FederaljTaxjResearch,j12thjEdition Pagej1-1
SolutionjManualjFederaljTaxjResearchj12thjEditionjbyjRobyjSawyers,jStevenjGill
CHAPTERj1
INTRODUCTIONjTOjTAXjPRACTICEjANDjETHICS
DISCUSSIONjQUESTIONS
1-1.
InjthejUnitedjStates,jthejtaxjsystemjisjanjoutgrowthjofjthejfollowingjfivejdisciplines:jla
w,jaccounting,jeconomics,jpoliticaljscience,jandjsociology.jThejenvironmentjforjthejtaxjsystemji
sjprovidedjbyjthejprinciplesjofjeconomics,jsociology,jandjpoliticaljscience,jwhilejthejlegaljandja
ccountingjfieldsjarejresponsiblejforjthejsystem‘sjinterpretationjandjapplication.
Eachjofjthesejdisciplinesjaffectsjthisjcountry‘sjtaxjsystemjinjajuniquejway.jEconomistsjaddressjsu
chjissuesjasjhowjproposedjtaxjlegislationjwilljaffectjthejratejofjinflationjorjeconomicjgrowth.jMea
surementjofjthejsocialjequityjofjajtaxjandjdeterminingjwhetherjajtaxjsystemjdiscriminatesjagainst
jcertainjtaxpayersjarejissuesjthatjarejexaminedjbyjsociologistsjandjpoliticaljscientists.
Finally,jattorneysjarejresponsiblejforjthejinterpretationjofjthejtaxationjstatutes,jandjaccountantsjen
surejthatjthesejsamejstatutesjarejappliedjconsistently.
Pagej4
1-2. Thejotherjmajorjcategoriesjofjtaxjpracticejinjadditionjtojtaxjresearchjarejasjfollows:
• Taxjcompliance
• Taxjplanning
• Taxjlitigation
jPagej5
1-3.
Taxjcompliancejconsistsjofjgatheringjpertinentjinformation,jevaluatingjandjclassifyingjt
hatjinformation,jandjfilingjanyjnecessaryjtaxjreturns.jCompliancejalsojincludesjotherjfunctionsjn
ecessaryjtojsatisfyjgovernmentaljrequirements,jsuchjasjrepresentingjajclientjduringjanjInternaljRe
venuejServicej(IRS)jaudit.
,Pagej1-2 SOLUTIONSjMANUAL
Pagej5
1-4.
Mostjofjthejtaxjcompliancejworkjisjperformedjbyjcommercialjtaxjpreparers,jenrolledjag
entsj(EAs),jattorneys,jandjcertifiedjpublicjaccountantsj(CPAs).jNoncomplexjindividual,jpartners
hip,jandjcorporatejtaxjreturnsjoftenjarejcompletedjbyjcommercialjtaxjpreparers.jThejpreparationj
ofjmorejcomplexjreturnsjusuallyjisjperformedjbyjEAs,jattorneys,jandjCPAs.jThejlatterjgroupsjalso
jprovidejtaxjplanningjservicesjandjrepresentjtheirjclientsjbeforejthejIRS.
AnjEAjisjonejwhojisjadmittedjtojpracticejbeforejthejIRSjbyjpassingjajspecialjIRS-
administeredjexamination,jorjwhojhasjworkedjforjthejIRSjforjfivejyearsjandjisjissuedjajpermitjtojrep
resentjclientsjbeforejthejIRS.jCPAsjandjattorneysjarejnotjrequiredjtojtakejthisjexaminationjandjareja
utomaticallyjadmittedjtojpracticejbeforejthejIRSjifjtheyjarejinjgoodjstandingjwithjthejappropriatejpro
fessionaljlicensingjboard.
Pagej5jandjCircularj230
1-5.
Taxjplanningjisjthejprocessjofjarrangingjone‘sjfinancialjaffairsjtojminimizejanyjtaxjliability.
jMuchjofjmodernjtaxjpracticejcentersjaroundjthisjprocess,jandjthejresultingjoutcomejisjtaxjavoidanc
e.
Therejisjnothingjillegaljorjimmoraljinjthejavoidancejofjtaxationjasjlongjasjthejtaxpayerjremainsjwith
injlegaljbounds.jInjcontrast,jtaxjevasionjconstitutesjthejillegaljnonpaymentjofjajtaxjandjcannotjbejcon
doned.jActivitiesjofjthisjsortjclearlyjviolatejexistingjlegaljconstraintsjandjfalljoutsidejofjthejdomainj
ofjthejprofessionaljtaxjpractitioner.
Pagej6
1-6.
Injanjopenjtaxjplanningjsituation,jthejtransactionjisjnotjyetjcomplete;jtherefore,jthejtaxjpract
itionerjmaintainsjsomejdegreejofjcontroljoverjthejpotentialjtaxjliability,jandjthejtransactionjmayjbej
modi-
jfiedjtojachievejajmorejfavorablejtaxjtreatment.jInjajclosedjtransactionjhowever,jalljofjthejpertinentja
ctionsjhavejbeenjcompleted,jandjtaxjplanningjactivitiesjmayjbejlimitedjtojthejpresentationjofjthejsitu
ationjtojthejgovernmentjinjthejmostjlegallyjadvantageousjmannerjpossible.
,FederaljTaxjResearch,j12thjEdition Pagej1-3
Pagej6
1-7.
TaxjlitigationjisjthejprocessjofjsettlingjajdisputejwithjthejIRSjinjajcourtjofjlaw.jTypicall
y,jajtaxjattorneyjhandlesjtaxjlitigationjthatjprogressesjbeyondjthejfinaljIRSjappeal.
Pagej6
1-8. CPAsjservejisjajsupportjcapacityjinjtaxjlitigation.
Pagej6
1-9.
Taxjresearchjconsistsjofjthejresolutionjofjunansweredjtaxationjquestions.jThejtaxjresearchj
processjincludesjthejfollowing:
1. Identificationjofjpertinentjissues;
2. Specificationjofjproperjauthorities;
3. Evaluationjofjthejproprietyjofjauthorities;jand,
4. Applicationjofjauthoritiesjtojajspecificjsituation.
Pagej6
1-10.
Circularj230jisjissuedjbyjthejTreasuryjDepartmentjandjappliesjtojalljwhojpracticejbeforejt
hejIRS.jPagej7
1-11.
InjadditionjtojCircularj230,jCPAsjmustjfollowjthejAICPA‘sjCodejofjProfessionaljCond
uctjandjStatementsjonjStandardsjforjTaxjServices.jCPAsjmustjalsojabidejbyjthejrulesjofjthejappro
priatejstatejboard(s)jofjaccountancy.
Pagej7
1-12. Ajreturnjpreparerjmustjobtainj18jhoursjofjcontinuingjeducationjfromjanjIRS-
approvedjCEjProvider.jThejhoursjmustjincludejaj6jcreditjhourjAnnualjFederaljTaxjRefresherjcours
ej(AFTR)jthatjcoversjfilingjseasonjissuesjandjtaxjlawjupdates.jThejAFTRjcoursejmustjincludejajkno
wledge-jbasedjcomprehensionjtestjadministeredjatjthejconclusionjofjthejcoursejbyjthejCEjProvider.
, Pagej1-4 SOLUTIONSjMANUAL
Limitedjpracticejrightsjallowjindividualsjtojrepresentjclientsjwhosejreturnsjtheyjpreparedjandjsig
ned,jbutjonlyjbeforejrevenuejagents,jcustomerjservicejrepresentatives,jandjsimilarjIRSjemploye
es.
Pagej10jandjIRS.gov
1-13.
False.jOnlyjcommunicationjwithjthejIRSjconcerningjajtaxpayer‘sjrights,jprivileges,jorjlia
bilityjisjincluded.jPracticejbeforejthejIRSjdoesjnotjincludejrepresentationjbeforejthejTaxjCourt.
Pagej7
1-14. Sectionj10.2jofjSubpartjAjofjCircularj230jdefinesjpracticejbeforejthejIRSjasjincluding:
mattersjconnectedjwithjpresentationjtojthejInternaljRevenuejServicejorjanyjofjitsjofficersjo
rjemployeesjrelatingjtojajclient‘sjrights,jprivileges,jorjliabilitiesjunderjlawsjorjregulationsja
dministeredjbyjthejInternaljRevenuejService.jSuchjpresentationsjincludejthejpreparationja
ndjfilingjofjnecessaryjdocuments,jcorrespondencejwith,jandjcommunicationsjtojthejIntern
aljRevenuejService,jandjthejrepresentationjofjajclientjatjconferences,jhearings,jandjmeetin
gs.
Pagej7
1-15.
TojbecomejanjEAjanjindividualjcanj(1)jpassjajtestjgivenjbyjthejIRSjorj(2)jworkjforjthejI
RSjforjfivejyears.jCircularj230,jSubpartjA,j§§j10.4jtoj10.6.
Pagej9
1-16.
EAsjmustjcompletej72jhoursjofjcontinuingjeducationjeveryjthreejyearsj(anjaveragejofj24jpe
rjyear,jwithjajminimumjofj16jhoursjduringjanyjyear).jCircularj230,jSubpartjA.j§j10.6.
Pagej9
1-17.
True.jAsjajgeneraljrule,janjindividualjmustjbejanjEA,jattorney,jorjCPAjtojrepresentjajclientj
beforejthejIRS.jTherejarejlimitedjsituationsjwherejothersjmayjrepresentjajtaxpayer;jhowever,jthisjfa
ctjpatternjisjnotjonejofjthem.jSincejLeighjdidjnotjsignjthejreturn,jshejcannotjrepresentjthejtaxpayer,j
onlyjRosejcan.
SolutionjManualjFederaljTaxjResearchj12thjEditionjbyjRobyjSawyers,jStevenjGill
CHAPTERj1
INTRODUCTIONjTOjTAXjPRACTICEjANDjETHICS
DISCUSSIONjQUESTIONS
1-1.
InjthejUnitedjStates,jthejtaxjsystemjisjanjoutgrowthjofjthejfollowingjfivejdisciplines:jla
w,jaccounting,jeconomics,jpoliticaljscience,jandjsociology.jThejenvironmentjforjthejtaxjsystemji
sjprovidedjbyjthejprinciplesjofjeconomics,jsociology,jandjpoliticaljscience,jwhilejthejlegaljandja
ccountingjfieldsjarejresponsiblejforjthejsystem‘sjinterpretationjandjapplication.
Eachjofjthesejdisciplinesjaffectsjthisjcountry‘sjtaxjsystemjinjajuniquejway.jEconomistsjaddressjsu
chjissuesjasjhowjproposedjtaxjlegislationjwilljaffectjthejratejofjinflationjorjeconomicjgrowth.jMea
surementjofjthejsocialjequityjofjajtaxjandjdeterminingjwhetherjajtaxjsystemjdiscriminatesjagainst
jcertainjtaxpayersjarejissuesjthatjarejexaminedjbyjsociologistsjandjpoliticaljscientists.
Finally,jattorneysjarejresponsiblejforjthejinterpretationjofjthejtaxationjstatutes,jandjaccountantsjen
surejthatjthesejsamejstatutesjarejappliedjconsistently.
Pagej4
1-2. Thejotherjmajorjcategoriesjofjtaxjpracticejinjadditionjtojtaxjresearchjarejasjfollows:
• Taxjcompliance
• Taxjplanning
• Taxjlitigation
jPagej5
1-3.
Taxjcompliancejconsistsjofjgatheringjpertinentjinformation,jevaluatingjandjclassifyingjt
hatjinformation,jandjfilingjanyjnecessaryjtaxjreturns.jCompliancejalsojincludesjotherjfunctionsjn
ecessaryjtojsatisfyjgovernmentaljrequirements,jsuchjasjrepresentingjajclientjduringjanjInternaljRe
venuejServicej(IRS)jaudit.
,Pagej1-2 SOLUTIONSjMANUAL
Pagej5
1-4.
Mostjofjthejtaxjcompliancejworkjisjperformedjbyjcommercialjtaxjpreparers,jenrolledjag
entsj(EAs),jattorneys,jandjcertifiedjpublicjaccountantsj(CPAs).jNoncomplexjindividual,jpartners
hip,jandjcorporatejtaxjreturnsjoftenjarejcompletedjbyjcommercialjtaxjpreparers.jThejpreparationj
ofjmorejcomplexjreturnsjusuallyjisjperformedjbyjEAs,jattorneys,jandjCPAs.jThejlatterjgroupsjalso
jprovidejtaxjplanningjservicesjandjrepresentjtheirjclientsjbeforejthejIRS.
AnjEAjisjonejwhojisjadmittedjtojpracticejbeforejthejIRSjbyjpassingjajspecialjIRS-
administeredjexamination,jorjwhojhasjworkedjforjthejIRSjforjfivejyearsjandjisjissuedjajpermitjtojrep
resentjclientsjbeforejthejIRS.jCPAsjandjattorneysjarejnotjrequiredjtojtakejthisjexaminationjandjareja
utomaticallyjadmittedjtojpracticejbeforejthejIRSjifjtheyjarejinjgoodjstandingjwithjthejappropriatejpro
fessionaljlicensingjboard.
Pagej5jandjCircularj230
1-5.
Taxjplanningjisjthejprocessjofjarrangingjone‘sjfinancialjaffairsjtojminimizejanyjtaxjliability.
jMuchjofjmodernjtaxjpracticejcentersjaroundjthisjprocess,jandjthejresultingjoutcomejisjtaxjavoidanc
e.
Therejisjnothingjillegaljorjimmoraljinjthejavoidancejofjtaxationjasjlongjasjthejtaxpayerjremainsjwith
injlegaljbounds.jInjcontrast,jtaxjevasionjconstitutesjthejillegaljnonpaymentjofjajtaxjandjcannotjbejcon
doned.jActivitiesjofjthisjsortjclearlyjviolatejexistingjlegaljconstraintsjandjfalljoutsidejofjthejdomainj
ofjthejprofessionaljtaxjpractitioner.
Pagej6
1-6.
Injanjopenjtaxjplanningjsituation,jthejtransactionjisjnotjyetjcomplete;jtherefore,jthejtaxjpract
itionerjmaintainsjsomejdegreejofjcontroljoverjthejpotentialjtaxjliability,jandjthejtransactionjmayjbej
modi-
jfiedjtojachievejajmorejfavorablejtaxjtreatment.jInjajclosedjtransactionjhowever,jalljofjthejpertinentja
ctionsjhavejbeenjcompleted,jandjtaxjplanningjactivitiesjmayjbejlimitedjtojthejpresentationjofjthejsitu
ationjtojthejgovernmentjinjthejmostjlegallyjadvantageousjmannerjpossible.
,FederaljTaxjResearch,j12thjEdition Pagej1-3
Pagej6
1-7.
TaxjlitigationjisjthejprocessjofjsettlingjajdisputejwithjthejIRSjinjajcourtjofjlaw.jTypicall
y,jajtaxjattorneyjhandlesjtaxjlitigationjthatjprogressesjbeyondjthejfinaljIRSjappeal.
Pagej6
1-8. CPAsjservejisjajsupportjcapacityjinjtaxjlitigation.
Pagej6
1-9.
Taxjresearchjconsistsjofjthejresolutionjofjunansweredjtaxationjquestions.jThejtaxjresearchj
processjincludesjthejfollowing:
1. Identificationjofjpertinentjissues;
2. Specificationjofjproperjauthorities;
3. Evaluationjofjthejproprietyjofjauthorities;jand,
4. Applicationjofjauthoritiesjtojajspecificjsituation.
Pagej6
1-10.
Circularj230jisjissuedjbyjthejTreasuryjDepartmentjandjappliesjtojalljwhojpracticejbeforejt
hejIRS.jPagej7
1-11.
InjadditionjtojCircularj230,jCPAsjmustjfollowjthejAICPA‘sjCodejofjProfessionaljCond
uctjandjStatementsjonjStandardsjforjTaxjServices.jCPAsjmustjalsojabidejbyjthejrulesjofjthejappro
priatejstatejboard(s)jofjaccountancy.
Pagej7
1-12. Ajreturnjpreparerjmustjobtainj18jhoursjofjcontinuingjeducationjfromjanjIRS-
approvedjCEjProvider.jThejhoursjmustjincludejaj6jcreditjhourjAnnualjFederaljTaxjRefresherjcours
ej(AFTR)jthatjcoversjfilingjseasonjissuesjandjtaxjlawjupdates.jThejAFTRjcoursejmustjincludejajkno
wledge-jbasedjcomprehensionjtestjadministeredjatjthejconclusionjofjthejcoursejbyjthejCEjProvider.
, Pagej1-4 SOLUTIONSjMANUAL
Limitedjpracticejrightsjallowjindividualsjtojrepresentjclientsjwhosejreturnsjtheyjpreparedjandjsig
ned,jbutjonlyjbeforejrevenuejagents,jcustomerjservicejrepresentatives,jandjsimilarjIRSjemploye
es.
Pagej10jandjIRS.gov
1-13.
False.jOnlyjcommunicationjwithjthejIRSjconcerningjajtaxpayer‘sjrights,jprivileges,jorjlia
bilityjisjincluded.jPracticejbeforejthejIRSjdoesjnotjincludejrepresentationjbeforejthejTaxjCourt.
Pagej7
1-14. Sectionj10.2jofjSubpartjAjofjCircularj230jdefinesjpracticejbeforejthejIRSjasjincluding:
mattersjconnectedjwithjpresentationjtojthejInternaljRevenuejServicejorjanyjofjitsjofficersjo
rjemployeesjrelatingjtojajclient‘sjrights,jprivileges,jorjliabilitiesjunderjlawsjorjregulationsja
dministeredjbyjthejInternaljRevenuejService.jSuchjpresentationsjincludejthejpreparationja
ndjfilingjofjnecessaryjdocuments,jcorrespondencejwith,jandjcommunicationsjtojthejIntern
aljRevenuejService,jandjthejrepresentationjofjajclientjatjconferences,jhearings,jandjmeetin
gs.
Pagej7
1-15.
TojbecomejanjEAjanjindividualjcanj(1)jpassjajtestjgivenjbyjthejIRSjorj(2)jworkjforjthejI
RSjforjfivejyears.jCircularj230,jSubpartjA,j§§j10.4jtoj10.6.
Pagej9
1-16.
EAsjmustjcompletej72jhoursjofjcontinuingjeducationjeveryjthreejyearsj(anjaveragejofj24jpe
rjyear,jwithjajminimumjofj16jhoursjduringjanyjyear).jCircularj230,jSubpartjA.j§j10.6.
Pagej9
1-17.
True.jAsjajgeneraljrule,janjindividualjmustjbejanjEA,jattorney,jorjCPAjtojrepresentjajclientj
beforejthejIRS.jTherejarejlimitedjsituationsjwherejothersjmayjrepresentjajtaxpayer;jhowever,jthisjfa
ctjpatternjisjnotjonejofjthem.jSincejLeighjdidjnotjsignjthejreturn,jshejcannotjrepresentjthejtaxpayer,j
onlyjRosejcan.
