Main Content
Lesson 1: Introduction to Taxation and How to Research
Tax Research
Now that you have an idea of the different types of taxes, it's time to look at how to find specific tax law to support the way that you, the tax preparer, handle a tax question or situation. Remember from prior discussion that there are many different areas where you can look for answers and guidance for handling taxes or deductions on a tax return.
Therefore, it's imperative for you to understand the process for locating the resources necessary to properly analyze each scenario you'll encounter throughout this course. Please review the three parts to the tax research process, which is what should go into conducting a successful search of tax sources:
- Primary tax code, which is the strongest evidence to support a tax position.
- Court system and tax treaties, which is more evidential material used to support a tax position.
- Steps to complete and write the tax research memo and letter to the client.
Primary Code Sources
The following primary code sources will be important as you research:
Internal Revenue Code
The Internal Revenue Code (IRC) is located in Title 26 of the U.S. Code. The format of the Code is rather important to understand. Income Taxes is under Subtitle A.
The code is broken down as follows:
- Title
- Subtitle
- Chapter
- Part
- Section
- Subsection
- Paragraph
- Subparagraph
- Paragraph
- Subsection
- Section
- Part
- Chapter
- Subtitle
To navigate the slide viewer below, click on the successive gray dots or arrows to move to a new slide.
Regulations (REG)
Revenue Rulings (REV RUL)
Revenue Procedures (REV PROC)
Letter Rulings (LTR RUL)
Court System and Tax Treaties
Tax Court
- Federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8
- Both parties present evidence to a single judge without rebuttal.
- Taxpayer not required to pay tax prior to filing
- Must file tax return within 90 days of receiving notice from IRS
- Tax decisions not bound by U.S. District Court or U.S. Court of Federal Claims decisions
- Tax Court must follow decisions of U.S. Supreme Court
Tax Decisions
- Tax Court decisions are binding only to the Tax Court.
- No other court is required to accept decisions of the Tax Court.
- There are three types of decisions issued by the Tax Court:
- reported,
- memorandum, and
- summary.
Reported Decisions
Reported decisions state the determination and carry legal weight. The IRS can choose to accept these decisions (acquiesce) or not.
Memorandum Decisions
Memorandum decisions state the determination but don't carry legal weight. These decisions aren't published. The IRS can acquiesce or not.
Summary Decisions
Summary decisions apply to only one case and therefore carry very little weight. The IRS will not acquiesce because it is the opinion of only one judge. These decisions can be appealed to the District Court of Appeals.
Trial Court
- Taxpayer may challenge the IRS.
- Taxpayer must first pay the amount the IRS is claiming.
District Court
- Taxpayer requests refund and awaits IRS decision or 6 months (whichever comes first)
- Taxpayer files suit against IRS
- Taxpayer can request jury trial or be heard by single judge
- Courts follow decisions within its district
Tax Research Process
The tax research process involves working through the following steps:
- Determine facts and circumstances.
- Locate sources that address issue.
- Assess validity of sources.
- Update the file.
- Resolve the issue:
- Consider options and ramifications.
- Consider nontax concerns.
- Consider cost-effectiveness.
- Communicate the findings.
- Document all work in the permanent file.
Let's look at the tax research process in more detail in Video 1.2.
Loading the player
Video 1.2 Total Time: 00:13:21 Tax Research Video Transcript
Part 1
PROFESSOR: Now we will look at the tax research process and how we present the evidence for a sound conclusion to the scenario being investigated.
How is tax research conducted and what does a tax professional need to focus on? The first step is to identify what you need to research. Make sure you have all relevant facts and you have asked all questions, and you understand the scenario at hand. You will then begin the research process itself. This is where you will identify law, regulations, revenue rulings, court cases that address the facts of the issue under investigation.
Once you have identified and collected authoritative sources, you will then start to create a solution, or solutions, and alternatives to the tax scenario. Then you will discuss the alternatives with the client, focusing on the following. What type of current and future ramifications are there? What non-tax ramifications could there be, as well as how much cost is involved to complete the scenario compared to the benefit actually realized?
After full discussion with the client on these aspects, an alternative would then be chosen. All information must be documented within a permanent file and must be communicated to the client in writing. The rest of this presentation will guide you through these steps.
The first place a tax preparer can start when searching a tax scenario is the IRS's site. Believe it or not, it is an easy site to navigate and is well maintained. You can search through the IRS publications and forms to help you get started in the right direction for your research. You never use this as evidence. It is only a starting point for a tax position to be determined.
Once you have more information about your tax issue, or if you wanted to bypass the IRS website, then you should use a professional tax library to conduct your research. You have access to different tax libraries. Remember, they have the same information, but they are organized differently. Let's look at a scenario and show you how to begin your tax research on that item.
Joseph is married, but his wife has left him and has had no contact with him. They don't have any children. Joseph comes to you for your help. He doesn't know how to file his tax return, since he cannot contact his wife. You are just a beginner tax student. You don't know what to tell him. What should you do?
You need to begin your research from the beginning. First, collect all facts and circumstances. During this process, you must ask questions. You will ask Joseph questions like, when did you get married? What is your wife's full name? What is her social security number? When is the last time your wife lived in your home? Has your wife contacted a lawyer? Are there any court decisions about your marriage, i.e. legal separation?
A preparer must make sure that they understand everything about the situation. They should ask questions like the ones listed. A preparer should never assume, but ask. Once you have the questions answered you can then proceed to the next step, research.
You can access the IRS website and use keywords to search for more information. As you can see, this search was conducted using keywords, [INAUDIBLE], married filing status. There are various sources that are then assessable. Once you start reading through these sources, it will provide guidance on the scenario at hand. Remember, this is not authoritative, so it is used only as a starting point.
Now, if you click on Publication 17, let's see what you get. It looks like Publication 17 is a great place to start. If you look, it provides information and guidance for marital status and filing status. You should then read through that material. This will help clarify that your keywords are good for your authoritative search, or to help you get more specific keywords for searching in the authoritative sources. Remember, it is the authoritative sources that are used for evidence in the tax position.
Professional tax libraries. Now that you are familiar with the available filing status, the scenario, and keywords for searching, you can now use the professional tax library to gather authoritative evidence. There are a few that most tax preparers and lawyers use to cite authoritative evidence for a tax position. Listed are a few. And what is even better is that you have access to them right now. All you need to do is click on the library links now. Let's use RIA Checkpoint for the demonstration, using Joseph's tax issue.
So we are now in RIA Checkpoint. On the left-hand side, please change the view using the dropdown box to Tax. Since you want to collect authoritative evidence, click on the Search tab at the top. You will then get the following.
Within the search area, select keywords to conduct your search and then what you want to search. Primary source material will give you results of the most authoritative evidence to support your scenario, so select those. Using the Keywords search box, enter Married Filing Status.
As you can see, the search results are categorized by type and authority. Internal Revenue Code with those key terms is listed first, then regulations, and finally, tax cases with the associated number of items to look at. Within the Internal Revenue Code search results, there is a result for Code Section 7703. Click on that reference to see if it will help. This is actual tax law, so let's see if there is any type of evidence here.
There is substantial evidence, it appears, for determining filing status when a person is married. Now you would continue to read through this section to see if there is evidence that provides help for Joseph's tax question. What filing status can he use for his tax return this year? You will see as you read through the evidence, it may lead you to more evidence, code section, or cause you to have more questions. That's why it is called research. You should be sure to collect all relevant information that is necessary to make a complete analysis and list of alternative actions.
It's a good time now to stop, take a breather, and remember a few key points. When conducting tax research, you must conduct research as necessary to find good evidence to help answer your tax questions. You must never make assumptions about the tax law or the scenario. Finally, read all evidence very carefully and make sure you understand what it is saying. This is very important so that you find the best action for your client.
When the research is finished, it is now time to determine alternative choices for the client. Based on Code Section 7703, Joseph is married at the end of the year if no court documents deemed him legally separated or divorced. Marital status is based on legal status on December 31st. He has one of two choices. He can file Married Filing Separately or Married Filing Jointly. We would then explain, based on research, how either would affect Joseph's current and future tax situation. And based on our client's input and discussion, take the best decided alternative.
Once the best alternative has been decided, it is now time to document all information in writing within a permanent client file, and also write a formal letter to our client on the tax issue, research, and resolution. We will now deal with that in our next presentation.
Part 2
PROFESSOR: The tax research memo consists of three main parts-- a brief introduction, where you will summarize the facts, list the issues, provide conclusions; the second is supporting analysis; and the third, recommended actions. Let's look at each part in detail.
An introduction must include the date, a list of all facts of the scenario at hand, the tax issue clearly stated, and a conclusion to the tax issue. If we look back at Joseph's tax issue from the prior presentation, you must be sure to include all facts, tax issues, and properly formed conclusions. This is necessary for the tax memo because it would be utilized if there is ever any question as to why a tax position was taken.
It is important that all the following occur with regards to the fact area. Be sure to clearly identify them. Provide a complete set of facts provided by the client. Pay attention and document all timing of events in proper order. And keep all facts together.
The complexity of the tax issue will determine how many issues must be addressed. Always keep all issues clearly stated. Write each one in the form of a question. Give details of the issue, but don't start using evidence at this point. And finally, arrange the issues in a logical sequence.
At this point, you will provide the conclusion of the issues identified in this tax scenario. You must be sure to include all issues and state the conclusion in a clear and unquestionable manner. This will prevent any uncertainty with the position taken.
The next step in your memo creation is to present all evidence collected. The best way to do this is to properly cite by code, identification numbers, and titles, as well as detailed information used to resolve the tax issue. You should always cite evidence from the most authoritative to least authoritative, as stated in the next lesson.
The final part of the tax research memo should include a brief statement on further information or recommendations. This is the typical process of writing a tax memo. Keeping it as a permanent record in a client's file is mandatory.
The final element of the tax research process is to communicate the information in writing to the client. You should date the letter, properly address, state all responsibilities of the parties involved, restate the facts of the tax issue, and then provide the recommendations and conclusions you agreed upon. A sample letter is in the next slide.
As you can see, the letter to the client is a normal letter style, where all items in the previous slide are addressed. Notice we don't bog down a client letter with code section and evidence. We present the scenarios and conclusions reached.
Finally, a review of the entire process is in order. Remember to carefully define and develop a clear understanding of the tax issue at hand. Research the issue, finding relevant evidence. Analyze the evidence.
And determine alternatives, paying special attention to tax and non-tax ramifications as well as cost benefit of each. Select the best alternative after discussion with your client. Communicate the issues and findings in a written letter to the client. And document all information in a tax research memo in a permanent client file.
An introduction must include the date, a list of all facts of the scenario at hand, the tax issue clearly stated, and a conclusion to the tax issue. If we look back at Joseph's tax issue from the prior presentation, you must be sure to include all facts, tax issues, and properly formed conclusions. This is necessary for the tax memo because it would be utilized if there is ever any question as to why a tax position was taken.
It is important that all the following occur with regards to the fact area. Be sure to clearly identify them. Provide a complete set of facts provided by the client. Pay attention and document all timing of events in proper order. And keep all facts together.
The complexity of the tax issue will determine how many issues must be addressed. Always keep all issues clearly stated. Write each one in the form of a question. Give details of the issue, but don't start using evidence at this point. And finally, arrange the issues in a logical sequence.
At this point, you will provide the conclusion of the issues identified in this tax scenario. You must be sure to include all issues and state the conclusion in a clear and unquestionable manner. This will prevent any uncertainty with the position taken.
The next step in your memo creation is to present all evidence collected. The best way to do this is to properly cite by code, identification numbers, and titles, as well as detailed information used to resolve the tax issue. You should always cite evidence from the most authoritative to least authoritative, as stated in the next lesson.
The final part of the tax research memo should include a brief statement on further information or recommendations. This is the typical process of writing a tax memo. Keeping it as a permanent record in a client's file is mandatory.
The final element of the tax research process is to communicate the information in writing to the client. You should date the letter, properly address, state all responsibilities of the parties involved, restate the facts of the tax issue, and then provide the recommendations and conclusions you agreed upon. A sample letter is in the next slide.
As you can see, the letter to the client is a normal letter style, where all items in the previous slide are addressed. Notice we don't bog down a client letter with code section and evidence. We present the scenarios and conclusions reached.
Finally, a review of the entire process is in order. Remember to carefully define and develop a clear understanding of the tax issue at hand. Research the issue, finding relevant evidence. Analyze the evidence.
And determine alternatives, paying special attention to tax and non-tax ramifications as well as cost benefit of each. Select the best alternative after discussion with your client. Communicate the issues and findings in a written letter to the client. And document all information in a tax research memo in a permanent client file.