Tax Research Chapter 1

A contingent fee is:

A fee based on the percentage of a taxpayer's refund on a tax return

Unconscionable fee

A fee for tax woke that is not in accordance with what is just or reasonable; the charging of unconscionable fees is prohibited.

Tax evasion is:

A fraudulent act involving illegal nonpayment of taxes

Good-faith belief

A good-faith belief is a belief that is based on reasonable interpretations of the tax law

Enrolled Agent (EA)

A person who is qualified to practice before the Internal Revenue Service by means other than becoming an attorney or certified public accountant.

Circular 230

A tax regulation detailing the requirements and responsibilities of those who prepare federal tax returns for compensation. Includes educational, ethical, and procedural guidelines.

Open transactions

A tax research issue is open when not all pertinent transactions have been completed by the tax-payer or other parties, such that the researcher can suggest to the client several alternative courses of action that generate differing tax consequences.

Closed transactions

A tax research situation is closed when all pertinent transactions have been completed by the taxpayer and other parties, such that the research issues may be limited to the proper nature and amount of disclosure to the government on the tax return or other document, and to preparation activities relative to subsequent government review.

Unauthorized practice of law

Activities of modern tax practice that non-attorneys are forbidden from engaging in, entailing, for example, the issuance of a legal opinion or the drafting of a legal document for the client. Legal or professional penalties may be imposed for the unauthorized practice of law.

Model Rules of Professional Conduct

Adopted by the ABA in 1983, the rules are intended as a guide for attorneys' professional conduct. The Model Rules deal with issues such as confidentiality and conflicts of interest in the client-lawyer relationship, responsibilities to non-clients, and so on.

Tax litigation

An element of modern tax practice in which a practitioner represents the client against the government in a judicial hearing

Tax compliance

An element of modern tax practice in which a practitioner works with a client to file appropriate tax returns in a timely manner and represents the client in administrative proceedings.

Tax research

An examination of pertinent sources of the state, local, and federal tax law in light of all relevant circumstances relative to a client's tax problem. Entails the use of professional judgment or draw appropriate conclusions and the communication of such conclusions or alternatives at a proper level to the client.

Certified public accountant (CPA)

An individual who has passed the CPA exam and been licensed by his or her state board of accountancy. In addition to specific educational requirements, licensing often requires specific work experience under the supervision of a CPA. Maintaining a CPA license typically requires 40 hours annually of continuing education.

Ethical standards

Boundaries of social or professional behavior, derived by the culture or its institutions. Tax ethics are described in various documents of governmental agencies or professional organizations.

Standards for Tax Services (SSTS) contain advisory guidelines for:

CPAs

Which of the following statements best describes Circular 230?

Circular 230 is a set of Treasury Department ethical and legal standards for those engaging in practice before the IRS

Tax compliance is the process of: A. Filing necessary tax returns B. Gathering the financial information necessary to report taxable income C. Representing a taxpayer at an IRS audit D. All of the above

D. All of the above

Who can represent a taxpayer before the IRS Appeals Office under Circular 230? A. A CPA B. An officer of a corporation may represent the corporation C. An attorney D. All of the above E. Only a and c

E. Only a and c

An unenrolled tax return preparer can make an appearance as the taxpayer's representative only before the:

Examination Division of the IRS

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

False

Under Circular 230, "covered opinions" include oral advice on tax avoidance transactions.

False

Registered tax return preparer

Individuals who must register with the IRS and meet certain requirements in order to practice before the IRS. Practice is generally limited to preparing and signing tax returns, claims of refund, and other documents for submission to the IRS.

The primary change made by the Sarbanes-Oxley Act which affects the practice of public accounting is:

Public accounting firms may provide some non-audit services to their audit clients if the services are approved in advance by an audit committee

Tax litigation is a process of:

Settling tax-related disputes in a court of law

Due diligence, in essence, means a tax practitioner:

Should use reasonable effort to comply with the tax laws

Independence

The AICPA requires the CPA who renders an opinion relative to a client's financial statements to be independent from the client. This principle entails restrictions as to the CPA's direct and indirect financial dealings with the client and the CPA's simultaneous role as a financial auditor.

Due diligence

The care a reasonable person should take in preparing or assisting in the preparation of, approving, and filing of tax returns, documents, and other papers relating to Internal Revenue Service matters.

Cohan Rule

The doctrine that allows taxpayers to use estimates to claim a tax deduction when they can show there is some factual foundations on which to base a reasonable approximation of the expense.

Tax avoidance

The legal structuring of one's financial affairs so as to optimize the related tax liability. Synonym for tax planning.

Contingent fees

The practice under which a professional bases his or her fee for services on the results obtained.

Regarding open transactions, which of the following statements in INCORRECT?

The practitioner can fix the problem by amending the client's tax return

Practice before the IRS

The privilege to sign tax returns as preparer for compensation to represent others before the IRS or in court in an unit or appeal proceeding.

American Bar Association (ABA)

The professional organization for practicing attorneys in the United States

American Institute of Certified Public Accountants (AICPA)

The professional organization of practicing certified public accountants (CPAs) in the United States

Tax evasion

The reduction of one's tax liability by illegal means.

Which of the following statements best explains the need for tax practitioners to understand nonregulatory ethical models of behavior?

There is more to ethical behavior than just following the rules of professional organizations.

Tax planning has more likelihood of success when a tax practitioner is dealing with an open transaction instead of a closed transaction.

Treu

A CPA can rely without verification on information given to the CPA by a taxpayer unless the information appears to be incorrect.

True

Enrolled actuaries are allowed to practice before the IRS.

True

Paid tax return preparers must register with the IRS and obtain a PTIN.

True

The Sarbanes-Oxley Act addresses issues of corporate governance as well as the independence of auditors.

True

Realistic possibility

Under the AICPA's SSTS No. 1, a member should have a good-faith belief that a tax return position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged. Realistic possibility is considered to be a one in three chance of success. This standard applies if the applicable taxing authority has no written standards with respect to recommending a tax return or preparing or signing a tax return, or if it's standards are lower than the standards set forth in the SSTS.

Covered opinions

Written advice by practitioners concerning on or more federal tax issues that are defined in Circular 230, subpart B, section 10.35.

The Lowell Bar Association v. Loeb case addressed the issue of:

unauthorized practice of law by non-attorneys engaged in tax practice