(Test Bank) Federal Tax Research

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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 applica tion. 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 determin ing whether a tax system discriminates against certain taxpayers, are issues that are examined 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 com pliance 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 p erformed 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, ta x 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 situ ation, 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, a ll 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 all ow 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 t est 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 hour s 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, guardia nship, 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 befor e 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 Enrolle d 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 ca nnot 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 Federal Tax Research, 11th Edition Page 1-5 paper which the client is required by the revenue laws of the United States to execute, shall advise the client promptly of the fact of such noncompliance, error, or omission. Page 11 1-25. According to Circular 230, the best practices rules are aspirational. Thus, a practitioner who fails to comply with best practices will not be subject to discipline by the IRS. Page 14 1-26. Best practices include: a. Communicating clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered. b. Establishing the fa cts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts. c. Advising the client regarding the importance of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy -related penalties under the Internal Revenue Code if a taxpayer acts in reliance on the advice. d. Acting fairly and with integrity in practice before the IRS. Pages 13-14 1-27. A practitioner must not give written advice if the practitioner: 1. bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events), 2. unreasonably relies upon representations, statements, findings, or agreements of the taxpayer or any other person, 3. does not consider all relevant facts that the practitioner knows or should know, or 4. in evaluating a Federal tax issue, takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised. Page 15 1-28 A preparer tax identification number (PTIN) is required of a compensate d individual who prepares or assists with the preparation of all or substantially all of a tax return or claim for refund must have a preparer tax identification number (PTIN). Normally, the individual must be an attorney, CPA, EA, or tax return preparer m ust obtain a PTIN in order to file tax returns for clients Page 11 1-29. Individuals who prepared tax returns for compensation must follow the rules under Circular 230 Subpart B -- Duties and Restrictions Relating to Practice Before the Internal Revenue Service and Subpart C -- Sanctions for Violation of the Regulations . Thus, they are generally held to the same standards of practice as persons who are Federal Tax Research, 11th Edition Page 1-6 eligible to practice before the IRS (Attorneys, Certified Public Accountan ts (CPAs), and Enrolled Agents (EAs). Page 11 1-30. The AICPA's Code of Professional Conduct provides a philosophical foundation upon which the Rules of Conduct are based. The Principles of the Code of Professional Conduc t suggest that a CPA should strive for behavior that is above the minimal level of acceptable conduct set forth by the rules. The Code was designed to provide the following: 1. A comprehensive code of ethics and professional conduct; 2. A guide for practitioners in answering complex questions; and, 3. Assurance to the public concerning the obligations and responsibilities of the accounting profession. Pages 16-17 1-31. Threats to complying with the Independence Rule include:  Members not acting with objectivity due to an adverse intere st  Advocacy threats  Familiarity threats due to a long or close relationship with a client  Management participation threats  Self-interest threats  Self-review threats  Undue influence threats Page 18 1-32. In a tax practice the CPA may be requested to blindly follow the guidelines of a government agency or the demands of an audit client. This rule prohibits such blind obedience. The code specifically recognizes that conflicts of interest may arise in tax contexts including providing tax or personal financial p lanning services for several members of a family whom the member knows to have opposing interests or when referring a personal financial planning or tax client to an insurance broker or other service provider which refers clients to the member under an exclusive arrangement. Page 20 1-33. The General Standards Include: 1. The CPA must be able to complete all professional services with professional competence. 2. The CPA must exercise due professional care in the performance of all professional services. 3. The CPA shall adequately plan and supervise the performance of all professional services. Federal Tax Research, 11th Edition Page 1-7 4. The CPA must obtain sufficient relevant data to afford a reasonable basis for any conclusion or recommendation in connection with the performance of any professional services. Competence encompasses not only technical subject matter but also knowledge of the profession’s standards and the ability to exercise sound judgment in applying the technical knowledge. At the same time, the code is clear that the m ember does not assume a responsibility for infallibility of knowledge or judgment Page 21 1-34. a. No violation b. 1.520.001 - Commissions and Referral Fees c. No violation d. 1.600.001 - Advertising and Other Forms of Solicitation e. 1.800.001 - Form of Organization and Name Rule f. 2.400.090 or 3.400.090 - Acts Discreditable Rule Pages 19 -21 1-35. 1.700.001 (Confidential Client Information Rule) does not apply in the following situations: 1. There is a conflict with the Compliance with Standards Rule [1.310.001] or the Accounting Principles Rule [1.320.001] 2. The CPA is served with an enforceable subpoena or summons or must comply with applicable laws and government regulations 3. There is a review of a CPA’s practice under AICPA or state society authorization 4. The CPA is responding to an inquiry of an investigative or disciplinary body of a recognized society, or the CPA is initiating a complaint with a disciplinary body Pages 19-20 1-36. The Statements on Standards for Tax Services , or SSTS, are a series of statements, issued by the AICPA, as to what constitutes appropriate standards for tax practice. The State - ments also delineate a member's responsibility to clients, the public, and the profession. The stated objectives of the Statements are as follows: SSTS No. 1: Tax Return Positions. This statement sets forth the applicable standards for members when recommending tax return positions, or preparing or signing tax returns. This statement also addresses a member’s obligation to advise a taxpayer of relevant tax return disclosure responsibilities and potential penalties. SSTS No. 2: Answers to Questions on Returns. This statement sets forth the applicable standards for members when signing the preparer’s de claration on a tax return if one or more questions on the return have not been answered. Federal Tax Research, 11th Edition Page 1-8 SSTS No. 3: Certain Procedural Aspects of Preparing Returns. This statement sets forth the applicable standards for members concerning the obligation to ex amine or verify certain supporting data or to consider information related to another taxpayer when preparing a taxpayer’s tax return. SSTS No. 4: Use of Estimates. This statement sets forth the applicable standards for members when using the taxpayer’s e stimates in the preparation of a tax return. A member may advise on estimates used in the preparation of a tax return, but the taxpayer has the responsibility to provide the estimated data. Appraisals or valuations are not considered estimates for purposes of this statement. SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision. This statement sets forth the applicable standards for members in recommending a tax return position that departs from the position determined in an administrative proceeding or in a court decision with respect to the taxpayer’s prior return. SSTS No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings. This statement sets forth the applicable standards for a member who becomes aware of (a) an error in a taxpayer’s previously filed tax return; ( b) an error in a return that is the subject of an administrative proceeding, such as an examination by a taxing authority or an appeals conference; or (c) a taxpayer’s failure to file a required tax return. SSTS No. 7: Form and Content of Advice to Taxpayers. This statement sets forth the applicable standards for members concerning certain aspects of providing advice to a taxpayer and considers the circumstances in which a member has a responsibility to communicate with a taxpayer when subsequent developments affect advice previously provided. Pages 22 - 26 1-37. Under SSTS No. 1, a member should determine and comply with the standards, if any, which are imposed by the applicable taxing authority with respect to recommending a tax return position, or preparing or signing a tax return. If the applicable taxing authority has no written standards with respect to recommending a tax return position or preparing or signin g a tax return, or if its standards are lower than the standards set forth in SSTS No. 1, then SSTS No. 1 must be followed. Page 22 1-38. SSTS No.1 provides that a member should have a good faith belief that a recommended position has a realistic possibi lity of being sustained if challenged. In addition, a member may recommend a tax return position if the member concludes that there is a reasonable basis for the position and advises the taxpayer to appropriately disclose that position. Thus, a member may prepare or sign a tax return that reflects a position if a member has a reasonable basis for the position and that position is appropriately disclosed . Page 22 1-39. Reasonable grounds for omitting an answer on a return include cases in which: Federal Tax Research, 11th Edition Page 1-9 1. The pertinent data are not readily available and are not significant to the determination of taxable income or loss or the resulting tax liability. 2. The taxpayer and the member are genuinely uncertain as to the meaning of the question on the return. 3. An answer is voluminous; however, assurance should be given on the return that the data can be supplied upon request. Page 23 1-40. In preparing a return, the member may ordinarily rely upon information that the taxpayer has provided. Although an examination of supporting documents is not required, the member should encourage the taxpayer to provide supporting documents, whenever appropriate. Page 23 1-41. A member may prepare tax returns that involve the use of the taxpayer's estimates, if, under the circumstances, it is impractical to obtain exact data and the estimated amounts appear reasonable to the member. Estimates may be appropriate where the keeping of precise records with respect to numerous items of small amounts is difficult to achi eve, where data is not available as of the time for filing the return, or certain records are missing. Pages 23-24 1-42. The selection of the treatment of an item on a tax return should be based upon the facts and the law that is applicable at the time a return is prepared. Unless the taxpayer is bound by the IRS to the treatment of an item in later years, such as by a closing agreement, the disposition of an item in a prior year's audit does not govern the treatment of a similar item in a later year's re turn. Therefore, a member may sign a return that contains a departure from a treatment that was required by the IRS in a prior year return, provided the standards under SSTS No. 1 are adhered to. Pages 24 - 25 1-43. When a member learns of an error in a previously filed tax return, or member becomes aware of an error during an administrative proceeding, he or she must advise the taxpayer promptly. This advice should include a recommendation of the appropriate measures that the taxpayer should take. The member is not obligated to inform the IRS of the error and may not do so without the taxpayer's permission, except as required by law. Page 25 1-44. SSTS No. 7. It states that the member must use judgment that reflects professional competence and serves the taxpayer's needs. Page 25 Federal Tax Research, 11th Edition Page 1-10 1-45. No, tax compliance work for an audit client is allowed. It must be approved by the audit committee of the issuer. Page 27 1-46. Neither the ABA Code nor the Model Rules have the force of law. Each was designed to be adopted by the appropriate agencies that govern the practice of law in the various states. In many jurisdictions, the state Supreme Court is charged with policing the practice of law. In other states, the legislature assumes this responsibil ity. Pages 27-28 1-47. An ethical dilemma occurs when someone is faced with a situation in which there are no clearly defined answers such as by regulation or law. Page 28 1-48. The major types of ethical reasoning are: 1. End-based Ethical Reasoning is where the ethical decision is the one that produced the most good for the largest number of people. 2. Rule-based Ethical Reasoning was based on German philosopher Immanuel Kant’s idea that individual actions should be such that we would accept similar behavior from everyone else. 3. Care-based Ethical Reasoning advises one to make decisions that would result in the treatment you yourself would like to receive. Page 29 1-49. Professional ethical behavior is the result of the interaction of personal morality, social responsibility, business ethics, and other general ethical standards. When something is judged to be morally right or wrong (or good or bad), the underlying standards on which such judgments are based are called moral standards. The tax pr actitioner must be aware of social responsibility in areas such as environmental protection, equal opportunity, and occupational safety. Business ethics examines the moral and ethical problems that arise in a business environment. There is disagreement abo ut whether a company has ethical responsibilities. Other ethical standards may include public policy, religious beliefs, and cultural values. Pages 29-31 1-50 Ethical issues involved in this case could include morality and business ethics. The moral issue involves the consideration of the “right thing to do” with respect to the plane ticket. The business ethics issues involve maintaining the integrity of the firm. 1-51 Unless the firm clearly allows staff to take home supplies (which likely would result in additional income to the staff members), this is clearly not ethical behavior. If Donna Federal Tax Research, 11th Edition Page 1-11 does work at home and the firm has clear policies allowing supplies to be taken home and used for work purposes, the behavior would be reasonable. 1-52. CPAs are in little danger of entering into the unauthorized practice of law as long as they avoid providing general legal services. The issue that arises is not whether CPAs are rendering legal services, but how much legal service is provided. Because of the l ack of guidelines on this issue, the federal agencies seem to have taken a lead in attempting to solve this problem. Page 33 1-53. To avoid being charged with the unauthorized practice of law, the following activities should be avoided.  Expressing a legal opinion on a nontax matter.  Drafting wills or trust instruments.  Drafting contracts.  Drafting incorporation papers.  Drafting partnership agreements. Page 35 EXERCISES 1-54. 1-55. a. Subpart A, § 10.4(c)8 Eligibility for enrollment as an enrolled agent or enrolled retirement plan agent. Discussion of the criteria for enrollment before the IRS b. Subpart B, § 10.21 Knowledge of client’s omission.. Each attorney, CPA, enrolled agent, or enrolled actuary who knows that the clien t 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 paper, shall advise the client promptly of the fact of such noncompliance, error, or omission. c. Subpart B, § 10. 26 Notaries.. A practitioner may not perform any official act as a notary public with respect to any matter administered by the IRS for which employed as counsel, attorney, or agent. d. Subpart B, § 10.29 Conflicting interests.. No tax practitioner can represent conflicting interests before the IRS unless he or she has the express consent of the directly interested parties Circular 230 a. Subpart C, § 10.51(a)(12) Contemptuous conduct in connection with practice before the Internal Revenue Service, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter b. Subpart A, § 10.6(e). Conditions for renewal. In order to qualify for renewal of enrollment, an individual, to practice before the IRS, must certify that he or she has satisfied the continuing professional education requirements. c. Subpart A, § 10.3(f) Registered tax return preparers Federal Tax Research, 11th Edition Page 1-12 d. Subpart B, § 10.27. Fees.. Discussion of provision that a practitioner may not charge an unconscionable fee for representing a client in a matter before the IRS. Also, a practitioner may not charge a contingent fee for preparing an original return. 1-56. Circular 230 a. Subpart B, § 10.22(b) Reliance on others. Except as modified by §§10.34 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person. b. Subpart A, § 10.7(c)(1)(vi). An individual may represent any individual or entit y, who is outside the United States, before personnel of the Internal Revenue Service when such representation takes place outside the United States. c. Subpart B, § 10.24. Prohibits assistance from disbarred or suspended persons. d. Subpart B, § 10.34. Defines standards for advising and signing returns. Circular 230 1-57. a. Subpart B, § 10.33. Discussion of adhering to the best practices in providing advice. b. Subpart B, § 10.35. Provides standards on “covered opinions.” c. Subpar t B, § 10.36. Requires that a firm take reasonable steps to adhere to the “covered opinions” section. d. Subpart B, § 10.37. Describes situations in which a tax practitioner should not give written advice. Circular 230 1-58. a. Solicitation is discussed in Subpart B, §10.30. b. Negotiation of a taxpayer's refund checks is discussed in Subpart B, § 10.31. c. Who may practice before the IRS? Subpart A §10.3 d. Authority to disbar or suspend from practice before the Internal Revenue Service is discussed in Subpart C, §10.50. Circular 230 1-59. a. Conflicting interests are discussed in Subpart B, § 10.39. b. Disreputable conduct is discussed in Subpart C, § 10.51. c. Assistance from disbarred or suspended persons is discussed in Subpart B, § 10.24. d. Representing oneself before the IRS is discussed in Subpart A, § 10.7. Circular 230 1-60. a. Practice of law is in Subpart B, § 0.32. b. Information to be furnished is in Subpart B, § 10.20. c. Fees are in Subpart B, § 10.27. Federal Tax Research, 11th Edition Page 1-13 d. Responsibility for correcting errors? Subpart, § 10.21 Circular 230 1-61. a. Best Practices are discussed in Subpart B, § 10.33 . b. The return of client’s records is discussed in Subpart B, § 10.28 . c. Tax Return Positions are discussed in Subpart B, § 10.34 . d. Due Diligence is discussed in Subpart B, § 10.22. Circular 230 1-62. a. SSTS No. 1. In preparing a tax return, a member should have a good -faith belief that a recommended position has a realistic possibility of being sustained if challenged; otherwise such a position should not be recommended by the member. b. SSTS No. 4. A member may prepare tax returns that involve the use of the taxpayer's estimates if it is impractical to obtain exact data and if the estimated amounts appear reasonable to the member. c. SSTS No. 6. The member must advise the taxpayer promptly, whether or not the member prepared or signed the return in question, when he or she learns of an error in a previously filed tax return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. However, the member is neither obligated to inform the IRS of the situation, nor may he or she do so without the taxpayer's permission, except as provided by law. Pages 22-25 1-63. a. Lowell Bar Association v. Loeb . The preparation of "simple" tax returns did not constitute the unauthorized practice of Massachusetts law because tax return preparation could not be identified as strictly within the legal discipline. b. Bercu . The court held that Bercu could have provided tax advice if it had been incidental to the tax return work he regularly performed for his clients. c. Sperry v. Florida . The U.S. Supreme Court held that a Federal statute that admitted nonattorneys to practice before Federal agencies (in this case, the Patent Office) took precedence over state regulation, thus CPAs and Enrolled Agents were not engaged in the unauthorized practice of law when they were giving tax advice. Pages 33-34 1-64. False. See Circular 230, §10.29. 1-65. True. See Circular 230, §10.7. 1-66. These fees would all be contingent fees if the IRS challenges a tax position. Under Circular 230 § 10.27 A Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund Federal Tax Research, 11th Edition Page 1-14 reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. Circular 230 1-67. Circular 230, § 10.32 (Practice of law) states that, “Nothing in the regulations in this part may be construed as authorizing persons not members of the bar to practice law.” Circular 230 1-68. d. Under Rule 1.100.001 of the AICPA Code of Conduct, CPAs cannot make self - laudatory statements not based on verifiable facts. Page 21 1-69. c. See Circular 230, §10.30 1-70. c. Under Rule 1.800.001 of the AICPA Code of Conduct , CPAs cannot practice public accounting under a firm name that is misleading. A sole practitioner is not a company. The only exception is when a sole practitioner survives the death or withdrawal of all other partners or shareholders, he or she can continue to practice under a firm name for up to two years after becoming a sole practitioner. Page 20 1-71. b. SSTS No. 4 allows a member to use reasonable estimates in the preparation of a tax return. Pages 23-24 1-72. d. Under Rule 1.510.001of the AICPA Code of Conduct , CPAs are allowed to take contingent fees in tax matters if they are based on judici al proceedings or the findings of governmental agencies. Page 18 1-73. c. Under Rule 1.700.001 of the AICPA Code of Conduct, CPAs cannot reveal confidential client information without the consent of the client unless it is to an investigative body, trial board, quality review body, or court of law. Pages 19-20 1-74. a. SSTS No. 4 requires members to disclose to the IRS the use of estimates when fire or computer failure has destroyed the relevant records. Pages 23-24 1-75. d. Under Subpart A, §10.7(c)(2)(i) of Circular 230, persons who are disbarred or suspended are not allowed to practice before the IRS. Federal Tax Research, 11th Edition Page 1-15 Circular 230 1-76. b. Under Subpart B, §10.21 of Circular 230 , practitioners must notify clients of any noncompliance with the tax law. A similar rule is found in SSTS No. 6. Page 11 1-77. a. Circular 230, Subpart A, §10.7(a) states that a taxpayer can appear on their own behalf before the IRS. b. 1.520.001 Commissions and Referral Fees Rule c. SSTS No. 3 Certain Procedural Aspects of Preparing Returns d. Under Statement on Standards for Tax Service (SSTS) No. 1, a member must have a good -faith belief that a recommended position has a realistic possibility of being sustained if challenged. Circular 230, Pages 20, 22, 24 1-78. a. Circu lar 230, Subpart C, §10.51 states that a practitioner can be disbarred or suspended from practice before the IRS for disreputable conduct. b. The knowledge of client omissions rule is found in Circular 230, Subpart B, §10.21. c. 1.400.200 Records Requests. Members must comply with the rules and regulations of authoritative regulatory bodies, such as the member’s state board(s) of accountancy, when the member performs services for a client and is subject to the rules and regulations of such regulatory body. d. SSTS No. 5 Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision e. Under Statement on Standards for Tax Services (SSTS) No. 7, a member must use judgment that reflects professional competence and serves the taxpayer’s needs. Circular 230, Pages 22 -26 1-79. The parts of the enrolled agent exam are: Part 1 - Individual Income Taxes Part 2 - Businesses Part 3 - Representation, Practices, Procedures See www.irs.gov for more information on the enrolled agent exam. 1-80. The Application for Enrollment to Practice Before the IRS is Form 23. 1-81. a. California - Minimum 3 semester or 4 quarter units in accounting ethics or accountants’ professional responsibilities b. Texas - The board requires that 3 passing semester hours be earned as a result of taking a course in ethics. c. North Carolina - The 150 semester hours required include a concentration in accounting, as defined by 21 NCAC 08A .0309, and 24 semester hours of coursework which include one (1) three (3) semester hour course from at least eight (8) of the following 10 fields of study: communications; computer technology; economics; ethics; Federal Tax Research, 11th Edition Page 1-16 finance; humanities/social science; international environment; law; management; or statistics CHAPTER 2 TAX RESEARCH METHODOLOGY DISCUSSION QUESTIONS 2-1. The primary purpose of tax research is to aid in finding solutions to tax problems. Page 46 2-2. The basic steps in conducting tax research include the following: Establish the Facts. This step involves the gathering of facts, including tax and nontax considerations. Identify the Issues. The tax researcher must identify both issues of fact and issues of law. In so doing, the researcher must rely on a combination of education, training, and experience. Locate the Appropriate Authority. The researcher must locate authority relevant to the client's situation. Authority may include both primary and secondary authority. Evaluate the Authority. This step in the tax research process requires the researcher to analyze the authority, including the current status of the authority and the precedential value of the authority. Develop Conclusions and Recommendations. The researcher must arrive at his or her conclusions based on the first four steps of the tax research process. Communicate the Recommendations. The final step in the research process is to communicate to the client the facts, assumptions, issues, sources of authority, and conclusions and recommendations. Pages 47-56 2-3. First, the researcher must understand the mechanical techniques that are used to identify and locate the tax authorities that relate to solving a problem. Second, the researcher must be creative and explore all of the relevant relationships among the facts and the problems at hand. Page 50 2-4. Significant tax facts that a tax practitioner might want to obtain could include any of the following: The client’s tax entity(ies). The client's family status and stability. The client's past, present, and projected marginal tax rates. The client's legal domicile and citizenship. The client's motivation for the transaction. Relationships among the client and other parties involved in the transaction. Whether special tax rules apply. Federal Tax Research, 11th Edition Page 1-17 Whether the transaction is proposed or completed. Pages 47-48 2-5. The researcher should be aware of the following pitfalls: 1. The researcher may attempt to research a problem before fully understanding the facts and circumstances relevant to the client's situation. 2. Often the researcher may have a tendency to ignore new questions that arise as the research task progresses. 3. The client may fail to provide all of the information that is vital to an accurate solution. 4. The tax researcher may approach a tax problem without considering other constraints on the solution to the problem, such as economic factors or personal preferences of the client. Page 50 2-6. a. T (lower tax liability). b. NT (economic constraints). c. NT (personal preference). d. NT (personal preference). e. NT (personal preference). 2-7. a. NT (personal preference). Might also be classified as T, since the taxpayer's motivation for a potential transaction is known. b. NT (personal preference) c. NT (family preference) d. T (lower tax liability) e. T (lower tax liability) Page 50 2-8. Research issues can be divided into two major categories, namely, fact issues and law issues. Fact issues are concerned with problems such as the dates of the transactions, the amounts involved in an exchange, reasonableness, intent, and purpose. Law issues arise when the facts are well established, but it is not clear which portion of the tax law applies. Page 48 Federal Tax Research, 11th Edition Page 1-18 2-9. The legal concept of collateral estoppel bars relitigation on the same facts or the same issues. Therefore, the tax practitioner must be certain that his or her case is researched fully and no issues have been overlooked. If an issue is not addressed in the original case, it may be lost forever. Page 49 2-10. Tax research may be spread over a lengthy period of time. The researcher must be aware of changes that occur during this period which might affect the outcome of the research. Applicable law or facts might be subject t o changes which will cause the researcher to arrive at different conclusions and recommendations, even concerning completed research activities. Page 52 2-11. All tax authority does not carry the same precedential value. The tax researcher must consider the source of the authority, including whether the source of authority is a primary or secondary source, and the force of the authority. Primary authority comes from statutory, administrative, and judicial sources. In fact, statutory authority is the basis for all tax provisions. Secondary authority consists of unofficial sources of tax information, such as tax journal articles, textbooks, and newsletters. The researcher should be cautious in relying upon secondary authority which does not have precedential value, but which may be of assistance in clarifying or explaining the primary authority. In addition, the researcher must take into account new issues that have developed since the date of the authority. Pages 51-52 2-12. Statutory sources include the Constitution, tax treaties, and tax laws that have been passed by Congress. Administrative authority includes the various rulings of the Treasury Department and the IRS. Judicial authority consists of the collected rulings of the various courts on Federal tax matters. Pages 52-53 2-13. a. P b. P c. S d. P e. P Pages 51-52 2-14. a. P b. P c. P d. S e. S Pages 51-52 2-15. a. S b. S Federal Tax Research, 11th Edition Page 1-19 c. P d. P e. S Pages 51-52 2-16. A citator is a reference source that enables the researcher to follow the judicial history of court cases. Page 54 2-17. A tax service is a coordinated set of reference materials that organizes the tax authority into a useable format, making the Internal Revenue Code more accessible. Page 58 2-18. a. TAXES - General tax practitioners b. Journal of Taxation - Sophisticated tax practitioners c. Practical Tax Strategies – General tax practitioners d. The Tax Adviser - Members of the AICPA and other tax practitioners e. The ATA Journal of Legal Tax Research – Tax academics and practitioners. Page 55 2-19. All tax authority does not carry the same precedential value. In the process of evaluating the tax authority for the issue under consideration, it is possible that new issues, not previously considered, may become known. In this case, the researcher may be required to gather additional facts, find more pertinent authority, and evaluate the new issues. Pages 51-52 2-20. If a clear solution to a tax research problem has not been obtained, the practitioner must use professional judgment as to the prope r conveyance of the research results to the client. In addition, the client might be informed of the alternative possible outcomes of the disputed transaction and give the best acceptable recommendation. Page 55 2-21. Include the following items in both the memorandum to the client file and the client letter: 1. A restatement of the pertinent facts from the researcher's perspective. 2. A summary of any assumptions that the researcher made in the course of his or her research. 3. A summary of the issues addressed in the research process. 4. The applicable authority used to arrive at the researcher's conclusions and recommendations. Federal Tax Research, 11th Edition Page 1-20 5. The researcher's conclusions and recommendations. Generally, the memorandum to the client file will contain significantly more details than the letter to the client. Pages 56-57 2-22. Yes. In many research situations, a fact generates an issue that in turn may lead to an answer or the need for more facts. Similarly, once an answer is found to an issue, it may also cause a new issue to appear or the need to gather more information. The same situation occurs in evaluating authority. Frequently, there will be ambiguity between items of authority that will require the researcher to use his or her critical thinking skills. This may result in new issues becoming known. The researcher would then be required to gather additional facts, find additional pertinent authority, and evaluate the new issues. Page 50 2-23. Substantial Authority under Reg. §1.6662 -4(d)(3)(iii) includes: a. The Internal Revenue Code and other statutory provisions, b. Proposed, Temporary, and Final Regulations, c. Revenue Rulings and Procedures, d. Tax Treaties and regulations there under, e. Court Cases, f. Congressional Committee Reports, g. The Blue Book, h. Private Letter Rulings issued after 10/31/76, i. Technical Advice Memoranda issued after 10/31/76, j. General Counsel Memoranda issued after 3/31/81, and k. IRS Information and Press Releases. It is important to be familiar with the above sources because any position documented based on these authorities will prevent accuracy -related penalties associated with the item or return under review. Page 52 2-24. Online tax research systems provide a fast, cheap method for tax practitioners to access tax information that he or she could not afford to buy before the use of computers. Today’s online systems allow the Federal Tax Research, 11th Edition Page 1-21 distribution of tax research information and entire tax services to multiple tax staff in both small and large CPA firms. They are accessible through the Internet and several public telecommunications networks. The materials that are available with these services are contained in databases that are stored at centralized computer locations. These databases may be accessed from remote l ocations with the use of a variety of compatible video devices and keyboards. Usually, they can be accessed via compatible handheld devices and computers that the user already owns. Advantages of such a system over a standard printed service are the abili ty on the part of the user to index any significant item by using it as a search item in a query, and the ability for the user to tailor his or her query to fit the requirements of a specific tax problem, which can result in the research process being cond ucted with greater speed and thoroughness; that online services are updated much faster than printed tax services; that they are particularly useful in researching case law, since every word contained in a case is included in the database, which in turn enables the user to save time by directly accessing only those cases that contain the key terms of his or her search, that certain documents may be obtained only from the central computer library, and that it can be used to obtain regularly published documen ts to which the researcher does not have access. Pages 58-59 2-25. Any of the following could be examples of web addresses of three free online Internet sites where someone could find information on various aspects of taxation:  http://taxsites.com  www.irs.gov  http://thomas.loc.gov Page 53 2-26. Citations not only document a preparer’s research and provide a trail for reviewers to follow but also to support that the preparer has met the substantial authority standard. Citations in a memo immediately signal to a reader the types of documents and level of authority a researcher is relying upon. Page 56 2-27. a. Thomson Reuters Checkpoint --A Web -based tax research service that contains research material on federal, state, local, and international taxation. Checkpoint contains analytical material such as the Tax Coordinator 2d and the United States Tax Reporter. b. CCH IntelliConnect --A Web -based tax research service that contains CCH’s tax services (Tax Research Consultant and Federal Income Tax Reporter) and other federal, state, local, and international legal and tax information. c. LexisAdvance Tax--Besides containing all federal and state tax research material, LexisNexis provides access to expert analytical materials from CCH, Tax Analysts, and BNA. In addition, LexisNexis has extensive libraries of newspapers, magazines, journals, and patent records and medical, economic, and accounting databases. d. Westlaw and WestlawNext contain all federal, state, local, and international legal sources, including court cases, administrative releases, and statutory information. All government documents (e.g., IRS publica tions, court cases) are also available on this system. Federal Tax Research, 11th Edition Page 1-22 2-28. The disadvantages of using a computerized tax service include the high cost of conducting a search and the broad nature of the database. The database includes all of the pertinent documents needed to conduct a thorough tax research. However, a computerized tax service does not normally include any type of indices; therefore, the researcher must determine the key words to utilize in his or her search request. If the request is not properly structured, the researcher will not locate the pertinent documents. Pages 62-63 2-29. Developing an effective search request requires that the researcher: 1. State the Issue in the Form of a Question 2. Identify the Keywords 3. Construct a Computer Research Query 4. Select Database and Execute Search 5. Interpret and Refine the Search Pages 59-60 2-30. To reduce the number of retrieved documents to a reasonable number, the researcher should modify his or her request, usually by editing the last request transmitted to one that is narrower in scope and utilize more unique key words. Page 61 2-31. The Checkpoint search connectors discussed in the text are:  and – finds documents with both chosen keywords in them  or – finds documents with either chosen keywords in them  /n - finds documents where the first chosen term is within ‘n’ words of the second chosen term  not – finds documents with the term that precedes the connector, but not the term following the connector Page 61 2-32 (1) Primary (2) Primary (3) Primary (4) Secondary Page 61 2-33. “Engagement Time Cost” could impact an engagement by making the research to costly for the client. Page 62 2-34. The “Potential Tax Liability” in a situation by making the research cost exceeds the tax savings. Federal Tax Research, 11th Edition Page 1-23 Page 63 2-35. The “Accuracy Threshold” could impact how much time is spent on the project. As a general rule, the more accuracy needed by the client, the more research that needs to be done to reach a higher level of client comfort. Page 63 2-36. “Professional Ethics” could impact a tax engagement by requiring the researcher to achieve an appropriate comfort level for the research conclusion. Page 63 2-37. The four parts of the Uniform CPA Exam are: 1. Auditing and Attestation (AUD) 2. Business Environment and Concepts (BEC) 3. Financial Accounting and Reporting (FAR) 4. Regulation (REG) The tax issues covered in the REG section of the Uniform CPA Exam include processes, procedures, accounting, and planning as well as federal taxation of property transactions, individuals, and entities. Ethics and professional and legal responsibilities are key components of the section, requiring that candidates be familiar with Treasury Department Circular 230, the AICPA Statements on Standards for Tax Services, and relevant IRS Code sections and regulations. Page 63 EXERCISES 2-38. All can be found online (however, a researcher may have to pay a subscription fee for access to them). For the second part of the question, the answer will vary by individual school campus library. 2-39. All responses and answers will vary with the availability of tax research services available for student use on your campus. Information regarding how students can gain access to the system for research projects in your classes should be obtained by the instructor. If the tax research service is not available on your campus, the student will state so. 2-40. Form 3903 and its instructions deal with moving expenses. IRS forms and publications can be accessed at: https ://www.irs.gov/forms -pubs. 2-41. IRS Publication 3 is the Armed Forces’ Tax Guide. IRS forms and publications can be accessed at: https:/ /www.irs.gov/forms -pubs. 2-42. IRS Publication 575 deals with Pension and Annuity Income. IRS forms and publications can be accessed at: https:/ /www.irs.gov/forms -pubs. 2-43. Form 1040 -PR can be found at: https:/ /www.irs.gov/forms -pubs. Federal Tax Research, 11th Edition Page 1-24 2-44. Publication 1542 is no longer updated by the IRS. Instead, the IRS updates per diem rates in annual (or more frequent) IRS Notices. At the time of the book’s printing, the most recent IRS Notice was Notice 2016 -58. 2-45. Answers will vary over time. 2-46. Issues that may be relevant in determining the tax consequences of these transactions include the following: 1. Does the condemnation of the land constitute an involuntary conversion of §1231 property? 2. If gain is realized, how is it computed? 3. If gain is recognized, is it ordinary income or capital gain? 4. Can any of the gain be deferred? 5. How is the award for damages treated? 2-47. Issues that may be relevant in determining the tax consequences of these transactions include the following: 1. Did the accident result from a “willful act” by Joey (i.e., his not setting the brake)? 2. Does the accident qualify for the casualty loss deduction for Joey? 3. How are the damages to the car and other property measured? 4. Are any payments for Nick’s injuries deductible by Joey? 5. Is the damage to Nick’s house deductible by Joey? 2-48. Issues that may be relevant in determining the tax consequences of these transactions include the following: 1. Who has the liability for the tax on the $75,000, John, Marsha, or both? 2. Could John and Marsha’s other income have any impact on the taxability of the $75,000? 3. Did John receive any benefit from the income and how might that affect any income tax liability? 4. Do John and Marsha live in a community property or common law state and what impact would that have on any tax liability? 5. If John reimburses the bank for the $75,000, is it deductible to him? 2-49. Issues that may be relevant in determining the tax consequences of these transactions include the following: Federal Tax Research, 11th Edition Page 1-25 1. Is the receipt of the restricted stock compensation to Dave? 2. Is there any gain realized on the receipt of the stock? If so, how is the gain computed? 3. If gain is recognized on the receipt of the stock, is it ordinary income or capital gain? 4. Can any of the gain be deferred? If so, how? 5. What is Dave’s basis in the restricted stock? 6. If Dave sells the stock after seven years, how will any gain or loss be taxed? 2-50. Issues that may be relevant in determining the tax consequences of these transactions include the following. 1. What are the tax consequences of rents received in advance? 2. Is Ericka a cash or accrual basis taxpayer? 3. If she is a cash basis taxpayer, how is the rent treated? 4. If she is an accrual basis taxpayer, how is the rent treated? 5. How are any expenses (e.g., depreciation and real estate taxes) associated with the rental income treated? 2-51. The query should include several of the following key words: redemption call proceeds tax-exempt bonds municipal 2-52. The query should include several of the following key words: treaty Germany fellowship income fellowship grant internship Examples of queries include the following: “treaty Germany” /10 & fellowship or internship (CheckPoint) treaty w/10 Germany and fellowship or internship (Lexis)