Federal7Tax7Research,711th7Edition Page71-1
CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
DISCUSSION7QUESTIONS
1-1.
In7the7United7States,7the7tax7system7is7an7outgrowth7of7the7following7five7disciplines
:7law,7accounting,7economics,7political7science,7and7sociology.7The7environment7for7the7ta
x7system7is7provided7by7the7principles7of7economics,7sociology,7and7political7science,7whil
e7the7legal7and7accounting7fields7are7responsible7for7the7system's7interpretation7and7applica
tion.
Each7of7these7disciplines7affects7this7country's7tax7system7in7a7unique7way.7Economists7ad
dress7such7issues7as7how7proposed7tax7legislation7will7affect7the7rate7of7inflation7or7econo
mic7growth.7Measurement7of7the7social7equity7of7a7tax,7and7determining7whether7a7tax7syst
em7discriminates7against7certain7taxpayers,7are7issues7that7are7examined7by7sociologists7an
d7political7scientists.7Finally,7attorneys7are7responsible7for7the7inter-
7pretation7of7the7taxation7statutes,7and7accountants7ensure7that7these7same7statutes7are7appl
ied7consistently.
Page74
1-2. The7other7major7categories7of7tax7practice7in7addition7to7tax7research7are:
tax7compliance
tax7planning
tax7litigation
Page75
7
1-3.
Tax7compliance7consists7of7gathering7pertinent7information,7evaluating7and7class
ifying7that7information,7and7filing7any7necessary7tax7returns.7Compliance7also7includes7
other7functions7necessary7to7satisfy7governmental7requirements,7such7as7representing7a7
client7during7an7IRS7audit.
Page75
1-4.
Most7of7the7tax7compliance7work7is7performed7by7commercial7tax7preparers,7enroll
ed7agents,7attorneys,7and7CPAs.7Noncomplex7individual,7partnership,7and7corporate7tax7r
eturns7often7are7completed7by7commercial7tax7preparers.7The7preparation7of7more7comple
x7returns7usually7is7performed7by7enrolled7agents,7attorneys,7and7CPAs.7The7latter7groups7
also7provide7tax7planning7services7and7represent7their7clients7before7the7IRS.
An7enrolled7agent7is7one7who7is7admitted7to7practice7before7the7IRS7by7passing7a7special7I
RS-
administered7examination,7or7who7has7worked7for7the7IRS7for7five7years,7and7is7issued7a7pe
rmit7to7represent7clients7before7the7IRS.7CPAs7and7attorneys7are7not7required7to7take7this7ex
amination7and7are7automatically7admitted7to7practice7before7the7IRS7if7they7are7in7good7sta
nding7with7the7appropriate7professional7licensing7board.
,Federal7Tax7Research,711th7Edition Page71-2
Page757and7Circular7230
1-5.
Tax7planning7is7the7process7of7arranging7one's7financial7affairs7to7minimize7any7tax7
liability.7Much7of7modern7tax7practice7centers7around7this7process,7and7the7resulting7outco
me7is7tax7avoidance.7There7is7nothing7illegal7or7immoral7in7the7avoidance7of7taxa-
7tion,7as7long7as7the7taxpayer7remains7within7legal7bounds.7In7contrast,7tax7evasion7constit
utes7the7illegal7nonpayment7of7a7tax7and7cannot7be7condoned.7Activities7of7this7sort7clearly7
violate7existing7legal7constraints7and7fall7outside7of7the7domain7of7the7professional7tax7prac
titioner.
Page76
1-6.
In7an7open7tax7planning7situation,7the7transaction7is7not7yet7complete,7therefore,7the7t
ax7practitioner7maintains7some7degree7of7control7over7the7potential7tax7liability,7and7the7tra
nsaction7may7be7modified7to7achieve7a7more7favorable7tax7treatment.7In7a7closed7transactio
n7however,7all7of7the7pertinent7actions7have7been7completed,7and7tax7planning7activities7m
ay7be7limited7to7the7presentation7of7the7situation7to7the7government7in7the7most7legally7adva
ntageous7manner7possible.
Page76
1-7.
Tax7litigation7is7the7process7of7settling7a7dispute7with7the7IRS7in7a7court7of7law.7Typi
cally,7a7tax7attorney7handles7tax7litigation7that7progresses7beyond7the7final7IRS7appeal.
Page76
1-8. CPAs7serve7is7a7support7capacity7in7tax7litigation.
Page76
1-9.
Tax7research7consists7of7the7resolution7of7unanswered7taxation7questions.7T
he7tax7research7process7includes7the7following:
1. Identification7of7pertinent7issues;
2. Specification7of7proper7authorities;
3. Evaluation7of7the7propriety7of7authorities;7and,
4. Application7of7authorities7to7a7specific7situation.
Page76
1-10.
Circular72307is7issued7by7the7Treasury7Department7and7applies7to7all7who7practice7b
efore7the7IRS.
Page77
,Federal7Tax7Research,711th7Edition Page71-3
1-11.
In7addition7to7Circular7230,7CPAs7must7follow7the7AICPA's7Code7of7Professio
nal7Conduct7and7Statements7on7Standards7for7Tax7Services.7CPAs7must7also7abide7by7
the7rules7of7the7appropriate7state7board(s)7of7accountancy.
Page77
1-12. A7return7preparer7must7obtain7187hours7of7continuing7education7from7an7IRS-
approved7CE7Provider.7The7hours7must7include7a767credit7hour7Annual7Federal7Tax7Ref
resher7course7(AFTR)7that7covers7filing7season7issues7and7tax7law7updates.7The7AFTR7
course7must7include7a7knowledge-
based7comprehension7test7administered7at7the7conclusion7of7the7course7by7the7CE7Provi
der.
Limited7practice7rights7allow7individuals7to7represent7clients7whose7returns7they7prepared7
and7signed,7but7only7before7revenue7agents,7customer7service7representatives,7and7similar7
IRS7employees.
Page7107and7IRS.gov
1-13.
False.7Only7communication7with7the7IRS7concerning7a7taxpayer's7rights,7privileg
es,7or7liability7is7included.7Practice7before7the7IRS7does7not7include7representation7befo
re7the7Tax7Court.
Page77
1-14. Section710.27of7Subpart7A7of7Circular72307defines7practice7before7the7IRS7as7including:
matters7connected7with7presentation7to7the7Internal7Revenue7Service7or7any7of7its7o
fficers7or7employees7relating7to7a7client's7rights,7privileges,7or7liabilities7under7law
s7or7regulations7administered7by7the7Internal7Revenue7Service.7Such7presentations
7include7the7preparation7and7filing7of7necessary7documents,7correspondence7with,7
and7communications7to7the7Internal7Revenue7Service,7and7the7representation7of7a7
client7at7conferences,7hearings,7and7meetings.
Page77
1-15.
To7become7an7Enrolled7Agent7an7individual7can7(1)7pass7a7test7given7by7the7IRS7
or7(2)7work7for7the7IRS7for7five7years.7Circular7230,7Subpart7A,7Secs.710.47to710.6.
Page79
1-16.
Enrolled7Agents7must7complete7727hours7of7Continuing7Education7every7three7yea
rs7(an7average7of7247per7year,7with7a7minimum7of7167hours7during7any7year.).7Circular723
0,7Subpart7A.7§10.6.
Page79
1-17.
True.7As7a7general7rule,7an7individual7must7be7an7enrolled7agent,7attorney,7or7CPA7t
o7represent7a7client7before7the7IRS.7There7are7limited7situations7where7others7may7represen
t7a7taxpayer;7however,7this7fact7pattern7is7not7one7of7them.7Since7Leigh7did7not7sign7the7ret
, Federal7Tax7Research,711th7Edition Page71-4
urn,7she7cannot7represent7the7taxpayer,7only7Rose7can.
CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
DISCUSSION7QUESTIONS
1-1.
In7the7United7States,7the7tax7system7is7an7outgrowth7of7the7following7five7disciplines
:7law,7accounting,7economics,7political7science,7and7sociology.7The7environment7for7the7ta
x7system7is7provided7by7the7principles7of7economics,7sociology,7and7political7science,7whil
e7the7legal7and7accounting7fields7are7responsible7for7the7system's7interpretation7and7applica
tion.
Each7of7these7disciplines7affects7this7country's7tax7system7in7a7unique7way.7Economists7ad
dress7such7issues7as7how7proposed7tax7legislation7will7affect7the7rate7of7inflation7or7econo
mic7growth.7Measurement7of7the7social7equity7of7a7tax,7and7determining7whether7a7tax7syst
em7discriminates7against7certain7taxpayers,7are7issues7that7are7examined7by7sociologists7an
d7political7scientists.7Finally,7attorneys7are7responsible7for7the7inter-
7pretation7of7the7taxation7statutes,7and7accountants7ensure7that7these7same7statutes7are7appl
ied7consistently.
Page74
1-2. The7other7major7categories7of7tax7practice7in7addition7to7tax7research7are:
tax7compliance
tax7planning
tax7litigation
Page75
7
1-3.
Tax7compliance7consists7of7gathering7pertinent7information,7evaluating7and7class
ifying7that7information,7and7filing7any7necessary7tax7returns.7Compliance7also7includes7
other7functions7necessary7to7satisfy7governmental7requirements,7such7as7representing7a7
client7during7an7IRS7audit.
Page75
1-4.
Most7of7the7tax7compliance7work7is7performed7by7commercial7tax7preparers,7enroll
ed7agents,7attorneys,7and7CPAs.7Noncomplex7individual,7partnership,7and7corporate7tax7r
eturns7often7are7completed7by7commercial7tax7preparers.7The7preparation7of7more7comple
x7returns7usually7is7performed7by7enrolled7agents,7attorneys,7and7CPAs.7The7latter7groups7
also7provide7tax7planning7services7and7represent7their7clients7before7the7IRS.
An7enrolled7agent7is7one7who7is7admitted7to7practice7before7the7IRS7by7passing7a7special7I
RS-
administered7examination,7or7who7has7worked7for7the7IRS7for7five7years,7and7is7issued7a7pe
rmit7to7represent7clients7before7the7IRS.7CPAs7and7attorneys7are7not7required7to7take7this7ex
amination7and7are7automatically7admitted7to7practice7before7the7IRS7if7they7are7in7good7sta
nding7with7the7appropriate7professional7licensing7board.
,Federal7Tax7Research,711th7Edition Page71-2
Page757and7Circular7230
1-5.
Tax7planning7is7the7process7of7arranging7one's7financial7affairs7to7minimize7any7tax7
liability.7Much7of7modern7tax7practice7centers7around7this7process,7and7the7resulting7outco
me7is7tax7avoidance.7There7is7nothing7illegal7or7immoral7in7the7avoidance7of7taxa-
7tion,7as7long7as7the7taxpayer7remains7within7legal7bounds.7In7contrast,7tax7evasion7constit
utes7the7illegal7nonpayment7of7a7tax7and7cannot7be7condoned.7Activities7of7this7sort7clearly7
violate7existing7legal7constraints7and7fall7outside7of7the7domain7of7the7professional7tax7prac
titioner.
Page76
1-6.
In7an7open7tax7planning7situation,7the7transaction7is7not7yet7complete,7therefore,7the7t
ax7practitioner7maintains7some7degree7of7control7over7the7potential7tax7liability,7and7the7tra
nsaction7may7be7modified7to7achieve7a7more7favorable7tax7treatment.7In7a7closed7transactio
n7however,7all7of7the7pertinent7actions7have7been7completed,7and7tax7planning7activities7m
ay7be7limited7to7the7presentation7of7the7situation7to7the7government7in7the7most7legally7adva
ntageous7manner7possible.
Page76
1-7.
Tax7litigation7is7the7process7of7settling7a7dispute7with7the7IRS7in7a7court7of7law.7Typi
cally,7a7tax7attorney7handles7tax7litigation7that7progresses7beyond7the7final7IRS7appeal.
Page76
1-8. CPAs7serve7is7a7support7capacity7in7tax7litigation.
Page76
1-9.
Tax7research7consists7of7the7resolution7of7unanswered7taxation7questions.7T
he7tax7research7process7includes7the7following:
1. Identification7of7pertinent7issues;
2. Specification7of7proper7authorities;
3. Evaluation7of7the7propriety7of7authorities;7and,
4. Application7of7authorities7to7a7specific7situation.
Page76
1-10.
Circular72307is7issued7by7the7Treasury7Department7and7applies7to7all7who7practice7b
efore7the7IRS.
Page77
,Federal7Tax7Research,711th7Edition Page71-3
1-11.
In7addition7to7Circular7230,7CPAs7must7follow7the7AICPA's7Code7of7Professio
nal7Conduct7and7Statements7on7Standards7for7Tax7Services.7CPAs7must7also7abide7by7
the7rules7of7the7appropriate7state7board(s)7of7accountancy.
Page77
1-12. A7return7preparer7must7obtain7187hours7of7continuing7education7from7an7IRS-
approved7CE7Provider.7The7hours7must7include7a767credit7hour7Annual7Federal7Tax7Ref
resher7course7(AFTR)7that7covers7filing7season7issues7and7tax7law7updates.7The7AFTR7
course7must7include7a7knowledge-
based7comprehension7test7administered7at7the7conclusion7of7the7course7by7the7CE7Provi
der.
Limited7practice7rights7allow7individuals7to7represent7clients7whose7returns7they7prepared7
and7signed,7but7only7before7revenue7agents,7customer7service7representatives,7and7similar7
IRS7employees.
Page7107and7IRS.gov
1-13.
False.7Only7communication7with7the7IRS7concerning7a7taxpayer's7rights,7privileg
es,7or7liability7is7included.7Practice7before7the7IRS7does7not7include7representation7befo
re7the7Tax7Court.
Page77
1-14. Section710.27of7Subpart7A7of7Circular72307defines7practice7before7the7IRS7as7including:
matters7connected7with7presentation7to7the7Internal7Revenue7Service7or7any7of7its7o
fficers7or7employees7relating7to7a7client's7rights,7privileges,7or7liabilities7under7law
s7or7regulations7administered7by7the7Internal7Revenue7Service.7Such7presentations
7include7the7preparation7and7filing7of7necessary7documents,7correspondence7with,7
and7communications7to7the7Internal7Revenue7Service,7and7the7representation7of7a7
client7at7conferences,7hearings,7and7meetings.
Page77
1-15.
To7become7an7Enrolled7Agent7an7individual7can7(1)7pass7a7test7given7by7the7IRS7
or7(2)7work7for7the7IRS7for7five7years.7Circular7230,7Subpart7A,7Secs.710.47to710.6.
Page79
1-16.
Enrolled7Agents7must7complete7727hours7of7Continuing7Education7every7three7yea
rs7(an7average7of7247per7year,7with7a7minimum7of7167hours7during7any7year.).7Circular723
0,7Subpart7A.7§10.6.
Page79
1-17.
True.7As7a7general7rule,7an7individual7must7be7an7enrolled7agent,7attorney,7or7CPA7t
o7represent7a7client7before7the7IRS.7There7are7limited7situations7where7others7may7represen
t7a7taxpayer;7however,7this7fact7pattern7is7not7one7of7them.7Since7Leigh7did7not7sign7the7ret
, Federal7Tax7Research,711th7Edition Page71-4
urn,7she7cannot7represent7the7taxpayer,7only7Rose7can.
