authorities;
3. Evaluation f7of f7the f7propriety f7of f7authorities; f7and,
4. Application f7of f7authorities f7to f7a f7specific f7situation.
Page f76
1-10. Circular f7230 f7is f7issued f7by f7the f7Treasury f7Department f7and f7applies f7to f7all f7who f7practice
f7 before f7the f7IRS.7fPage f77
1-11. In f7addition f7to f7Circular f7230, f7CPAs f7must f7follow f7the f7AICPA‘s f7Code f7of f7Professional
f7 Conduct f7and f7Statements f7on f7Standards f7for f7Tax f7Services. f7CPAs f7must f7also f7abide f7by
f7 the f7rules f7of f7the f7appropriate7fstate f7board(s) f7of f7accountancy.
Page f77
1-12. A f7return f7preparer f7must f7obtain f718 f7hours f7of f7continuing f7education f7from f7an f7IRS-
approved f7CE f7Provider. f7The f7hours f7must f7include f7a f76 f7credit f7hour f7Annual f7Federal f7Tax
f7 Refresher f7course f7(AFTR) f7that f7covers f7filing f7season f7issues f7and f7tax f7law f7updates. f7The
f7 AFTR f7course f7must f7include f7a f7knowledge-f7based f7comprehension f7test f7administered f7at f7the
f7 conclusion f7 of f7the f7course f7by f7the f7CE f7Provider.
