Federal Tax Research, 12th Edition Page 1-1
Solution Manual Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill
CHAPTER 1
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 interpretation 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 as follows:
• 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 Internal
Revenue Service (IRS) audit.
,Page 1-2 SOLUTIONS MANUAL
Page 5
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents
(EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership,
and corporate tax returns often are completed by commercial tax preparers. The preparation of
more complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups also
provide tax planning services and represent their clients before the IRS.
An EA 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 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.
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 taxation 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 transaction may be modi-
fied 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.
,Federal Tax Research, 12th Edition Page 1-3
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
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.
, Page 1-4 SOLUTIONS MANUAL
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 EA an individual can (1) pass a test given by the IRS or (2) work for the IRS for
five years. Circular 230, Subpart A, §§ 10.4 to 10.6.
Page 9
1-16. EAs 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 EA, 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.
Solution Manual Federal Tax Research 12th Edition by Roby Sawyers, Steven Gill
CHAPTER 1
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 interpretation 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 as follows:
• 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 Internal
Revenue Service (IRS) audit.
,Page 1-2 SOLUTIONS MANUAL
Page 5
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled agents
(EAs), attorneys, and certified public accountants (CPAs). Noncomplex individual, partnership,
and corporate tax returns often are completed by commercial tax preparers. The preparation of
more complex returns usually is performed by EAs, attorneys, and CPAs. The latter groups also
provide tax planning services and represent their clients before the IRS.
An EA 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 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.
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 taxation 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 transaction may be modi-
fied 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.
,Federal Tax Research, 12th Edition Page 1-3
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
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.
, Page 1-4 SOLUTIONS MANUAL
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 EA an individual can (1) pass a test given by the IRS or (2) work for the IRS for
five years. Circular 230, Subpart A, §§ 10.4 to 10.6.
Page 9
1-16. EAs 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 EA, 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.
