FederalbTaxbResearch,b11thbEdition Pageb1-1
CHAPTER 1 b
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
b b b b b b
DISCUSSIONbQUESTIONS
1-1.
InbthebUnitedbStates,bthebtaxbsystembisbanboutgrowthbofbthebfollowingbfivebdisciplines:b
law,baccounting,beconomics,bpoliticalbscience,bandbsociology.bThebenvironmentbforbthebtaxb
systembisbprovidedbbybthebprinciplesbofbeconomics,bsociology,bandbpoliticalbscience,bwhilebt
heblegalbandbaccountingbfieldsbarebresponsiblebforbthebsystem'sbinterpretationbandbapplicati
on.
Eachbofbthesebdisciplinesbaffectsbthisbcountry'sbtaxbsystembinbabuniquebway.bEconomistsbad
dressbsuchbissuesbasbhowbproposedbtaxblegislationbwillbaffectbthebratebofbinflationborbecono
micbgrowth.bMeasurementbofbthebsocialbequitybofbabtax,bandbdeterminingbwhetherbabtaxbsyst
embdiscriminatesbagainstbcertainbtaxpayers,barebissuesbthatbarebexaminedbbybsociologistsba
ndbpoliticalbscientists.bFinally,battorneysbarebresponsiblebforbthebinter-
bpretationbofbthebtaxationbstatutes,bandbaccountantsbensurebthatbthesebsamebstatutesbarebappl
iedbconsistently.
Pageb4
1-2. Thebotherbmajorbcategoriesbofbtaxbpracticebinbadditionbtobtaxbresearchbare:
• taxbcompliance
• taxbplanning
• taxblitigationb
Pageb5
1-3.
Taxbcompliancebconsistsbofbgatheringbpertinentbinformation,bevaluatingbandbclassif
yingbthatbinformation,bandbfilingbanybnecessarybtaxbreturns.bCompliancebalsobincludesbot
herbfunctionsbnecessarybtobsatisfybgovernmentalbrequirements,bsuchbasbrepresentingbabcli
entbduringbanbIRSbaudit.
Pageb5
1-4.
Mostbofbthebtaxbcompliancebworkbisbperformedbbybcommercialbtaxbpreparers,benrolle
dbagents,battorneys,bandbCPAs.bNoncomplexbindividual,bpartnership,bandbcorporatebtaxbre
turnsboftenbarebcompletedbbybcommercialbtaxbpreparers.bThebpreparationbofbmorebcomple
xbreturnsbusuallybisbperformedbbybenrolledbagents,battorneys,bandbCPAs.bTheblatterbgroupsb
alsobprovidebtaxbplanningbservicesbandbrepresentbtheirbclientsbbeforebthebIRS.
AnbenrolledbagentbisbonebwhobisbadmittedbtobpracticebbeforebthebIRSbbybpassingbabspecialbI
RS-
administeredbexamination,borbwhobhasbworkedbforbthebIRSbforbfivebyears,bandbisbissuedbabp
ermitbtobrepresentbclientsbbeforebthebIRS.bCPAsbandbattorneysbarebnotbrequiredbtobtakebthisbe
xaminationbandbarebautomaticallybadmittedbtobpracticebbeforebthebIRSbifbtheybarebinbgoodbsta
ndingbwithbthebappropriatebprofessionalblicensingbboard.
,FederalbTaxbResearch,b11thbEdition Pageb1-2
Pageb5bandbCircularb230
1-5.
Taxbplanningbisbthebprocessbofbarrangingbone'sbfinancialbaffairsbtobminimizebanybtaxbli
ability.bMuchbofbmodernbtaxbpracticebcentersbaroundbthisbprocess,bandbthebresultingboutco
mebisbtaxbavoidance.bTherebisbnothingbillegalborbimmoralbinbthebavoidancebofbtaxa-
btion,basblongbasbthebtaxpayerbremainsbwithinblegalbbounds.bInbcontrast,btaxbevasionbconstit
utesbthebillegalbnonpaymentbofbabtaxbandbcannotbbebcondoned.bActivitiesbofbthisbsortbclearlyb
violatebexistingblegalbconstraintsbandbfallboutsidebofbthebdomainbofbthebprofessionalbtaxbprac
titioner.
Pageb6
1-6.
Inbanbopenbtaxbplanningbsituation,bthebtransactionbisbnotbyetbcomplete,btherefore,bthebta
xbpractitionerbmaintainsbsomebdegreebofbcontrolboverbthebpotentialbtaxbliability,bandbthebtra
nsactionbmaybbebmodifiedbtobachievebabmorebfavorablebtaxbtreatment.bInbabclosedbtransacti
onbhowever,ballbofbthebpertinentbactionsbhavebbeenbcompleted,bandbtaxbplanningbactivitiesb
maybbeblimitedbtobthebpresentationbofbthebsituationbtobthebgovernmentbinbthebmostblegallybad
vantageousbmannerbpossible.
Pageb6
1-7.
TaxblitigationbisbthebprocessbofbsettlingbabdisputebwithbthebIRSbinbabcourtbofblaw.bTypic
ally,babtaxbattorneybhandlesbtaxblitigationbthatbprogressesbbeyondbthebfinalbIRSbappeal.
Pageb6
1-8. CPAsbservebisbabsupportbcapacitybinbtaxblitigation.
Pageb6
1-9.
Taxbresearchbconsistsbofbthebresolutionbofbunansweredbtaxationbquestions.bTh
ebtaxbresearchbprocessbincludesbthebfollowing:
1. Identificationbofbpertinentbissues;
2. Specificationbofbproperbauthorities;
3. Evaluationbofbthebproprietybofbauthorities;band,
4. Applicationbofbauthoritiesbtobabspecificbsituation.
Pageb6
1-10.
Circularb230bisbissuedbbybthebTreasurybDepartmentbandbappliesbtoballbwhobpracticebbe
forebthebIRS.
Pageb7
,FederalbTaxbResearch,b11thbEdition Pageb1-3
1-11.
InbadditionbtobCircularb230,bCPAsbmustbfollowbthebAICPA'sbCodebofbProfessiona
lbConductbandbStatementsbonbStandardsbforbTaxbServices.bCPAsbmustbalsobabidebbybth
ebrulesbofbthebappropriatebstatebboard(s)bofbaccountancy.
Pageb7
1-12. Abreturnbpreparerbmustbobtainb18bhoursbofbcontinuingbeducationbfrombanbIRS-
approvedbCEbProvider.bThebhoursbmustbincludebab6bcreditbhourbAnnualbFederalbTaxbRef
resherbcourseb(AFTR)bthatbcoversbfilingbseasonbissuesbandbtaxblawbupdates.bThebAFTRb
coursebmustbincludebabknowledge-
basedbcomprehensionbtestbadministeredbatbthebconclusionbofbthebcoursebbybthebCEbProvi
der.
Limitedbpracticebrightsballowbindividualsbtobrepresentbclientsbwhosebreturnsbtheybpreparedb
andbsigned,bbutbonlybbeforebrevenuebagents,bcustomerbservicebrepresentatives,bandbsimilarb
IRSbemployees.
Pageb10bandbIRS.gov
1-13.
False.bOnlybcommunicationbwithbthebIRSbconcerningbabtaxpayer'sbrights,bprivilege
s,borbliabilitybisbincluded.bPracticebbeforebthebIRSbdoesbnotbincludebrepresentationbbefore
btheb
TaxbCourt.
Pageb7
1-14. Sectionb10.2bofbSubpartbAbofbCircularb230bdefinesbpracticebbeforebthebIRSbasbincluding:
mattersbconnectedbwithbpresentationbtobthebInternalbRevenuebServiceborbanybofbitsbo
fficersborbemployeesbrelatingbtobabclient'sbrights,bprivileges,borbliabilitiesbunderbla
wsborbregulationsbadministeredbbybthebInternalbRevenuebService.bSuchbpresentatio
nsbincludebthebpreparationbandbfilingbofbnecessarybdocuments,bcorrespondencebwit
h,bandbcommunicationsbtobthebInternalbRevenuebService,bandbthebrepresentationbofb
abclientbatbconferences,bhearings,bandbmeetings.
Pageb7
1-15.
TobbecomebanbEnrolledbAgentbanbindividualbcanb(1)bpassbabtestbgivenbbybthebIRSbo
rb(2)bworkbforbthebIRSbforbfivebyears.bCircularb230,bSubpartbA,bSecs.b10.4btob10.6.
Pageb9
1-16.
EnrolledbAgentsbmustbcompleteb72bhoursbofbContinuingbEducationbeverybthreebyear
sb(anbaveragebofb24bperbyear,bwithbabminimumbofb16bhoursbduringbanybyear.).bCircularb23
0,bSubpartbA.b§10.6.
Pageb9
1-17.
True.bAsbabgeneralbrule,banbindividualbmustbbebanbenrolledbagent,battorney,borbCPAbto
representbabclientbbeforebthebIRS.bTherebareblimitedbsituationsbwherebothersbmaybrepresentb
b
abtaxpayer;bhowever,bthisbfactbpatternbisbnotbonebofbthem.bSincebLeighbdidbnotbsignbthebret
, FederalbTaxbResearch,b11thbEdition Pageb1-4
urn,bshebcannotbrepresentbthebtaxpayer,bonlybRosebcan.
CHAPTER 1 b
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
b b b b b b
DISCUSSIONbQUESTIONS
1-1.
InbthebUnitedbStates,bthebtaxbsystembisbanboutgrowthbofbthebfollowingbfivebdisciplines:b
law,baccounting,beconomics,bpoliticalbscience,bandbsociology.bThebenvironmentbforbthebtaxb
systembisbprovidedbbybthebprinciplesbofbeconomics,bsociology,bandbpoliticalbscience,bwhilebt
heblegalbandbaccountingbfieldsbarebresponsiblebforbthebsystem'sbinterpretationbandbapplicati
on.
Eachbofbthesebdisciplinesbaffectsbthisbcountry'sbtaxbsystembinbabuniquebway.bEconomistsbad
dressbsuchbissuesbasbhowbproposedbtaxblegislationbwillbaffectbthebratebofbinflationborbecono
micbgrowth.bMeasurementbofbthebsocialbequitybofbabtax,bandbdeterminingbwhetherbabtaxbsyst
embdiscriminatesbagainstbcertainbtaxpayers,barebissuesbthatbarebexaminedbbybsociologistsba
ndbpoliticalbscientists.bFinally,battorneysbarebresponsiblebforbthebinter-
bpretationbofbthebtaxationbstatutes,bandbaccountantsbensurebthatbthesebsamebstatutesbarebappl
iedbconsistently.
Pageb4
1-2. Thebotherbmajorbcategoriesbofbtaxbpracticebinbadditionbtobtaxbresearchbare:
• taxbcompliance
• taxbplanning
• taxblitigationb
Pageb5
1-3.
Taxbcompliancebconsistsbofbgatheringbpertinentbinformation,bevaluatingbandbclassif
yingbthatbinformation,bandbfilingbanybnecessarybtaxbreturns.bCompliancebalsobincludesbot
herbfunctionsbnecessarybtobsatisfybgovernmentalbrequirements,bsuchbasbrepresentingbabcli
entbduringbanbIRSbaudit.
Pageb5
1-4.
Mostbofbthebtaxbcompliancebworkbisbperformedbbybcommercialbtaxbpreparers,benrolle
dbagents,battorneys,bandbCPAs.bNoncomplexbindividual,bpartnership,bandbcorporatebtaxbre
turnsboftenbarebcompletedbbybcommercialbtaxbpreparers.bThebpreparationbofbmorebcomple
xbreturnsbusuallybisbperformedbbybenrolledbagents,battorneys,bandbCPAs.bTheblatterbgroupsb
alsobprovidebtaxbplanningbservicesbandbrepresentbtheirbclientsbbeforebthebIRS.
AnbenrolledbagentbisbonebwhobisbadmittedbtobpracticebbeforebthebIRSbbybpassingbabspecialbI
RS-
administeredbexamination,borbwhobhasbworkedbforbthebIRSbforbfivebyears,bandbisbissuedbabp
ermitbtobrepresentbclientsbbeforebthebIRS.bCPAsbandbattorneysbarebnotbrequiredbtobtakebthisbe
xaminationbandbarebautomaticallybadmittedbtobpracticebbeforebthebIRSbifbtheybarebinbgoodbsta
ndingbwithbthebappropriatebprofessionalblicensingbboard.
,FederalbTaxbResearch,b11thbEdition Pageb1-2
Pageb5bandbCircularb230
1-5.
Taxbplanningbisbthebprocessbofbarrangingbone'sbfinancialbaffairsbtobminimizebanybtaxbli
ability.bMuchbofbmodernbtaxbpracticebcentersbaroundbthisbprocess,bandbthebresultingboutco
mebisbtaxbavoidance.bTherebisbnothingbillegalborbimmoralbinbthebavoidancebofbtaxa-
btion,basblongbasbthebtaxpayerbremainsbwithinblegalbbounds.bInbcontrast,btaxbevasionbconstit
utesbthebillegalbnonpaymentbofbabtaxbandbcannotbbebcondoned.bActivitiesbofbthisbsortbclearlyb
violatebexistingblegalbconstraintsbandbfallboutsidebofbthebdomainbofbthebprofessionalbtaxbprac
titioner.
Pageb6
1-6.
Inbanbopenbtaxbplanningbsituation,bthebtransactionbisbnotbyetbcomplete,btherefore,bthebta
xbpractitionerbmaintainsbsomebdegreebofbcontrolboverbthebpotentialbtaxbliability,bandbthebtra
nsactionbmaybbebmodifiedbtobachievebabmorebfavorablebtaxbtreatment.bInbabclosedbtransacti
onbhowever,ballbofbthebpertinentbactionsbhavebbeenbcompleted,bandbtaxbplanningbactivitiesb
maybbeblimitedbtobthebpresentationbofbthebsituationbtobthebgovernmentbinbthebmostblegallybad
vantageousbmannerbpossible.
Pageb6
1-7.
TaxblitigationbisbthebprocessbofbsettlingbabdisputebwithbthebIRSbinbabcourtbofblaw.bTypic
ally,babtaxbattorneybhandlesbtaxblitigationbthatbprogressesbbeyondbthebfinalbIRSbappeal.
Pageb6
1-8. CPAsbservebisbabsupportbcapacitybinbtaxblitigation.
Pageb6
1-9.
Taxbresearchbconsistsbofbthebresolutionbofbunansweredbtaxationbquestions.bTh
ebtaxbresearchbprocessbincludesbthebfollowing:
1. Identificationbofbpertinentbissues;
2. Specificationbofbproperbauthorities;
3. Evaluationbofbthebproprietybofbauthorities;band,
4. Applicationbofbauthoritiesbtobabspecificbsituation.
Pageb6
1-10.
Circularb230bisbissuedbbybthebTreasurybDepartmentbandbappliesbtoballbwhobpracticebbe
forebthebIRS.
Pageb7
,FederalbTaxbResearch,b11thbEdition Pageb1-3
1-11.
InbadditionbtobCircularb230,bCPAsbmustbfollowbthebAICPA'sbCodebofbProfessiona
lbConductbandbStatementsbonbStandardsbforbTaxbServices.bCPAsbmustbalsobabidebbybth
ebrulesbofbthebappropriatebstatebboard(s)bofbaccountancy.
Pageb7
1-12. Abreturnbpreparerbmustbobtainb18bhoursbofbcontinuingbeducationbfrombanbIRS-
approvedbCEbProvider.bThebhoursbmustbincludebab6bcreditbhourbAnnualbFederalbTaxbRef
resherbcourseb(AFTR)bthatbcoversbfilingbseasonbissuesbandbtaxblawbupdates.bThebAFTRb
coursebmustbincludebabknowledge-
basedbcomprehensionbtestbadministeredbatbthebconclusionbofbthebcoursebbybthebCEbProvi
der.
Limitedbpracticebrightsballowbindividualsbtobrepresentbclientsbwhosebreturnsbtheybpreparedb
andbsigned,bbutbonlybbeforebrevenuebagents,bcustomerbservicebrepresentatives,bandbsimilarb
IRSbemployees.
Pageb10bandbIRS.gov
1-13.
False.bOnlybcommunicationbwithbthebIRSbconcerningbabtaxpayer'sbrights,bprivilege
s,borbliabilitybisbincluded.bPracticebbeforebthebIRSbdoesbnotbincludebrepresentationbbefore
btheb
TaxbCourt.
Pageb7
1-14. Sectionb10.2bofbSubpartbAbofbCircularb230bdefinesbpracticebbeforebthebIRSbasbincluding:
mattersbconnectedbwithbpresentationbtobthebInternalbRevenuebServiceborbanybofbitsbo
fficersborbemployeesbrelatingbtobabclient'sbrights,bprivileges,borbliabilitiesbunderbla
wsborbregulationsbadministeredbbybthebInternalbRevenuebService.bSuchbpresentatio
nsbincludebthebpreparationbandbfilingbofbnecessarybdocuments,bcorrespondencebwit
h,bandbcommunicationsbtobthebInternalbRevenuebService,bandbthebrepresentationbofb
abclientbatbconferences,bhearings,bandbmeetings.
Pageb7
1-15.
TobbecomebanbEnrolledbAgentbanbindividualbcanb(1)bpassbabtestbgivenbbybthebIRSbo
rb(2)bworkbforbthebIRSbforbfivebyears.bCircularb230,bSubpartbA,bSecs.b10.4btob10.6.
Pageb9
1-16.
EnrolledbAgentsbmustbcompleteb72bhoursbofbContinuingbEducationbeverybthreebyear
sb(anbaveragebofb24bperbyear,bwithbabminimumbofb16bhoursbduringbanybyear.).bCircularb23
0,bSubpartbA.b§10.6.
Pageb9
1-17.
True.bAsbabgeneralbrule,banbindividualbmustbbebanbenrolledbagent,battorney,borbCPAbto
representbabclientbbeforebthebIRS.bTherebareblimitedbsituationsbwherebothersbmaybrepresentb
b
abtaxpayer;bhowever,bthisbfactbpatternbisbnotbonebofbthem.bSincebLeighbdidbnotbsignbthebret
, FederalbTaxbResearch,b11thbEdition Pageb1-4
urn,bshebcannotbrepresentbthebtaxpayer,bonlybRosebcan.
