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
the legal and accounting fields are responsible for the system's interpretation and
application.
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
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.
Page 4
1-2. 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 bpertinent binformation, bevaluating band
bclassifying bthat binformation, band bfiling bany bnecessary btax breturns. bCompliance
balso bincludes bother bfunctions bnecessary bto bsatisfy bgovernmental brequirements,
bsuch bas brepresenting ba bclient bduring ban bIRS baudit.
Page b5
1-4. Most bof bthe btax bcompliance bwork bis bperformed bby bcommercial btax bpreparers,
benrolled bagents, battorneys, band bCPAs. bNoncomplex bindividual, bpartnership, band
bcorporate btax breturns boften bare bcompleted bby bcommercial btax bpreparers. bThe
bpreparation bof bmore bcomplex breturns busually bis bperformed bby benrolled bagents,
battorneys, band bCPAs. bThe blatter bgroups balso bprovide btax bplanning bservices band
brepresent btheir bclients bbefore bthe bIRS.
An benrolled bagent bis bone bwho bis badmitted bto bpractice bbefore bthe bIRS bby bpassing
ba bspecial bIRS-administered bexamination, bor bwho bhas bworked bfor bthe bIRS bfor bfive
byears, band bis bissued ba bpermit bto brepresent bclients bbefore bthe bIRS. bCPAs band
battorneys bare bnot brequired bto btake bthis bexamination band bare bautomatically badmitted
bto bpractice bbefore bthe bIRS bif bthey bare bin bgood bstanding bwith bthe bappropriate
bprofessional blicensing bboard.
,Federal Tax Research, 11th Edition Page 1-2
Page b5 band bCircular b230
1-5. Tax bplanning bis bthe bprocess bof barranging bone's bfinancial baffairs bto bminimize bany
btax bliability. bMuch bof bmodern btax bpractice bcenters baround bthis bprocess, band bthe
bresulting boutcome bis btax bavoidance. bThere bis bnothing billegal bor bimmoral bin bthe
bavoidance bof btaxa- btion, bas blong bas bthe btaxpayer bremains bwithin blegal bbounds.
bIn bcontrast, btax bevasion bconstitutes bthe billegal bnonpayment bof ba btax band bcannot
bbe bcondoned. bActivities bof bthis bsort bclearly bviolate bexisting blegal bconstraints band
bfall boutside bof bthe bdomain bof bthe bprofessional btax bpractitioner.
Page b6
1-6. In ban bopen btax bplanning bsituation, bthe btransaction bis bnot byet bcomplete, btherefore,
bthe btax bpractitioner bmaintains bsome bdegree bof bcontrol bover bthe bpotential btax
bliability, band bthe btransaction bmay bbe bmodified bto bachieve ba bmore bfavorable btax
btreatment. bIn ba bclosed btransaction bhowever, ball bof bthe bpertinent bactions bhave
bbeen bcompleted, band btax bplanning bactivities bmay bbe blimited bto bthe bpresentation
bof bthe bsituation bto bthe bgovernment bin bthe bmost blegally badvantageous bmanner
bpossible.
Page b6
1-7. Tax blitigation bis bthe bprocess bof bsettling ba bdispute bwith bthe bIRS bin ba bcourt bof
blaw. bTypically, ba btax battorney bhandles btax blitigation bthat bprogresses bbeyond bthe
bfinal bIRS bappeal.
Page b6
1-8. CPAs bserve bis ba bsupport bcapacity bin btax blitigation.
Page b6
1-9. Tax bresearch bconsists bof bthe bresolution bof bunanswered btaxation bquestions.
bThe btax bresearch bprocess bincludes bthe bfollowing:
1. Identification bof bpertinent bissues;
2. Specification bof bproper bauthorities;
3. Evaluation bof bthe bpropriety bof bauthorities; band,
4. Application bof bauthorities bto ba bspecific bsituation.
Page b6
1-10. Circular b230 bis bissued bby bthe bTreasury bDepartment band bapplies bto ball bwho
bpractice bbefore bthe bIRS.
Page b7
,Federal Tax Research, 11th Edition Page 1-3
1-11. In baddition bto bCircular b230, bCPAs bmust bfollow bthe bAICPA's bCode bof
bProfessional bConduct band bStatements bon bStandards bfor bTax bServices. bCPAs
bmust balso babide bby bthe brules bof bthe bappropriate bstate bboard(s) bof
baccountancy.
Page b7
1-12. A breturn bpreparer bmust bobtain b18 bhours bof bcontinuing beducation bfrom ban bIRS-
approved bCE bProvider. bThe bhours bmust binclude ba b6 bcredit bhour bAnnual
bFederal bTax bRefresher bcourse b(AFTR) bthat bcovers bfiling bseason bissues band btax
blaw bupdates. bThe bAFTR bcourse bmust binclude ba bknowledge-based
bcomprehension btest badministered bat bthe bconclusion bof bthe bcourse bby bthe bCE
bProvider.
Limited bpractice brights ballow bindividuals bto brepresent bclients bwhose breturns bthey
bprepared band bsigned, bbut bonly bbefore brevenue bagents, bcustomer bservice
brepresentatives, band bsimilar bIRS bemployees.
Page b10 band bIRS.gov
1-13. False. bOnly bcommunication bwith bthe bIRS bconcerning ba btaxpayer's brights,
bprivileges, bor bliability bis bincluded. bPractice bbefore bthe bIRS bdoes bnot binclude
brepresentation bbefore bthe bTax bCourt.
Page b7
1-14. Section b10.2 bof bSubpart bA bof bCircular b230 bdefines bpractice bbefore bthe bIRS bas bincluding:
matters bconnected bwith bpresentation bto bthe bInternal bRevenue bService bor
bany bof bits bofficers bor bemployees brelating bto ba bclient's brights, bprivileges,
bor bliabilities bunder blaws bor bregulations badministered bby bthe bInternal
bRevenue bService. bSuch bpresentations binclude bthe bpreparation band bfiling bof
bnecessary bdocuments, bcorrespondence bwith, band bcommunications bto bthe
bInternal bRevenue bService, band bthe brepresentation bof ba bclient bat
bconferences, bhearings, band bmeetings.
Page b7
1-15. To bbecome ban bEnrolled bAgent ban bindividual bcan b(1) bpass ba btest bgiven bby bthe
bIRS bor b(2) bwork bfor bthe bIRS bfor bfive byears. bCircular b230, bSubpart bA, bSecs.
b10.4 bto b10.6.
Page b9
1-16. Enrolled bAgents bmust bcomplete b72 bhours bof bContinuing bEducation bevery bthree
byears b(an baverage bof b24 bper byear, bwith ba bminimum bof b16 bhours bduring bany
byear.). bCircular b230, bSubpart bA. b§10.6.
Page b9
1-17. True. bAs ba bgeneral brule, ban bindividual bmust bbe ban benrolled bagent, battorney, bor
bCPA bto brepresent ba bclient bbefore bthe bIRS. bThere bare blimited bsituations bwhere
bothers bmay brepresent ba btaxpayer; bhowever, bthis bfact bpattern bis bnot bone bof bthem.
bSince bLeigh bdid bnot bsign bthe breturn, bshe bcannot brepresent bthe btaxpayer, bonly
bRose bcan.
, Federal Tax Research, 11th Edition Page 1-4
Pages b10-11
1-18. The bnames bof borganizations bthat bcan bbe brepresented bby bregular bfull-time
bemployees bare bfound bin bCircular b230, b§10.7(c). bA bregular bfull-time bemployee bcan
brepresent bthe bemployer b(individual bemployer). bA bregular bfull-time bemployee bof ba
bpartnership bmay brepresent bthe bpartnership. bAlso, ba bregular bfull-time bemployee bof
ba btrust, breceivership, bguardianship, bor bestate bmay brepresent bthe btrust, breceivership,
bguardianship, bor bestate. bFurthermore, ba b regular bfull-time bemployee bof ba
bgovernmental bunit, bagency, bor bauthority bmay brepresent bthe bgovernmental bunit,
bagency, bor bauthority bin bthe bcourse bof bhis bor bher bofficial bduties.
Page b10
1-19. Yes. bCircular b230, bSubpart bA, bSec. b10.7.
Page b10
1-20. True. bA bpractitioner bmay bbe bsuspended bor bdisbarred bfrom bpractice bbefore bthe
bIRS bif bhe bor bshe bknowingly bhelps ba bsuspended bor bdisbarred bperson bpractice
bindirectly bbefore bthe bIRS.
Page b12
1-21. A bpractitioner bmay bnot badvise ba bclient bto btake ba bposition bon ba bdocument,
baffidavit, bor bother bpaper bsubmitted bto bthe bInternal bRevenue bService bunless bthe
bposition bis bnot bfrivolous.
Circular b230 b§10.34(b)
Page b14
1-22. Under bCircular b230, ban battorney, bcertified bpublic baccountant b(CPA), bor benrolled
bagent bmay buse bmass bmedia b(e.g., bT.V. band bthe bInternet) bfor badvertising
bpurposes. bSuch bmedia bmay bnot bcontain bfalse, bfraudulent, bunduly binfluencing,
bcoercive, bor bunfair bstatements bor bclaims. bAttorneys, bCPAs, band benrolled bagents
bmust balso bobserve bany bapplicable bstandards bof bethical bconduct badopted bby bthe
bAmerican bBar bAssociation b(ABA), bthe bAmerican bInstitute bof bCertified bPublic
bAccountants b(AICPA), band bthe bNational bAssociation bof bEnrolled bAgents
b(NAEA). bAdditional bstandards band blisting bof bitems bthat bmay bbe bincluded bin
bmass bmedia badvertising bare bdefined bunder bSection b10.30 bof bSubpart bB bin
bCircular b230.
Page b19
1-23. Under bSection b10.25 bof bCircular b230, bpartners bof bgovernment bemployees bcannot
brepresent banyone bfor bwhich bthe bgovernment bemployee-partner bhas b(or bhas bhad)
bofficial bresponsibility. bFor binstance, ba bCPA bfirm bwith ban bIRS bagent bcould bnot
brepresent bany btaxpayer bthat bis b(or bwas bin bthe bpast) bassigned bto bthe bIRS bagent-
partner.
Page b12
1-24. Under bSection b10.21 bof bCircular b230, beach battorney, bCPA, benrolled bagent, bor
benrolled bactuary bwho bknows bthat bthe bclient bhas bnot bcomplied bwith bthe brevenue
blaws bof bthe bUnited bStates bor bhas bmade ban berror bin bor bomission bfrom bany
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
the legal and accounting fields are responsible for the system's interpretation and
application.
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
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.
Page 4
1-2. 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 bpertinent binformation, bevaluating band
bclassifying bthat binformation, band bfiling bany bnecessary btax breturns. bCompliance
balso bincludes bother bfunctions bnecessary bto bsatisfy bgovernmental brequirements,
bsuch bas brepresenting ba bclient bduring ban bIRS baudit.
Page b5
1-4. Most bof bthe btax bcompliance bwork bis bperformed bby bcommercial btax bpreparers,
benrolled bagents, battorneys, band bCPAs. bNoncomplex bindividual, bpartnership, band
bcorporate btax breturns boften bare bcompleted bby bcommercial btax bpreparers. bThe
bpreparation bof bmore bcomplex breturns busually bis bperformed bby benrolled bagents,
battorneys, band bCPAs. bThe blatter bgroups balso bprovide btax bplanning bservices band
brepresent btheir bclients bbefore bthe bIRS.
An benrolled bagent bis bone bwho bis badmitted bto bpractice bbefore bthe bIRS bby bpassing
ba bspecial bIRS-administered bexamination, bor bwho bhas bworked bfor bthe bIRS bfor bfive
byears, band bis bissued ba bpermit bto brepresent bclients bbefore bthe bIRS. bCPAs band
battorneys bare bnot brequired bto btake bthis bexamination band bare bautomatically badmitted
bto bpractice bbefore bthe bIRS bif bthey bare bin bgood bstanding bwith bthe bappropriate
bprofessional blicensing bboard.
,Federal Tax Research, 11th Edition Page 1-2
Page b5 band bCircular b230
1-5. Tax bplanning bis bthe bprocess bof barranging bone's bfinancial baffairs bto bminimize bany
btax bliability. bMuch bof bmodern btax bpractice bcenters baround bthis bprocess, band bthe
bresulting boutcome bis btax bavoidance. bThere bis bnothing billegal bor bimmoral bin bthe
bavoidance bof btaxa- btion, bas blong bas bthe btaxpayer bremains bwithin blegal bbounds.
bIn bcontrast, btax bevasion bconstitutes bthe billegal bnonpayment bof ba btax band bcannot
bbe bcondoned. bActivities bof bthis bsort bclearly bviolate bexisting blegal bconstraints band
bfall boutside bof bthe bdomain bof bthe bprofessional btax bpractitioner.
Page b6
1-6. In ban bopen btax bplanning bsituation, bthe btransaction bis bnot byet bcomplete, btherefore,
bthe btax bpractitioner bmaintains bsome bdegree bof bcontrol bover bthe bpotential btax
bliability, band bthe btransaction bmay bbe bmodified bto bachieve ba bmore bfavorable btax
btreatment. bIn ba bclosed btransaction bhowever, ball bof bthe bpertinent bactions bhave
bbeen bcompleted, band btax bplanning bactivities bmay bbe blimited bto bthe bpresentation
bof bthe bsituation bto bthe bgovernment bin bthe bmost blegally badvantageous bmanner
bpossible.
Page b6
1-7. Tax blitigation bis bthe bprocess bof bsettling ba bdispute bwith bthe bIRS bin ba bcourt bof
blaw. bTypically, ba btax battorney bhandles btax blitigation bthat bprogresses bbeyond bthe
bfinal bIRS bappeal.
Page b6
1-8. CPAs bserve bis ba bsupport bcapacity bin btax blitigation.
Page b6
1-9. Tax bresearch bconsists bof bthe bresolution bof bunanswered btaxation bquestions.
bThe btax bresearch bprocess bincludes bthe bfollowing:
1. Identification bof bpertinent bissues;
2. Specification bof bproper bauthorities;
3. Evaluation bof bthe bpropriety bof bauthorities; band,
4. Application bof bauthorities bto ba bspecific bsituation.
Page b6
1-10. Circular b230 bis bissued bby bthe bTreasury bDepartment band bapplies bto ball bwho
bpractice bbefore bthe bIRS.
Page b7
,Federal Tax Research, 11th Edition Page 1-3
1-11. In baddition bto bCircular b230, bCPAs bmust bfollow bthe bAICPA's bCode bof
bProfessional bConduct band bStatements bon bStandards bfor bTax bServices. bCPAs
bmust balso babide bby bthe brules bof bthe bappropriate bstate bboard(s) bof
baccountancy.
Page b7
1-12. A breturn bpreparer bmust bobtain b18 bhours bof bcontinuing beducation bfrom ban bIRS-
approved bCE bProvider. bThe bhours bmust binclude ba b6 bcredit bhour bAnnual
bFederal bTax bRefresher bcourse b(AFTR) bthat bcovers bfiling bseason bissues band btax
blaw bupdates. bThe bAFTR bcourse bmust binclude ba bknowledge-based
bcomprehension btest badministered bat bthe bconclusion bof bthe bcourse bby bthe bCE
bProvider.
Limited bpractice brights ballow bindividuals bto brepresent bclients bwhose breturns bthey
bprepared band bsigned, bbut bonly bbefore brevenue bagents, bcustomer bservice
brepresentatives, band bsimilar bIRS bemployees.
Page b10 band bIRS.gov
1-13. False. bOnly bcommunication bwith bthe bIRS bconcerning ba btaxpayer's brights,
bprivileges, bor bliability bis bincluded. bPractice bbefore bthe bIRS bdoes bnot binclude
brepresentation bbefore bthe bTax bCourt.
Page b7
1-14. Section b10.2 bof bSubpart bA bof bCircular b230 bdefines bpractice bbefore bthe bIRS bas bincluding:
matters bconnected bwith bpresentation bto bthe bInternal bRevenue bService bor
bany bof bits bofficers bor bemployees brelating bto ba bclient's brights, bprivileges,
bor bliabilities bunder blaws bor bregulations badministered bby bthe bInternal
bRevenue bService. bSuch bpresentations binclude bthe bpreparation band bfiling bof
bnecessary bdocuments, bcorrespondence bwith, band bcommunications bto bthe
bInternal bRevenue bService, band bthe brepresentation bof ba bclient bat
bconferences, bhearings, band bmeetings.
Page b7
1-15. To bbecome ban bEnrolled bAgent ban bindividual bcan b(1) bpass ba btest bgiven bby bthe
bIRS bor b(2) bwork bfor bthe bIRS bfor bfive byears. bCircular b230, bSubpart bA, bSecs.
b10.4 bto b10.6.
Page b9
1-16. Enrolled bAgents bmust bcomplete b72 bhours bof bContinuing bEducation bevery bthree
byears b(an baverage bof b24 bper byear, bwith ba bminimum bof b16 bhours bduring bany
byear.). bCircular b230, bSubpart bA. b§10.6.
Page b9
1-17. True. bAs ba bgeneral brule, ban bindividual bmust bbe ban benrolled bagent, battorney, bor
bCPA bto brepresent ba bclient bbefore bthe bIRS. bThere bare blimited bsituations bwhere
bothers bmay brepresent ba btaxpayer; bhowever, bthis bfact bpattern bis bnot bone bof bthem.
bSince bLeigh bdid bnot bsign bthe breturn, bshe bcannot brepresent bthe btaxpayer, bonly
bRose bcan.
, Federal Tax Research, 11th Edition Page 1-4
Pages b10-11
1-18. The bnames bof borganizations bthat bcan bbe brepresented bby bregular bfull-time
bemployees bare bfound bin bCircular b230, b§10.7(c). bA bregular bfull-time bemployee bcan
brepresent bthe bemployer b(individual bemployer). bA bregular bfull-time bemployee bof ba
bpartnership bmay brepresent bthe bpartnership. bAlso, ba bregular bfull-time bemployee bof
ba btrust, breceivership, bguardianship, bor bestate bmay brepresent bthe btrust, breceivership,
bguardianship, bor bestate. bFurthermore, ba b regular bfull-time bemployee bof ba
bgovernmental bunit, bagency, bor bauthority bmay brepresent bthe bgovernmental bunit,
bagency, bor bauthority bin bthe bcourse bof bhis bor bher bofficial bduties.
Page b10
1-19. Yes. bCircular b230, bSubpart bA, bSec. b10.7.
Page b10
1-20. True. bA bpractitioner bmay bbe bsuspended bor bdisbarred bfrom bpractice bbefore bthe
bIRS bif bhe bor bshe bknowingly bhelps ba bsuspended bor bdisbarred bperson bpractice
bindirectly bbefore bthe bIRS.
Page b12
1-21. A bpractitioner bmay bnot badvise ba bclient bto btake ba bposition bon ba bdocument,
baffidavit, bor bother bpaper bsubmitted bto bthe bInternal bRevenue bService bunless bthe
bposition bis bnot bfrivolous.
Circular b230 b§10.34(b)
Page b14
1-22. Under bCircular b230, ban battorney, bcertified bpublic baccountant b(CPA), bor benrolled
bagent bmay buse bmass bmedia b(e.g., bT.V. band bthe bInternet) bfor badvertising
bpurposes. bSuch bmedia bmay bnot bcontain bfalse, bfraudulent, bunduly binfluencing,
bcoercive, bor bunfair bstatements bor bclaims. bAttorneys, bCPAs, band benrolled bagents
bmust balso bobserve bany bapplicable bstandards bof bethical bconduct badopted bby bthe
bAmerican bBar bAssociation b(ABA), bthe bAmerican bInstitute bof bCertified bPublic
bAccountants b(AICPA), band bthe bNational bAssociation bof bEnrolled bAgents
b(NAEA). bAdditional bstandards band blisting bof bitems bthat bmay bbe bincluded bin
bmass bmedia badvertising bare bdefined bunder bSection b10.30 bof bSubpart bB bin
bCircular b230.
Page b19
1-23. Under bSection b10.25 bof bCircular b230, bpartners bof bgovernment bemployees bcannot
brepresent banyone bfor bwhich bthe bgovernment bemployee-partner bhas b(or bhas bhad)
bofficial bresponsibility. bFor binstance, ba bCPA bfirm bwith ban bIRS bagent bcould bnot
brepresent bany btaxpayer bthat bis b(or bwas bin bthe bpast) bassigned bto bthe bIRS bagent-
partner.
Page b12
1-24. Under bSection b10.21 bof bCircular b230, beach battorney, bCPA, benrolled bagent, bor
benrolled bactuary bwho bknows bthat bthe bclient bhas bnot bcomplied bwith bthe brevenue
blaws bof bthe bUnited bStates bor bhas bmade ban berror bin bor bomission bfrom bany
