8e-sm-01

Federal Tax Research, Eighth Edition

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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. See page 4 of the text.

1-2.

The four major categories of tax practice are:    

tax tax tax tax

compliance planning litigation research


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See page 5 of the text. 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. See page 5 of the text.

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. See page 5 of the text 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 resultant 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. See page 5 of the text.

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 modified to achieve a more favorable tax treatment. In a closed planning situation, 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. See page 5 of the text.

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. See page 6 of the text.

1-8.

CPAs serve is a support capacity in tax litigation.


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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.


Circular 230 is issued by the Treasury Department and applies to all who practice before the IRS. See page 7 of the text.

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. See page 7 of the text.

1-12.

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. See page 7 of the text.

1-13.

Section 10.2 of Subpart A of the Circular defines practice before the IRS as including ...all 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. See page 7 of the text.

1-14.

To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2) work for the IRS for 5 years. Circular 230, Subpart A, Secs. 10.4 to 10.6. See page 8 of the text.

1-15.

Enrolled Agents must complete 72 hours of Continuing Education every three years (an average of 24 per year). Circular 230, Subpart A. Sec. 10.6.


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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. See page 8 of the text.

1-17.

The names of organizations that can be represented by regular fulltime employees are found in Circular 230, § 10.7(c). A regular full-time employee can represent the employer (individual employer). A regular fulltime 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. See page 8 of the text.

1-18.

Yes. Circular 230, Subpart A, Sec. 10.7. See page 8 of the text.

1-19.

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. See page 10 of the text.

1-20.

The more-likely-than-not chance is defined by the IRS in Circular 230 § 10.34(a)(4) as being met if analysis of the tax return position by a reasonable and well-informed person knowledgeable in the tax law(s) would lead such a person to conclude that the position has a greater than 50 percent likelihood of being sustained on its merits. A tax practitioner may sign an income tax return that takes a non-more-likely-than-not standard, if the position is not frivolous and the position is disclosed on the income tax return. See page 12 of the text.

1-21.

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. See page 11 of the text.


1-22.

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Under Section 10.25 of Circular 230, partners of government employees cannot represent anyone for which the government employeepartner 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. See page 10 of the text.

1-23.

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 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. See page 10 of the text.

1-24.

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. See page 12 of the text.

1-25.

Best practices include: 1. 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. 2. Establishing the facts, 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. 3. 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. 4. Acting fairly and with integrity in practice before the IRS. See page 12 of the text.

1-26.

A reliance opinion is written advice that concludes at a confidence level of a greater than 50 percent likelihood that one or more significant Federal tax issues would be resolved in the taxpayer’s favor. A marketed opinion is written advice that the practitioner knows or has reason to know will be used or referred to by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayer(s). §10.36 requires a practitioner who has principal authority and responsibility for overseeing a firm’s practice of providing advice concerning Federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect to ensure compliance with §10.35. See page 13 of the text.


1-27.

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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. See page 14 of the text.

1-28.

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 Conduct 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 to the public.


The only exceptions to the Rules of Conduct occur when the wording of a Rule indicates otherwise or the member is in a foreign country. See page 15 of the text.

1-30.

Under Rule 503, a CPA may accept a commission if he or she does not do audit, review, or complication work for the client and a disclosure of the commission is made to the client. See page 18 of the text.

1-31.

Independence is impaired if a CPA: 1.

Has a direct or material indirect financial interest in the client's enterprise;

2.

Has any material jointly held investment with the client, or with its officers, directors, or principal stockholders;

3.

Has any loan to or from the client, an officer, or director of the client or stockholder of the client, except for loans, such as home mortgages that were obtained under normal lending procedures;

4.

Is an officer, director, employee, or underwriter of the client, during the period that is covered by the financial statements, during the


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period of the professional engagement, or at the time of expressing an opinion; or, 5.

Is a trustee, executor, or administrator of any estate that holds a direct or material indirect financial interest in the client.


A CPA in tax practice may present an issue resolving doubt in favor of the client in an advocacy engagement. Such presentation by the CPA is permitted and is not considered to impair integrity or objectivity. See page 16 of the text.

1-33.

The four general standards of Rule 201 are as follows. 1.

The CPA must be able to complete all professional services with professional competence.

2.

The CPA must exercise due professional care in performing all professional services.

3.

The CPA shall adequately plan and supervise the performance of professional services.

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.


a.

No violation

b.

503 - Commissions

c.

No violation

d.

502 - Advertising and Solicitation

e.

505 - Form of Practice and Name

f.

501 - Discreditable Acts

Various pages of the text. 1-35.

Rule 301 does not apply in the following situations. 1.

If there is a conflict with Rules 202 and 203 as set forth by the AICPA Code of Professional Conduct;

2.

If the CPA is served with an enforceable subpoena or summons, or must comply with applicable laws and government regulations;

3.

The review of a CPA's practice under AICPA or state society authorization; or


4.

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If the CPA is responding to an inquiry of an investigative or disciplinary body of a recognized society or where the CPA is initiating a compliant with a disciplinary body.


The Statements on Standards for Tax Services are a series of guidelines, issued by the AICPA, as to what constitutes good standards of tax practice. The Statements also delineate a member's responsibility to clients, the public, and the profession. The stated objectives of the Statements are as follows. 1.

To recommend appropriate standards relative to the member's standards for tax services;

2.

To encourage an increased understanding of the member's responsibilities by the Treasury Department and the IRS; and,

3.

To foster an increased public understanding of, compliance with, and confidence in the tax system, through awareness of the recommended standards of responsibilities of members.


SSTS No.1 provides that a member should have a good faith belief that a recommended position has a realistic possibility of being sustained if challenged. A member may reach such a conclusion based on well-reasoned articles by tax specialists, treatises, IRS General Counsel Memoranda and written determinations, and explanations of tax acts as prepared by the Joint Committee on Taxation. See page 19 of the text.

1-38.

Reasonable grounds for omitting an answer on a return include cases in which 1.

the 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; or,

3.

an answer is voluminous; however, assurance should be given on the return that the data can be supplied upon request.


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. See page 20 of the text.


1-40.

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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 achieve, where data is not available as of the time for filing the return, or certain records are missing. See page 20 of the text.

1-41.

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 return. 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. See page 21 of the text.

1-42.

When a member learns of an error in a previously filed tax return, or that a required return has not been filed, 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. If a member becomes aware of an error during an administrative proceeding, the member should request the taxpayer's approval to disclose the error to the IRS, unless the error would have only an insignificant effect on the taxpayer's tax liability. If the taxpayer is unwilling to grant such approval, the member may be under an obligation to withdraw from the engagement. See pages 21 and 22 of the text.

1-43.

SSTS No. 8. It states that the member must use judgment that reflects professional competence and serves the taxpayer's needs. See page 22 of the text.

1-44.

No, tax compliance work for an audit client is not prohibited. It must be approved by the audit committee. See pages 23 and 24 of the text.

1-45.

The ABA Code of Professional Responsibility is a set of guidelines that define appropriate professional conduct. The ABA Code includes nine Canons, which may be thought of as statements of principles. The ABA Code has been adopted by the policy agencies in all jurisdictions. However, sometimes modifications were made to the Code. The Model Rules for Professional Conduct were adopted in August 1983, but


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presently are being used by only a few states. It is expected, however, that the Model Rules will eventually replace the ABA Code as the statement of legal ethical principles. See page 24 of the text. 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 responsibility. See page 24 of the text.

1-47.

An Ethical Dilemma is when someone is faced with a situation in which there are no clearly defined answers by regulation or law. See page 25 of the text.

1.48.

The major types of ethical reasoning are: 

End-based Ethical Reasoning is where the ethical decision is the one that produced the most good for the largest number of people.



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.



Care-based Ethical Reasoning says make decisions that would result in the treatment you yourself would like to receive.


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 practitioner 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 about whether a company has ethical responsibilities. Other ethical standards may include public policy, religious beliefs and cultural values. See pages 26-29 of the text.

1-50.

In the period before the 1960s, the legal profession brought a series of legal challenges to the practice of tax by CPAs and other nonattorneys. The lawyers contended that the practice of tax was part of the field of law and, therefore, nonattorneys could not practice tax. In 1963, the U.S. Supreme Court held (in Sperry) that a federal statute that admitted nonattorneys to practice before federal agencies (in this case, the Patent Office) took precedence over state regulation. Later, in 1965, Congress enacted Public Law 89-332, amending prior law and allowing CPAs to practice before the IRS. Although this law added to the force of the Sperry decision as it applied to


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CPAs, Sperry still provides for the preemption of federal regulations and statutes in matters of practice before other federal agencies. See page 32 of the text. 1-51.

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


a. Subpart A, 10.4(b). Discussion of the criteria for enrollment of former Internal Revenue Service employees. b. Subpart B, Sec. 10.21. 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 paper, shall advise the client promptly of the fact of such noncompliance, error, or omission. c. Subpart B, Sec. 10.26. Discussion of the general rules and definitions of the practice by former government employees, their partners and their associates. It also discusses the rules of representation by former government employees. d. Subpart B, Sec. 10.32. Discussion of the practice of law, stating that nothing in the regulations shall be construed as authorizing persons not members of the Bar to practice law. Various pages of the text.

1-53.

a. Subpart C, Sec. 10.51(b). Disreputable conduct is giving false or misleading information or participating in any way in the giving of false or misleading information to the Department of Treasury or any officer, in any matter pending or likely to be pending before them and knowing such information is misleading. b. Subpart A, Sec. 10.6(e). 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, Sec. 10.2(e). Discussion of definition of practice before the IRS. It comprises all matters concerned/connected with a presentation to the IRS or any of its officers of a client∋s rights, privileges, or liabilities under laws or regulations administered by the IRS. d. Subpart B, Sec. 10.27. 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.


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Various pages of the text. 1-54.

a. Subpart A, Sec. 10.2(e). Defines practice before the IRS b. Subpart A, Sec. 10.7(c)(viii). Allows limited representation before the IRS for signers of tax returns. c. Subpart B, Sec. 10.24. Prohibits assistance from disbarred or suspended

persons. d. Subpart B, Sec. 10.34. Defines standards for advising and signing returns. Various pages of the text. 1-55.

a. Subpart B, Sec. 10.33. Discussion of adhering to the best practices in providing advice. b. Subpart B, Sec. 10.35. Provides standards on “covered opinions.” c. Subpart B, Sec. 10.36. Requires that a firm take reasonable steps to adhere to the “covered opinions” section. d. Subpart B, Sec. 10.37. Describes situations in which a tax practitioner should not give written advice. Various pages of the text.

1-56.

a. Solicitation is discussed in Subpart B, Sec. 10.30. b. Negotiation of a taxpayer's refund checks is discussed in Subpart B, Sec.10.31. c. Depositions are discussed in Subpart C, Sec. 10.67. d. Authority to disbar or suspend from practice before the Internal Revenue Service is discussed in Subpart C, Sec. 10.50. Various pages of the text.

1-57.

a. Conflicting interests are discussed in Subpart B, Sec. 10.39. b. Tax shelter opinions are discussed in Subpart B, Sec.10.33. c. Disreputable conduct is discussed in Subpart C, Sec. 10.51. d. Assistance from disbarred or suspended persons is discussed in Subpart B, Sec. 10.24. Various pages of the text.

1-58.

a. Practice of law is in Subpart B, Sec. 10.32. b. Information to be furnished is in Subpart B, Sec. 10.20. c. Fees are in Subpart B, Sec. 10.27.


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d. Who may practice before the IRS is in Subpart A, Sec. 10.3. Various pages of the text. 1-59.

a. Best Practices are discussed in Subpart B, Sec. 10.33. b. Covered Opinions are discussed in Subpart B, Sec. 10.35. c. Tax Return Positions are discussed in Subpart B, Sec. 10.34. d. Due Diligence are discussed in Subpart B, Sec. 10.22. Various pages of the text.

1-60.

a. Article VI, & .01. Services should be consistent with acceptable behavior for certified public accountants. A CPA should perform services with integrity, objectivity, and independence, along with due care. For example, a person who does not use objectivity, independence, or due care in dealing with his clients is inconsistent with acceptable professional behavior as defined by Article VI of the AICPA Code of Professional Conduct. b. Rule 201, & .02 201-1. This paragraph discusses the competence of a CPA to complete an engagement. It states that competence to perform professional services involves both the technical qualifications of the member and the member's staff and the ability to supervise and evaluate the quality of the work performed. Competence relates both to knowledge of the profession's standards, techniques and the technical subject matter involved, and to the capability to exercise sound judgment in applying such knowledge in the performance of professional services. c. Rule 502, & .03 502-2. A CPA in public practice cannot seek clients by false, misleading, or deceptive advertising or other forms of solicitation. Activities do not meet this Rule if they: 

Create false or unjustified expectations of favorable results.



Imply the ability to influence any court, tribunal, regulatory agency, or similar body or official.



Contain a representation that specific professional services in current or future periods will be performed for a stated fee, estimated fee, or fee range when it was likely at the time of the representation that such fees would be substantially increased and the prospective client was not advised of that likelihood.



Contain any other representations that would be likely to cause a reasonable person to misunderstand or be deceived.

There are no restrictions as to the type, media, or frequency of a CPA's advertisements. d. Rule 504, & .01. Rule 504 of the AICPA Code of Professional Conduct does not exist. See pages 15-18 of the text.


1-61.

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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, or becomes aware that a required return was not filed. 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. See pages 19-21 of the text.

1-62.

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. See page 32 of the text.

1-63.

False. See Circular 230, § 10.29.

1-64.

True. See Circular 230, § 10.7.

1-65.

False. See Circular 230, §§ 10.2 and 10.3.

1-66.

True. See Circular 230, § 10.22.

1-67.

c. See Circular 230, § 10.30

1-68.

d. See Circular 230, § 10.75

1-69.

d. Under Rule 502 of the AICPA Code of Conduct, CPAs cannot make self-laudatory statements not based on verifiable facts.

1-70.

c. Under Rule 505 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


Page 1-15

continue to practice under a firm name for up to two year after becoming a sole practitioner. 1-71.

b. SSTS No. 4 allows a member to use reasonable estimates in the preparation of a tax return.

1-72.

d. Under Rule 302 of the AICPA Code of Conduct, CPAs are allowed to take contingent fees in tax matters if they are based on judicial proceedings or the findings of governmental agencies.

1-73.

c. Under Rule 301 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.

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.

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.

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.

1-77.

a. Circular 230, Subpart A, § 10.7(a) states that a taxpayer can appear on their own behalf before the IRS. b. The tax shelter opinions are found in Circular 230, Subpart B, § 10.33. c. Under Rule 301 a CPA in the practice of public accounting must not disclose confidential client data without the specific consent of the client. d. SSTS No. 4 addresses the use of estimates. e. 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. Various pages in the text.

1-78.

a. Circular 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. Under Rule 503 A CPA in public practice cannot charge or receive a commission or referral fee from a client for whom the CPA or the CPA’s firm performs audit, review, or compilation work. d. SSTS No. 3 states that in preparing or signing a return, the member ordinarily may rely without verification on information that the taxpayer or a third party has provided, unless such information appears to be incorrect,


Page 1-16

incomplete, or inconsistent. e. Under Statement on Standards for Tax Services (SSTS) No. 8, a member must use judgment that reflects professional competence and serves the taxpayer’s needs. Various pages in the text. 1-79.

The parts of the enrolled agent exam are: Part 1 - Individual Income Taxes Part 2 - Sole Proprietorships and Partnerships Part 3 - Corporations (including S Corporations), Fiduciaries, Estate and Gift Tax, and Trusts Part 4 - Ethics, Record keeping Procedures, Appeal Procedures, Exempt Organizations, Retirement Plans, Practitioner Penalty Provisions, Research Materials and Collection Procedures. See www.irs.gov for more information on the enrolled agent exam. 1-80.

This is an online activity based exercise. The current president of the NAEA is Diana Thompson. The headquarters is in Washington, D.C.

1-81.

This is an online activity based exercise.

1-82.


1-83.


1-84.

Answers will vary by state.

Note: For the following cases, students may present other positions which could be considered ethically correct. The answers presented below are the views of the authors and are presented as a basis to judge a student's ethical conclusion. 1-85.

Note: There is no right or wrong answer to this question, it is designed to elicit discussion about ethical issues. 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.

1-86.

Note: There is no right or wrong answer to this question, it is designed to elicit discussion about ethical issues. Ethical issues involved in this case could include morality. The moral aspects of the case may include the materiality of the supplies stolen and a consideration of what is the right thing to do given the circumstances.

1-87.

Note: There is no right or wrong answer to this question, it is designed to elicit discussion about ethical issues. Nonregulatory ethical issues involved in this situation could include morality and business ethics. Examples of the moral aspects of this case are: 1)

the materiality of the violation of the Internal Revenue Code, and

2)

a consideration of the "right thing to do.∀


Page 1-17

The business ethics issues involve:

1-88.

1)

the obligation of the business for fair and honest dealings with its clients,

2)

the obligation of the business for fair and honest dealings with the Internal Revenue Service, and

3)

maintaining the firm's integrity within the business community.

Note: There is no right or wrong answer to this question, it is designed to elicit discussion about ethical issues. The nonregulatory ethical issues in this situation involve morality and business ethics. The moral aspects of this case involve the obligation of both parties to disclose assets to determine an equitable allocation to each party. The business ethics issues involve the obligation of the business to the community at large not to participate in unfair or dishonest dealings of its clients and the obligation of the business not to participate in dishonest dealings with the Internal Revenue Service.

1-89. Rule Rule Rule Rule SSTS

AICPA Code of Professional Conduct 101: Independence 102: Objectivity and Integrity 301: Confidential Client Information 501: Acts Discreditable No. 1: Tax Return Positions

It is not advisable for the Ahi Corporation to complete the transaction. Under Rule 102, all professional services by a CPA should be rendered with objectivity and integrity, avoiding any potential or existing conflicts of interest. The CPA must exercise due professional care in the performance of all professional services and comply with all standards promulgated by the bodies designated by the AICPA Council. Under Rule 501, a CPA must not commit an act that is discreditable to the profession. Under the Statements of Standards for Tax Services (SSTS), a CPA should have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged. The CPA must use judgment that reflects professional competence and serves the client's needs. Written communication should be given to the client in important, unusual, or complicated transactions. The CPA should advise the client of such risk as in the instant case. Where the taxpayer insists on the specific position, the CPA should not continue with the engagement as the tax return position is exploitative and frivolous. 1-90.

AICPA Code of Professional Conduct Rule 102: Objectivity and Integrity SSTS

No. 1: Tax Return Positions No. 6: Knowledge of Error: Return Preparation

A CPA must comply with all standards promulgated by bodies designated by the AICPA Council and conform to generally accepted accounting principles. Under Rule 102, all professional services by a CPA should be rendered with


Page 1-18

objectivity and integrity, avoiding any potential or existing conflicts of interest. In addition, a CPA should neither knowingly misrepresent facts nor subordinate his or her judgment to that of others in rendering any professional services. Under the Statements of Standards for Tax Services (SSTS), a CPA should have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged. In the instant case, the CPA must notify and advise the client promptly upon his or her knowledge of a prior or current tax return error(s) that has a significant effect upon the taxpayer's liability. The client must be notified and advised either orally or in writing. Once rental prices of the current area have been verified and compared against the amount paid by Haddock Corp., the CPA should take the appropriate actions. The CPA should consider whether to proceed with the preparation of the current year's return or resign from the engagement completely. He or she should not sign the tax return until the appropriate measures have been taken to correct the errors made in the current and prior returns. 1-91.

AICPA Code of Professional Conduct Rule 102: Objectivity and Integrity Rule 301: Confidential Client Information Under Rule 301 of the AICPA Code of Professional Conduct, a CPA in the practice of public accounting must not disclose confidential client data without specific consent of the client. There are exceptions that exist for Rule 301. Under Rule 102, all professional services by a CPA should be rendered with objectivity and integrity, avoiding any potential or existing conflicts of interest. In addition, a CPA should neither knowingly misrepresent facts nor subordinate his or her judgment to that of others in rendering any professional services. In the instant case, the CPA should notify the client, Shark Corporation, of the misrepresentation of facts. If the client is not willing to notify the buyer of the building's current structural condition, the CPA should resign from the engagement. If the CPA has already told the other side that the building was OK when he or she learns of its status, the CPA should resign from the engagement with the Shark Corporation.

1-92.

AICPA Code of Professional Conduct Rule 102: Objectivity and Integrity Rule 201: General Standards Rule 301: Confidential Client Information Under Rule 301 of the AICPA Code of Professional Conduct, a CPA in the practice of public accounting must not disclose confidential client data without specific consent of the client. There are exceptions that exist for Rule 301. In the instant case, if and only if Anchovy gives permission to Tom can Anchovy's financial condition be disclosed to the Sardine Corporation, Alice's client.

1-93.

AICPA Code of Professional Conduct Rule 101: Independence Rule 102: Objectivity and Integrity


Page 1-19

As the tax manager, it is not advisable for you to go on the fishing trip with the audit manager, all expenses paid by Snapper. Under Rule 101 of the AICPA Code of Professional Conduct, a CPA in public practice must be independent of the enterprise for which professional services are being rendered. As in the instant case, independence is impaired if a CPA (or CPA firm) has any direct or material indirect financial interest in the client's enterprise, since Snapper could be a major client for the CPA firm. Under Rule 102, all professional services by a CPA should be rendered with both the utmost objectivity and integrity, avoiding any conflict of interest. Rule 102 prohibits a CPA firm from being requested to follow blindly the demands of an audit client or to subordinate his or her judgment to that of others in rendering any professional services. It would be in good faith to notify the CPA firm of the audit manager's failure to comply with the Rules under the AICPA Code of Professional Conduct. Notifying the CPA firm could require a moral decision to inform on a fellow staff member. It is in the best interest of the CPA firm to abide by all Rules and Regulations or risk severe consequences. 1-94.

Circular 230 AICPA Code of Professional Conduct a. Under § 10.27 of Circular 230, a tax practitioner cannot charge an unconscionable fee. Since the attorney appears to be charging such a fee, the CPA should inform the attorney of that fact. If the attorney does nothing about the fee, then the CPA is faced with an ethical dilemma. b. Ethical problems: (1) since the CPA works for the attorney, is it proper to go directly to the attorneys client, or (2) should (or can) the CPA inform the IRS of the unconscionable fee? There is general guidance under Article II (Public Interest) and Article III (Integrity) in the AICPA Code of Professional Conduct on what a CPA should do in unusual situations. However, this situation is more a nonregulatory ethics question since it is not covered directly by official pronouncements (e.g., Circular 230). Since there is no clear answer to this situation, expect students to come up with a variety of opinions on what to do and why it should be done.

1-95.

a. There should be a variety of student recommendations on what Darlene should do in this situation. The recommendations could range from eat the time to quit the firm. b. The ethical questions raised in this situation should be of the nonregulatory type. Questions of what is right? Is the situation fair? etc. Since there is no clear answer to this situation, expect students to come up with a variety of opinions on what to do and why it should be done.

1-96.

a. There should be a variety of student recommendations on what Freya should do in this situation. The recommendations could range from do nothing to be a whistle blower and call the U.S. Navy to report the problem. b. The questions raised in this situation could be of the legal or ethical type. For example, could Freya get into legal trouble for not reporting the double billing? Of course, the ethical questions of what is right?, what is moral?, and what is proper? come into play in this situation. Expect students to come up with a variety of opinions on what to do and why it should be done.


1-97.

Page 1-20

a. There should be a variety of student recommendations on what Jenny should do in this situation. The recommendations could range from do nothing to be a whistle blower and call the Securities and Exchange Commission to report the problem. b. The questions raised in this situation could be of the legal or ethical type. For example, could Jenny get into legal trouble for not reporting the accounting reporting problem? Of course, the ethical questions of what is right?, what is moral?, and what is proper? come into play in this situation. Expect students to come up with a variety of opinions on what to do and why it should be done.

1-98.

a. This situation runs afoul of the Sarbanes-Oxley Act requirement that the audit committee approve any non-audit services provided by a CPA firm for a client. Eric should probably inform both the partner on the engagement and the client of the problem so that it can addressed. b. The questions raised in this situation could be of the legal or ethical type. For example, could Eric get into legal trouble for not reporting the accounting reporting problem? Of course, the ethical questions of what is right?, what is moral?, and what is proper? come into play in this situation. Expect students to come up with a variety of opinions on what to do and why it should be done. See page 23 in the text.

1-99.

a. The answer to this question will vary by student. Some will say go ahead since it is "legal," while other might say even though it is legal, it would be improper to go ahead with the inversion on moral grounds. b. The ethical questions are such items as; what is right?, what is moral?, and what is proper? Expect students to come up with a variety of opinions on what to do and why it should be done.


Page 1-21

FEDERAL TAX RESEARCH Concept Review Introduction to Tax Practice and Ethics Quiz 1 True or False Indicate which of the following statements are true or false by circling the correct answer. T

F 1. Tax compliance consists of gathering pertinent information, evaluating and classifying that information, and filing any appropriate tax returns.

T

F 2. Tax planning is the process of illegally arranging one's financial affairs to optimize any applicable tax liability.

T

F 3. practice.

T

F 4. Under the Circular 230, ∀limited practice∀ provision, an income tax return preparer can execute a claim for refund for a client.

T

F 5. Subpart A of Circular 230 provides the rules of conduct for individuals authorized to practice before the IRS.

T

F 6. All members of the American Institute of CPAs are subject to the Institute's Code of Professional Conduct.

T

F 7. Under the AICPA's Code of Professional Conduct, a CPA may disclose confidential client data without the consent of the client.

T

F 8. Under the AICPA's Code of Professional Conduct, a CPA may not advertise in newspapers or on TV.

T

F 9. The Statements on Standards for Tax Services are issued by the AICPA.

T

F 10. Under SSTS #4, a CPA cannot use an estimate in preparing a tax return for a client.

Tax avoidance is the objective of much of modern tax

Fill-in-the Blanks Complete the following statements with the appropriate word(s) or amounts. 1.

Tax planning can be divided into two major categories: the ________ transaction and the ________ transaction situations.

2.

The rules that govern practice before the IRS are found in ________.

3.

A(n) ________ ________ is a person who has passed a special IRS examination or who

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INSTRUCTORS MANUAL

has worked for the IRS for five years and is issued a permit to represent clients before the IRS. 4.

Under Rule 505 of the AICPA Code of Professional Conduct, CPAs may practice public accounting only in the form of a ________, ________, or professional corporation.

5.

The ________ ________ ________ ________ _________ provide guidelines for attorney professional conduct.

6.

Tax ________ is the object of much of tax practice.

7.

________ ________ is the process of arranging one's financial affairs to minimize any applicable tax liability.

8.

________ ________ is the process of settling a dispute with the IRS in a federal court.

9.

According to Circular 230, ________, CPAs, _________ ________, and enrolled actuaries may practice before the IRS.

10.

The AICPA Code of Professional Conduct consists of two integral sections -the ________ and the ________.


Page 1-23

SOLUTIONS, CHAPTER 1 QUIZ 1 True or False 1. 2.

T

3. 4. 5. 6. 7.

T

8. 9. 10.

F Tax planning is the process of legally arranging one's financial affairs to minimize any applicable tax liability. F F

A preparer cannot execute a claim for refund. Subpart B contains the rules of conduct.

T F A CPA may not disclose confidential client data without the consent of the client. F Advertising must not be false, misleading, or deceptive. T F Under certain circumstances, a CPA may use estimates in preparing a tax return.

Fill-in-the-Blanks 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

open, closed Circular 230 enrolled agent proprietorship, partnership Model Rules for Professional Conduct planning or avoidance Tax planning Tax litigation attorneys, enrolled agents principles, rules

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FEDERAL TAX RESEARCH Concept Review Introduction to Tax Practice and Ethics Quiz 2 True or False Indicate which of the following statements are true or false by circling the correct answer. T

F 1. Tax compliance is the process of arranging one's financial affairs to minimize any applicable tax liability.

T

F

T

F 3. Under Circular 230, tax practitioners are required to use due diligence in preparing tax returns.

T

F 4. A CPA who has been suspended by a state board of accountancy is prohibited from practicing before the IRS by Circular 230.

T

F 5. An individual may represent (without compensation) an immediate family member before the IRS.

T

F 6. Enrollment is not required to represent a client outside the United States.

T

F 7. The AICPA Code of Professional Conduct consists of two sections, Principles and Rules.

T

F 8. manner.

A CPA may advertise in a false, misleading, or deceptive

T

F

A CPA cannot advertise on TV.

T

F 10. Under the AICPA SSTS, a member has to answer every question on a tax return before he or she can sign the return.

2.

9.

Tax avoidance and tax evasion are not the same thing.

Fill-in-the Blanks Complete the following statements with the appropriate word(s) or amounts. 1.

The illegal nonpayment of a tax is tax _____________.

2.

The process of settling a dispute in a court of law is tax _____________.

3.

Tax _____________ consists of the resolution of unanswered tax questions.

4.

Who may practice before the IRS is defined in __________ __________ .


Page 1-25

5.

Under Rule 101, a CPA (or CPA firm) in public practice must be _____________ of the enterprise for which the professional services are being provided.

6.

In rendering professional services, a CPA should perform such services with __________ and _____________.

7.

A CPA must not commit an act that is ________________ to the profession.

8.

In preparing a tax return, a member should have a good faith belief that a recommended position has a _________ _________ of being sustained if challenged.

9.

The ABA Model Code includes _______ Canons, which may be thought of as statements of principles.

10.

Nonregulatory ethics concepts include __________, social ____________, and business ethics.

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SOLUTIONS, CHAPTER 1 QUIZ 2 True or False 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

F T T T T T T F

This is the definition of tax planning.

F A CPA cannot advertise in false, misleading, or deceptive manners. A CPA can advertise on TV. F A member only has to make a reasonable effort to answer every question on a tax return.

Fill-in-the blanks 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

evasion litigation research Circular 230 independent objectivity, integrity discreditable realistic possibility nine morality, responsibility


Page 1-27

TEST BANK, Chapter 1 Multiple Choice Choose the best answer for each of the following questions. ___

___

1. Under the Statements of Standards for Tax Services, if an accountant finds that a taxpayer has intentionally or otherwise underpaid income taxes for a previous tax year, a. The member should refuse to sign the return. b. The member must report it immediately to the IRS. c. The member must advise the taxpayer of the omission. d. The member is not expected to address issues related to prior year returns. e. None of the above. 2.

Tax evasion is: a. Legally minimizing taxes. b. Illegally minimizing taxes. c. The same as tax avoidance. d. None of the above.

___

3. a. b. c. d. e.

Circular 230 is a publication of: The Internal Revenue Service. The American Institute of CPAs. The American Bar Association. The Securities Exchange Commission. None of the above.

___

4. a. b. c. d. e.

According to the text, the primary purpose of effective tax planning is: Eradicating the tax entirely. Deferring the receipt of income. Converting ordinary income into capital gain. Eliminating tax in the current year. Minimizing tax liability.

___

5. Under Circular 230, who may not practice before the Internal Revenue Service? a. Attorneys. b. Certified Public Accountants. c. Enrolled Agents. d. Enrolled Actuaries. e. Real Estate Appraisers.

___

6. These a. b. c. d. e.

The AICPA Code of Professional Conduct consists of two sections. are: Principles and Rules. Concepts and Rules. Principles and Concepts. Interpretations and Rules. Interpretations and Concepts.

___

7. a.

The Statements on Standards for Tax Services are issued by: The Internal Revenue Service.

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b. c. d. e.

The American Institute of CPAs. The American Bar Association. The Securities Exchange Commission. None of the above.

___

8. Which of the following is not an element of tax practice as defined in the text? a. Tax Compliance. b. Tax Planning. c. Tax Litigation. d. Auditing financial statements. e. None of the above.

___

9. a. b. c. d. e.

Under Statement on Standards for Tax Services #2, a member: Must make a reasonable effort to answer questions on a tax return. May not make use of estimates. May not depart from a position previously taken. Must always give written advice to a client. May not disclose confidential client data without the consent of the client.

___

10. her: a. b. c. d. e.

Under Circular 230, an individual may represent before the IRS his or

___

11. before a. b. c. d. e.

Under Circular 230, which of the following individuals may practice the IRS? Attorneys. Certified Public Accountants. Enrolled Actuaries. a. and b. All of the above.

___

12. The Code of Professional Conduct was designed to provide its members with the following. a. A comprehensive code of ethical and professional conduct. b. A guide for all members in answering complex questions. c. Assurance to the public concerning the obligations and responsibilities of the accounting profession. d. a. and c. e. All of the above.

___

13. Any failure to follow the Rules under the AICPA's Code of Professional Conduct may result in the offender's receiving: (more than one answer may be correct) a. Disbarment. b. Admonishment, suspension or expulsion from membership in the AICPA. c. One or more fines from the AICPA. d. b. and c. e. All of the above.

full-time employer. a partnership in which he or she is a partner. an immediate family member (without compensation). a trust. all of the above can be represented.


Page 1-29

___

14. The AICPA Code of Professional Conduct is relevant to all of the professional services performed by a CPA, including those services provided in the practice of: a. Public accounting. b. Private industry. c. Education. d. a. and c. e. All of the above.

___

15. Tax planning may be limited to the presentation of the facts to the government in the most favorable, legally acceptable manner possible if the situation involves a(n): a. Open transaction. b. Tax research. c. Closed transaction. d. Significant tax liability. e. None of the above.

___

16. a. b. c. d. e.

___

17.

Which of the following is not an element of taxation? Accounting Law Political science Economics Psychology

Completing a tax return for a client is an example of: a. Tax compliance b. Tax planning c. Tax litigation d. Tax avoidance e. Tax research

___

18. a. b. c. d. e.

Tax planning can be divided into two major categories. These are: Open and shut Open and closed Good and bad Correct and incorrect Avoidance and evasion

___

19. a. b. c. d. e.

The Statements on Standards for Tax Services are a publication of: The Internal Revenue Service. The American Institute of CPAs. The American Bar Association. The Securities Exchange Commission. None of the above.

___

20. The AICPA Code of Professional Conduct contains two integral sections. These are: a. principles and rules b. principles and concepts c. rules and concepts d. rules and canons e. principles and canons

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___

21.

Which of the following names would not be allowed for a CPA in public practice by Rule 505 of the AICPA Code of Professional Conduct? a. Sally Jones, CPA b. Smith and Gomez, CPAs c. Kim, Chow, and Wong, CPAs (Kim, the founding partner died three years ago) d. The Texas Tax Service, CPAs e. all of the above would be allowed.

___

22.

Under SSTS No. 1, in preparing a tax return, a member should have a ___________ belief that a recommended position has a realistic possibility of being sustained if challenged. a. honest faith b. good faith c. reasonable d. rational e. likely

___

23.

Under SSTS No. 2, a member may prepare a tax return that involves the use of estimates if under the circumstances it is __________ to obtain exact data. a. impossible b. futile c. impractical d. unrealistic e. infeasible

___

24.

Which a. b. c. d. e.

___

25.

Which of the following is not mentioned in the text as a concept for the examination of ethical behavior? a. morality b. social responsibility c. business ethics d. scruples e. all of the above are mentioned in the text

___

26. a. b. c. d. e.

___ 27. Under simultaneously? a. b. c. d.

Rule from the ABA Model Rules requires an attorney to be competent? Rule 1.1 Rule 2.1 Rule 3.1 Rule 1.2 None, attorneys are not required to be competent.

Under the Αlimited practice≅ provision of Circular 230, an individual may represent which of the following before the IRS? His or her full-time employer. His or her mother, who is in a nursing home. A trust in which the individual is the trustee. A friend who asked for help. An individual can represent all of the above before the IRS. Circular 230, an individual cannot be which of the following A CPA and an enrolled agent. An attorney and an enrolled agent. A CPA, attorney, and an enrolled agent. An individual can be a CPA, attorney, and enrolled agent


Page 1-31

simultaneously under Circular 230. ___

28.

Which section in Subpart A of Circular 230 allows limited practice before the IRS without enrollment? a. § 10.7 b. § 10.4 c. § 10.24 d. § 10.27 e. § 10.6

True or False Indicate which of the following statements are true or false by circling the correct answer. T

F

1.

The avoidance of taxation is illegal and immoral.

T

F

2. With respect to tax planning, the tax practitioner maintains some degree of control over the attendant tax liability in an open transaction situation.

T

F

3. Typically, a CPA handles tax litigation with the government that progresses beyond the initial appeal of an IRS audit result.

T

F

4. In a closed transaction situation, tax planning may be limited to the presentation of the factual situation to the government in the most favorable, legally acceptable manner possible.

T

F

5. The ethical conduct of an attorney is governed by the laws of the state(s) in which he or she is licensed to practice.

T

F

6. The AICPA has produced a series of eight Statements on Standards for Tax Services, which contain advisory guidelines for members who prepare financial statements.

T

F

7. An enrolled agent is a person who has passed a special IRS examination, or who has worked for the IRS for five years, and is issued a permit to represent clients before the IRS.

T

F

8. According to Circular 230, a corporation may be represented before the IRS by an officer or by a part- or full-time employee.

T

F

9. The AICPA Code of Professional Conduct is relevant to all of the professional services performed by a CPA, including those services provided in the practice of public accounting, private industry, government, or education.

T

F

10. Unlike the Regulations under Circular 230, the provisions under the Internal Revenue Code, and the AICPA Code of Professional Conduct, the AICPA Statements on Standards for Tax Services do not have such authority, but instead depend on general acceptance by practitioners and the public for their authority.

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T

F

11.

The tax system is partially derived from economics and sociology.

T

F

T

F

T

F

14. Under Rule 101 of the AICPA Code of Professional Conduct, a tax partner should not own stock in an audit client of his or her firm.

T

F

15. If a CPA is served with an enforceable subpoena or summons, he or she must comply with applicable laws and regulations in regard to that subpoena or summons.

T

F

16. Under Rule 505 of the AICPA Code of Professional Conduct, a CPA in public practice is not allowed to receive a payment for a referral of a product or service of a third party to a client.

T

F

17. In the preparation of a tax return, a CPA may ordinarily rely, without verification, upon information provided by a client.

T

F

18. If a CPA becomes aware of an error in a tax return, he or she must immediately notify the IRS.

12. The Internal Revenue Code (IRC) is issued by the Internal Revenue Service and is binding on tax preparers. 13.

Enrolled agents may practice before the IRS under Circular 230.

T F 19. Model Rules.

Attorneys may share legal fees with nonattorneys under the ABA

T

F

20. The tax practitioner must be aware of social responsibility when practicing his or her profession.

T

F

T

F

22. Tax practitioners are prohibited from charging contingent fees by Section 10.27 of Circular 230.

T

F

23. An attorney, CPA, or enrolled agent may use public communication to obtain clients under ∋ 10.30 of Subpart B of Circular 230.

21.

Due Diligence is not defined in Circular 230.

Short Answer 1.

Identify and contrast the two major categories of tax planning.

2.

Taxation is comprised of the interaction of several disciplines. What are those disciplines? Briefly discuss their impact on taxation.


Page 1-33

SOLUTIONS, CHAPTER 1 TEST BANK Multiple Choice 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

c b a e e a b d a e e e b e c e a b b a e b c a d d d a

True or False 1.

F

2. 3.

T F

4. T 5. T 6. F returns. 7. T 8. F 9. 10. 11. 12. 13. 14.

T F T F T T

There is nothing illegal or immoral in the avoidance of taxation as long as legal methods are used. Typically, a tax attorney handles tax litigation with the government that progresses beyond the initial appeal of an IRS audit result. The Statements contain advisory guidelines for CPAs who prepare tax According to Circular 230, a corporation may be represented by an officer or full-time employee, but not by a part-time employee. The Statements on Standards for Tax Services are enforceable. The IRC is issued by Congress.

Page 1-34

15. 16. 17. 18. 19. 20. 21. 22. 23.

T T T F F T T T T

INSTRUCTORS MANUAL

A CPA cannot inform the IRS. An attorney cannot share legal fees with nonattorneys under Model Rule 5.4.

Short Answer 1.

Tax planning can be divided into two major categories: the "open" transaction and the "closed" transaction. In an open situation, the tax practitioner maintains some degree of control over the attendant tax liability because the transaction is not yet complete; e.g., the title to an asset has not yet passed. If desired, some modifications to an incomplete transaction can be made to receive a more favorable tax treatment. In a closed situation, however, all of the pertinent transactions have been conducted; therefore, tax planning may be limited to the presentation of the facts to the government in the most favorable, legally acceptable manner possible.

2.

Taxation is accounting that is based on law. The tax law itself is a product of economics, political science, and sociology. Each of these disciplines influences taxation in a different way. Economics provides input about how the tax law will affect the economy. Political science is the process by which laws are made, and sociology provides the framework to determine the equity of the tax law.


Page 1-35

CHAPTER ONE AN INTRODUCTION TO TAX PRACTICE AND ETHICS LECTURE NOTES ELEMENTS OF TAX PRACTICE 1.

Tax Compliance is the gathering of information, evaluation, and classification of such information, and the filing of any necessary tax returns, along with representation of clients at meetings with tax officials.

2.

Tax Planning is the process of arranging one's financial affairs to minimize tax liabilities.

3.

Tax Litigation is the process of settling disputes with the IRS in the courts.

4.

Tax Research includes identifying the issues, finding proper authorities, evaluating appropriateness of the authorities, and applying the authorities to specific facts.

RULES AND ETHICS IN TAX PRACTICE 1.

2.

Circular 230 contains the rules governing practice before the IRS, states who may conduct such a practice, and sets forth the disciplinary procedures applying to persons who practice before the IRS. a.

Attorneys, CPAs, enrolled agents, and enrolled actuaries may practice before the IRS.

b.

Unenrolled persons may practice before the IRS on their own behalf and for other specified taxpaying entities.

c.

There are various Subparts to Circular 230. These subparts are: Subpart A, Rules Governing Authority to Practice Subpart B, Duties and Restrictions Relating to Practice before the IRS Subpart C, Rules Applicable to Disciplinary Proceedings Subpart D, Rules Applicable to Disqualification of Appraisers Subpart E, General Provisions

The AICPA Code of Professional Conduct governs CPAs who are members of the Institute. a.

Principles express basic tenets, including the responsibility to perform professional services with integrity, objectivity, and independence.

b.

Rules provide a set of enforceable ethical standards.

c.

Rules apply to CPAs, their employees, partners or shareholders, and others who act on behalf of CPAs.

d.

A member who departs from Ethics Rulings bears the burden of justifying the departure.

e.

Specific rules: (1)

Rule 101: Independence. A CPA in public practice must be independent of the enterprise for which professional services are being provided.

(2)

Rule 102: Integrity and Objectivity. In rendering any professional services, a CPA should perform such services with objectivity and integrity and should avoid any conflict of interest.

(3)

Rule 201: General Standards. The CPA should comply with the four general standards.

(4)

Rule 202: Compliance with Standards. A CPA must comply with all standards

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promulgated by bodies designated by the AICPA Council.

3.

4.

(5)

Rule 203: Accounting Principles. No departure from technical standards is permitted unless the departure is described, its effect is described, and justification for the departure is disclosed.

(6)

Rule 301: Confidential Client Information. A CPA in the practice of public accounting shall not disclose confidential client data without the specific consent of the client.

(7)

Rule 302: Contingent Fees. A CPA shall not offer any professional services that are contingent upon the ultimate findings of such services.

(8)

Rule 501: Acts Discreditable. A CPA must not commit any act that is discreditable to the profession.

(9)

Rule 502: Advertising and Other Forms of Solicitation. A CPA cannot seek clients by false, misleading, or deceptive advertising or other forms of solicitation.

(10)

Rule 503: Commissions. A member in public practice is not allowed to receive a payment for referral of a product or service of a third party to a client.

(11)

Rule 505: Form of Practice and Name. CPAs may practice public accounting only in the form of a proprietorship, partnership, or professional corporation.

Statements on Standards for Tax Services are enforceable. a.

SSTS No. 1: Tax Return Positions...good faith belief that a recommended position has a realistic possibility of being sustained.

b.

SSTS No. 2: Answers to Questions on Returns...reasonable effort to obtain and provide appropriate answers to all questions on the taxpayer's return.

c.

SSTS No. 3: Certain Procedural Aspects of Preparing Returns...rely without verification upon information provided unless such information appears to be incorrect, incomplete, or inconsistent.

d.

SSTS No. 4: Use of Estimates...may use estimates if it is impractical to obtain exact data and the estimated amounts appear reasonable.

e.

SSTS No. 5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision...disposition of an item in a prior year does not prevent the member from recommending a different treatment of a similar item in a later year's return.

f.

SSTS No. 6: Knowledge of Error: Return Preparation...when a member learns of an error in a previously filed return or becomes aware that a required return was not filed, he or she must advise the taxpayer promptly.

g.

SSTS No. 7: Knowledge of Error: Administrative Proceedings...the member should request the taxpayer's permission to disclose the error to the IRS.

h.

SSTS No. 8: Form and Content of Advice to Taxpayers...the member must use judgment that reflects professional competence and serves the taxpayer's needs.

Nonregulatory Ethical Considerations a.

Morality

b.

Social responsibility


c.

General ethical standards

d.

Ethical behavior

5.

Tax Research by Certified Public Accountants

Page 1-37

Key Point: Tax problems are legal problems, raising the question of whether CPAs are violating the prohibition against unauthorized practice of law.

7.

a.

Preparation of "simple" tax returns is not unauthorized practice of law. Lowell

b.

Tax work "incidental to accounting work" is not unauthorized practice of law. Bercu

c.

Accountants can give tax advice. Gardner

d.

Extensive legal research is not permissible to accountants. Agran v. Shapiro

e.

The Supreme Court held that federal statutes took precedence over state regulations in deciding who could practice before federal agencies. Sperry v. Florida

f.

PL 89-92 permits CPAs to practice before the IRS.

g.

The AICPA and the ABA issued a Statement saying clients are best served when attorneys and CPAs work together.

Present Status. a.

CPAs should avoid expressing a legal opinion on any nontax matter and avoid drafting wills or trust instruments, contracts, incorporation papers, and partnership agreements.

b.

Few state courts have rendered opinions on the unauthorized practice of tax law.

c.

Tax compliance, tax planning, and tax research are within acceptable bounds for the CPA.

SUMMARY--Tax practitioners come from different disciplines and are subject to overlapping rules of conduct.

8e-sm-01

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