Page uu!1-1
CHAPTER 1 uu!
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
uu! uu! uu! uu! uu! uu!
DISCUSSION uu!QUESTIONS
1-1. In uu!the uu!United uu!States, uu!the uu!tax uu!system uu!is uu!an uu!outgrowth uu!of uu!the uu!following uu!five
uu!disciplines: uu!law, uu!accounting, uu!economics, uu!political uu!science, uu!and uu!sociology. uu!The
uu!environment uu!for uu!the uu!tax uu!system uu!is uu!provided uu!by uu!the uu!principles uu!of uu!economics,
uu!sociology, uu!and uu!political uu!science, uu!while uu!the uu!legal uu!and uu!accounting uu!fields uu!are
uu!responsible uu!for uu!the uu!system's uu!interpretation uu!and uu!application.
Each uu!of uu!these uu!disciplines uu!affects uu!this uu!country's uu!tax uu!system uu!in uu!a uu!unique uu!way.
uu!Economists uu!address uu!such uu!issues uu!as uu!how uu!proposed uu!tax uu!legislation uu!will uu!affect
uu!the uu!rate uu!of uu!inflation uu!or uu!economic uu!growth. uu!Measurement uu!of uu!the uu!social uu!equity
uu!of uu!a uu!tax, uu!and uu!determining uu!whether uu!a uu!tax uu!system uu!discriminates uu!against uu!certain
uu!taxpayers, uu!are uu!issues uu!that uu!are uu!examined uu!by uu!sociologists uu!and uu!political
uu!scientists. uu!Finally, uu!attorneys uu!are uu!responsible uu!for uu!the uu!inter- uu!pretation uu!of uu!the
uu!taxation uu!statutes, uu!and uu!accountants uu!ensure uu!that uu!these uu!same uu!statutes uu!are uu!applied
uu!consistently.
Page uu!4
1-2. The uu!other uu!major uu!categories uu!of uu!tax uu!practice uu!in uu!addition uu!to uu!tax uu!research uu!are:
tax uu!compliance
tax uu!planning
tax
litigation uu!Page uu!5
uu!
1-3. Tax uu!compliance uu!consists uu!of uu!gathering uu!pertinent uu!information, uu!evaluating uu!and
uu!classifying uu!that uu!information, uu!and uu!filing uu!any uu!necessary uu!tax uu!returns.
, Page uu!1-2
uu! Compliance uu!also uu!includes uu!other uu!functions uu!necessary uu!to uu!satisfy uu!governmental
uu! requirements, uu!such uu!as uu!representing uu!a uu!client uu!during uu!an uu!IRS uu!audit.
Page uu!5
1-4. Most uu!of uu!the uu!tax uu!compliance uu!work uu!is uu!performed uu!by uu!commercial uu!tax
uu!preparers, uu!enrolled uu!agents, uu!attorneys, uu!and uu!CPAs. uu!Noncomplex uu!individual,
uu!partnership, uu!and uu!corporate uu!tax uu!returns uu!often uu!are uu!completed uu!by uu!commercial
uu!tax uu!preparers. uu!The uu!preparation uu!of uu!more uu!complex uu!returns uu!usually uu!is
uu!performed uu!by uu!enrolled uu!agents, uu!attorneys, uu!and uu!CPAs. uu!The uu!latter uu!groups uu!also
uu!provide uu!tax uu!planning uu!services uu!and uu!represent uu!their uu!clients uu!before uu!the uu!IRS.
An uu!enrolled uu!agent uu!is uu!one uu!who uu!is uu!admitted uu!to uu!practice uu!before uu!the uu!IRS uu!by
uu!passing uu!a uu!special uu!IRS-administered uu!examination, uu!or uu!who uu!has uu!worked uu!for uu!the
uu!IRS uu!for uu!five uu!years, uu!and uu!is uu!issued uu!a uu!permit uu!to uu!represent uu!clients uu!before uu!the
uu!IRS. uu!CPAs uu!and uu!attorneys uu!are uu!not uu!required uu!to uu!take uu!this uu!examination uu!and uu!are
uu!automatically uu!admitted uu!to uu!practice uu!before uu!the uu!IRS uu!if uu!they uu!are uu!in uu!good
uu!standing uu!with uu!the uu!appropriate uu!professional uu!licensing uu!board.
, Page uu!1-3
Page uu!5 uu!and uu!Circular uu!230
1-5. Tax uu!planning uu!is uu!the uu!process uu!of uu!arranging uu!one's uu!financial uu!affairs uu!to uu!minimize
uu!any uu!tax uu!liability. uu!Much uu!of uu!modern uu!tax uu!practice uu!centers uu!around uu!this uu!process,
uu!and uu!the uu!resulting uu!outcome uu!is uu!tax uu!avoidance. uu!There uu!is uu!nothing uu!illegal uu!or
uu!immoral uu!in uu!the uu!avoidance uu!of uu!taxa- uu!tion, uu!as uu!long uu!as uu!the uu!taxpayer uu!remains
uu!within uu!legal uu!bounds. uu!In uu!contrast, uu!tax uu!evasion uu!constitutes uu!the uu!illegal
uu!nonpayment uu!of uu!a uu!tax uu!and uu!cannot uu!be uu!condoned. uu!Activities uu!of uu!this uu!sort uu!clearly
uu!violate uu!existing uu!legal uu!constraints uu!and uu!fall uu!outside uu!of uu!the uu!domain uu!of uu!the
uu!professional uu!tax uu!practitioner.
Page uu!6
1-6. In uu!an uu!open uu!tax uu!planning uu!situation, uu!the uu!transaction uu!is uu!not uu!yet uu!complete,
uu!therefore, uu!the uu!tax uu!practitioner uu!maintains uu!some uu!degree uu!of uu!control uu!over uu!the
uu!potential uu!tax uu!liability, uu!and uu!the uu!transaction uu!may uu!be uu!modified uu!to uu!achieve uu!a
uu!more uu!favorable uu!tax uu!treatment. uu!In uu!a uu!closed uu!transaction uu!however, uu!all uu!of uu!the
uu!pertinent uu!actions uu!have uu!been uu!completed, uu!and uu!tax uu!planning uu!activities uu!may uu!be
uu!limited uu!to uu!the uu!presentation uu!of uu!the uu!situation uu!to uu!the uu!government uu!in uu!the uu!most
uu!legally uu!advantageous uu!manner uu!possible.
Page uu!6
1-7. Tax uu!litigation uu!is uu!the uu!process uu!of uu!settling uu!a uu!dispute uu!with uu!the uu!IRS uu!in uu!a uu!court
uu!of uu!law. uu!Typically, uu!a uu!tax uu!attorney uu!handles uu!tax uu!litigation uu!that uu!progresses
uu!beyond uu!the uu!final uu!IRS uu!appeal.
Page uu!6
1-8. CPAs uu!serve uu!is uu!a uu!support uu!capacity uu!in uu!tax uu!litigation.
Page uu!6
1-9. Tax uu!research uu!consists uu!of uu!the uu!resolution uu!of uu!unanswered uu!taxation
uu!questions. uu!The uu!tax uu!research uu!process uu!includes uu!the uu!following:
1. Identification uu!of uu!pertinent uu!issues;
2. Specification uu!of uu!proper uu!authorities;
3. Evaluation uu!of uu!the uu!propriety uu!of uu!authorities; uu!and,
4. Application uu!of uu!authorities uu!to uu!a uu!specific uu!situation.
Page uu!6
1-10. Circular uu!230 uu!is uu!issued uu!by uu!the uu!Treasury uu!Department uu!and uu!applies uu!to uu!all uu!who
uu!practice uu!before uu!the uu!IRS.
Page uu!7
, Page uu!1-4
1-11. In uu!addition uu!to uu!Circular uu!230, uu!CPAs uu!must uu!follow uu!the uu!AICPA's uu!Code uu!of
uu!Professional uu!Conduct uu!and uu!Statements uu!on uu!Standards uu!for uu!Tax uu!Services.
uu!CPAs uu!must uu!also uu!abide uu!by uu!the uu!rules uu!of uu!the uu!appropriate uu!state uu!board(s) uu!of
uu!accountancy.
Page uu!7
1-12. A uu!return uu!preparer uu!must uu!obtain uu!18 uu!hours uu!of uu!continuing uu!education uu!from uu!an
uu!IRS-approved uu!CE uu!Provider. uu!The uu!hours uu!must uu!include uu!a uu!6 uu!credit uu!hour
uu!Annual uu!Federal uu!Tax uu!Refresher uu!course uu!(AFTR) uu!that uu!covers uu!filing uu!season
uu!issues uu!and uu!tax uu!law uu!updates. uu!The uu!AFTR uu!course uu!must uu!include uu!a
uu!knowledge-based uu!comprehension uu!test uu!administered uu!at uu!the uu!conclusion uu!of uu!the
uu!course uu!by uu!the uu!CE uu!Provider.
Limited uu!practice uu!rights uu!allow uu!individuals uu!to uu!represent uu!clients uu!whose uu!returns
uu!they uu!prepared uu!and uu!signed, uu!but uu!only uu!before uu!revenue uu!agents, uu!customer uu!service
uu!representatives, uu!and uu!similar uu!IRS uu!employees.
Page uu!10 uu!and uu!IRS.gov
1-13. False. uu!Only uu!communication uu!with uu!the uu!IRS uu!concerning uu!a uu!taxpayer's uu!rights,
uu!privileges, uu!or uu!liability uu!is uu!included. uu!Practice uu!before uu!the uu!IRS uu!does uu!not
uu!include uu!representation uu!before uu!the uu!Tax uu!Court.
Page uu!7
1-14. Section uu!10.2 uu!of uu!Subpart uu!A uu!of uu!Circular uu!230 uu!defines uu!practice uu!before uu!the uu!IRS uu!as
uu!including:
matters uu!connected uu!with uu!presentation uu!to uu!the uu!Internal uu!Revenue uu!Service uu!or
uu!any uu!of uu!its uu!officers uu!or uu!employees uu!relating uu!to uu!a uu!client's uu!rights,
uu!privileges, uu!or uu!liabilities uu!under uu!laws uu!or uu!regulations uu!administered uu!by
uu!the uu!Internal uu!Revenue uu!Service. uu!Such uu!presentations uu!include uu!the
uu!preparation uu!and uu!filing uu!of uu!necessary uu!documents, uu!correspondence uu!with,
uu!and uu!communications uu!to uu!the uu!Internal uu!Revenue uu!Service, uu!and uu!the
uu!representation uu!of uu!a uu!client uu!at uu!conferences, uu!hearings, uu!and uu!meetings.
Page uu!7
1-15. To uu!become uu!an uu!Enrolled uu!Agent uu!an uu!individual uu!can uu!(1) uu!pass uu!a uu!test uu!given uu!by
uu!the uu!IRS uu!or uu!(2) uu!work uu!for uu!the uu!IRS uu!for uu!five uu!years. uu!Circular uu!230, uu!Subpart
uu!A, uu!Secs. uu!10.4 uu!to uu!10.6.
Page uu!9
1-16. Enrolled uu!Agents uu!must uu!complete uu!72 uu!hours uu!of uu!Continuing uu!Education uu!every
uu!three uu!years uu!(an uu!average uu!of uu!24 uu!per uu!year, uu!with uu!a uu!minimum uu!of uu!16 uu!hours
uu!during uu!any uu!year.). uu!Circular uu!230, uu!Subpart uu!A. uu!§10.6.
Page uu!9
1-17. True. uu!As uu!a uu!general uu!rule, uu!an uu!individual uu!must uu!be uu!an uu!enrolled uu!agent, uu!attorney,
uu!or uu!CPA uu!to uu!represent uu!a uu!client uu!before uu!the uu!IRS. uu!There uu!are uu!limited uu!situations
uu!where uu!others uu!may uu!represent uu!a uu!taxpayer; uu!however, uu!this uu!fact uu!pattern uu!is uu!not
uu!one uu!of uu!them. uu!Since uu!Leigh uu!did uu!not uu!sign uu!the uu!return, uu!she uu!cannot uu!represent
CHAPTER 1 uu!
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
uu! uu! uu! uu! uu! uu!
DISCUSSION uu!QUESTIONS
1-1. In uu!the uu!United uu!States, uu!the uu!tax uu!system uu!is uu!an uu!outgrowth uu!of uu!the uu!following uu!five
uu!disciplines: uu!law, uu!accounting, uu!economics, uu!political uu!science, uu!and uu!sociology. uu!The
uu!environment uu!for uu!the uu!tax uu!system uu!is uu!provided uu!by uu!the uu!principles uu!of uu!economics,
uu!sociology, uu!and uu!political uu!science, uu!while uu!the uu!legal uu!and uu!accounting uu!fields uu!are
uu!responsible uu!for uu!the uu!system's uu!interpretation uu!and uu!application.
Each uu!of uu!these uu!disciplines uu!affects uu!this uu!country's uu!tax uu!system uu!in uu!a uu!unique uu!way.
uu!Economists uu!address uu!such uu!issues uu!as uu!how uu!proposed uu!tax uu!legislation uu!will uu!affect
uu!the uu!rate uu!of uu!inflation uu!or uu!economic uu!growth. uu!Measurement uu!of uu!the uu!social uu!equity
uu!of uu!a uu!tax, uu!and uu!determining uu!whether uu!a uu!tax uu!system uu!discriminates uu!against uu!certain
uu!taxpayers, uu!are uu!issues uu!that uu!are uu!examined uu!by uu!sociologists uu!and uu!political
uu!scientists. uu!Finally, uu!attorneys uu!are uu!responsible uu!for uu!the uu!inter- uu!pretation uu!of uu!the
uu!taxation uu!statutes, uu!and uu!accountants uu!ensure uu!that uu!these uu!same uu!statutes uu!are uu!applied
uu!consistently.
Page uu!4
1-2. The uu!other uu!major uu!categories uu!of uu!tax uu!practice uu!in uu!addition uu!to uu!tax uu!research uu!are:
tax uu!compliance
tax uu!planning
tax
litigation uu!Page uu!5
uu!
1-3. Tax uu!compliance uu!consists uu!of uu!gathering uu!pertinent uu!information, uu!evaluating uu!and
uu!classifying uu!that uu!information, uu!and uu!filing uu!any uu!necessary uu!tax uu!returns.
, Page uu!1-2
uu! Compliance uu!also uu!includes uu!other uu!functions uu!necessary uu!to uu!satisfy uu!governmental
uu! requirements, uu!such uu!as uu!representing uu!a uu!client uu!during uu!an uu!IRS uu!audit.
Page uu!5
1-4. Most uu!of uu!the uu!tax uu!compliance uu!work uu!is uu!performed uu!by uu!commercial uu!tax
uu!preparers, uu!enrolled uu!agents, uu!attorneys, uu!and uu!CPAs. uu!Noncomplex uu!individual,
uu!partnership, uu!and uu!corporate uu!tax uu!returns uu!often uu!are uu!completed uu!by uu!commercial
uu!tax uu!preparers. uu!The uu!preparation uu!of uu!more uu!complex uu!returns uu!usually uu!is
uu!performed uu!by uu!enrolled uu!agents, uu!attorneys, uu!and uu!CPAs. uu!The uu!latter uu!groups uu!also
uu!provide uu!tax uu!planning uu!services uu!and uu!represent uu!their uu!clients uu!before uu!the uu!IRS.
An uu!enrolled uu!agent uu!is uu!one uu!who uu!is uu!admitted uu!to uu!practice uu!before uu!the uu!IRS uu!by
uu!passing uu!a uu!special uu!IRS-administered uu!examination, uu!or uu!who uu!has uu!worked uu!for uu!the
uu!IRS uu!for uu!five uu!years, uu!and uu!is uu!issued uu!a uu!permit uu!to uu!represent uu!clients uu!before uu!the
uu!IRS. uu!CPAs uu!and uu!attorneys uu!are uu!not uu!required uu!to uu!take uu!this uu!examination uu!and uu!are
uu!automatically uu!admitted uu!to uu!practice uu!before uu!the uu!IRS uu!if uu!they uu!are uu!in uu!good
uu!standing uu!with uu!the uu!appropriate uu!professional uu!licensing uu!board.
, Page uu!1-3
Page uu!5 uu!and uu!Circular uu!230
1-5. Tax uu!planning uu!is uu!the uu!process uu!of uu!arranging uu!one's uu!financial uu!affairs uu!to uu!minimize
uu!any uu!tax uu!liability. uu!Much uu!of uu!modern uu!tax uu!practice uu!centers uu!around uu!this uu!process,
uu!and uu!the uu!resulting uu!outcome uu!is uu!tax uu!avoidance. uu!There uu!is uu!nothing uu!illegal uu!or
uu!immoral uu!in uu!the uu!avoidance uu!of uu!taxa- uu!tion, uu!as uu!long uu!as uu!the uu!taxpayer uu!remains
uu!within uu!legal uu!bounds. uu!In uu!contrast, uu!tax uu!evasion uu!constitutes uu!the uu!illegal
uu!nonpayment uu!of uu!a uu!tax uu!and uu!cannot uu!be uu!condoned. uu!Activities uu!of uu!this uu!sort uu!clearly
uu!violate uu!existing uu!legal uu!constraints uu!and uu!fall uu!outside uu!of uu!the uu!domain uu!of uu!the
uu!professional uu!tax uu!practitioner.
Page uu!6
1-6. In uu!an uu!open uu!tax uu!planning uu!situation, uu!the uu!transaction uu!is uu!not uu!yet uu!complete,
uu!therefore, uu!the uu!tax uu!practitioner uu!maintains uu!some uu!degree uu!of uu!control uu!over uu!the
uu!potential uu!tax uu!liability, uu!and uu!the uu!transaction uu!may uu!be uu!modified uu!to uu!achieve uu!a
uu!more uu!favorable uu!tax uu!treatment. uu!In uu!a uu!closed uu!transaction uu!however, uu!all uu!of uu!the
uu!pertinent uu!actions uu!have uu!been uu!completed, uu!and uu!tax uu!planning uu!activities uu!may uu!be
uu!limited uu!to uu!the uu!presentation uu!of uu!the uu!situation uu!to uu!the uu!government uu!in uu!the uu!most
uu!legally uu!advantageous uu!manner uu!possible.
Page uu!6
1-7. Tax uu!litigation uu!is uu!the uu!process uu!of uu!settling uu!a uu!dispute uu!with uu!the uu!IRS uu!in uu!a uu!court
uu!of uu!law. uu!Typically, uu!a uu!tax uu!attorney uu!handles uu!tax uu!litigation uu!that uu!progresses
uu!beyond uu!the uu!final uu!IRS uu!appeal.
Page uu!6
1-8. CPAs uu!serve uu!is uu!a uu!support uu!capacity uu!in uu!tax uu!litigation.
Page uu!6
1-9. Tax uu!research uu!consists uu!of uu!the uu!resolution uu!of uu!unanswered uu!taxation
uu!questions. uu!The uu!tax uu!research uu!process uu!includes uu!the uu!following:
1. Identification uu!of uu!pertinent uu!issues;
2. Specification uu!of uu!proper uu!authorities;
3. Evaluation uu!of uu!the uu!propriety uu!of uu!authorities; uu!and,
4. Application uu!of uu!authorities uu!to uu!a uu!specific uu!situation.
Page uu!6
1-10. Circular uu!230 uu!is uu!issued uu!by uu!the uu!Treasury uu!Department uu!and uu!applies uu!to uu!all uu!who
uu!practice uu!before uu!the uu!IRS.
Page uu!7
, Page uu!1-4
1-11. In uu!addition uu!to uu!Circular uu!230, uu!CPAs uu!must uu!follow uu!the uu!AICPA's uu!Code uu!of
uu!Professional uu!Conduct uu!and uu!Statements uu!on uu!Standards uu!for uu!Tax uu!Services.
uu!CPAs uu!must uu!also uu!abide uu!by uu!the uu!rules uu!of uu!the uu!appropriate uu!state uu!board(s) uu!of
uu!accountancy.
Page uu!7
1-12. A uu!return uu!preparer uu!must uu!obtain uu!18 uu!hours uu!of uu!continuing uu!education uu!from uu!an
uu!IRS-approved uu!CE uu!Provider. uu!The uu!hours uu!must uu!include uu!a uu!6 uu!credit uu!hour
uu!Annual uu!Federal uu!Tax uu!Refresher uu!course uu!(AFTR) uu!that uu!covers uu!filing uu!season
uu!issues uu!and uu!tax uu!law uu!updates. uu!The uu!AFTR uu!course uu!must uu!include uu!a
uu!knowledge-based uu!comprehension uu!test uu!administered uu!at uu!the uu!conclusion uu!of uu!the
uu!course uu!by uu!the uu!CE uu!Provider.
Limited uu!practice uu!rights uu!allow uu!individuals uu!to uu!represent uu!clients uu!whose uu!returns
uu!they uu!prepared uu!and uu!signed, uu!but uu!only uu!before uu!revenue uu!agents, uu!customer uu!service
uu!representatives, uu!and uu!similar uu!IRS uu!employees.
Page uu!10 uu!and uu!IRS.gov
1-13. False. uu!Only uu!communication uu!with uu!the uu!IRS uu!concerning uu!a uu!taxpayer's uu!rights,
uu!privileges, uu!or uu!liability uu!is uu!included. uu!Practice uu!before uu!the uu!IRS uu!does uu!not
uu!include uu!representation uu!before uu!the uu!Tax uu!Court.
Page uu!7
1-14. Section uu!10.2 uu!of uu!Subpart uu!A uu!of uu!Circular uu!230 uu!defines uu!practice uu!before uu!the uu!IRS uu!as
uu!including:
matters uu!connected uu!with uu!presentation uu!to uu!the uu!Internal uu!Revenue uu!Service uu!or
uu!any uu!of uu!its uu!officers uu!or uu!employees uu!relating uu!to uu!a uu!client's uu!rights,
uu!privileges, uu!or uu!liabilities uu!under uu!laws uu!or uu!regulations uu!administered uu!by
uu!the uu!Internal uu!Revenue uu!Service. uu!Such uu!presentations uu!include uu!the
uu!preparation uu!and uu!filing uu!of uu!necessary uu!documents, uu!correspondence uu!with,
uu!and uu!communications uu!to uu!the uu!Internal uu!Revenue uu!Service, uu!and uu!the
uu!representation uu!of uu!a uu!client uu!at uu!conferences, uu!hearings, uu!and uu!meetings.
Page uu!7
1-15. To uu!become uu!an uu!Enrolled uu!Agent uu!an uu!individual uu!can uu!(1) uu!pass uu!a uu!test uu!given uu!by
uu!the uu!IRS uu!or uu!(2) uu!work uu!for uu!the uu!IRS uu!for uu!five uu!years. uu!Circular uu!230, uu!Subpart
uu!A, uu!Secs. uu!10.4 uu!to uu!10.6.
Page uu!9
1-16. Enrolled uu!Agents uu!must uu!complete uu!72 uu!hours uu!of uu!Continuing uu!Education uu!every
uu!three uu!years uu!(an uu!average uu!of uu!24 uu!per uu!year, uu!with uu!a uu!minimum uu!of uu!16 uu!hours
uu!during uu!any uu!year.). uu!Circular uu!230, uu!Subpart uu!A. uu!§10.6.
Page uu!9
1-17. True. uu!As uu!a uu!general uu!rule, uu!an uu!individual uu!must uu!be uu!an uu!enrolled uu!agent, uu!attorney,
uu!or uu!CPA uu!to uu!represent uu!a uu!client uu!before uu!the uu!IRS. uu!There uu!are uu!limited uu!situations
uu!where uu!others uu!may uu!represent uu!a uu!taxpayer; uu!however, uu!this uu!fact uu!pattern uu!is uu!not
uu!one uu!of uu!them. uu!Since uu!Leigh uu!did uu!not uu!sign uu!the uu!return, uu!she uu!cannot uu!represent
