Federal rTax rResearch, r12th rEdition Page r1-1
CHAPTER 1 r
INTRODUCTION TO TAX PRACTICE AND ETHICS
r r r r r
DISCUSSION rQUESTIONS
1-1. In rthe rUnited rStates, rthe rtax rsystem ris ran routgrowth rof rthe rfollowing rfive rdisciplines: rlaw,
r accounting, reconomics, rpolitical rscience, rand rsociology. rThe renvironment rfor rthe rtax rsystem
r is rprovided rby rthe rprinciples rof reconomics, rsociology, rand rpolitical rscience, rwhile rthe rlegal
r and raccounting rfields rare rresponsible rfor rthe rsystem’s rinterpretation rand rapplication.
Each rof rthese rdisciplines raffects rthis rcountry’s rtax rsystem rin ra runique rway. rEconomists
r address rsuch rissues ras rhow rproposed rtax rlegislation rwill raffect rthe rrate rof rinflation ror
r economic rgrowth. rMeasurement rof rthe rsocial requity rof ra rtax rand rdetermining rwhether ra rtax
r system rdiscriminates ragainst rcertain rtaxpayers rare rissues rthat rare rexamined rby rsociologists
r and rpolitical rscientists. rFinally, rattorneys rare rresponsible rfor rthe rinterpretation rof rthe rtaxation
r statutes, rand raccountants rensure rthat rthese rsame rstatutes rare rapplied rconsistently.
Page r4
1-2. The rother rmajor rcategories rof rtax rpractice rin raddition rto rtax rresearch rare ras rfollows:
• Tax rcompliance
• Tax rplanning
• Tax rlitigation
Page r5
1-3. Tax rcompliance rconsists rof rgathering rpertinent rinformation, revaluating rand rclassifying rthat
r information, rand rfiling rany rnecessary rtax rreturns. rCompliance ralso rincludes rother rfunctions
r necessary rto rsatisfy rgovernmental rrequirements, rsuch ras rrepresenting ra rclient rduring ran
r Internal rRevenue rService r(IRS) raudit.
Page r5
,Page r1-2 SOLUTIONS rMANUAL
1-4. Most rof rthe rtax rcompliance rwork ris rperformed rby rcommercial rtax rpreparers, renrolled ragents
r (EAs), rattorneys, rand rcertified rpublic raccountants r(CPAs). rNoncomplex rindividual,
r partnership, rand rcorporate rtax rreturns roften rare rcompleted rby rcommercial rtax rpreparers. rThe
r preparation rof rmore rcomplex rreturns rusually ris rperformed rby rEAs, rattorneys, rand rCPAs. rThe
r latter rgroups ralso rprovide rtax rplanning rservices rand rrepresent rtheir rclients rbefore rthe rIRS.
An rEA ris rone rwho ris radmitted rto rpractice rbefore rthe rIRS rby rpassing ra rspecial rIRS-
administered rexamination, ror rwho rhas rworked rfor rthe rIRS rfor rfive ryears rand ris rissued ra
r permit rto rrepresent rclients rbefore rthe rIRS. rCPAs rand rattorneys rare rnot rrequired rto rtake rthis
r examination rand rare rautomatically radmitted rto rpractice rbefore rthe rIRS rif rthey rare rin rgood
r standing rwith rthe rappropriate rprofessional rlicensing rboard.
Page r5 rand rCircular r230
1-5. Tax rplanning ris rthe rprocess rof rarranging rone’s rfinancial raffairs rto rminimize rany rtax rliability.
r Much rof rmodern rtax rpractice rcenters raround rthis rprocess, rand rthe rresulting routcome ris rtax
r avoidance. rThere ris rnothing rillegal ror rimmoral rin rthe ravoidance rof rtaxation ras rlong ras rthe
r taxpayer rremains rwithin rlegal rbounds. rIn rcontrast, rtax revasion rconstitutes rthe rillegal
r nonpayment rof ra rtax rand rcannot rbe rcondoned. rActivities rof rthis rsort rclearly rviolate rexisting
r legal rconstraints rand rfall routside rof rthe rdomain rof rthe rprofessional rtax rpractitioner.
Page r6
1-6. In ran ropen rtax rplanning rsituation, rthe rtransaction ris rnot ryet rcomplete; rtherefore, rthe rtax
r practitioner rmaintains rsome rdegree rof rcontrol rover rthe rpotential rtax rliability, rand rthe
r transaction rmay rbe rmodified rto rachieve ra rmore rfavorable rtax rtreatment. rIn ra rclosed
r transaction rhowever, rall rof rthe rpertinent ractions rhave rbeen rcompleted, rand rtax rplanning
r activities rmay rbe rlimited rto rthe rpresentation rof rthe rsituation rto rthe rgovernment rin rthe rmost
r legally radvantageous rmanner rpossible.
Page r6
,Federal rTax rResearch, r12th rEdition Page r1-3
1-7. Tax rlitigation ris rthe rprocess rof rsettling ra rdispute rwith rthe rIRS rin ra rcourt rof rlaw. rTypically, ra
r tax rattorney rhandles rtax rlitigation rthat rprogresses rbeyond rthe rfinal rIRS rappeal.
Page r6
1-8. CPAs rserve ris ra rsupport rcapacity rin rtax rlitigation.
Page r6
1-9. Tax rresearch rconsists rof rthe rresolution rof runanswered rtaxation rquestions. rThe rtax rresearch
r process rincludes rthe rfollowing:
1. Identification rof rpertinent rissues;
2. Specification rof rproper rauthorities;
3. Evaluation rof rthe rpropriety rof rauthorities; rand,
4. Application rof rauthorities rto ra rspecific rsituation.
Page r6
1-10. Circular r230 ris rissued rby rthe rTreasury rDepartment rand rapplies rto rall rwho rpractice rbefore rthe
r IRS.
Page r7
1-11. In raddition rto rCircular r230, rCPAs rmust rfollow rthe rAICPA’s rCode rof rProfessional rConduct
r and rStatements ron rStandards rfor rTax rServices. rCPAs rmust ralso rabide rby rthe rrules rof rthe
r appropriate rstate rboard(s) rof raccountancy. r
Page r7 r
1-12. A rreturn rpreparer rmust robtain r18 rhours rof rcontinuing reducation rfrom ran rIRS-approved rCE
r Provider. rThe rhours rmust rinclude ra r6 rcredit rhour rAnnual rFederal rTax rRefresher rcourse
r (AFTR) rthat rcovers rfiling rseason rissues rand rtax rlaw rupdates. rThe rAFTR rcourse rmust rinclude
r a rknowledge-based rcomprehension rtest radministered rat rthe rconclusion rof rthe rcourse rby rthe
r CE rProvider. r
, Page r1-4 SOLUTIONS rMANUAL
Limited rpractice rrights rallow rindividuals rto rrepresent rclients rwhose rreturns rthey rprepared rand
r signed, rbut ronly rbefore rrevenue ragents, rcustomer rservice rrepresentatives, rand rsimilar rIRS
r employees.
Page r10 rand rIRS.gov
1-13. False. rOnly rcommunication rwith rthe rIRS rconcerning ra rtaxpayer’s rrights, rprivileges, ror
r liability ris rincluded. rPractice rbefore rthe rIRS rdoes rnot rinclude rrepresentation rbefore rthe rTax
r Court.
Page r7
1-14. Section r10.2 rof rSubpart rA rof rCircular r230 rdefines rpractice rbefore rthe rIRS ras rincluding:
matters rconnected rwith rpresentation rto rthe rInternal rRevenue rService ror rany rof rits
r officers ror remployees rrelating rto ra rclient’s rrights, rprivileges, ror rliabilities runder rlaws
r or rregulations radministered rby rthe rInternal rRevenue rService. rSuch rpresentations
include rthe rpreparation rand rfiling rof rnecessary rdocuments, rcorrespondence rwith, rand
r
r communications rto rthe rInternal rRevenue rService, rand rthe rrepresentation rof ra rclient
r at rconferences, rhearings, rand rmeetings. r
Page r7
1-15. To rbecome ran rEA ran rindividual rcan r(1) rpass ra rtest rgiven rby rthe rIRS ror r(2) rwork rfor rthe
r IRS rfor rfive ryears. rCircular r230, rSubpart rA, r§§ r10.4 rto r10.6.
Page r9
1-16. EAs rmust rcomplete r72 rhours rof rcontinuing reducation revery rthree ryears r(an raverage rof r24
r per ryear, rwith ra rminimum rof r16 rhours rduring rany ryear). rCircular r230, rSubpart rA. r§ r10.6.
Page r9
1-17. True. rAs ra rgeneral rrule, ran rindividual rmust rbe ran rEA, rattorney, ror rCPA rto rrepresent ra rclient
r before rthe rIRS. rThere rare rlimited rsituations rwhere rothers rmay rrepresent ra rtaxpayer; rhowever,
CHAPTER 1 r
INTRODUCTION TO TAX PRACTICE AND ETHICS
r r r r r
DISCUSSION rQUESTIONS
1-1. In rthe rUnited rStates, rthe rtax rsystem ris ran routgrowth rof rthe rfollowing rfive rdisciplines: rlaw,
r accounting, reconomics, rpolitical rscience, rand rsociology. rThe renvironment rfor rthe rtax rsystem
r is rprovided rby rthe rprinciples rof reconomics, rsociology, rand rpolitical rscience, rwhile rthe rlegal
r and raccounting rfields rare rresponsible rfor rthe rsystem’s rinterpretation rand rapplication.
Each rof rthese rdisciplines raffects rthis rcountry’s rtax rsystem rin ra runique rway. rEconomists
r address rsuch rissues ras rhow rproposed rtax rlegislation rwill raffect rthe rrate rof rinflation ror
r economic rgrowth. rMeasurement rof rthe rsocial requity rof ra rtax rand rdetermining rwhether ra rtax
r system rdiscriminates ragainst rcertain rtaxpayers rare rissues rthat rare rexamined rby rsociologists
r and rpolitical rscientists. rFinally, rattorneys rare rresponsible rfor rthe rinterpretation rof rthe rtaxation
r statutes, rand raccountants rensure rthat rthese rsame rstatutes rare rapplied rconsistently.
Page r4
1-2. The rother rmajor rcategories rof rtax rpractice rin raddition rto rtax rresearch rare ras rfollows:
• Tax rcompliance
• Tax rplanning
• Tax rlitigation
Page r5
1-3. Tax rcompliance rconsists rof rgathering rpertinent rinformation, revaluating rand rclassifying rthat
r information, rand rfiling rany rnecessary rtax rreturns. rCompliance ralso rincludes rother rfunctions
r necessary rto rsatisfy rgovernmental rrequirements, rsuch ras rrepresenting ra rclient rduring ran
r Internal rRevenue rService r(IRS) raudit.
Page r5
,Page r1-2 SOLUTIONS rMANUAL
1-4. Most rof rthe rtax rcompliance rwork ris rperformed rby rcommercial rtax rpreparers, renrolled ragents
r (EAs), rattorneys, rand rcertified rpublic raccountants r(CPAs). rNoncomplex rindividual,
r partnership, rand rcorporate rtax rreturns roften rare rcompleted rby rcommercial rtax rpreparers. rThe
r preparation rof rmore rcomplex rreturns rusually ris rperformed rby rEAs, rattorneys, rand rCPAs. rThe
r latter rgroups ralso rprovide rtax rplanning rservices rand rrepresent rtheir rclients rbefore rthe rIRS.
An rEA ris rone rwho ris radmitted rto rpractice rbefore rthe rIRS rby rpassing ra rspecial rIRS-
administered rexamination, ror rwho rhas rworked rfor rthe rIRS rfor rfive ryears rand ris rissued ra
r permit rto rrepresent rclients rbefore rthe rIRS. rCPAs rand rattorneys rare rnot rrequired rto rtake rthis
r examination rand rare rautomatically radmitted rto rpractice rbefore rthe rIRS rif rthey rare rin rgood
r standing rwith rthe rappropriate rprofessional rlicensing rboard.
Page r5 rand rCircular r230
1-5. Tax rplanning ris rthe rprocess rof rarranging rone’s rfinancial raffairs rto rminimize rany rtax rliability.
r Much rof rmodern rtax rpractice rcenters raround rthis rprocess, rand rthe rresulting routcome ris rtax
r avoidance. rThere ris rnothing rillegal ror rimmoral rin rthe ravoidance rof rtaxation ras rlong ras rthe
r taxpayer rremains rwithin rlegal rbounds. rIn rcontrast, rtax revasion rconstitutes rthe rillegal
r nonpayment rof ra rtax rand rcannot rbe rcondoned. rActivities rof rthis rsort rclearly rviolate rexisting
r legal rconstraints rand rfall routside rof rthe rdomain rof rthe rprofessional rtax rpractitioner.
Page r6
1-6. In ran ropen rtax rplanning rsituation, rthe rtransaction ris rnot ryet rcomplete; rtherefore, rthe rtax
r practitioner rmaintains rsome rdegree rof rcontrol rover rthe rpotential rtax rliability, rand rthe
r transaction rmay rbe rmodified rto rachieve ra rmore rfavorable rtax rtreatment. rIn ra rclosed
r transaction rhowever, rall rof rthe rpertinent ractions rhave rbeen rcompleted, rand rtax rplanning
r activities rmay rbe rlimited rto rthe rpresentation rof rthe rsituation rto rthe rgovernment rin rthe rmost
r legally radvantageous rmanner rpossible.
Page r6
,Federal rTax rResearch, r12th rEdition Page r1-3
1-7. Tax rlitigation ris rthe rprocess rof rsettling ra rdispute rwith rthe rIRS rin ra rcourt rof rlaw. rTypically, ra
r tax rattorney rhandles rtax rlitigation rthat rprogresses rbeyond rthe rfinal rIRS rappeal.
Page r6
1-8. CPAs rserve ris ra rsupport rcapacity rin rtax rlitigation.
Page r6
1-9. Tax rresearch rconsists rof rthe rresolution rof runanswered rtaxation rquestions. rThe rtax rresearch
r process rincludes rthe rfollowing:
1. Identification rof rpertinent rissues;
2. Specification rof rproper rauthorities;
3. Evaluation rof rthe rpropriety rof rauthorities; rand,
4. Application rof rauthorities rto ra rspecific rsituation.
Page r6
1-10. Circular r230 ris rissued rby rthe rTreasury rDepartment rand rapplies rto rall rwho rpractice rbefore rthe
r IRS.
Page r7
1-11. In raddition rto rCircular r230, rCPAs rmust rfollow rthe rAICPA’s rCode rof rProfessional rConduct
r and rStatements ron rStandards rfor rTax rServices. rCPAs rmust ralso rabide rby rthe rrules rof rthe
r appropriate rstate rboard(s) rof raccountancy. r
Page r7 r
1-12. A rreturn rpreparer rmust robtain r18 rhours rof rcontinuing reducation rfrom ran rIRS-approved rCE
r Provider. rThe rhours rmust rinclude ra r6 rcredit rhour rAnnual rFederal rTax rRefresher rcourse
r (AFTR) rthat rcovers rfiling rseason rissues rand rtax rlaw rupdates. rThe rAFTR rcourse rmust rinclude
r a rknowledge-based rcomprehension rtest radministered rat rthe rconclusion rof rthe rcourse rby rthe
r CE rProvider. r
, Page r1-4 SOLUTIONS rMANUAL
Limited rpractice rrights rallow rindividuals rto rrepresent rclients rwhose rreturns rthey rprepared rand
r signed, rbut ronly rbefore rrevenue ragents, rcustomer rservice rrepresentatives, rand rsimilar rIRS
r employees.
Page r10 rand rIRS.gov
1-13. False. rOnly rcommunication rwith rthe rIRS rconcerning ra rtaxpayer’s rrights, rprivileges, ror
r liability ris rincluded. rPractice rbefore rthe rIRS rdoes rnot rinclude rrepresentation rbefore rthe rTax
r Court.
Page r7
1-14. Section r10.2 rof rSubpart rA rof rCircular r230 rdefines rpractice rbefore rthe rIRS ras rincluding:
matters rconnected rwith rpresentation rto rthe rInternal rRevenue rService ror rany rof rits
r officers ror remployees rrelating rto ra rclient’s rrights, rprivileges, ror rliabilities runder rlaws
r or rregulations radministered rby rthe rInternal rRevenue rService. rSuch rpresentations
include rthe rpreparation rand rfiling rof rnecessary rdocuments, rcorrespondence rwith, rand
r
r communications rto rthe rInternal rRevenue rService, rand rthe rrepresentation rof ra rclient
r at rconferences, rhearings, rand rmeetings. r
Page r7
1-15. To rbecome ran rEA ran rindividual rcan r(1) rpass ra rtest rgiven rby rthe rIRS ror r(2) rwork rfor rthe
r IRS rfor rfive ryears. rCircular r230, rSubpart rA, r§§ r10.4 rto r10.6.
Page r9
1-16. EAs rmust rcomplete r72 rhours rof rcontinuing reducation revery rthree ryears r(an raverage rof r24
r per ryear, rwith ra rminimum rof r16 rhours rduring rany ryear). rCircular r230, rSubpart rA. r§ r10.6.
Page r9
1-17. True. rAs ra rgeneral rrule, ran rindividual rmust rbe ran rEA, rattorney, ror rCPA rto rrepresent ra rclient
r before rthe rIRS. rThere rare rlimited rsituations rwhere rothers rmay rrepresent ra rtaxpayer; rhowever,
