Chapter 7 Tax Research for Compliance and Tax Planning.
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1 Chapter 7Tax Research for Compliance and Tax Planning
2 Learning Objectives Tax research goals Tax research challenges Tax research databasesPrimary tax authoritiesCode, Treasury Regs, and casesTax research processProfessional standards
3 Tax Research Goals Some desire to minimize disputes Not always to get the lowest tax liabilityMaximize after-tax return or benefitsSome desire to minimize disputesDistinguishTax Evasion – illegal actsTax Avoidance –minimize taxes legallyAbusive Tax Avoidance – misapplying tax laws, some tax shelters
4 Tax Research - DefinedTwo different types of tax research exist:Applied tax researchChecks existing law, examines the impact on a given situation.This textbook uses applied tax research.Academic tax researchOften empirical, behavioral tax researchSome policy oriented for society at largeOccasionally theoretical
5 Tax Research Challenges Determine the relevant facts.Facts include events and both the taxpayer’s and IRS’s positions.Many disputes have questions of fact.Relevancy decided by applicable law.“Relevant facts” are those that make a difference in how the law is applied.“Colorable facts” are those that only some people consider relevant.
6 Tax Research Challenges (contd.) Find and examine relevant tax laws.Apply the law to the facts to determine the tax consequences.Alternative correct paths may exist.Inform the client of differing options.
7 Tax Practice Tax Compliance Tax Planning Tax Litigation Three types of tax practice for research:Tax ComplianceCompletes tax returns (facts have already occurred)Tax PlanningOpen fact engagementsCarefully executed tax avoidance.Planning requires knowledge and skills.Tax LitigationLawyers handle tax litigation.
8 Tax Research Databases Many alternative sources of tax law existLegal databases - LexisNexis and Westlaw.Specialized tax databases -RIA and CCH.Research Institute of America – RIA CheckpointCommerce Clearing House - CCH IntelliConnect previously CCH had Tax Research NetworkDatabases include bothPrimary tax authorities: Code, Regs, & casesSecondary authorities: tax services, treatises IRS publications, private letter rulings, …
9 Primary Tax Authorities Created by the 3 areas of government:Congress, the executive branch, & the courtsHierarchy of tax law exists:Statutory lawLaw passed by Congress, signed by PresidentUS Constitution, tax treaties also part of top level
10 Primary Tax Authorities Administrative regulationsTreasury Department releases treasury regulationsInternal Revenue Service creates Revenue RulingsCourt casesJudicial case decisions are law in common law countries, such as the United StatesHierarchy exists
11 The Code - Introduction Statutory law for federal taxation commonly referred to as the Code or IRCInternal Revenue Code of 1986, as AmendedFound in Title 26 of the U.S. CodeWithin the Code, refer to sections (§).Sections are uniquely numbered
12 The Code - Introduction (contd.) To find a code section, search by keywords, drill down in table of contents, or use the index in the Code or a Tax Service.If the code section number is known, the citation approach can access it quickly.
13 The Code - SectionsA section is divided into subsections, paragraphs, subparagraphs, clauses.Cite as specific as possible within the section, such as subsection, paragraph, or subparagraph.Always read subsection (a) carefully.Scan other subsections for relevancy.If another code section is referenced in a relevant part, examine that other section.
14 Administrative Authorities Citation to a regulation references the Code provision explained.The Executive branch issues admin. auth.The Treasury Department creates Treasury regulations – interpret and clarify statutory lawInternal Revenue Service is part of Treas. Dep’t creates lesser authorities and enforces the law.
15 Administrative Authorities (contd.) Three types of Treasury RegulationsProposed Regs – trial balloons – not authorityTemporary Regs - no public hearings, legally binding, but expire in 3 yearsFinal Regulations – go through public hearing process, follow the regulations or penalties exist
16 Treasury Regulations - Final Two types of final regulationsLegislative RegulationsArise when Congress has delegated specific law-making authority to the Treasury Dep’tInterpretive RegulationsArise under the authority of Section 7805(a) which expressly provides that the Treasury Department Secretary ”shall prescribe all needful rules and regulations for the enforcement of this title.”Most consider both types equal in weight of authority, some favor legislative regulations
17 Revenue Ruling & Revenue Procedures Revenue Rulings and Revenue ProceduresBoth issued by the IRS.Revenue RulingsApply the law to a specific set of facts.Weaker than Treasury Regulations.Citation to a rev. rul. does not reference the Code sec., but some publishers add that info.
18 Revenue Ruling & Revenue Procedures (contd.) Provides procedural requirements that taxpayers must follow, such as documents to include when filing a tax return involving a Sec. 351 tax-free incorporation.
19 Judicial SourcesCourt decisions interpret the Code and the RegulationsCourts have the final say regarding what the Code words really mean.Judicial Precedent – Courts will follow prior case holdings
20 Judicial Sources (contd.) Federal court hierarchy existsSupreme Court is the highest courtCourts of Appeals is the second highestThree alternative trial courts:Tax Court, District Court, & Court of Federal Claims
21 U.S. Tax CourtAdvantage to the taxpayer: No prepayment needed for the amount in dispute.Other trial courts consider only refunds.Acquiescence (acq.) – IRS will follow the court’s decision in similar cases.
22 U.S. Tax Court (contd.) Tax Court has two types of decisions “Regular decision” - Chief judge decides if new legal principle announced“Memorandum decision” applies prior principle to new facts
23 U.S. Court of Appeals U.S. Court of Appeals Court of Appeals considers only the application of the law, not redetermination of facts.Both taxpayers and IRS can appeal Tax Court and District Court decisions to the relevant regional Court of Appeals13 court of appeals, 11 regional, DC and Federal –citation must be specificDistrict courts must follow precedent set by the relevant circuit court.
24 U.S. Supreme Court Considers few cases involving tax issues. All courts must follow the precedent from the Supreme Court.U.S. Congress can overturn a decision by passing new statutory law.The citator enables the researcher to check the subsequent decisions referencing a case, and the case history
25 Evaluating Tax Authorities The Code is the strongest authorityTreasury Regulations are the next strongest authoritySupreme Court decision applies to all courts and taxpayers.Circuit court decisions are either precedent or influential on other courts.Published IRS Revenue Rulings and Revenue Procedures are binding on IRS revenue agents, but not the courts
26 Steps in Conducting Tax Research 1. Investigate the facts and identify issues2. Collect the appropriate authorities3. Analyze the research4. Develop the reasoning and conclusions5. Communicate the results
27 Standards for Tax IRS Circular 230 Governs practice before the IRS and provides enforceable standards of conductImpacted tax practice in various waysAICPA’s Statements on Standards for Tax ServicesSupplements the AICPA Code of Professional ConductCPA tests students on tax research