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 o 𝑓 in 𝑓lation 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 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 o 𝑓 more
complex returns usually is per𝑓ormed by enrolled agents, attorneys, and CPAs. The
latter groups also provide tax planning services and represent their clients be 𝑓ore the
IRS.
An enrolled agent is one who is admitted to practice be 𝑓ore 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.
,Federal Tax Research, 11th Edition Page 1-2
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 o 𝑓 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, there 𝑓ore, the tax
practitioner maintains some degree o𝑓 control over the potential tax liability, and the
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.
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
1-8. CPAs serve is a support capacity in tax litigation.
Page 6
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,
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.
Page 7
,Federal Tax Research, 11th Edition Page 1-3
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
liability is included. Practice be𝑓ore the IRS does not include representation be𝑓ore
the Tax Court.
Page 7
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,
correspondence with, and communications to the Internal Revenue Service, and
the representation o𝑓 a client at con𝑓erences, hearings, and meetings.
Page 7
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
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
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 o 𝑓 them. Since Leigh did not
sign the return, she cannot represent the taxpayer, only Rose can.
, Federal Tax Research, 11th Edition Page 1-4
Pages 10-11
1-18. The names o𝑓 organizations that can be represented by regular 𝑓ull-time employees are
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
partnership. Also, a regular 𝑓ull-time employee o𝑓 a trust, receivership, guardianship, or
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 governmental unit, agency, or authority in the course o 𝑓 his or her o 𝑓𝑓icial duties.
Page 10
1-19. Yes. Circular 230, Subpart A, Sec. 10.7.
Page 10
1-20. True. A practitioner may be suspended or disbarred 𝑓rom practice be𝑓ore the IRS i𝑓 he
or she knowingly helps a suspended or disbarred person practice indirectly be 𝑓ore the
IRS.
Page 12
1-21. A practitioner may not advise a client to take a position on a document, a𝑓𝑓idavit, or
other paper submitted to the Internal Revenue Service unless the position is not
𝑓rivolous.
Circular 230 §10.34(b)
Page 14
1-22. Under Circular 230, an attorney, certi𝑓ied public accountant (CPA), or enrolled agent
may use mass media (e.g., T.V. and the Internet) 𝑓or advertising purposes. Such media
may not contain 𝑓alse, 𝑓raudulent, unduly in𝑓luencing, coercive, or un𝑓air statements or
claims. Attorneys, CPAs, and enrolled agents must also observe any applicable
standards o𝑓 ethical conduct adopted by the American Bar Association (ABA), the
American Institute o𝑓 Certi𝑓ied Public Accountants (AICPA), and the National
Association o𝑓 Enrolled Agents (NAEA). Additional standards and listing o𝑓 items that
may be included in mass media advertising are de𝑓ined under Section 10.30 o𝑓 Subpart
B in Circular 230.
Page 19
1-23. Under Section 10.25 o𝑓 Circular 230, partners o𝑓 government employees cannot
represent anyone 𝑓or which the government employee-partner has (or has had) o 𝑓𝑓icial
responsibility. For instance, a CPA 𝑓irm with an IRS agent could not represent any
taxpayer that is (or was in the past) assigned to the IRS agent-partner.
Page 12
1-24. Under Section 10.21 o𝑓 Circular 230, each attorney, CPA, enrolled agent, or enrolled
actuary who knows that the client has not complied with the revenue laws o𝑓 the United
States or has made an error in or omission 𝑓rom any return, document, a𝑓𝑓idavit, or
other
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 o 𝑓 in 𝑓lation 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 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 o 𝑓 more
complex returns usually is per𝑓ormed by enrolled agents, attorneys, and CPAs. The
latter groups also provide tax planning services and represent their clients be 𝑓ore the
IRS.
An enrolled agent is one who is admitted to practice be 𝑓ore 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.
,Federal Tax Research, 11th Edition Page 1-2
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 o 𝑓 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, there 𝑓ore, the tax
practitioner maintains some degree o𝑓 control over the potential tax liability, and the
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.
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
1-8. CPAs serve is a support capacity in tax litigation.
Page 6
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,
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.
Page 7
,Federal Tax Research, 11th Edition Page 1-3
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
liability is included. Practice be𝑓ore the IRS does not include representation be𝑓ore
the Tax Court.
Page 7
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,
correspondence with, and communications to the Internal Revenue Service, and
the representation o𝑓 a client at con𝑓erences, hearings, and meetings.
Page 7
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
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
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 o 𝑓 them. Since Leigh did not
sign the return, she cannot represent the taxpayer, only Rose can.
, Federal Tax Research, 11th Edition Page 1-4
Pages 10-11
1-18. The names o𝑓 organizations that can be represented by regular 𝑓ull-time employees are
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
partnership. Also, a regular 𝑓ull-time employee o𝑓 a trust, receivership, guardianship, or
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 governmental unit, agency, or authority in the course o 𝑓 his or her o 𝑓𝑓icial duties.
Page 10
1-19. Yes. Circular 230, Subpart A, Sec. 10.7.
Page 10
1-20. True. A practitioner may be suspended or disbarred 𝑓rom practice be𝑓ore the IRS i𝑓 he
or she knowingly helps a suspended or disbarred person practice indirectly be 𝑓ore the
IRS.
Page 12
1-21. A practitioner may not advise a client to take a position on a document, a𝑓𝑓idavit, or
other paper submitted to the Internal Revenue Service unless the position is not
𝑓rivolous.
Circular 230 §10.34(b)
Page 14
1-22. Under Circular 230, an attorney, certi𝑓ied public accountant (CPA), or enrolled agent
may use mass media (e.g., T.V. and the Internet) 𝑓or advertising purposes. Such media
may not contain 𝑓alse, 𝑓raudulent, unduly in𝑓luencing, coercive, or un𝑓air statements or
claims. Attorneys, CPAs, and enrolled agents must also observe any applicable
standards o𝑓 ethical conduct adopted by the American Bar Association (ABA), the
American Institute o𝑓 Certi𝑓ied Public Accountants (AICPA), and the National
Association o𝑓 Enrolled Agents (NAEA). Additional standards and listing o𝑓 items that
may be included in mass media advertising are de𝑓ined under Section 10.30 o𝑓 Subpart
B in Circular 230.
Page 19
1-23. Under Section 10.25 o𝑓 Circular 230, partners o𝑓 government employees cannot
represent anyone 𝑓or which the government employee-partner has (or has had) o 𝑓𝑓icial
responsibility. For instance, a CPA 𝑓irm with an IRS agent could not represent any
taxpayer that is (or was in the past) assigned to the IRS agent-partner.
Page 12
1-24. Under Section 10.21 o𝑓 Circular 230, each attorney, CPA, enrolled agent, or enrolled
actuary who knows that the client has not complied with the revenue laws o𝑓 the United
States or has made an error in or omission 𝑓rom any return, document, a𝑓𝑓idavit, or
other
