FederalhTaxhResearch,h11thhEdition Pageh1-1
CHAPTER 1
AN INTRODUCTION TO TAX
PRACTICE AND ETHICS
DISCUSSIONhQUESTIONS
1-1.
InhthehUnitedhStates,hthehtaxhsystemhishanhoutgrowthhofhthehfollowinghfivehdisciplines
:hlaw,haccounting,heconomics,hpoliticalhscience,handhsociology.hThehenvironmenthforhthehta
xhsystemhishprovidedhbyhthehprincipleshofheconomics,hsociology,handhpoliticalhscience,hwhil
ehthehlegalhandhaccountinghfieldsharehresponsiblehforhthehsystem'shinterpretationhandhapplica
tion.
Eachhofhthesehdisciplineshaffectshthishcountry'shtaxhsystemhinhahuniquehway.hEconomistshad
dresshsuchhissueshashhowhproposedhtaxhlegislationhwillhaffecththehratehofhinflationhorhecono
michgrowth.hMeasurementhofhthehsocialhequityhofhahtax,handhdetermininghwhetherhahtaxhsyst
emhdiscriminateshagainsthcertainhtaxpayers,harehissueshthatharehexaminedhbyhsociologistshan
dhpoliticalhscientists.hFinally,hattorneysharehresponsiblehforhthehinter-
hpretationhofhthehtaxationhstatutes,handhaccountantshensurehthaththesehsamehstatutesharehappl
iedhconsistently.
Pageh4
1-2. Thehotherhmajorhcategorieshofhtaxhpracticehinhadditionhtohtaxhresearchhare:
taxhcompliance
taxhplanning
taxhlitigation
h Pageh5
1-3.
Taxhcompliancehconsistshofhgatheringhpertinenthinformation,hevaluatinghandhclass
ifyinghthathinformation,handhfilinghanyhnecessaryhtaxhreturns.hCompliancehalsohincludesh
otherhfunctionshnecessaryhtohsatisfyhgovernmentalhrequirements,hsuchhashrepresentinghah
clienthduringhanhIRShaudit.
Pageh5
1-4.
Mosthofhthehtaxhcompliancehworkhishperformedhbyhcommercialhtaxhpreparers,henroll
edhagents,hattorneys,handhCPAs.hNoncomplexhindividual,hpartnership,handhcorporatehtaxhr
eturnshoftenharehcompletedhbyhcommercialhtaxhpreparers.hThehpreparationhofhmorehcomple
xhreturnshusuallyhishperformedhbyhenrolledhagents,hattorneys,handhCPAs.hThehlatterhgroupsh
alsohprovidehtaxhplanninghserviceshandhrepresenththeirhclientshbeforehthehIRS.
AnhenrolledhagenthishonehwhohishadmittedhtohpracticehbeforehthehIRShbyhpassinghahspecialhI
RS-
administeredhexamination,horhwhohhashworkedhforhthehIRShforhfivehyears,handhishissuedhahpe
rmithtohrepresenthclientshbeforehthehIRS.hCPAshandhattorneysharehnothrequiredhtohtakehthishex
,FederalhTaxhResearch,h11thhEdition Pageh1-2
aminationhandharehautomaticallyhadmittedhtohpracticehbeforehthehIRShifhtheyharehinhgoodhsta
ndinghwithhthehappropriatehprofessionalhlicensinghboard.
,FederalhTaxhResearch,h11thhEdition Pageh1-3
Pageh5handhCircularh230
1-5.
Taxhplanninghishthehprocesshofharranginghone'shfinancialhaffairshtohminimizehanyhtaxh
liability.hMuchhofhmodernhtaxhpracticehcentersharoundhthishprocess,handhthehresultinghoutco
mehishtaxhavoidance.hTherehishnothinghillegalhorhimmoralhinhthehavoidancehofhtaxa-
htion,hashlonghashthehtaxpayerhremainshwithinhlegalhbounds.hInhcontrast,htaxhevasionhconstit
uteshthehillegalhnonpaymenthofhahtaxhandhcannothbehcondoned.hActivitieshofhthishsorthclearlyh
violatehexistinghlegalhconstraintshandhfallhoutsidehofhthehdomainhofhthehprofessionalhtaxhprac
titioner.
Pageh6
1-6.
Inhanhopenhtaxhplanninghsituation,hthehtransactionhishnothyethcomplete,htherefore,htheht
axhpractitionerhmaintainshsomehdegreehofhcontrolhoverhthehpotentialhtaxhliability,handhthehtra
nsactionhmayhbehmodifiedhtohachievehahmorehfavorablehtaxhtreatment.hInhahclosedhtransactio
nhhowever,hallhofhthehpertinenthactionshhavehbeenhcompleted,handhtaxhplanninghactivitieshm
ayhbehlimitedhtohthehpresentationhofhthehsituationhtohthehgovernmenthinhthehmosthlegallyhadva
ntageoushmannerhpossible.
Pageh6
1-7.
TaxhlitigationhishthehprocesshofhsettlinghahdisputehwithhthehIRShinhahcourthofhlaw.hTypi
cally,hahtaxhattorneyhhandleshtaxhlitigationhthathprogresseshbeyondhthehfinalhIRShappeal.
Pageh6
1-8. CPAshservehishahsupporthcapacityhinhtaxhlitigation.
Pageh6
1-9.
Taxhresearchhconsistshofhthehresolutionhofhunansweredhtaxationhquestions.hT
hehtaxhresearchhprocesshincludeshthehfollowing:
1. Identificationhofhpertinenthissues;
2. Specificationhofhproperhauthorities;
3. Evaluationhofhthehproprietyhofhauthorities;hand,
4. Applicationhofhauthoritieshtohahspecifichsituation.
Pageh6
1-10.
Circularh230hishissuedhbyhthehTreasuryhDepartmenthandhapplieshtohallhwhohpracticehb
eforehthehIRS.
Pageh7
, FederalhTaxhResearch,h11thhEdition Pageh1-4
1-11.
InhadditionhtohCircularh230,hCPAshmusthfollowhthehAICPA'shCodehofhProfessio
nalhConducthandhStatementshonhStandardshforhTaxhServices.hCPAshmusthalsohabidehbyh
thehruleshofhthehappropriatehstatehboard(s)hofhaccountancy.
Pageh7
1-12. Ahreturnhpreparerhmusthobtainh18hhourshofhcontinuingheducationhfromhanhIRS-
approvedhCEhProvider.hThehhourshmusthincludehah6hcredithhourhAnnualhFederalhTaxhRef
resherhcourseh(AFTR)hthathcovershfilinghseasonhissueshandhtaxhlawhupdates.hThehAFTRh
coursehmusthincludehahknowledge-
basedhcomprehensionhtesthadministeredhaththehconclusionhofhthehcoursehbyhthehCEhProvi
der.
Limitedhpracticehrightshallowhindividualshtohrepresenthclientshwhosehreturnshtheyhpreparedh
andhsigned,hbuthonlyhbeforehrevenuehagents,hcustomerhservicehrepresentatives,handhsimilarh
IRShemployees.
Pageh10handhIRS.gov
1-13.
False.hOnlyhcommunicationhwithhthehIRShconcerninghahtaxpayer'shrights,hprivileg
es,horhliabilityhishincluded.hPracticehbeforehthehIRShdoeshnothincludehrepresentationhbefo
rehthehTaxhCourt.
Pageh7
1-14. Sectionh10.2hofhSubparthAhofhCircularh230hdefineshpracticehbeforehthehIRShashincluding:
mattershconnectedhwithhpresentationhtohthehInternalhRevenuehServicehorhanyhofhitsho
fficershorhemployeeshrelatinghtohahclient'shrights,hprivileges,horhliabilitieshunderhlaw
shorhregulationshadministeredhbyhthehInternalhRevenuehService.hSuchhpresentations
hincludehthehpreparationhandhfilinghofhnecessaryhdocuments,hcorrespondencehwith,h
andhcommunicationshtohthehInternalhRevenuehService,handhthehrepresentationhofhah
clienthathconferences,hhearings,handhmeetings.
Pageh7
1-15.
TohbecomehanhEnrolledhAgenthanhindividualhcanh(1)hpasshahtesthgivenhbyhthehIRSh
orh(2)hworkhforhthehIRShforhfivehyears.hCircularh230,hSubparthA,hSecs.h10.4htoh10.6.
Pageh9
1-16.
EnrolledhAgentshmusthcompleteh72hhourshofhContinuinghEducationheveryhthreehyea
rsh(anhaveragehofh24hperhyear,hwithhahminimumhofh16hhourshduringhanyhyear.).hCircularh23
0,hSubparthA.h§10.6.
Pageh9
1-17.
True.hAshahgeneralhrule,hanhindividualhmusthbehanhenrolledhagent,hattorney,horhCPAht
ohrepresenthahclienthbeforehthehIRS.hThereharehlimitedhsituationshwherehothershmayhrepresen
thahtaxpayer;hhowever,hthishfacthpatternhishnothonehofhthem.hSincehLeighhdidhnothsignhthehret
CHAPTER 1
AN INTRODUCTION TO TAX
PRACTICE AND ETHICS
DISCUSSIONhQUESTIONS
1-1.
InhthehUnitedhStates,hthehtaxhsystemhishanhoutgrowthhofhthehfollowinghfivehdisciplines
:hlaw,haccounting,heconomics,hpoliticalhscience,handhsociology.hThehenvironmenthforhthehta
xhsystemhishprovidedhbyhthehprincipleshofheconomics,hsociology,handhpoliticalhscience,hwhil
ehthehlegalhandhaccountinghfieldsharehresponsiblehforhthehsystem'shinterpretationhandhapplica
tion.
Eachhofhthesehdisciplineshaffectshthishcountry'shtaxhsystemhinhahuniquehway.hEconomistshad
dresshsuchhissueshashhowhproposedhtaxhlegislationhwillhaffecththehratehofhinflationhorhecono
michgrowth.hMeasurementhofhthehsocialhequityhofhahtax,handhdetermininghwhetherhahtaxhsyst
emhdiscriminateshagainsthcertainhtaxpayers,harehissueshthatharehexaminedhbyhsociologistshan
dhpoliticalhscientists.hFinally,hattorneysharehresponsiblehforhthehinter-
hpretationhofhthehtaxationhstatutes,handhaccountantshensurehthaththesehsamehstatutesharehappl
iedhconsistently.
Pageh4
1-2. Thehotherhmajorhcategorieshofhtaxhpracticehinhadditionhtohtaxhresearchhare:
taxhcompliance
taxhplanning
taxhlitigation
h Pageh5
1-3.
Taxhcompliancehconsistshofhgatheringhpertinenthinformation,hevaluatinghandhclass
ifyinghthathinformation,handhfilinghanyhnecessaryhtaxhreturns.hCompliancehalsohincludesh
otherhfunctionshnecessaryhtohsatisfyhgovernmentalhrequirements,hsuchhashrepresentinghah
clienthduringhanhIRShaudit.
Pageh5
1-4.
Mosthofhthehtaxhcompliancehworkhishperformedhbyhcommercialhtaxhpreparers,henroll
edhagents,hattorneys,handhCPAs.hNoncomplexhindividual,hpartnership,handhcorporatehtaxhr
eturnshoftenharehcompletedhbyhcommercialhtaxhpreparers.hThehpreparationhofhmorehcomple
xhreturnshusuallyhishperformedhbyhenrolledhagents,hattorneys,handhCPAs.hThehlatterhgroupsh
alsohprovidehtaxhplanninghserviceshandhrepresenththeirhclientshbeforehthehIRS.
AnhenrolledhagenthishonehwhohishadmittedhtohpracticehbeforehthehIRShbyhpassinghahspecialhI
RS-
administeredhexamination,horhwhohhashworkedhforhthehIRShforhfivehyears,handhishissuedhahpe
rmithtohrepresenthclientshbeforehthehIRS.hCPAshandhattorneysharehnothrequiredhtohtakehthishex
,FederalhTaxhResearch,h11thhEdition Pageh1-2
aminationhandharehautomaticallyhadmittedhtohpracticehbeforehthehIRShifhtheyharehinhgoodhsta
ndinghwithhthehappropriatehprofessionalhlicensinghboard.
,FederalhTaxhResearch,h11thhEdition Pageh1-3
Pageh5handhCircularh230
1-5.
Taxhplanninghishthehprocesshofharranginghone'shfinancialhaffairshtohminimizehanyhtaxh
liability.hMuchhofhmodernhtaxhpracticehcentersharoundhthishprocess,handhthehresultinghoutco
mehishtaxhavoidance.hTherehishnothinghillegalhorhimmoralhinhthehavoidancehofhtaxa-
htion,hashlonghashthehtaxpayerhremainshwithinhlegalhbounds.hInhcontrast,htaxhevasionhconstit
uteshthehillegalhnonpaymenthofhahtaxhandhcannothbehcondoned.hActivitieshofhthishsorthclearlyh
violatehexistinghlegalhconstraintshandhfallhoutsidehofhthehdomainhofhthehprofessionalhtaxhprac
titioner.
Pageh6
1-6.
Inhanhopenhtaxhplanninghsituation,hthehtransactionhishnothyethcomplete,htherefore,htheht
axhpractitionerhmaintainshsomehdegreehofhcontrolhoverhthehpotentialhtaxhliability,handhthehtra
nsactionhmayhbehmodifiedhtohachievehahmorehfavorablehtaxhtreatment.hInhahclosedhtransactio
nhhowever,hallhofhthehpertinenthactionshhavehbeenhcompleted,handhtaxhplanninghactivitieshm
ayhbehlimitedhtohthehpresentationhofhthehsituationhtohthehgovernmenthinhthehmosthlegallyhadva
ntageoushmannerhpossible.
Pageh6
1-7.
TaxhlitigationhishthehprocesshofhsettlinghahdisputehwithhthehIRShinhahcourthofhlaw.hTypi
cally,hahtaxhattorneyhhandleshtaxhlitigationhthathprogresseshbeyondhthehfinalhIRShappeal.
Pageh6
1-8. CPAshservehishahsupporthcapacityhinhtaxhlitigation.
Pageh6
1-9.
Taxhresearchhconsistshofhthehresolutionhofhunansweredhtaxationhquestions.hT
hehtaxhresearchhprocesshincludeshthehfollowing:
1. Identificationhofhpertinenthissues;
2. Specificationhofhproperhauthorities;
3. Evaluationhofhthehproprietyhofhauthorities;hand,
4. Applicationhofhauthoritieshtohahspecifichsituation.
Pageh6
1-10.
Circularh230hishissuedhbyhthehTreasuryhDepartmenthandhapplieshtohallhwhohpracticehb
eforehthehIRS.
Pageh7
, FederalhTaxhResearch,h11thhEdition Pageh1-4
1-11.
InhadditionhtohCircularh230,hCPAshmusthfollowhthehAICPA'shCodehofhProfessio
nalhConducthandhStatementshonhStandardshforhTaxhServices.hCPAshmusthalsohabidehbyh
thehruleshofhthehappropriatehstatehboard(s)hofhaccountancy.
Pageh7
1-12. Ahreturnhpreparerhmusthobtainh18hhourshofhcontinuingheducationhfromhanhIRS-
approvedhCEhProvider.hThehhourshmusthincludehah6hcredithhourhAnnualhFederalhTaxhRef
resherhcourseh(AFTR)hthathcovershfilinghseasonhissueshandhtaxhlawhupdates.hThehAFTRh
coursehmusthincludehahknowledge-
basedhcomprehensionhtesthadministeredhaththehconclusionhofhthehcoursehbyhthehCEhProvi
der.
Limitedhpracticehrightshallowhindividualshtohrepresenthclientshwhosehreturnshtheyhpreparedh
andhsigned,hbuthonlyhbeforehrevenuehagents,hcustomerhservicehrepresentatives,handhsimilarh
IRShemployees.
Pageh10handhIRS.gov
1-13.
False.hOnlyhcommunicationhwithhthehIRShconcerninghahtaxpayer'shrights,hprivileg
es,horhliabilityhishincluded.hPracticehbeforehthehIRShdoeshnothincludehrepresentationhbefo
rehthehTaxhCourt.
Pageh7
1-14. Sectionh10.2hofhSubparthAhofhCircularh230hdefineshpracticehbeforehthehIRShashincluding:
mattershconnectedhwithhpresentationhtohthehInternalhRevenuehServicehorhanyhofhitsho
fficershorhemployeeshrelatinghtohahclient'shrights,hprivileges,horhliabilitieshunderhlaw
shorhregulationshadministeredhbyhthehInternalhRevenuehService.hSuchhpresentations
hincludehthehpreparationhandhfilinghofhnecessaryhdocuments,hcorrespondencehwith,h
andhcommunicationshtohthehInternalhRevenuehService,handhthehrepresentationhofhah
clienthathconferences,hhearings,handhmeetings.
Pageh7
1-15.
TohbecomehanhEnrolledhAgenthanhindividualhcanh(1)hpasshahtesthgivenhbyhthehIRSh
orh(2)hworkhforhthehIRShforhfivehyears.hCircularh230,hSubparthA,hSecs.h10.4htoh10.6.
Pageh9
1-16.
EnrolledhAgentshmusthcompleteh72hhourshofhContinuinghEducationheveryhthreehyea
rsh(anhaveragehofh24hperhyear,hwithhahminimumhofh16hhourshduringhanyhyear.).hCircularh23
0,hSubparthA.h§10.6.
Pageh9
1-17.
True.hAshahgeneralhrule,hanhindividualhmusthbehanhenrolledhagent,hattorney,horhCPAht
ohrepresenthahclienthbeforehthehIRS.hThereharehlimitedhsituationshwherehothershmayhrepresen
thahtaxpayer;hhowever,hthishfacthpatternhishnothonehofhthem.hSincehLeighhdidhnothsignhthehret
