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