FederalgTaxgResearch,g12thgEditiong Pageg1-1g
g
SolutiongManualgFederalgTaxgResearchg12thgEditiongbygRobygSawyers,gStevengGill
g
g
CHAPTERg1g
g INTRODUCTIONgTOgTAXgPRACTICEgANDgETHICSg
g
g
DISCUSSIONgQUESTIONSg
g
1-1.g
IngthegUnitedgStates,gthegtaxgsystemgisgangoutgrowthgofgthegfollowinggfivegdisciplines:gl
aw,gaccounting,geconomics,gpoliticalgscience,gandgsociology.gThegenvironmentgforgthegtaxgsyste
mgisgprovidedgbygthegprinciplesgofgeconomics,gsociology,gandgpoliticalgscience,gwhilegtheglegalg
andgaccountinggfieldsgaregresponsiblegforgthegsystem‘sginterpretationgandgapplication.g
g
Eachgofgthesegdisciplinesgaffectsgthisgcountry‘sgtaxgsystemgingaguniquegway.gEconomistsgaddress
gsuchgissuesgasghowgproposedgtaxglegislationgwillgaffectgthegrategofginflationgorgeconomicggrowt
h.gMeasurementgofgthegsocialgequitygofgagtaxgandgdetermininggwhethergagtaxgsystemgdiscriminat
esgagainstgcertaingtaxpayersgaregissuesgthatgaregexaminedgbygsociologistsgandgpoliticalgscientists.
gFinally,gattorneysgaregresponsiblegforgtheginterpretationgofgthegtaxationgstatutes,gandgaccountants
gensuregthatgthesegsamegstatutesgaregappliedgconsistently.g
g
g g Pageg4g
g
1-2.g g Thegothergmajorgcategoriesgofgtaxgpracticegingadditiongtogtaxgresearchgaregasgfollows:g
g
• Taxgcomplianceg
• Taxgplanningg
• Taxglitigationg
g
g g Pageg5g
g
1-3. Taxgcompliancegconsistsgofggatheringgpertinentginformation,gevaluatinggandgclassifyinggthatginfo
rmation,gandgfilingganygnecessarygtaxgreturns.gCompliancegalsogincludesgothergfunctionsgnecessa
rygtogsatisfyggovernmentalgrequirements,gsuchgasgrepresentinggagclientgduringgangInternalgReven
uegServiceg(IRS)gaudit.g
g g Pageg5g
g
,Pageg1-2g SOLUTIONSgMANUALg
g
g
1-4. Mostgofgthegtaxgcompliancegworkgisgperformedgbygcommercialgtaxgpreparers,genrolledgagentsg(E
As),gattorneys,gandgcertifiedgpublicgaccountantsg(CPAs).gNoncomplexgindividual,gpartnership,gan
dgcorporategtaxgreturnsgoftengaregcompletedgbygcommercialgtaxgpreparers.gThegpreparationgofgm
oregcomplexgreturnsgusuallygisgperformedgbygEAs,gattorneys,gandgCPAs.gTheglatterggroupsgalsog
providegtaxgplanninggservicesgandgrepresentgtheirgclientsgbeforegthegIRS.g
g
AngEAgisgonegwhogisgadmittedgtogpracticegbeforegthegIRSgbygpassinggagspecialgIRS-
administeredgexamination,gorgwhoghasgworkedgforgthegIRSgforgfivegyearsgandgisgissuedgagpermit
gtogrepresentgclientsgbeforegthegIRS.gCPAsgandgattorneysgaregnotgrequiredgtogtakegthisgexaminat
iongandgaregautomaticallygadmittedgtogpracticegbeforegthegIRSgifgtheygareginggoodgstandinggwith
gthegappropriategprofessionalglicensinggboard.g
g
g g Pageg5gandgCircularg230g
g
g
g
g
g
1-5. Taxgplanninggisgthegprocessgofgarranginggone‘sgfinancialgaffairsgtogminimizeganygtaxgliability.gM
uchgofgmoderngtaxgpracticegcentersgaroundgthisgprocess,gandgthegresultinggoutcomegisgtaxgavoida
nce.gTheregisgnothinggillegalgorgimmoralgingthegavoidancegofgtaxationgasglonggasgthegtaxpayergre
mainsgwithinglegalgbounds.gIngcontrast,gtaxgevasiongconstitutesgthegillegalgnonpaymentgofgagtaxg
andgcannotgbegcondoned.gActivitiesgofgthisgsortgclearlygviolategexistingglegalgconstraintsgandgfall
goutsidegofgthegdomaingofgthegprofessionalgtaxgpractitioner.g
g
g Pageg6g
g
1-6. Ingangopengtaxgplanninggsituation,gthegtransactiongisgnotgyetgcomplete;gtherefore,gthegtaxgpractiti
onergmaintainsgsomegdegreegofgcontrolgovergthegpotentialgtaxgliability,gandgthegtransactiongmayg
begmodifiedgtogachievegagmoregfavorablegtaxgtreatment.gIngagclosedgtransactionghowever,gallgofgt
hegpertinentgactionsghavegbeengcompleted,gandgtaxgplanninggactivitiesgmaygbeglimitedgtogthegpre
sentationgofgthegsituationgtogtheggovernmentgingthegmostglegallygadvantageousgmannergpossible.g
g
Pageg6g
g
1-7. TaxglitigationgisgthegprocessgofgsettlinggagdisputegwithgthegIRSgingagcourtgofglaw.gTypically,gagta
xgattorneyghandlesgtaxglitigationgthatgprogressesgbeyondgthegfinalgIRSgappeal.g
g
Pageg6g
,FederalgTaxgResearch,g12thgEditiong Pageg1-3g
g
g
1-8. CPAsgservegisgagsupportgcapacitygingtaxglitigation.g
g
g g Pageg6g
g
1-9. Taxgresearchgconsistsgofgthegresolutiongofgunansweredgtaxationgquestions.gThegtaxgresearchgproc
essgincludesgthegfollowing:g
g
1. Identificationgofgpertinentgissues;g
2. Specificationgofgpropergauthorities;g
3. Evaluationgofgthegproprietygofgauthorities;gand,g
4. Applicationgofgauthoritiesgtogagspecificgsituation.g
g
Pageg6g
g
1-10. Circularg230gisgissuedgbygthegTreasurygDepartmentgandgappliesgtogallgwhogpracticegbeforegthegI
RS.g
g
Pageg7g
g
1-11. IngadditiongtogCircularg230,gCPAsgmustgfollowgthegAICPA‘sgCodegofgProfessionalgConductgand
gStatementsgongStandardsgforgTaxgServices.gCPAsgmustgalsogabidegbygthegrulesgofgthegappropria
tegstategboard(s)gofgaccountancy.gg
g
g Pageg7gg
g
1-12. Agreturngpreparergmustgobtaing18ghoursgofgcontinuinggeducationgfromgangIRS-
approvedgCEgProvider.gTheghoursgmustgincludegag6gcreditghourgAnnualgFederalgTaxgRefreshergc
ourseg(AFTR)gthatgcoversgfilinggseasongissuesgandgtaxglawgupdates.gThegAFTRgcoursegmustgincl
udegagknowledgebasedgcomprehensiongtestgadministeredgatgthegconclusiongofgthegcoursegbygtheg
CEgProvider.gg
g
Limitedgpracticegrightsgallowgindividualsgtogrepresentgclientsgwhosegreturnsgtheygpreparedg
andgsigned,gbutgonlygbeforegrevenuegagents,gcustomergservicegrepresentatives,gandgsimilarg
IRSgemployees.g
g Pageg10gandgIRS.govg
g
1-13. False.gOnlygcommunicationgwithgthegIRSgconcerninggagtaxpayer‘sgrights,gprivileges,gorgliabilityg
isgincluded.gPracticegbeforegthegIRSgdoesgnotgincludegrepresentationgbeforegthegTaxgCourt.g
g
, Pageg1-4g SOLUTIONSgMANUALg
g
g
g g Pageg7g
g
1-14. Sectiong10.2gofgSubpartgAgofgCircularg230gdefinesgpracticegbeforegthegIRSgasgincluding:g
gmattersgconnectedgwithgpresentationgtogthegInternalgRevenuegServicegorganygofgitsgofficersgorgemployeesgrelatin
ggtogagclient‘sgrights,gprivileges,gorgliabilitiesgunderglawsgorgregulationsgadministeredg
bygthegInternalgRevenuegService.gSuchgpresentationsgincludegthegpreparationgandgfilin
ggofgnecessarygdocuments,gcorrespondencegwith,gandgcommunicationsgtogthegInternalg
RevenuegService,gandgthegrepresentationgofgagclientgatgconferences,ghearings,gandgmee
tings.gg
g
Pageg7g
g
1-15. TogbecomegangEAgangindividualgcang(1)gpassgagtestggivengbygthegIRSgorg(2)gworkgforgthegIRSgf
orgfivegyears.gCircularg230,gSubpartgA,g§§g10.4gtog10.6.g
g
g Pageg9g
g
g
1-16. EAsgmustgcompleteg72ghoursgofgcontinuinggeducationgeverygthreegyearsg(angaveragegofg24gpergy
ear,gwithgagminimumgofg16ghoursgduringganygyear).gCircularg230,gSubpartgA.g§g10.6.g
g
g Pageg9g
g
1-17. True.gAsgaggeneralgrule,gangindividualgmustgbegangEA,gattorney,gorgCPAgtogrepresentgagclientgbe
foregthegIRS.gTheregareglimitedgsituationsgwheregothersgmaygrepresentgagtaxpayer;ghowever,gthis
gfactgpatterngisgnotgonegofgthem.gSincegLeighgdidgnotgsigngthegreturn,gshegcannotgrepresentgthegt
axpayer,gonlygRosegcan.g
g Pagesg10–11g
g
1-18. Thegnamesgofgorganizationsgthatgcangbegrepresentedgbygregulargfull-
timegemployeesgaregfoundgingCircularg230,g§g10.7(c).gAgregulargfull-
timegemployeegcangrepresentgthegemployerg(individualgemployer).gAgregulargfull-
timegemployeegofgagpartnershipgmaygrepresentgthegpartnership.gAlso,gagregulargfull-
timegemployeegofgagtrust,greceivership,gguardianship,gorgestategmaygrepresentgthegtrust,greceivers
hip,gguardianship,gorgestate.gFurthermore,gagregulargfull-
timegemployeegofgaggovernmentalgunit,gagency,gorgauthoritygmaygrepresentgtheggovernmentalgun
it,gagency,gorgauthoritygingthegcoursegofghisgorghergofficialgduties.g
g
g
SolutiongManualgFederalgTaxgResearchg12thgEditiongbygRobygSawyers,gStevengGill
g
g
CHAPTERg1g
g INTRODUCTIONgTOgTAXgPRACTICEgANDgETHICSg
g
g
DISCUSSIONgQUESTIONSg
g
1-1.g
IngthegUnitedgStates,gthegtaxgsystemgisgangoutgrowthgofgthegfollowinggfivegdisciplines:gl
aw,gaccounting,geconomics,gpoliticalgscience,gandgsociology.gThegenvironmentgforgthegtaxgsyste
mgisgprovidedgbygthegprinciplesgofgeconomics,gsociology,gandgpoliticalgscience,gwhilegtheglegalg
andgaccountinggfieldsgaregresponsiblegforgthegsystem‘sginterpretationgandgapplication.g
g
Eachgofgthesegdisciplinesgaffectsgthisgcountry‘sgtaxgsystemgingaguniquegway.gEconomistsgaddress
gsuchgissuesgasghowgproposedgtaxglegislationgwillgaffectgthegrategofginflationgorgeconomicggrowt
h.gMeasurementgofgthegsocialgequitygofgagtaxgandgdetermininggwhethergagtaxgsystemgdiscriminat
esgagainstgcertaingtaxpayersgaregissuesgthatgaregexaminedgbygsociologistsgandgpoliticalgscientists.
gFinally,gattorneysgaregresponsiblegforgtheginterpretationgofgthegtaxationgstatutes,gandgaccountants
gensuregthatgthesegsamegstatutesgaregappliedgconsistently.g
g
g g Pageg4g
g
1-2.g g Thegothergmajorgcategoriesgofgtaxgpracticegingadditiongtogtaxgresearchgaregasgfollows:g
g
• Taxgcomplianceg
• Taxgplanningg
• Taxglitigationg
g
g g Pageg5g
g
1-3. Taxgcompliancegconsistsgofggatheringgpertinentginformation,gevaluatinggandgclassifyinggthatginfo
rmation,gandgfilingganygnecessarygtaxgreturns.gCompliancegalsogincludesgothergfunctionsgnecessa
rygtogsatisfyggovernmentalgrequirements,gsuchgasgrepresentinggagclientgduringgangInternalgReven
uegServiceg(IRS)gaudit.g
g g Pageg5g
g
,Pageg1-2g SOLUTIONSgMANUALg
g
g
1-4. Mostgofgthegtaxgcompliancegworkgisgperformedgbygcommercialgtaxgpreparers,genrolledgagentsg(E
As),gattorneys,gandgcertifiedgpublicgaccountantsg(CPAs).gNoncomplexgindividual,gpartnership,gan
dgcorporategtaxgreturnsgoftengaregcompletedgbygcommercialgtaxgpreparers.gThegpreparationgofgm
oregcomplexgreturnsgusuallygisgperformedgbygEAs,gattorneys,gandgCPAs.gTheglatterggroupsgalsog
providegtaxgplanninggservicesgandgrepresentgtheirgclientsgbeforegthegIRS.g
g
AngEAgisgonegwhogisgadmittedgtogpracticegbeforegthegIRSgbygpassinggagspecialgIRS-
administeredgexamination,gorgwhoghasgworkedgforgthegIRSgforgfivegyearsgandgisgissuedgagpermit
gtogrepresentgclientsgbeforegthegIRS.gCPAsgandgattorneysgaregnotgrequiredgtogtakegthisgexaminat
iongandgaregautomaticallygadmittedgtogpracticegbeforegthegIRSgifgtheygareginggoodgstandinggwith
gthegappropriategprofessionalglicensinggboard.g
g
g g Pageg5gandgCircularg230g
g
g
g
g
g
1-5. Taxgplanninggisgthegprocessgofgarranginggone‘sgfinancialgaffairsgtogminimizeganygtaxgliability.gM
uchgofgmoderngtaxgpracticegcentersgaroundgthisgprocess,gandgthegresultinggoutcomegisgtaxgavoida
nce.gTheregisgnothinggillegalgorgimmoralgingthegavoidancegofgtaxationgasglonggasgthegtaxpayergre
mainsgwithinglegalgbounds.gIngcontrast,gtaxgevasiongconstitutesgthegillegalgnonpaymentgofgagtaxg
andgcannotgbegcondoned.gActivitiesgofgthisgsortgclearlygviolategexistingglegalgconstraintsgandgfall
goutsidegofgthegdomaingofgthegprofessionalgtaxgpractitioner.g
g
g Pageg6g
g
1-6. Ingangopengtaxgplanninggsituation,gthegtransactiongisgnotgyetgcomplete;gtherefore,gthegtaxgpractiti
onergmaintainsgsomegdegreegofgcontrolgovergthegpotentialgtaxgliability,gandgthegtransactiongmayg
begmodifiedgtogachievegagmoregfavorablegtaxgtreatment.gIngagclosedgtransactionghowever,gallgofgt
hegpertinentgactionsghavegbeengcompleted,gandgtaxgplanninggactivitiesgmaygbeglimitedgtogthegpre
sentationgofgthegsituationgtogtheggovernmentgingthegmostglegallygadvantageousgmannergpossible.g
g
Pageg6g
g
1-7. TaxglitigationgisgthegprocessgofgsettlinggagdisputegwithgthegIRSgingagcourtgofglaw.gTypically,gagta
xgattorneyghandlesgtaxglitigationgthatgprogressesgbeyondgthegfinalgIRSgappeal.g
g
Pageg6g
,FederalgTaxgResearch,g12thgEditiong Pageg1-3g
g
g
1-8. CPAsgservegisgagsupportgcapacitygingtaxglitigation.g
g
g g Pageg6g
g
1-9. Taxgresearchgconsistsgofgthegresolutiongofgunansweredgtaxationgquestions.gThegtaxgresearchgproc
essgincludesgthegfollowing:g
g
1. Identificationgofgpertinentgissues;g
2. Specificationgofgpropergauthorities;g
3. Evaluationgofgthegproprietygofgauthorities;gand,g
4. Applicationgofgauthoritiesgtogagspecificgsituation.g
g
Pageg6g
g
1-10. Circularg230gisgissuedgbygthegTreasurygDepartmentgandgappliesgtogallgwhogpracticegbeforegthegI
RS.g
g
Pageg7g
g
1-11. IngadditiongtogCircularg230,gCPAsgmustgfollowgthegAICPA‘sgCodegofgProfessionalgConductgand
gStatementsgongStandardsgforgTaxgServices.gCPAsgmustgalsogabidegbygthegrulesgofgthegappropria
tegstategboard(s)gofgaccountancy.gg
g
g Pageg7gg
g
1-12. Agreturngpreparergmustgobtaing18ghoursgofgcontinuinggeducationgfromgangIRS-
approvedgCEgProvider.gTheghoursgmustgincludegag6gcreditghourgAnnualgFederalgTaxgRefreshergc
ourseg(AFTR)gthatgcoversgfilinggseasongissuesgandgtaxglawgupdates.gThegAFTRgcoursegmustgincl
udegagknowledgebasedgcomprehensiongtestgadministeredgatgthegconclusiongofgthegcoursegbygtheg
CEgProvider.gg
g
Limitedgpracticegrightsgallowgindividualsgtogrepresentgclientsgwhosegreturnsgtheygpreparedg
andgsigned,gbutgonlygbeforegrevenuegagents,gcustomergservicegrepresentatives,gandgsimilarg
IRSgemployees.g
g Pageg10gandgIRS.govg
g
1-13. False.gOnlygcommunicationgwithgthegIRSgconcerninggagtaxpayer‘sgrights,gprivileges,gorgliabilityg
isgincluded.gPracticegbeforegthegIRSgdoesgnotgincludegrepresentationgbeforegthegTaxgCourt.g
g
, Pageg1-4g SOLUTIONSgMANUALg
g
g
g g Pageg7g
g
1-14. Sectiong10.2gofgSubpartgAgofgCircularg230gdefinesgpracticegbeforegthegIRSgasgincluding:g
gmattersgconnectedgwithgpresentationgtogthegInternalgRevenuegServicegorganygofgitsgofficersgorgemployeesgrelatin
ggtogagclient‘sgrights,gprivileges,gorgliabilitiesgunderglawsgorgregulationsgadministeredg
bygthegInternalgRevenuegService.gSuchgpresentationsgincludegthegpreparationgandgfilin
ggofgnecessarygdocuments,gcorrespondencegwith,gandgcommunicationsgtogthegInternalg
RevenuegService,gandgthegrepresentationgofgagclientgatgconferences,ghearings,gandgmee
tings.gg
g
Pageg7g
g
1-15. TogbecomegangEAgangindividualgcang(1)gpassgagtestggivengbygthegIRSgorg(2)gworkgforgthegIRSgf
orgfivegyears.gCircularg230,gSubpartgA,g§§g10.4gtog10.6.g
g
g Pageg9g
g
g
1-16. EAsgmustgcompleteg72ghoursgofgcontinuinggeducationgeverygthreegyearsg(angaveragegofg24gpergy
ear,gwithgagminimumgofg16ghoursgduringganygyear).gCircularg230,gSubpartgA.g§g10.6.g
g
g Pageg9g
g
1-17. True.gAsgaggeneralgrule,gangindividualgmustgbegangEA,gattorney,gorgCPAgtogrepresentgagclientgbe
foregthegIRS.gTheregareglimitedgsituationsgwheregothersgmaygrepresentgagtaxpayer;ghowever,gthis
gfactgpatterngisgnotgonegofgthem.gSincegLeighgdidgnotgsigngthegreturn,gshegcannotgrepresentgthegt
axpayer,gonlygRosegcan.g
g Pagesg10–11g
g
1-18. Thegnamesgofgorganizationsgthatgcangbegrepresentedgbygregulargfull-
timegemployeesgaregfoundgingCircularg230,g§g10.7(c).gAgregulargfull-
timegemployeegcangrepresentgthegemployerg(individualgemployer).gAgregulargfull-
timegemployeegofgagpartnershipgmaygrepresentgthegpartnership.gAlso,gagregulargfull-
timegemployeegofgagtrust,greceivership,gguardianship,gorgestategmaygrepresentgthegtrust,greceivers
hip,gguardianship,gorgestate.gFurthermore,gagregulargfull-
timegemployeegofgaggovernmentalgunit,gagency,gorgauthoritygmaygrepresentgtheggovernmentalgun
it,gagency,gorgauthoritygingthegcoursegofghisgorghergofficialgduties.g
g
