Ch 01 Practice and Ethics

Question 1

American Bar Association

Answer 1

The professional organization for practicing attorneys in the United States, namely, the American Bar Association.

Question 2

American Institute of Certified Public Accountants (AICPA)

Answer 2

The professional organization of practicing Certified Public Accountants (CPAs) in the United States, namely, the American Institute of CPAs.

Question 3

Circular 230

Answer 3

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

Question 4

closed transactions

Answer 4

A tax research situation is closed when all of the 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.

Question 5

Cohan Rule

Answer 5

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

Question 6

contingent fees

Answer 6

The practice under which a professional bases his or her fee for services upon the results thereof. The American Institute of Certified Public Accountants has held that the performance of services for a contingent fee can be unethical; one exception is available, though, where (as in tax practice) the results are subject to third-party actions (here the government, in an audit setting). Several states are relaxing this restriction, allowing certified public accountants to mix the form of their compensation between fixed and contingent fees.

Question 7

covered opinions

Answer 7

Written advice by practitioners concerning one or more Federals tax issues that are defined in Circular 230, Subpart B, Section 10.35.

Question 8

due diligence

Answer 8

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. See Circular 230 Subpart B, Section 10.22.

Question 9

Enrolled Agent (EA)

Answer 9

One who is qualified to practice before the Internal Revenue Service by means other than becoming an attorney or certified public accountant. Typically, one must pass a qualifying examination and meet other requirements to become an Enrolled Agent.

Question 10

ethical standards

Answer 10

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.

Question 11

independence

Answer 11

The American Institute of Certified Public Accountants requires the certified public accountant (CPA) who renders an opinion relative to a client’s financial statements to be (and to appear to be) independent from the client. This principle entails restrictions as to the CPA’s direct and indirect financial dealings with the client, and its simultaneous role as financial auditor.

Question 12

open transactions

Answer 12

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

Question 13

practice before the IRS

Answer 13

The privilege to sign tax returns as preparer for compensation and to represent others before the Internal Revenue Service (IRS) or in court in an audit or appeal proceeding. This privilege is granted by the IRS and controlled under Circular 230.

Question 14

realistic possibility

Answer 14

Formerly the standard by which a tax preparer conduct penalty was applied under IRC Section 6694 and the current standard for tax return positions under the AICPA’s SSTS No. 1. Under SSTS No. 1, a member should have a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged.

Question 15

tax avoidance

Answer 15

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

Question 16

tax compliance

Answer 16

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.

Question 17

tax evasion

Answer 17

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

Question 18

tax litigation

Answer 18

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

Question 19

tax planning

Answer 19

Synonym for tax avoidance.

Question 20

tax research

Answer 20

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 to draw an appropriate conclusion and the communication of such conclusions or alternatives at a proper level to the client.

Question 21

unauthorized practice of law

Answer 21

A prohibited aspect of modern tax practice by nonattorneys, entailing, for example, the issuance of a legal opinion or the drafting of a legal document for the client, for which the practitioner could be subject to legal or professional penalties.

Question 22

unconscionable fee

Answer 22

Prohibits charging a fee for tax work that is not in accordance with what is just or reasonable; see Circular 230, Subpart B, Section 10.27(a).