Federal Tax Research, 12th Edition
b b b b Page 1-1
b
Solution Manual Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill
b b b b b b b b b b b
CHAPTER 1 b
INTRODUCTION TO TAX PRACTICE AND ETHICS b b b b b
DISCUSSION QUESTIONS b
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
b b b b b b b b b b b b b b b
b accounting, economics, political science, and sociology. The environment for the tax system is
b b b b b b b b b b b b
provided by the principles of economics, sociology, and political science, while the legal and
b b b b b b b b b b b b b b
b accounting fields are responsible for the system‘s interpretation and application.
b b b b b b b b b
Each of these disciplines affects this country‘s tax system in a unique way. Economists address
b b b b b b b b b b b b b b
such issues as how proposed tax legislation will affect the rate of inflation or economic growth.
b b b b b b b b b b b b b b b b
Measurement of the social equity of a tax and determining whether a tax system discriminates
b b b b b b b b b b b b b b b
b against certain taxpayers are issues that are examined by sociologists and political scientists.
b b b b b b b b b b b b
Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants
b b b b b b b b b b b b
ensure that these same statutes are applied consistently.
b b b b b b b b
Page 4 b
1-2. The other major categories of tax practice in addition to tax research are as follows:
b b b b b b b b b b b b b b
• Tax compliance b
• Tax planning b
• Tax litigation b
Page 5
b b
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that
b b b b b b b b b b
b information, and filing any necessary tax returns. Compliance also includes other functions
b b b b b b b b b b b
b necessary to satisfy governmental requirements, such as representing a client during an Internal
b b b b b b b b b b b b
Revenue Service (IRS) audit.
b b b b
,Page 1-2
b SOLUTIONS MANUAL b
Page 5 b
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents (EAs),
b b b b b b b b b b b b b b
b attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership,and
b b b b b b b b b
b corporate tax returns often are completed by commercial tax preparers. The preparation of more
b b b b b b b b b b b b b
b complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups alsoprovide
b b b b b b b b b b b b b b
tax planning services and represent their clients before the IRS.
b b b b b b b b b b
An EA is one who is admitted to practice before the IRS by passing a special IRS-administered
b b b b b b b b b b b b b b b b
b examination, or who has worked for the IRS for five years and is issued a permit to represent clients
b b b b b b b b b b b b b b b b b b
b before the IRS. CPAs and attorneys are not required to take this examination and are automatically
b b b b b b b b b b b b b b b
b admitted to practice before the IRS if they are in good standing with the appropriateprofessional
b b b b b b b b b b b b b b b
licensing board.
b b
Page 5 and Circular 230
b b b b
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability. Muchof
b b b b b b b b b b b b b b b b
modern tax practice centers around this process, and the resulting outcome is tax avoidance.
b b b b b b b b b b b b b b
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains within
b b b b b b b b b b b b b b b b b
b legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannotbe
b b b b b b b b b b b b b b b
b condoned. Activities of this sort clearly violate existing legal constraints and fall outside of the
b b b b b b b b b b b b b b
b domain of the professional tax practitioner.
b b b b b
Page 6 b
1-6. In an open tax planning situation, the transaction is not yet complete; therefore, the tax practitioner
b b b b b b b b b b b b b b b
maintains some degree of control over the potential tax liability, and the transaction may be modi- fied
b b b b b b b b b b b b b b b b b
b to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinentactions
b b b b b b b b b b b b b b b b
b have been completed, and tax planning activities may be limited to the presentation of the situation to
b b b b b b b b b b b b b b b b
the government in the most legally advantageous manner possible.
b b b b b b b b b
,Federal Tax Research, 12th Edition
b b b b Page 1-3
b
Page 6 b
1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax
b b b b b b b b b b b b b b b b b b b
attorney handles tax litigation that progresses beyond the final IRS appeal.
b b b b b b b b b b b
Page 6 b
1-8. CPAs serve is a support capacity in tax litigation.
b b b b b b b b
Page 6 b
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax research process
b b b b b b b b b b b b b
includes the following:
b b b
1. Identification of pertinent issues; b b b
2. Specification of proper authorities; b b b
3. Evaluation of the propriety of authorities; and, b b b b b b
4. Application of authorities to a specific situation. b b b b b b
Page 6 b
1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS.
b b b b b b b b b b b b b b b b
Page 7
b b
1-11. In addition to Circular 230, CPAs must follow the AICPA‘s Code of Professional Conduct and
b b b b b b b b b b b b b b
b Statements on Standards for Tax Services. CPAs must also abide by the rules of the appropriate
b b b b b b b b b b b b b b b
state board(s) of accountancy.
b b b b
Page 7 b
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE Provider.
b b b b b b b b b b b b b b
b The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers
b b b b b b b b b b b b b b b
b filing season issues and tax law updates. The AFTR course must include a knowledge-based
b b b b b b b b b b b b b b
b comprehension test administered at the conclusion of the course by the CE Provider.
b b b b b b b b b b b b
, Page 1-4
b SOLUTIONS MANUAL b
Limited practice rights allow individuals to represent clients whose returns they prepared and
b b b b b b b b b b b b
signed, but only before revenue agents, customer service representatives, and similar IRS
b b b b b b b b b b b b
b employees.
Page 10 and IRS.gov
b b b
1-13. False. Only communication with the IRS concerning a taxpayer‘s rights, privileges, or liability is
b b b b b b b b b b b b b
included. Practice before the IRS does not include representation before the Tax Court.
b b b b b b b b b b b b b
Page 7 b
1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:
b b b b b b b b b b b b b b
matters connected with presentation to the Internal Revenue Service or any of its officersor
b b b b b b b b b b b b b b
b employees relating to a client‘s rights, privileges, or liabilities under laws or regulations
b b b b b b b b b b b b
b administered by the Internal Revenue Service. Such presentations include thepreparation b b b b b b b b b b
b and filing of necessary documents, correspondence with, and communications to the
b b b b b b b b b b
b Internal Revenue Service, and the representation of a client at conferences, hearings, and
b b b b b b b b b b b b
meetings.
b
Page 7 b
1-15. To become an EA an individual can (1) pass a test given by the IRS or (2) work for the IRS forfive
b b b b b b b b b b b b b b b b b b b b b b
b years. Circular 230, Subpart A, §§ 10.4 to 10.6.
b b b b b b b b
Page 9 b
1-16. EAs must complete 72 hours of continuing education every three years (an average of 24 per year,
b b b b b b b b b b b b b b b b
with a minimum of 16 hours during any year). Circular 230, Subpart A. § 10.6.
b b b b b b b b b b b b b b b
Page 9 b
1-17. True. As a general rule, an individual must be an EA, attorney, or CPA to represent a client beforethe
b b b b b b b b b b b b b b b b b b b
b IRS. There are limited situations where others may represent a taxpayer; however, this fact pattern is
b b b b b b b b b b b b b b b
b not one of them. Since Leigh did not sign the return, she cannot represent the taxpayer, only Rose can.
b b b b b b b b b b b b b b b b b b
b b b b Page 1-1
b
Solution Manual Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill
b b b b b b b b b b b
CHAPTER 1 b
INTRODUCTION TO TAX PRACTICE AND ETHICS b b b b b
DISCUSSION QUESTIONS b
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
b b b b b b b b b b b b b b b
b accounting, economics, political science, and sociology. The environment for the tax system is
b b b b b b b b b b b b
provided by the principles of economics, sociology, and political science, while the legal and
b b b b b b b b b b b b b b
b accounting fields are responsible for the system‘s interpretation and application.
b b b b b b b b b
Each of these disciplines affects this country‘s tax system in a unique way. Economists address
b b b b b b b b b b b b b b
such issues as how proposed tax legislation will affect the rate of inflation or economic growth.
b b b b b b b b b b b b b b b b
Measurement of the social equity of a tax and determining whether a tax system discriminates
b b b b b b b b b b b b b b b
b against certain taxpayers are issues that are examined by sociologists and political scientists.
b b b b b b b b b b b b
Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants
b b b b b b b b b b b b
ensure that these same statutes are applied consistently.
b b b b b b b b
Page 4 b
1-2. The other major categories of tax practice in addition to tax research are as follows:
b b b b b b b b b b b b b b
• Tax compliance b
• Tax planning b
• Tax litigation b
Page 5
b b
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying that
b b b b b b b b b b
b information, and filing any necessary tax returns. Compliance also includes other functions
b b b b b b b b b b b
b necessary to satisfy governmental requirements, such as representing a client during an Internal
b b b b b b b b b b b b
Revenue Service (IRS) audit.
b b b b
,Page 1-2
b SOLUTIONS MANUAL b
Page 5 b
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents (EAs),
b b b b b b b b b b b b b b
b attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership,and
b b b b b b b b b
b corporate tax returns often are completed by commercial tax preparers. The preparation of more
b b b b b b b b b b b b b
b complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups alsoprovide
b b b b b b b b b b b b b b
tax planning services and represent their clients before the IRS.
b b b b b b b b b b
An EA is one who is admitted to practice before the IRS by passing a special IRS-administered
b b b b b b b b b b b b b b b b
b examination, or who has worked for the IRS for five years and is issued a permit to represent clients
b b b b b b b b b b b b b b b b b b
b before the IRS. CPAs and attorneys are not required to take this examination and are automatically
b b b b b b b b b b b b b b b
b admitted to practice before the IRS if they are in good standing with the appropriateprofessional
b b b b b b b b b b b b b b b
licensing board.
b b
Page 5 and Circular 230
b b b b
1-5. Tax planning is the process of arranging one‘s financial affairs to minimize any tax liability. Muchof
b b b b b b b b b b b b b b b b
modern tax practice centers around this process, and the resulting outcome is tax avoidance.
b b b b b b b b b b b b b b
There is nothing illegal or immoral in the avoidance of taxation as long as the taxpayer remains within
b b b b b b b b b b b b b b b b b
b legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax and cannotbe
b b b b b b b b b b b b b b b
b condoned. Activities of this sort clearly violate existing legal constraints and fall outside of the
b b b b b b b b b b b b b b
b domain of the professional tax practitioner.
b b b b b
Page 6 b
1-6. In an open tax planning situation, the transaction is not yet complete; therefore, the tax practitioner
b b b b b b b b b b b b b b b
maintains some degree of control over the potential tax liability, and the transaction may be modi- fied
b b b b b b b b b b b b b b b b b
b to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinentactions
b b b b b b b b b b b b b b b b
b have been completed, and tax planning activities may be limited to the presentation of the situation to
b b b b b b b b b b b b b b b b
the government in the most legally advantageous manner possible.
b b b b b b b b b
,Federal Tax Research, 12th Edition
b b b b Page 1-3
b
Page 6 b
1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax
b b b b b b b b b b b b b b b b b b b
attorney handles tax litigation that progresses beyond the final IRS appeal.
b b b b b b b b b b b
Page 6 b
1-8. CPAs serve is a support capacity in tax litigation.
b b b b b b b b
Page 6 b
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax research process
b b b b b b b b b b b b b
includes the following:
b b b
1. Identification of pertinent issues; b b b
2. Specification of proper authorities; b b b
3. Evaluation of the propriety of authorities; and, b b b b b b
4. Application of authorities to a specific situation. b b b b b b
Page 6 b
1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS.
b b b b b b b b b b b b b b b b
Page 7
b b
1-11. In addition to Circular 230, CPAs must follow the AICPA‘s Code of Professional Conduct and
b b b b b b b b b b b b b b
b Statements on Standards for Tax Services. CPAs must also abide by the rules of the appropriate
b b b b b b b b b b b b b b b
state board(s) of accountancy.
b b b b
Page 7 b
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE Provider.
b b b b b b b b b b b b b b
b The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers
b b b b b b b b b b b b b b b
b filing season issues and tax law updates. The AFTR course must include a knowledge-based
b b b b b b b b b b b b b b
b comprehension test administered at the conclusion of the course by the CE Provider.
b b b b b b b b b b b b
, Page 1-4
b SOLUTIONS MANUAL b
Limited practice rights allow individuals to represent clients whose returns they prepared and
b b b b b b b b b b b b
signed, but only before revenue agents, customer service representatives, and similar IRS
b b b b b b b b b b b b
b employees.
Page 10 and IRS.gov
b b b
1-13. False. Only communication with the IRS concerning a taxpayer‘s rights, privileges, or liability is
b b b b b b b b b b b b b
included. Practice before the IRS does not include representation before the Tax Court.
b b b b b b b b b b b b b
Page 7 b
1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:
b b b b b b b b b b b b b b
matters connected with presentation to the Internal Revenue Service or any of its officersor
b b b b b b b b b b b b b b
b employees relating to a client‘s rights, privileges, or liabilities under laws or regulations
b b b b b b b b b b b b
b administered by the Internal Revenue Service. Such presentations include thepreparation b b b b b b b b b b
b and filing of necessary documents, correspondence with, and communications to the
b b b b b b b b b b
b Internal Revenue Service, and the representation of a client at conferences, hearings, and
b b b b b b b b b b b b
meetings.
b
Page 7 b
1-15. To become an EA an individual can (1) pass a test given by the IRS or (2) work for the IRS forfive
b b b b b b b b b b b b b b b b b b b b b b
b years. Circular 230, Subpart A, §§ 10.4 to 10.6.
b b b b b b b b
Page 9 b
1-16. EAs must complete 72 hours of continuing education every three years (an average of 24 per year,
b b b b b b b b b b b b b b b b
with a minimum of 16 hours during any year). Circular 230, Subpart A. § 10.6.
b b b b b b b b b b b b b b b
Page 9 b
1-17. True. As a general rule, an individual must be an EA, attorney, or CPA to represent a client beforethe
b b b b b b b b b b b b b b b b b b b
b IRS. There are limited situations where others may represent a taxpayer; however, this fact pattern is
b b b b b b b b b b b b b b b
b not one of them. Since Leigh did not sign the return, she cannot represent the taxpayer, only Rose can.
b b b b b b b b b b b b b b b b b b
