A Practical Guide to Perfecting Your Tax Research Techniques

IMGCAP(1)]To maximize your accounting firm’s overall efficiency, effectiveness and productivity in researching and resolving a tax issue and determining the sustainability of a client’s tax return filing position, the appropriate tax research processes must be meticulously designed, implemented and executed.

The following five steps will guide you in establishing an all-inclusive tax research effort on behalf of your client base, while ascertaining the likelihood of success should a tax position taken on a tax return be challenged by the Internal Revenue Service upon examination.

Establish the Facts and Circumstances
The first step in the tax research process is to establish all of the facts and circumstances provided by your client in order to determine which tax laws apply to your client’s fact pattern.
At this initial stage, it is imperative not to omit or overlook any of your client’s facts and circumstances, whether they appear material or immaterial. Always be guided by the axiom that facts and circumstances that appear to be immaterial individually may, in fact, be material in the aggregate.

Determine All the Issues
The second step in the tax research process entails determining all of the tax issues affecting your client’s specific facts and circumstances, and any and all mitigating factors.

Normally, complex tax issues evolve through several stages of development. For instance, an experienced tax professional, based upon his or her prior knowledge of the tax laws, can usually determine most of the initial pertinent issues in terms of general tax laws. However, after performing an initial search of the authorities to answer the initial issues, a tax professional often discovers that one or more additional specific technical questions of interpretation must be resolved before the initial issues can be fully addressed.

Consequently, at this stage a tax professional may also need to obtain additional facts from the client. Accordingly, the tax research process may have to move back from step two to step one. In addition, you, the tax professional, may learn at this stage that facts initially not considered to be important may in fact prove critical to the resolution of all of your client’s tax issues.

Identify Supporting Authorities
The third step in the tax research process entails identifying the specific authorities to support all of your client’s tax issues while appropriately weighing authorities that may be contrary to your supporting position.

Generally, this process begins with consulting statutory authority (e.g., the Internal Revenue Code) and quickly expands to encompass administrative authority (e.g., Proposed Treasury Regulations, Temporary Treasury Regulations, Final Treasury Regulations, Revenue Rulings, Revenue Procedures, Private Letter Rulings, Technical Advice Memorandum, General Counsel Memorandum, Circular 230, Internal Revenue Manual, Internal Revenue Bulletins, IRS Field Service Advice Memorandum, IRS Determination Letters and IRS Notices) and judicial authority (e.g., decisions by the U.S. Tax Court, U.S. District Court, U.S. Court of Federal Claims, U.S. Circuit Court of Appeals, U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court).

In addition, at times you may have to consult the legislative history (e.g., the Public Laws and Congressional Committee Reports from the House of Representatives and the Senate) of a particular Internal Revenue Code section to fully address Congress’s intent in passing a particular bill. Lastly, you may also want to consult the voluminous range of editorial interpretations (e.g., tax treatises, tax journals, etc.) available to assist in the interpretation a particular tax issue.

However, it must be duly noted that editorial interpretations are generally impressible sources of authority before the IRS and the judicial system.

Resolve the Issues
The fourth step in the tax research process entails the resolution of your client’s tax issues after identifying, analyzing and interpreting all of the applicable authorities.

It cannot be overstated that you should have provided, as needed, reasonable statutory, administrative and judicial support to demonstrate that your position could be upheld if challenged by the IRS upon examination and that you exercised due diligence and acted in good faith.

Furthermore, at times positions taken on tax returns may need to be disclosed on Form 8275, “Disclosure Statement,” or Form 8275-R, “Regulation Disclosure Statement,” depending upon the complexity and controversial nature of the tax issue. Note that by disclosing positions on your client’s tax returns, you may be able to avoid paid preparer penalties should your position be disallowed and avoid the application of the six-year statutory period for assessment under I.R.C. Section 6501(e).

From a risk management perspective, in order to mitigate or avoid income tax return paid preparer penalties pursuant to I.R.C. Section 6694 (i.e., penalties that are assessed on both paid tax return preparers and tax advisers that are deemed paid tax return preparers due to their consulting on matters that constitute a substantial portion of their client’s tax returns even if they were not engaged to prepare nor review the tax return), a “more likely than not” standard should be satisfied.

It should be duly noted that all of the standards have a relevant meaning to both taxpayers and tax professionals when evaluating a tax position and the related disclosure requirements. The percentages listed for “more likely than not” (50 percent) and “realistic possibility of success” (one in three, or 33 percent) are specifically provided for and discussed in the Treasury regulations. In contrast, the percentages for “substantial authority” (40 percent), “reasonable basis” (between non-frivolous and realistic possibility), “non-frivolous” (10 percent) and “frivolous” (less than 10 percent) have been developed based upon their relative importance in the hierarchy of standards of opinion as primarily provided for in congressional committee reports. While not scientifically calculable, the percentages are still practical in demonstrating the relative strength of one level as opposed to another level.

Communicate with Your Client
The fifth and final step in the tax research process entails communicating the conclusion to your client. Your client, of course, must ultimately make the final decision concerning what course of action to take, even though the client’s decision is guided by and often dependent upon the conclusions reached by you, the tax professional.

It is strongly recommended that this tax advice be rendered to your client in a written format, as opposed to a verbal communication, and preferably in a formal tax advice memorandum format (i.e., facts & circumstances section; issue(s) section; analysis section; and conclusion section) meticulously discussing the applicable statutory, administrative and judicial authority to appropriately document your due diligence in assessing the tax issues and resolving them satisfactorily to reach a strong tax return filing position (i.e., “more likely than not,” “should” “or “will” filing positions).

Finally, caveat language in the form of a disclaimer should be documented within the tax advice memorandum for any areas of the tax law that were not within the scope and application of your tax research services (i.e., the scope and application of this tax advice memorandum analyzes the federal-level tax consequences only and does not provide any advice or analysis in connection to any multi-state tax consequences or any international tax consequences).

By following the preceding all-inclusive steps in the tax research process, you should be able to render your research services to your entire client base in a more efficient, effective and productive manner while adequately weighing risk management concerns in connection with tax return filing positions. As a final reminder, the guidance contained in this article should be applied with due professional care, including seeking further professional advice from a subject matter expert should it be deemed warranted based upon both the complexity and contentious nature (i.e., a Tier 1 IRS Audit Directive issue; taking a tax position contrary to a Treasury regulation on Form 8275-R, etc.) of the tax matter under review.

Peter J. Scalise serves as the national partner-in-charge and the federal tax practice leader for Engineered Tax Services. He is also a distinguished member of both the board of directors and board of editors for the American Society of Tax Professionals and is the founding president and chairman of the Northeastern Region Tax Roundtable, an operating division of the ASTP.

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