Describe the steps in the tax research process 3. Explain how the facts influence the tax consequences 4. Identify the sources of tax law and understand the authoritative value of each 5. Consult tax services to research an issue 6. use a citator to assess authorities 7. Grasp the basics of Internet-based tax research 8. understand professional guidelines that CPAs in tax practice should follow 9. Prepare work papers and communicate to clients Overview of Tax Research Policy-oriented tax research
Typically conducted by economists or in an academic setting to help formulate tax research. Client-oriented tax research Typically conducted by accountants and lawyers. Help determine the tax consequences to taxpayers due to various transactions. Tax compliance research – “closed-facts”; determine the tax consequences after the fact. Tax-planning research ” “open facts”; advise the client on tax-planning opportunities before engaging in a transaction. What is the primary objective of tax research? Which parties should be considered in tax-planning? What other types of implications should be considered?
Steps in the Tax Research Process Establish the facts – focus on the relevant facts for the question Identify the issues State the issue as a question Based on the issues, questions may arise relating to facts and law (if application or law or meaning is uncertain, or if the law is incomplete or non- existent) Locate authority (“tax lav”‘ includes multiple types of authority) Primary authority Examples? Secondary authority Evaluate authority Considerations (non-exclusive): Age Jurisdiction Is the IRS bound to follow? Closeness of facts Develop conclusions and recommendations May not be a clear solution
Professional judgment and consideration of client preferences are needed If applicable, inform the client about alternative outcomes, including the pros/ cons and risks associated with all reasonable recommendations Communicate the recommendations Memorandum to the client file (see A-6) Client letter (less technical; see A-7) Often a circular process The Influence of Facts Many gray areas Law may be unclear Facts may be unclear Example of identifying facts and issues: Your client, an attorney, tells you she sold a painting that she had owned for several years at a loss of $5,000 (the original cost was $1 8,000, and she sold it or 3,000).
What additional facts do you need? What are some of the issues you need to consider? DO these issues require you to obtain more facts? Sources of Tax Law Statutory (Legislative) Sources 16th Amendment to the U. S. Constitution (1913) – gives Congress the power to levy and collect an income tax Amendment 16, Section 1 “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. ” egislative Process Where must all tax law originate?
What are the steps in the process? How are committee reports useful? The Internal Revenue Code (IRC) of 1 986 (As Amended) = foundation Of all tax law. Title 26 of the united States Code Su btitles (A) Chapters (1) Su bchapters (B) Parts (VI) sections (179) However, citations are made using the Section number because each section number is used only once in the Code. Section (179) Su bsection (b) Paragraph (5) Subparagraph (B) Clause (i) Subclause (I) Example of IRC Section 179, Election to Expense Certain Depreciable Business Assets (from the 201 5 edition): 179(b)(5)(B) SPORT UTILITY VEHICLE.
For purposes of subparagraph (A) 79(b)(5)(B)(i) IN GENERAL. –The term “sport utility vehicle” means any 4- wheeled vehicle – 1 which is primarily designed or which can be used to carry passengers over public streets, roads, or highways (except any vehicle operated exclusively on a rail or rails), 1 which is not subject to section 280F, and 1 which is rated at not more than 14,000 pounds gross vehicle weight. Interpreting the IRC can be difficult and confusing.
Most Code sections include: A general rule Followed by conditions that must be satisfied Followed by exceptions Often followed by exceptions to the exceptions. C] Definitions In reading the Code, read the entire Code section and carefully read definitions and clauses (such as “and” versus “or”). Remember that just because a section fails to mention an item does not mean that the item is excluded ” many issues are not addressed in the Code!
Example from Tax I of interpreting the Code: Jasmine is under age 1 9 and lives with her father and her aunt. She is supported 1/3 by her father and 2/3’s by her aunt. Who (if anyone) can claim a dependency exemption for Jasmine? (Hint: IRC Section 152 addresses dependency exemptions. ) Tax Treaties Agreements entered into between two countries to allow for modifications to he tax laws for residents of both countries If a tax treaty and the IRC (or other laws) conflicts, the one that is adopted later will typically control.
Administrative Sources Treasury Regulations – official interpretations ofthe IRC by the Treasury Department and the IRS (may not be updated in a timely manner when statutory changes occur frequently). Citing a regulation: Type of Regulation (1 . ) Code Section (179-) Regulation Number (1) Paragraph (c) Su bparagraph (1 ) Temporary regulations have a “T” after the regulation number Proposed First form of issuance; do not have the force of law Gives the public an opportunity to comment on the proposals Example: prop. Reg. 553. 071 -l Temporary Effective immediately, but expire 3 years after issuance Example: Reg. 5 1. 163-1 IT Final (General) Issued under the general authority granted to IRS to interpret the language of the code after the public has commented on proposed regulations Example: Reg. 51. 179-1 egislative Congress delegates the rule-making to the Treasury Department (e. g. , consolidated return rules) Greatest precedential value of any IRS Pronouncement Example: Reg. 5 1. 199-1 Interpretive – interpret statutory language and provide illustrations
Assessing regulations Regulations are assumed to be valid by the courts (legislative reenactment doctrine) If a taxpayer takes a position contrary to the regulations WITHOUT supporting authority, then it is likely that an accuracy-related penalty for the “intentional disregard of rules and regulations” will be imposed, resulting in a 20% of underpayment penalty Warning – many regulations are based on prior law, so may NOT be up-to- date Administrative Pronouncements (carry’ less weight than Treasury Regu lations) Revenue Rulings – official pronouncements of the National Office of the IRS, hich deal with application of the Code and Regs to a specific factual situation Revenue Procedures – deal with internal practices and procedures of the IRS in the administration of tax laws Private Letter Rulings (PLRs) – advice by the IRS National Office to a specific taxpayer on specific prospective transactions Other Interpretations: Technical Advice Memoranda – advice issued by the IRS National Office on past or communicated transactions Information Releases – information disseminated to the general public and written in “lay” language Announcements – public pronouncements with immediate or short-term value
Notices – guidance with substantive interpretations of the Code Judicial Sources Lower Courts U. S. Tax Court 19 permanent judges (tax law specialists) Hear only tax law cases Successor in 1 943 to the Board of Tax Appeals (BTA) Both regular and memorandum (factual variation of previously-decided cases) decisions; carry the same authoritative weight What are advantages to the taxpayer in filing suit in the U. S. Tax Court over other types of lower courts?