Federal Tax Research, 11th Edition
Complete Solutions Manual | Tax Research,
IRS Authority & Professional Tax Practice
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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-
Tr
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:
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• tax compliance
• tax planning
• tax litigation
Page 5
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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
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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
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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
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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
1-5. Tax planning is the process of arranging one's financial affairs to minimize any tax
liability. Much of modern tax practice centers around this process, and the resulting
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa-
tion, as long as the taxpayer remains within legal bounds. In contrast, tax evasion
constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort
clearly violate existing legal constraints and fall outside of the domain of the professional
tax practitioner.
Page 6
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
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transaction may be modified to achieve a more favorable tax treatment. In a closed
transaction however, all of the pertinent actions have been completed, and tax planning
activities may be limited to the presentation of the situation to the government in the most
legally advantageous manner possible.
us
Page 6
1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically,
a tax attorney handles tax litigation that progresses beyond the final IRS appeal.
Page 6
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1-8. CPAs serve is a support capacity in tax litigation.
Page 6
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1-9. Tax research consists of the resolution of unanswered taxation questions. The tax
research process includes the following:
1. Identification of pertinent issues;
2. Specification of proper authorities;
3. Evaluation of the propriety of authorities; and,
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4. Application of authorities to a specific situation.
Page 6
1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before
the IRS.
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Page 7
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TS Trustedscholar
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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
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved
CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher
course (AFTR) that covers filing season issues and tax law updates. The AFTR course
must include a knowledge-based comprehension test administered at the conclusion of
the course by the CE Provider.
Limited practice rights allow individuals to represent clients whose returns they prepared
and signed, but only before revenue agents, customer service representatives, and similar
IRS employees.
Page 10 and IRS.gov
1-13. False. Only communication with the IRS concerning a taxpayer's rights, privileges, or
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liability is included. Practice before the IRS does not include representation before the
Tax Court.
Page 7
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1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:
matters connected with presentation to the Internal Revenue Service or any of its
officers or employees relating to a client's rights, privileges, or liabilities under
laws or regulations administered by the Internal Revenue Service. Such
presentations include the preparation and filing of necessary documents,
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correspondence with, and communications to the Internal Revenue Service, and
the representation of a client at conferences, hearings, and meetings.
Page 7
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1-15. To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2)
work for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.
Page 9
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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,
Subpart A. §10.6.
Page 9
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1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
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.
ar
TS Trustedscholar
Complete Solutions Manual | Tax Research,
IRS Authority & Professional Tax Practice
Tr
us
te
ds
ch
ol
ar
TS Trustedscholar
, ytrew
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-
Tr
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:
us
• tax compliance
• tax planning
• tax litigation
Page 5
te
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
ds
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
ch
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
ol
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.
ar
TS Trustedscholar
, ytrew
Page 5 and Circular 230
1-5. Tax planning is the process of arranging one's financial affairs to minimize any tax
liability. Much of modern tax practice centers around this process, and the resulting
outcome is tax avoidance. There is nothing illegal or immoral in the avoidance of taxa-
tion, as long as the taxpayer remains within legal bounds. In contrast, tax evasion
constitutes the illegal nonpayment of a tax and cannot be condoned. Activities of this sort
clearly violate existing legal constraints and fall outside of the domain of the professional
tax practitioner.
Page 6
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
Tr
transaction may be modified to achieve a more favorable tax treatment. In a closed
transaction however, all of the pertinent actions have been completed, and tax planning
activities may be limited to the presentation of the situation to the government in the most
legally advantageous manner possible.
us
Page 6
1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically,
a tax attorney handles tax litigation that progresses beyond the final IRS appeal.
Page 6
te
1-8. CPAs serve is a support capacity in tax litigation.
Page 6
ds
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax
research process includes the following:
1. Identification of pertinent issues;
2. Specification of proper authorities;
3. Evaluation of the propriety of authorities; and,
ch
4. Application of authorities to a specific situation.
Page 6
1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before
the IRS.
ol
Page 7
ar
TS Trustedscholar
, ytrew
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
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved
CE Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher
course (AFTR) that covers filing season issues and tax law updates. The AFTR course
must include a knowledge-based comprehension test administered at the conclusion of
the course by the CE Provider.
Limited practice rights allow individuals to represent clients whose returns they prepared
and signed, but only before revenue agents, customer service representatives, and similar
IRS employees.
Page 10 and IRS.gov
1-13. False. Only communication with the IRS concerning a taxpayer's rights, privileges, or
Tr
liability is included. Practice before the IRS does not include representation before the
Tax Court.
Page 7
us
1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:
matters connected with presentation to the Internal Revenue Service or any of its
officers or employees relating to a client's rights, privileges, or liabilities under
laws or regulations administered by the Internal Revenue Service. Such
presentations include the preparation and filing of necessary documents,
te
correspondence with, and communications to the Internal Revenue Service, and
the representation of a client at conferences, hearings, and meetings.
Page 7
ds
1-15. To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2)
work for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.
Page 9
ch
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,
Subpart A. §10.6.
Page 9
ol
1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
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.
ar
TS Trustedscholar
