As a tax professional, you may come across an issue that you don’t know how to treat because it falls into the gray area of tax law. With technology, it’s easier to go online and search for your answer; however, you also may quickly become overwhelmed with all the information out there. How do you know which information is reliable? Tax research is important, and we must perform due diligence to find the appropriate support for a tax position.
Tax research will help define the tax effect or impact of certain tax positions. Performing the proper steps will help you and your clients make more informed decisions, and can also be used to prepare for client representation during an IRS audit.
Our goal in this article is to refer you to alternate sources and provide guidance on how to prioritize the results, especially for preparers who don’t have the resources for paid subscriptions or printed guides.
Step 1: Identify and define
Analyze the facts around the issue by gathering as much background information as you can. Examples include:
- Filing status
- Type of entity
- Prior year returns
- Basis (asset cost, shareholder/partner)
- Financial statements
- Important dates
- Contracts in place
- Purchase/sales agreements
Determine the keywords to frame a question or tax issue to begin your research. Break up your searches into multiple issues and questions if necessary.
- Tax Issue: What is the proper federal income tax treatment of a stock investment made by a 60 percent shareholder/employee to a now-bankrupt corporation?
- Keywords: Small business stock, worthless stock.
Step 2: Identify your research tools
After identifying and defining your tax issue, you can use the following web-based resources to begin your research using the keywords from Step 1:
Social media has gained more traction through online groups, but be cautious; the information may not always be correct. Although social media and Google can provide a good starting point with regard to keywords or code sections/regulations, tax preparers should always use their professional skepticism when looking through the results.
Step 3: Sort findings by authoritative hierarchy
Prioritizing your findings is a very important step. Tax law authorities can be separated into two main categories:
#1: Primary authority: This is the highest, most impactful, and binding type of authority, and consists of:
- Statutory – Internal Revenue Code and legislative process.
- Administrative – regulations, revenue rulings, private letter rulings, general counsel memos, and Internal Revenue manuals.
- Judicial – district courts, claims courts, circuit courts of appeal, and supreme courts.
#2: Secondary authority: These are the unofficial sources of tax information, and should only be used as a last resource. They include:
- IRS publications, form instructions, and audit manuals
- Internal Revenue bulletins
- External handbooks
- News articles
Step 4: Document your findings
Documenting your findings will provide proof of how you arrived to your conclusion and can be used for future reference. Your findings can be documented by:
- Printing or saving a PDF of the findings.
- Summarizing findings in a client letter.
- Creating a tax memorandum; include the following:
- Facts: All the facts of the case, especially those that played an important role in determining the conclusion.
- Issue: the tax question.
- Conclusion of the Issue: This can be stated before or after discussion of the issue, and is used to quickly reference the answer to the tax issue.
- Discussion of the Issue: Describe the authoritative sources used to arrive at the conclusion. You can reference the sources used and how they apply specifically to your facts.
- Summary of cited authority – Internal Revenue Code, regulations, court cases and other information.
Step 5: Verify professional guidelines
The last step of tax research is to verify that you have followed all professional guidelines. Tax preparers are subject to rules set forth in Circular 230, and failure to adhere to these rules may result in penalties to the taxpayer or the preparer. CPAs must abide to the guidelines set by the AICPA. EAs and JDs are also bound by certain standards. Each group is regulated by different boards, but some of the rules sound similar.
Research is important
As tax professionals, we must perform our due diligence to determine the impact of certain tax decisions. We should go through the process of tax research to come to the best conclusion possible. Tax research begins by defining the issue, identifying keywords, and visiting the web sources by using keywords to search for an issue. It should then be prioritized, documented, and communicated.
Good luck and happy research!
Editor’s note: For more information on this topic, access the recording of “Tax Research A to Z,” a webinar presented by Nadia Rodriguez, CPA, and Stephanie Sanchez on the Intuit® Accountants Training Center.