TEST BANK FOR FEDERAL TAX RESEARCH 11th EDITION ROBY B. SAWYERS, STEVEN GILL

Federal Tax Research, 11th Edition Page 1-1




CHAPTER 1
AN INTRODUCTION TO TAX PRACTICE AND ETHICS


DISCUSSION QUESTIONS

1-1. 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

TEST BANK FOR FEDERAL the legal and accounting fields are responsible for the system's interpretation and
application.



TAX RESEARCH 11th
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

EDITION ROBY B. sociologists and political scientists. Finally, attorneys are responsible for the inter-
pretation of the taxation statutes, and accountants ensure that these same statutes are
applied consistently.


SAWYERS, STEVEN GILL. 1-2.
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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.

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Page 5 and Circular 230 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

1-5. Tax planning is the process of arranging one's financial affairs to minimize any tax 1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved
liability. Much of modern tax practice centers around this process, and the resulting CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa- course (AFTR) that covers filing season issues and tax law updates. The AFTR course
tion, as long as the taxpayer remains within legal bounds. In contrast, tax evasion must include a knowledge-based comprehension test administered at the conclusion of
constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort the course by the CE Provider.
clearly violate existing legal constraints and fall outside of the domain of the professional
tax practitioner. Limited practice rights allow individuals to represent clients whose returns they prepared
and signed, but only before revenue agents, customer service representatives, and similar
Page 6 IRS employees.
Page 10 and IRS.gov
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 1-13. False. Only communication with the IRS concerning a taxpayer's rights, privileges, or
transaction may be modified to achieve a more favorable tax treatment. In a closed liability is included. Practice before the IRS does not include representation before the
transaction however, all of the pertinent actions have been completed, and tax planning Tax Court.
activities may be limited to the presentation of the situation to the government in the most
legally advantageous manner possible. Page 7

Page 6 1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:

1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, matters connected with presentation to the Internal Revenue Service or any of its
a tax attorney handles tax litigation that progresses beyond the final IRS appeal. officers or employees relating to a client's rights, privileges, or liabilities under
laws or regulations administered by the Internal Revenue Service. Such
Page 6 presentations include the preparation and filing of necessary documents,
correspondence with, and communications to the Internal Revenue Service, and
1-8. CPAs serve is a support capacity in tax litigation. the representation of a client at conferences, hearings, and meetings.

Page 6 Page 7

1-9. Tax research consists of the resolution of unanswered taxation questions. The tax 1-15. To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2)
research process includes the following: work for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.

1. Identification of pertinent issues; Page 9
2. Specification of proper authorities;
3. Evaluation of the propriety of authorities; and,
4. Application of authorities to a specific situation. 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,
Page 6 Subpart A. §10.6.

1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before Page 9
the IRS.
1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
Page 7 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.

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paper which the client is required by the revenue laws of the United States to execute,
Pages 10-11 shall advise the client promptly of the fact of such noncompliance, error, or omission.

1-18. The names of organizations that can be represented by regular full-time employees are Page 11
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 1-25. According to Circular 230, the best practices rules are aspirational. Thus, a practitioner
partnership. Also, a regular full-time employee of a trust, receivership, guardianship, or who fails to comply with best practices will not be subject to discipline by the IRS.
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 Page 14
governmental unit, agency, or authority in the course of his or her official duties.
1-26. Best practices include:
Page 10 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
1-19. Yes. Circular 230, Subpart A, Sec. 10.7. the advice and should have a clear understanding with the client regarding the form
and scope of the advice or assistance to be rendered.
Page 10 b. Establishing the facts, determining which facts are relevant, evaluating the
reasonableness of any assumptions or representations, relating the applicable law
1-20. True. A practitioner may be suspended or disbarred from practice before the IRS if he or (including potentially applicable judicial doctrines) to the relevant facts, and arriving
she knowingly helps a suspended or disbarred person practice indirectly before the IRS. at a conclusion supported by the law and the facts.
c. Advising the client regarding the importance of the conclusions reached, including,
Page 12 for example, whether a taxpayer may avoid accuracy-related penalties under the
Internal Revenue Code if a taxpayer acts in reliance on the advice.
1-21. A practitioner may not advise a client to take a position on a document, affidavit, or other d. Acting fairly and with integrity in practice before the IRS.
paper submitted to the Internal Revenue Service unless the position is not frivolous.
Circular 230 §10.34(b) Pages 13-14

Page 14 1-27. A practitioner must not give written advice if the practitioner:

1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent 1. bases the written advice on unreasonable factual or legal assumptions (including
may use mass media (e.g., T.V. and the Internet) for advertising purposes. Such media assumptions as to future events),
may not contain false, fraudulent, unduly influencing, coercive, or unfair statements or 2. unreasonably relies upon representations, statements, findings, or agreements of the taxpayer
claims. Attorneys, CPAs, and enrolled agents must also observe any applicable standards or any other person,
of ethical conduct adopted by the American Bar Association (ABA), the American 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
Institute of Certified Public Accountants (AICPA), and the National Association of
audited, that an issue will not be raised on audit, or that an issue will be resolved through
Enrolled Agents (NAEA). Additional standards and listing of items that may be included settlement if raised.
in mass media advertising are defined under Section 10.30 of Subpart B in Circular 230.
Page 15
Page 19
1-28 A preparer tax identification number (PTIN) is required of a compensated individual who
1-23. Under Section 10.25 of Circular 230, partners of government employees cannot represent prepares or assists with the preparation of all or substantially all of a tax return or claim
anyone for which the government employee-partner has (or has had) official for refund must have a preparer tax identification number (PTIN). Normally, the
responsibility. For instance, a CPA firm with an IRS agent could not represent any individual must be an attorney, CPA, EA, or tax return preparer must obtain a PTIN in
taxpayer that is (or was in the past) assigned to the IRS agent-partner. order to file tax returns for clients
Page 12 Page 11
1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled 1-29. Individuals who prepared tax returns for compensation must follow the rules under
actuary who knows that the client has not complied with the revenue laws of the United Circular 230 Subpart B-- Duties and Restrictions Relating to Practice Before the
States or has made an error in or omission from any return, document, affidavit, or other 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

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eligible to practice before the IRS (Attorneys, Certified Public Accountants (CPAs), and 4. The CPA must obtain sufficient relevant data to afford a reasonable basis for any
Enrolled Agents (EAs). conclusion or recommendation in connection with the performance of any professional
services.
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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
1-30. The AICPA's Code of Professional Conduct provides a philosophical foundation upon technical knowledge. At the same time, the code is clear that the member does not
which the Rules of Conduct are based. The Principles of the Code of Professional assume a responsibility for infallibility of knowledge or judgment
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 Page 21
following:
1-34.
1. A comprehensive code of ethics and professional conduct; a. No violation
2. A guide for practitioners in answering complex questions; and, b. 1.520.001- Commissions and Referral Fees
3. Assurance to the public concerning the obligations and responsibilities of the c. No violation
accounting profession. d. 1.600.001- Advertising and Other Forms of Solicitation
e. 1.800.001- Form of Organization and Name Rule
Pages 16-17 f. 2.400.090 or 3.400.090- Acts Discreditable Rule

1-31. Threats to complying with the Independence Rule include: Pages 19-21

 Members not acting with objectivity due to an adverse interest 1-35.
 Advocacy threats 1.700.001 (Confidential Client Information Rule) does not apply in the following
 Familiarity threats due to a long or close relationship with a client situations:
 Management participation threats
 Self-interest threats 1. There is a conflict with the Compliance with Standards Rule [1.310.001] or the
 Self-review threats Accounting Principles Rule [1.320.001]
 2. The CPA is served with an enforceable subpoena or summons or must comply with
Undue influence threats
applicable laws and government regulations
Page 18 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
1-32. In a tax practice the CPA may be requested to blindly follow the guidelines of a recognized society, or the CPA is initiating a complaint with a disciplinary body
government agency or the demands of an audit client. This rule prohibits such blind
Pages 19-20
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 1-36. The Statements on Standards for Tax Services, or SSTS, are a series of statements, issued
referring a personal financial planning or tax client to an insurance broker or other service by the AICPA, as to what constitutes appropriate standards for tax practice. The State-
ments also delineate a member's responsibility to clients, the public, and the profession.
provider which refers clients to the member under an exclusive arrangement.
The stated objectives of the Statements are as follows:
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1-33. The General Standards Include: 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.
1. The CPA must be able to complete all professional services with professional This statement also addresses a member’s obligation to advise a taxpayer of relevant tax
competence. return disclosure responsibilities and potential penalties.
2. The CPA must exercise due professional care in the performance of all professional
SSTS No. 2: Answers to Questions on Returns. This statement sets forth the applicable
services.
standards for members when signing the preparer’s declaration on a tax return if one or
3. The CPA shall adequately plan and supervise the performance of all professional
services. more questions on the return have not been answered.