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