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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 examined by sociologists and political scientists.
Finally, attorneys are responsible for the interpretation of the taxation statutes, and accountants
ensure that these same statutes are applied consistently.
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1-2. The other major categories of tax practice in addition to tax research are:
tax compliance
tax planning
tax litigation
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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.
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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.
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 taxation, as long as the taxpayer remains
within legal bounds. In contrast, tax evasion constitutes the illegal nonpayment of a tax. Activities
of this sort clearly violate existing legal constraints and fall outside of the domain of the
professional tax practitioner.
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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 attendant tax liability, and the transaction may be modi-
fied to achieve a more favorable tax treatment. In a closed transaction however, all of the pertinent
transactions have been completed, and tax planning activities are limited to the presentation of the
situation to the government in the most legally advantageous manner possible.
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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.
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1-9. Tax research consists of the resolution of unanswered taxation questions. The tax research process
includes the following:
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1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS.
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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.
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1-12. Beginning in 2011, tax return preparers who prepare all, or substantially all, of a Federal tax return
(for compensation) will be subject to new requirements including:
1. Registration
2. Testing
3. Continuing Education (15 hours per year for all paid tax return preparers)
4. Tax compliance checks on all tax return preparers.
5. Extending Circular 230 ethics standards to all preparers.
Pages 11-12
Federal Tax Research, Ninth Edition Page 1-3
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.
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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.
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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.
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1-17. The Enrolled Agent Special Enrollment Examination (SEE) is an online exam given throughout
the year that consists of three parts. The length of each part is 3.5 hours.
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1-18. 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. Sec. 10.6.
Page 10
1-19. 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.
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1-20. 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.
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may be lawfully reclaimed, and conveyed to the person claiming his
or her labor or service as aforesaid.
Be it ordained by the authority aforesaid, That the resolutions of
the 23d of April, 1784, relative to the subject of this ordinance, be,
and the same are hereby repealed and declared null and void.
Done by the United States in Congress assembled, the thirteenth
day of July, in the year of our Lord one thousand seven hundred and
eighty-seven, and of their sovereignty and independence the twelfth.
Charles Thompson,
Secretary.
Constitution of the United States of America,
ARTICLE I.
ARTICLE II.
ARTICLE III.
ARTICLE IV.
Section I.—Full Faith and Credit shall be given in each State to the
public Acts, Records, and judicial Proceedings of every other State.
And the Congress may by general Laws prescribe the Manner in
which such Acts, Records and Proceedings shall be proved, and the
Effect thereof.
Section II.—The Citizens of each State shall be entitled to all
Privileges and Immunities of Citizens in the several States.
A Person charged in any State with Treason, Felony, or other
Crime, who shall flee from Justice, and be found in another State,
shall on Demand of the executive Authority of the State from which
he fled, be delivered up, to be removed to the State having
Jurisdiction of the Crime.
No Person held to Service or Labour in one State, under the Laws
thereof, escaping into another, shall, in Consequence of any Law or
Regulation therein, be discharged from such Service or Labour, but
shall be delivered up on Claim of the Party to whom such Service or
Labour may be due.
Section iii. New States may be admitted by the Congress into this
Union; but no new State shall be formed or erected within the
Jurisdiction of any other State; nor any State be formed by the
Junction of two or more States, or Parts of States, without the
Consent of the Legislatures of the States concerned as well as of the
Congress.
The Congress shall have Power to dispose of and make all needful
Rules and Regulations respecting the Territory or other Property
belonging to the United States; and nothing in this Constitution shall
be so construed as to Prejudice any Claims of the United States, or of
any particular State.
Section iv. The United States shall guarantee to every State in this
Union a Republican Form of Government, and shall protect each of
them against Invasion, and on Application of the Legislature, or of
the Executive (when the Legislature cannot be convened) against
domestic Violence.
ARTICLE V.
Article VI.
Article VII.
Nathaniel Gorham,
Massachusetts.
Rufus King.
Wil: Livingston,
Wm. Paterson,
New Jersey.
David Brearley,
Jona. Dayton.
B. Franklin,
Robt. Morris,
Tho: Fitzsimons,
James Wilson,
Pennsylvania.
Thomas Mifflin,
Geo: Clymer,
Jared Ingersoll,
Gouv: Morris.
Geo: Read,
John Dickinson,
Delaware. Jaco: Broom,
Gunning Bedford, Jr.,
Richard Bassett.
James M’Henry,
Maryland. Danl. Carroll,
Dan: of St. Thos: Jenifer.
John Blair,
Virginia.
James Madison, Jr.
Wm. Blount,
North Carolina. Hu. Williamson,
Rich’d Dobbs Spaight.
J. Rutledge,
Charles Pinckney,
South Carolina.
Charles Cotesworth Pinckney,
Pierce Butler.
William Few,
Georgia.
Abr. Baldwin.