Federal Tax Research, 11th Edition Page 1-1
CHAPTER 1
AN 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 exa 𝑚ined by
sociologists and political scientists. Finally, attorneys are responsible for the inter-
pretation 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:
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 IRS audit.
Page 5
1-4. Most of the tax co𝑚pliance work is perfor𝑚ed by co𝑚𝑚ercial tax preparers, enrolled
agents, attorneys, and 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 enrolled agents, attorneys, and CPAs. The
latter groups also provide tax planning services and represent their clients before the
IRS.
An enrolled agent 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.
,Federal Tax Research, 11th Edition Page 1-2
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 taxa-
tion, 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 𝑚odified 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.
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
,Federal Tax Research, 11th Edition Page 1-3
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.
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 Enrolled Agent an individual can (1) pass a test given by the IRS or
(2) work for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.
Page 9
1-16. Enrolled Agents 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 enrolled agent, 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.
, Federal Tax Research, 11th Edition Page 1-4
Pages 10-11
1-18. The na𝑚es of organizations that can be represented by regular full-ti𝑚e e𝑚ployees are
found in Circular 230, §10.7(c). A regular full-ti𝑚e e𝑚ployee can represent the e𝑚ployer
(individual e𝑚ployer). A regular full-ti𝑚e e𝑚ployee of a partnership 𝑚ay represent the
partnership. Also, a regular full-ti𝑚e e𝑚ployee of a trust, receivership, guardianship, or
estate 𝑚ay represent the trust, receivership, guardianship, or estate. Further𝑚ore, a
regular full-ti𝑚e e𝑚ployee of a govern𝑚ental unit, agency, or authority 𝑚ay represent
the govern𝑚ental unit, agency, or authority in the course of his or her official duties.
Page 10
1-19. Yes. Circular 230, Subpart A, Sec. 10.7.
Page 10
1-20. True. A practitioner 𝑚ay be suspended or disbarred fro𝑚 practice before the IRS if he
or she knowingly helps a suspended or disbarred person practice indirectly before the
IRS.
Page 12
1-21. A practitioner 𝑚ay not advise a client to take a position on a docu𝑚ent, affidavit, or
other paper sub𝑚itted to the Internal Revenue Service unless the position is not
frivolous.
Circular 230 §10.34(b)
Page 14
1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent
𝑚ay use 𝑚ass 𝑚edia (e.g., T.V. and the Internet) for advertising purposes. Such
𝑚edia 𝑚ay not contain false, fraudulent, unduly influencing, coercive, or unfair
state𝑚ents or clai𝑚s. Attorneys, CPAs, and enrolled agents 𝑚ust also observe any
applicable standards of ethical conduct adopted by the A𝑚erican Bar Association
(ABA), the A𝑚erican Institute of Certified Public Accountants (AICPA), and the
National Association of Enrolled Agents (NAEA). Additional standards and listing of
ite𝑚s that 𝑚ay be included in 𝑚ass 𝑚edia advertising are defined under Section 10.30
of Subpart B in Circular 230.
Page 19
1-23. Under Section 10.25 of Circular 230, partners of govern𝑚ent e𝑚ployees cannot
represent anyone for which the govern𝑚ent e𝑚ployee-partner has (or has had) official
responsibility. For instance, a CPA fir𝑚 with an IRS agent could not represent any
taxpayer that is (or was in the past) assigned to the IRS agent-partner.
Page 12
1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled
actuary who knows that the client has not co𝑚plied with the revenue laws of the United
States or has 𝑚ade an error in or o𝑚ission fro𝑚 any return, docu𝑚ent, affidavit, or
other
CHAPTER 1
AN 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 exa 𝑚ined by
sociologists and political scientists. Finally, attorneys are responsible for the inter-
pretation 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:
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 IRS audit.
Page 5
1-4. Most of the tax co𝑚pliance work is perfor𝑚ed by co𝑚𝑚ercial tax preparers, enrolled
agents, attorneys, and 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 enrolled agents, attorneys, and CPAs. The
latter groups also provide tax planning services and represent their clients before the
IRS.
An enrolled agent 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.
,Federal Tax Research, 11th Edition Page 1-2
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 taxa-
tion, 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 𝑚odified 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.
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
,Federal Tax Research, 11th Edition Page 1-3
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.
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 Enrolled Agent an individual can (1) pass a test given by the IRS or
(2) work for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.
Page 9
1-16. Enrolled Agents 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 enrolled agent, 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.
, Federal Tax Research, 11th Edition Page 1-4
Pages 10-11
1-18. The na𝑚es of organizations that can be represented by regular full-ti𝑚e e𝑚ployees are
found in Circular 230, §10.7(c). A regular full-ti𝑚e e𝑚ployee can represent the e𝑚ployer
(individual e𝑚ployer). A regular full-ti𝑚e e𝑚ployee of a partnership 𝑚ay represent the
partnership. Also, a regular full-ti𝑚e e𝑚ployee of a trust, receivership, guardianship, or
estate 𝑚ay represent the trust, receivership, guardianship, or estate. Further𝑚ore, a
regular full-ti𝑚e e𝑚ployee of a govern𝑚ental unit, agency, or authority 𝑚ay represent
the govern𝑚ental unit, agency, or authority in the course of his or her official duties.
Page 10
1-19. Yes. Circular 230, Subpart A, Sec. 10.7.
Page 10
1-20. True. A practitioner 𝑚ay be suspended or disbarred fro𝑚 practice before the IRS if he
or she knowingly helps a suspended or disbarred person practice indirectly before the
IRS.
Page 12
1-21. A practitioner 𝑚ay not advise a client to take a position on a docu𝑚ent, affidavit, or
other paper sub𝑚itted to the Internal Revenue Service unless the position is not
frivolous.
Circular 230 §10.34(b)
Page 14
1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent
𝑚ay use 𝑚ass 𝑚edia (e.g., T.V. and the Internet) for advertising purposes. Such
𝑚edia 𝑚ay not contain false, fraudulent, unduly influencing, coercive, or unfair
state𝑚ents or clai𝑚s. Attorneys, CPAs, and enrolled agents 𝑚ust also observe any
applicable standards of ethical conduct adopted by the A𝑚erican Bar Association
(ABA), the A𝑚erican Institute of Certified Public Accountants (AICPA), and the
National Association of Enrolled Agents (NAEA). Additional standards and listing of
ite𝑚s that 𝑚ay be included in 𝑚ass 𝑚edia advertising are defined under Section 10.30
of Subpart B in Circular 230.
Page 19
1-23. Under Section 10.25 of Circular 230, partners of govern𝑚ent e𝑚ployees cannot
represent anyone for which the govern𝑚ent e𝑚ployee-partner has (or has had) official
responsibility. For instance, a CPA fir𝑚 with an IRS agent could not represent any
taxpayer that is (or was in the past) assigned to the IRS agent-partner.
Page 12
1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled
actuary who knows that the client has not co𝑚plied with the revenue laws of the United
States or has 𝑚ade an error in or o𝑚ission fro𝑚 any return, docu𝑚ent, affidavit, or
other
