Federal6Tax6Research,611th6Edition Page61-1
CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
DISCUSSION6QUESTIONS
1-1.
In6the6United6States,6the6tax6system6is6an6outgrowth6of6the6following6five6disciplines
:6law,6accounting,6economics,6political6science,6and6sociology.6The6environment6for6the6ta
x6system6is6provided6by6the6principles6of6economics,6sociology,6and6political6science,6whil
e6the6legal6and6accounting6fields6are6responsible6for6the6system's6interpretation6and6applica
tion.
Each6of6these6disciplines6affects6this6country's6tax6system6in6a6unique6way.6Economists6ad
dress6such6issues6as6how6proposed6tax6legislation6will6affect6the6rate6of6inflation6or6econo
mic6growth.6Measurement6of6the6social6equity6of6a6tax,6and6determining6whether6a6tax6syst
em6discriminates6against6certain6taxpayers,6are6issues6that6are6examined6by6sociologists6an
d6political6scientists.6Finally,6attorneys6are6responsible6for6the6inter-
6pretation6of6the6taxation6statutes,6and6accountants6ensure6that6these6same6statutes6are6appl
ied6consistently.
Page64
1-2. The6other6major6categories6of6tax6practice6in6addition6to6tax6research6are:
tax6compliance
tax6planning
tax6litigation
Page65
6
1-3.
Tax6compliance6consists6of6gathering6pertinent6information,6evaluating6and6class
ifying6that6information,6and6filing6any6necessary6tax6returns.6Compliance6also6includes6
other6functions6necessary6to6satisfy6governmental6requirements,6such6as6representing6a6
client6during6an6IRS6audit.
Page65
1-4.
Most6of6the6tax6compliance6work6is6performed6by6commercial6tax6preparers,6enroll
ed6agents,6attorneys,6and6CPAs.6Noncomplex6individual,6partnership,6and6corporate6tax6r
eturns6often6are6completed6by6commercial6tax6preparers.6The6preparation6of6more6comple
x6returns6usually6is6performed6by6enrolled6agents,6attorneys,6and6CPAs.6The6latter6groups6
also6provide6tax6planning6services6and6represent6their6clients6before6the6IRS.
An6enrolled6agent6is6one6who6is6admitted6to6practice6before6the6IRS6by6passing6a6special6I
RS-
administered6examination,6or6who6has6worked6for6the6IRS6for6five6years,6and6is6issued6a6pe
rmit6to6represent6clients6before6the6IRS.6CPAs6and6attorneys6are6not6required6to6take6this6ex
amination6and6are6automatically6admitted6to6practice6before6the6IRS6if6they6are6in6good6sta
nding6with6the6appropriate6professional6licensing6board.
,Federal6Tax6Research,611th6Edition Page61-2
Page656and6Circular6230
1-5.
Tax6planning6is6the6process6of6arranging6one's6financial6affairs6to6minimize6any6tax6
liability.6Much6of6modern6tax6practice6centers6around6this6process,6and6the6resulting6outco
me6is6tax6avoidance.6There6is6nothing6illegal6or6immoral6in6the6avoidance6of6taxa-
6tion,6as6long6as6the6taxpayer6remains6within6legal6bounds.6In6contrast,6tax6evasion6constit
utes6the6illegal6nonpayment6of6a6tax6and6cannot6be6condoned.6Activities6of6this6sort6clearly6
violate6existing6legal6constraints6and6fall6outside6of6the6domain6of6the6professional6tax6prac
titioner.
Page66
1-6.
In6an6open6tax6planning6situation,6the6transaction6is6not6yet6complete,6therefore,6the6t
ax6practitioner6maintains6some6degree6of6control6over6the6potential6tax6liability,6and6the6tra
nsaction6may6be6modified6to6achieve6a6more6favorable6tax6treatment.6In6a6closed6transactio
n6however,6all6of6the6pertinent6actions6have6been6completed,6and6tax6planning6activities6m
ay6be6limited6to6the6presentation6of6the6situation6to6the6government6in6the6most6legally6adva
ntageous6manner6possible.
Page66
1-7.
Tax6litigation6is6the6process6of6settling6a6dispute6with6the6IRS6in6a6court6of6law.6Typi
cally,6a6tax6attorney6handles6tax6litigation6that6progresses6beyond6the6final6IRS6appeal.
Page66
1-8. CPAs6serve6is6a6support6capacity6in6tax6litigation.
Page66
1-9.
Tax6research6consists6of6the6resolution6of6unanswered6taxation6questions.6T
he6tax6research6process6includes6the6following:
1. Identification6of6pertinent6issues;
2. Specification6of6proper6authorities;
3. Evaluation6of6the6propriety6of6authorities;6and,
4. Application6of6authorities6to6a6specific6situation.
Page66
1-10.
Circular62306is6issued6by6the6Treasury6Department6and6applies6to6all6who6practice6b
efore6the6IRS.
Page67
,Federal6Tax6Research,611th6Edition Page61-3
1-11.
In6addition6to6Circular6230,6CPAs6must6follow6the6AICPA's6Code6of6Professio
nal6Conduct6and6Statements6on6Standards6for6Tax6Services.6CPAs6must6also6abide6by6
the6rules6of6the6appropriate6state6board(s)6of6accountancy.
Page67
1-12. A6return6preparer6must6obtain6186hours6of6continuing6education6from6an6IRS-
approved6CE6Provider.6The6hours6must6include6a666credit6hour6Annual6Federal6Tax6Ref
resher6course6(AFTR)6that6covers6filing6season6issues6and6tax6law6updates.6The6AFTR6
course6must6include6a6knowledge-
based6comprehension6test6administered6at6the6conclusion6of6the6course6by6the6CE6Provi
der.
Limited6practice6rights6allow6individuals6to6represent6clients6whose6returns6they6prepared6
and6signed,6but6only6before6revenue6agents,6customer6service6representatives,6and6similar6
IRS6employees.
Page6106and6IRS.gov
1-13.
False.6Only6communication6with6the6IRS6concerning6a6taxpayer's6rights,6privileg
es,6or6liability6is6included.6Practice6before6the6IRS6does6not6include6representation6befo
re6the6Tax6Court.
Page67
1-14. Section610.26of6Subpart6A6of6Circular62306defines6practice6before6the6IRS6as6including:
matters6connected6with6presentation6to6the6Internal6Revenue6Service6or6any6of6its6o
fficers6or6employees6relating6to6a6client's6rights,6privileges,6or6liabilities6under6law
s6or6regulations6administered6by6the6Internal6Revenue6Service.6Such6presentations
6include6the6preparation6and6filing6of6necessary6documents,6correspondence6with,6
and6communications6to6the6Internal6Revenue6Service,6and6the6representation6of6a6
client6at6conferences,6hearings,6and6meetings.
Page67
1-15.
To6become6an6Enrolled6Agent6an6individual6can6(1)6pass6a6test6given6by6the6IRS6
or6(2)6work6for6the6IRS6for6five6years.6Circular6230,6Subpart6A,6Secs.610.46to610.6.
Page69
1-16.
Enrolled6Agents6must6complete6726hours6of6Continuing6Education6every6three6yea
rs6(an6average6of6246per6year,6with6a6minimum6of6166hours6during6any6year.).6Circular623
0,6Subpart6A.6§10.6.
Page69
1-17.
True.6As6a6general6rule,6an6individual6must6be6an6enrolled6agent,6attorney,6or6CPA6t
o6represent6a6client6before6the6IRS.6There6are6limited6situations6where6others6may6represen
t6a6taxpayer;6however,6this6fact6pattern6is6not6one6of6them.6Since6Leigh6did6not6sign6the6ret
, Federal6Tax6Research,611th6Edition Page61-4
urn,6she6cannot6represent6the6taxpayer,6only6Rose6can.
CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
DISCUSSION6QUESTIONS
1-1.
In6the6United6States,6the6tax6system6is6an6outgrowth6of6the6following6five6disciplines
:6law,6accounting,6economics,6political6science,6and6sociology.6The6environment6for6the6ta
x6system6is6provided6by6the6principles6of6economics,6sociology,6and6political6science,6whil
e6the6legal6and6accounting6fields6are6responsible6for6the6system's6interpretation6and6applica
tion.
Each6of6these6disciplines6affects6this6country's6tax6system6in6a6unique6way.6Economists6ad
dress6such6issues6as6how6proposed6tax6legislation6will6affect6the6rate6of6inflation6or6econo
mic6growth.6Measurement6of6the6social6equity6of6a6tax,6and6determining6whether6a6tax6syst
em6discriminates6against6certain6taxpayers,6are6issues6that6are6examined6by6sociologists6an
d6political6scientists.6Finally,6attorneys6are6responsible6for6the6inter-
6pretation6of6the6taxation6statutes,6and6accountants6ensure6that6these6same6statutes6are6appl
ied6consistently.
Page64
1-2. The6other6major6categories6of6tax6practice6in6addition6to6tax6research6are:
tax6compliance
tax6planning
tax6litigation
Page65
6
1-3.
Tax6compliance6consists6of6gathering6pertinent6information,6evaluating6and6class
ifying6that6information,6and6filing6any6necessary6tax6returns.6Compliance6also6includes6
other6functions6necessary6to6satisfy6governmental6requirements,6such6as6representing6a6
client6during6an6IRS6audit.
Page65
1-4.
Most6of6the6tax6compliance6work6is6performed6by6commercial6tax6preparers,6enroll
ed6agents,6attorneys,6and6CPAs.6Noncomplex6individual,6partnership,6and6corporate6tax6r
eturns6often6are6completed6by6commercial6tax6preparers.6The6preparation6of6more6comple
x6returns6usually6is6performed6by6enrolled6agents,6attorneys,6and6CPAs.6The6latter6groups6
also6provide6tax6planning6services6and6represent6their6clients6before6the6IRS.
An6enrolled6agent6is6one6who6is6admitted6to6practice6before6the6IRS6by6passing6a6special6I
RS-
administered6examination,6or6who6has6worked6for6the6IRS6for6five6years,6and6is6issued6a6pe
rmit6to6represent6clients6before6the6IRS.6CPAs6and6attorneys6are6not6required6to6take6this6ex
amination6and6are6automatically6admitted6to6practice6before6the6IRS6if6they6are6in6good6sta
nding6with6the6appropriate6professional6licensing6board.
,Federal6Tax6Research,611th6Edition Page61-2
Page656and6Circular6230
1-5.
Tax6planning6is6the6process6of6arranging6one's6financial6affairs6to6minimize6any6tax6
liability.6Much6of6modern6tax6practice6centers6around6this6process,6and6the6resulting6outco
me6is6tax6avoidance.6There6is6nothing6illegal6or6immoral6in6the6avoidance6of6taxa-
6tion,6as6long6as6the6taxpayer6remains6within6legal6bounds.6In6contrast,6tax6evasion6constit
utes6the6illegal6nonpayment6of6a6tax6and6cannot6be6condoned.6Activities6of6this6sort6clearly6
violate6existing6legal6constraints6and6fall6outside6of6the6domain6of6the6professional6tax6prac
titioner.
Page66
1-6.
In6an6open6tax6planning6situation,6the6transaction6is6not6yet6complete,6therefore,6the6t
ax6practitioner6maintains6some6degree6of6control6over6the6potential6tax6liability,6and6the6tra
nsaction6may6be6modified6to6achieve6a6more6favorable6tax6treatment.6In6a6closed6transactio
n6however,6all6of6the6pertinent6actions6have6been6completed,6and6tax6planning6activities6m
ay6be6limited6to6the6presentation6of6the6situation6to6the6government6in6the6most6legally6adva
ntageous6manner6possible.
Page66
1-7.
Tax6litigation6is6the6process6of6settling6a6dispute6with6the6IRS6in6a6court6of6law.6Typi
cally,6a6tax6attorney6handles6tax6litigation6that6progresses6beyond6the6final6IRS6appeal.
Page66
1-8. CPAs6serve6is6a6support6capacity6in6tax6litigation.
Page66
1-9.
Tax6research6consists6of6the6resolution6of6unanswered6taxation6questions.6T
he6tax6research6process6includes6the6following:
1. Identification6of6pertinent6issues;
2. Specification6of6proper6authorities;
3. Evaluation6of6the6propriety6of6authorities;6and,
4. Application6of6authorities6to6a6specific6situation.
Page66
1-10.
Circular62306is6issued6by6the6Treasury6Department6and6applies6to6all6who6practice6b
efore6the6IRS.
Page67
,Federal6Tax6Research,611th6Edition Page61-3
1-11.
In6addition6to6Circular6230,6CPAs6must6follow6the6AICPA's6Code6of6Professio
nal6Conduct6and6Statements6on6Standards6for6Tax6Services.6CPAs6must6also6abide6by6
the6rules6of6the6appropriate6state6board(s)6of6accountancy.
Page67
1-12. A6return6preparer6must6obtain6186hours6of6continuing6education6from6an6IRS-
approved6CE6Provider.6The6hours6must6include6a666credit6hour6Annual6Federal6Tax6Ref
resher6course6(AFTR)6that6covers6filing6season6issues6and6tax6law6updates.6The6AFTR6
course6must6include6a6knowledge-
based6comprehension6test6administered6at6the6conclusion6of6the6course6by6the6CE6Provi
der.
Limited6practice6rights6allow6individuals6to6represent6clients6whose6returns6they6prepared6
and6signed,6but6only6before6revenue6agents,6customer6service6representatives,6and6similar6
IRS6employees.
Page6106and6IRS.gov
1-13.
False.6Only6communication6with6the6IRS6concerning6a6taxpayer's6rights,6privileg
es,6or6liability6is6included.6Practice6before6the6IRS6does6not6include6representation6befo
re6the6Tax6Court.
Page67
1-14. Section610.26of6Subpart6A6of6Circular62306defines6practice6before6the6IRS6as6including:
matters6connected6with6presentation6to6the6Internal6Revenue6Service6or6any6of6its6o
fficers6or6employees6relating6to6a6client's6rights,6privileges,6or6liabilities6under6law
s6or6regulations6administered6by6the6Internal6Revenue6Service.6Such6presentations
6include6the6preparation6and6filing6of6necessary6documents,6correspondence6with,6
and6communications6to6the6Internal6Revenue6Service,6and6the6representation6of6a6
client6at6conferences,6hearings,6and6meetings.
Page67
1-15.
To6become6an6Enrolled6Agent6an6individual6can6(1)6pass6a6test6given6by6the6IRS6
or6(2)6work6for6the6IRS6for6five6years.6Circular6230,6Subpart6A,6Secs.610.46to610.6.
Page69
1-16.
Enrolled6Agents6must6complete6726hours6of6Continuing6Education6every6three6yea
rs6(an6average6of6246per6year,6with6a6minimum6of6166hours6during6any6year.).6Circular623
0,6Subpart6A.6§10.6.
Page69
1-17.
True.6As6a6general6rule,6an6individual6must6be6an6enrolled6agent,6attorney,6or6CPA6t
o6represent6a6client6before6the6IRS.6There6are6limited6situations6where6others6may6represen
t6a6taxpayer;6however,6this6fact6pattern6is6not6one6of6them.6Since6Leigh6did6not6sign6the6ret
, Federal6Tax6Research,611th6Edition Page61-4
urn,6she6cannot6represent6the6taxpayer,6only6Rose6can.
