TEST BANK FOR FEDERAL TAX RESEARCH 11th EDITION BY ROBY B. SAWYERS, STEVEN GILL | COMPLETE GUIDE | CHAPTER

TEST BANK FOR FEDERAL TAX RESEARCH 11th EDITION BY ROBY B. SAWYERS, STEVEN GILL | COMPLETE GUIDE | CHAPTER . 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 interpretation 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 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. Federal Tax Research, 11th Edition Page 1-2 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 taxation, 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 Federal Tax Research, 11th Edition Page 1-3 1-11. In addition to Circular 230, CPAs must follow the AICPA's Code of Professional Conduct and Statements on Standards for Tax Services. CPAs must also abide by the rules of the appropriate state board(s) of accountancy. Page 7 1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher course (AFTR) that covers filing season issues and tax law updates. The AFTR course must include a knowledge-based comprehension test administered at the conclusion of the course by the CE Provider. Limited practice rights allow individuals to represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees. Page 10 and IRS.gov 1-13. False. Only communication with the IRS concerning a taxpayer's rights, privileges, or liability is included. Practice before the IRS does not include representation before the Tax Court. Page 7 1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including: matters connected with presentation to the Internal Revenue Service or any of its officers or employees relating to a client's rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include the preparation and filing of necessary documents, correspondence with, and communications to the Internal Revenue Service, and the representation of a client at conferences, hearings, and meetings. Page 7 1-15. To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2) work for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6. Page 9 1-16. Enrolled Agents must complete 72 hours of Continuing Education every three years (an average of 24 per year, with a minimum of 16 hours during any year.). Circular 230, Subpart A. §10.6. Page 9 1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to represent a client before the IRS. There are limited situations where others may represent a taxpayer; however, this fact pattern is not one of them. Since Leigh did not sign the return, she cannot represent the taxpayer, only Rose can. Federal Tax Research, 11th Edition Page 1-4 Pages 10-11 1-18. The names of organizations that can be represented by regular full-time employees are found in Circular 230, §10.7(c). A regular full-time employee can represent the employer (individual employer). A regular full-time employee of a partnership may represent the partnership. Also, a regular full-time employee of a trust, receivership, guardianship, or estate may represent the trust, receivership, guardianship, or estate. Furthermore, a regular full-time employee of a governmental unit, agency, or authority may represent the governmental unit, agency, or authority in the course of his or her official duties. Page 10 1-19. Yes. Circular 230, Subpart A, Sec. 10.7. Page 10 1-20. True. A practitioner may be suspended or disbarred from practice before the IRS if he or she knowingly helps a suspended or disbarred person practice indirectly before the IRS. Page 12 1-21. A practitioner may not advise a client to take a position on a document, affidavit, or other paper submitted to the Internal Revenue Service unless the position is not frivolous. Circular 230 §10.34(b) Page 14 1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent may use mass media (e.g., T.V. and the Internet) for advertising purposes. Such media may not contain false, fraudulent, unduly influencing, coercive, or unfair statements or claims. Attorneys, CPAs, and enrolled agents must also observe any applicable standards of ethical conduct adopted by the American Bar Association (ABA), the American Institute of Certified Public Accountants (AICPA), and the National Association of Enrolled Agents (NAEA). Additional standards and listing of items that may be included in mass media advertising are defined under Section 10.30 of Subpart B in Circular 230. Page 19 1-23. Under Section 10.25 of Circular 230, partners of government employees cannot represent anyone for which the government employee-partner has (or has had) official responsibility. For instance, a CPA firm with an IRS agent could not represent any taxpayer that is (or was in the past) assigned to the IRS agent-partner. Page 12 1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled actuary who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other Federal Tax Research, 11th Edition Page 1-5 paper which the client is required by the revenue laws of the United States to execute, shall advise the client promptly of the fact of such noncompliance, error, or omission. Page 11 1-25. According to Circular 230, the best practices rules are aspirational. Thus, a practitioner who fails to comply with best practices will not be subject to discipline by the IRS. Page 14 1-26. Best practices include: a. Communicating clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered. b. Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts. c. Advising the client regarding the importance of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy-related penalties under the Internal Revenue Code if a taxpayer acts in reliance on the advice. d. Acting fairly and with integrity in practice before the IRS. Pages 13-14 1-27. A practitioner must not give written advice if the practitioner: 1. bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events), 2. unreasonably relies upon representations, statements, findings, or agreements of the taxpayer or any other person, 3. does not consider all relevant facts that the practitioner knows or should know, or 4. in evaluating a Federal tax issue, takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised. Page 15 1-28 A preparer tax identification number (PTIN) is required of a compensated individual who prepares or assists with the preparation of all or substantially all of a tax return or claim for refund must have a preparer tax identification number (PTIN). Normally, the individual must be an attorney, CPA, EA, or tax return preparer must obtain a PTIN in order to file tax returns for clients Page 11 1-29. Individuals who prepared tax returns for compensation must follow the rules under Circular 230 Subpart B-- Duties and Restrictions Relating to Practice Before the Internal Revenue Service and Subpart C-- Sanctions for Violation of the Regulations. Thus, they are generally held to the same standards of practice as persons who are Federal Tax Research, 11th Edition Page 1-6 eligible to practice before the IRS (Attorneys, Certified Public Accountants (CPAs), and Enrolled Agents (EAs). Page 11 1-30. The AICPA's Code of Professional Conduct provides a philosophical foundation upon which the Rules of Conduct are based. The Principles of the Code of Professional Conduct suggest that a CPA should strive for behavior that is above the minimal level of acceptable conduct set forth by the rules. The Code was designed to provide the following: 1. A comprehensive code of ethics and professional conduct; 2. A guide for practitioners in answering complex questions; and, 3. Assurance to the public concerning the obligations and responsibilities of the accounting profession. Pages 16-17 1-31. Threats to complying with the Independence Rule include:  Members not acting with objectivity due to an adverse interest  Advocacy threats  Familiarity threats due to a long or close relationship with a client  Management participation threats  Self-interest threats  Self-review threats  Undue influence threats Page 18 1-32. In a tax practice the CPA may be requested to blindly follow the guidelines of a government agency or the demands of an audit client. This rule prohibits such blind obedience. The code specifically recognizes that conflicts of interest may arise in tax contexts including providing tax or personal financial planning services for several members of a family whom the member knows to have opposing interests or when referring a personal financial planning or tax client to an insurance broker or other service provider which refers clients to the member under an exclusive arrangement. Page 20 1-33. The General Standards Include: 1. The CPA must be able to complete all professional services with professional competence. 2. The CPA must exercise due professional care in the performance of all professional services. 3. The CPA shall adequately plan and supervise the performance of all professional services. Federal Tax Research, 11th Edition Page 1-7 4. The CPA must obtain sufficient relevant data to afford a reasonable basis for any conclusion or recommendation in connection with the performance of any professional services. Competence encompasses not only technical subject matter but also knowledge of the profession’s standards and the ability to exercise sound judgment in applying the technical knowledge. At the same time, the code is clear that the member does not assume a responsibility for infallibility of knowledge or judgment Page 21 1-34. a. No violation b. 1.520.001- Commissions and Referral Fees c. No violation d. 1.600.001- Advertising and Other Forms of Solicitation e. 1.800.001- Form of Organization and Name Rule f. 2.400.090 or 3.400.090- Acts Discreditable Rule Pages 19-21 1-35. 1.700.001 (Confidential Client Information Rule) does not apply in the following situations: 1. There is a conflict with the Compliance with Standards Rule [1.310.001] or the Accounting Principles Rule [1.320.001] 2. The CPA is served with an enforceable subpoena or summons or must comply with applicable laws and government regulations 3. There is a review of a CPA’s practice under AICPA or state society authorization 4. The CPA is responding to an inquiry of an investigative or disciplinary body of a recognized society, or the CPA is initiating a complaint with a disciplinary body Pages 19-20 1-36. The Statements on Standards for Tax Services, or SSTS, are a series of statements, issued by the AICPA, as to what constitutes appropriate standards for tax practice. The Statements also delineate a member's responsibility to clients, the public, and the profession. The stated objectives of the Statements are as follows: SSTS No. 1: Tax Return Positions. This statement sets forth the applicable standards for members when recommending tax return positions, or preparing or signing tax returns. This statement also addresses a member’s obligation to advise a taxpayer of relevant tax return disclosure responsibilities and potential penalties. SSTS No. 2: Answers to Questions on Returns. This statement sets forth the applicable standards for members when signing the preparer’s declaration on a tax return if one or more questions on the return have not been answered. Federal Tax Research, 11th Edition Page 1-8 SSTS No. 3: Certain Procedural Aspects of Preparing Returns. This statement sets forth the applicable standards for members concerning the obligation to examine or verify certain supporting data or to consider information related to another taxpayer when preparing a taxpayer’s tax return. SSTS No. 4: Use of Estimates. This statement sets forth the applicable standards for members when using the taxpayer’s estimates in the preparation of a tax return. A member may advise on estimates used in the preparation of a tax return, but the taxpayer has the responsibility to provide the estimated data. Appraisals or valuations are not considered estimates for purposes of this statement. SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision. This statement sets forth the applicable standards for members in recommending a tax return position that departs from the position determined in an administrative proceeding or in a court decision with respect to the taxpayer’s prior return. SSTS No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings. This statement sets forth the applicable standards for a member who becomes aware of (a) an error in a taxpayer’s previously filed tax return; (b) an error in a return that is the subject of an administrative proceeding, such as an examination by a taxing authority or an appeals conference; or (c) a taxpayer’s failure to file a required tax return. SSTS No. 7: Form and Content of Advice to Taxpayers. This statement sets forth the applicable standards for members concerning certain aspects of providing advice to a taxpayer and considers the circumstances in which a member has a responsibility to communicate with a taxpayer when subsequent developments affect advice previously provided. Pages 22 - 26 1-37. Under SSTS No. 1, a member should determine and comply with the standards, if any, which are imposed by the applicable taxing authority with respect to recommending a tax return position, or preparing or signing a tax return. If the applicable taxing authority has no written standards with respect to recommending a tax return position or preparing or signing a tax return, or if its standards are lower than the standards set forth in SSTS No. 1, then SSTS No. 1 must be followed. Page 22 1-38. SSTS No.1 provides that a member should have a good faith belief that a recommended position has a realistic possibility of being sustained if challenged. In addition, a member may recommend a tax return position if the member concludes that there is a reasonable basis for the position and advises the taxpayer to appropriately disclose that position. Thus, a member may prepare or sign a tax return that reflects a position if a member has a reasonable basis for the position and that position is appropriately disclosed. Page 22 1-39. Reasonable grounds for omitting an answer on a return include cases in which: Federal Tax Research, 11th Edition Page 1-9 1. The pertinent data are not readily available and are not significant to the determination of taxable income or loss or the resulting tax liability. 2. The taxpayer and the member are genuinely uncertain as to the meaning of the question on the return. 3. An answer is voluminous; however, assurance should be given on the return that the data can be supplied upon request. Page 23 1-40. In preparing a return, the member may ordinarily rely upon information that the taxpayer has provided. Although an examination of supporting documents is not required, the member should encourage the taxpayer to provide supporting documents, whenever appropriate. Page 23 1-41. A member may prepare tax returns that involve the use of the taxpayer's estimates, if, under the circumstances, it is impractical to obtain exact data and the estimated amounts appear reasonable to the member. Estimates may be appropriate where the keeping of precise records with respect to numerous items of small amounts is difficult to achieve, where data is not available as of the time for filing the return, or certain records are missing. Pages 23-24 1-42. The selection of the treatment of an item on a tax return should be based upon the facts and the law that is applicable at the time a return is prepared. Unless the taxpayer is bound by the IRS to the treatment of an item in later years, such as by a closing agreement, the disposition of an item in a prior year's audit does not govern the treatment of a similar item in a later year's return. Therefore, a member may sign a return that contains a departure from a treatment that was required by the IRS in a prior year return, provided the standards under SSTS No. 1 are adhered to. Pages 24 - 25 1-43. When a member learns of an error in a previously filed tax return, or member becomes aware of an error during an administrative proceeding, he or she must advise the taxpayer promptly. This advice should include a recommendation of the appropriate measures that the taxpayer should take. The member is not obligated to inform the IRS of the error and may not do so without the taxpayer's permission, except as required by law. Page 25 1-44. SSTS No. 7. It states that the member must use judgment that reflects professional competence and serves the taxpayer's needs. Page 25 Federal Tax Research, 11th Edition Page 1-10 1-45. No, tax compliance work for an audit client is allowed. It must be approved by the audit committee of the issuer. Page 27 1-46. Neither the ABA Code nor the Model Rules have the force of law. Each was designed to be adopted by the appropriate agencies that govern the practice of law in the various states. In many jurisdictions, the state Supreme Court is charged with policing the practice of law. In other states, the legislature assumes this responsibility. Pages 27-28 1-47. An ethical dilemma occurs when someone is faced with a situation in which there are no clearly defined answers such as by regulation or law. Page 28 1-48. The major types of ethical reasoning are: 1. End-based Ethical Reasoning is where the ethical decision is the one that produced the most good for the largest number of people. 2. Rule-based Ethical Reasoning was based on German philosopher Immanuel Kant’s idea that individual actions should be such that we would accept similar behavior from everyone else. 3. Care-based Ethical Reasoning advises one to make decisions that would result in the treatment you yourself would like to receive. Page 29 1-49. Professional ethical behavior is the result of the interaction of personal morality, social responsibility, business ethics, and other general ethical standards. When something is judged to be morally right or wrong (or good or bad), the underlying standards on which such judgments are based are called moral standards. The tax practitioner must be aware of social responsibility in areas such as environmental protection, equal opportunity, and occupational safety. Business ethics examines the moral and ethical problems that arise in a business environment. There is disagreement about whether a company has ethical responsibilities. Other ethical standards may include public policy, religious beliefs, and cultural values. Pages 29-31 1-50 Ethical issues involved in this case could include morality and business ethics. The moral issue involves the consideration of the “right thing to do” with respect to the plane ticket. The business ethics issues involve maintaining the integrity of the firm. 1-51 Unless the firm clearly allows staff to take home supplies (which likely would result in additional income to the staff members), this is clearly not ethical behavior. If Donna Federal Tax Research, 11th Edition Page 1-11 does work at home and the firm has clear policies allowing supplies to be taken home and used for work purposes, the behavior would be reasonable. 1-52. CPAs are in little danger of entering into the unauthorized practice of law as long as they avoid providing general legal services. The issue that arises is not whether CPAs are rendering legal services, but how much legal service is provided. Because of the lack of guidelines on this issue, the federal agencies seem to have taken a lead in attempting to solve this problem. Page 33 1-53. To avoid being charged with the unauthorized practice of law, the following activities should be avoided.  Expressing a legal opinion on a nontax matter.  Drafting wills or trust instruments.  Drafting contracts.  Drafting incorporation papers.  Drafting partnership agreements. Page 35 EXERCISES 1-54. a. Subpart A, § 10.4(c)8 Eligibility for enrollment as an enrolled agent or enrolled retirement plan agent. Discussion of the criteria for enrollment before the IRS b. Subpart B, § 10.21 Knowledge of client’s omission.. Each attorney, CPA, enrolled agent, or enrolled actuary who knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper, shall advise the client promptly of the fact of such noncompliance, error, or omission. c. Subpart B, § 10.26 Notaries.. A practitioner may not perform any official act as a notary public with respect to any matter administered by the IRS for which employed as counsel, attorney, or agent. d. Subpart B, § 10.29 Conflicting interests.. No tax practitioner can represent conflicting interests before the IRS unless he or she has the express consent of the directly interested parties Circular 230 1-55. a. Subpart C, § 10.51(a)(12) Contemptuous conduct in connection with practice before the Internal Revenue Service, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter b. Subpart A, § 10.6(e). Conditions for renewal. In order to qualify for renewal of enrollment, an individual, to practice before the IRS, must certify that he or she has satisfied the continuing professional education requirements. c. Subpart A, § 10.3(f) Registered tax return preparers Federal Tax Research, 11th Edition Page 1-12 d. Subpart B, § 10.27. Fees.. Discussion of provision that a practitioner may not charge an unconscionable fee for representing a client in a matter before the IRS. Also, a practitioner may not charge a contingent fee for preparing an original return. Circular 230 1-56. a. Subpart B, § 10.22(b) Reliance on others. Except as modified by §§10.34 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person. b. Subpart A, § 10.7(c)(1)(vi). An individual may represent any individual or entity, who is outside the United States, before personnel of the Internal Revenue Service when such representation takes place outside the United States. c. Subpart B, § 10.24. Prohibits assistance from disbarred or suspended persons. d. Subpart B, § 10.34. Defines standards for advising and signing returns. Circular 230 1-57. a. Subpart B, § 10.33. Discussion of adhering to the best practices in providing advice. b. Subpart B, § 10.35. Provides standards on “covered opinions.” c. Subpart B, § 10.36. Requires that a firm take reasonable steps to adhere to the “covered opinions” section. d. Subpart B, § 10.37. Describes situations in which a tax practitioner should not give written advice. Circular 230 1-58. a. Solicitation is discussed in Subpart B, §10.30. b. Negotiation of a taxpayer's refund checks is discussed in Subpart B, § 10.31. c. Who may practice before the IRS? Subpart A §10.3 d. Authority to disbar or suspend from practice before the Internal Revenue Service is discussed in Subpart C, §10.50. Circular 230 1-59. a. Conflicting interests are discussed in Subpart B, § 10.39. b. Disreputable conduct is discussed in Subpart C, § 10.51. c. Assistance from disbarred or suspended persons is discussed in Subpart B, § 10.24. d. Representing oneself before the IRS is discussed in Subpart A, § 10.7. Circular 230 1-60. a. Practice of law is in Subpart B, § 0.32. b. Information to be furnished is in Subpart B, § 10.20. c. Fees are in Subpart B, § 10.27. Federal Tax Research, 11th Edition Page 1-13 d. Responsibility for correcting errors? Subpart, § 10.21 Circular 230 1-61. a. Best Practices are discussed in Subpart B, § 10.33. b. The return of client’s records is discussed in Subpart B, § 10.28. c. Tax Return Positions are discussed in Subpart B, § 10.34. d. Due Diligence is discussed in Subpart B, § 10.22. Circular 230 1-62. a. SSTS No. 1. In preparing a tax return, a member should have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged; otherwise such a position should not be recommended by the member. b. SSTS No. 4. A member may prepare tax returns that involve the use of the taxpayer's estimates if it is impractical to obtain exact data and if the estimated amounts appear reasonable to the member. c. SSTS No. 6. The member must advise the taxpayer promptly, whether or not the member prepared or signed the return in question, when he or she learns of an error in a previously filed tax return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. However, the member is neither obligated to inform the IRS of the situation, nor may he or she do so without the taxpayer's permission, except as provided by law. Pages 22-25 1-63. a. Lowell Bar Association v. Loeb. The preparation of