Tax Research and Its Methodologies

Tax research ensures compliance and strategic planning. As tax laws continuously evolve, professionals need quick access to reliable sources and thorough analysis to address complex tax issues, reduce risks, and make informed decisions for their clients. 

This guide explores tax research methodologies, tools, and best practices to help tax professionals and accountants navigate the changing tax landscape.

Understanding Tax Research

Definition and Importance of Tax Research

Tax research involves identifying, analyzing, and applying tax laws to client situations or transactions to determine their tax impact. It ensures compliance with legal standards and supports strategic tax planning. Through thorough research, tax professionals can confidently advise clients, address complex issues, and minimize risks, such as penalties or audits. 

Who Needs to Conduct Tax Research?

Tax research is important for a wide range of professionals, including tax preparers, accountants, auditors, and legal advisors. It serves in-house tax teams, corporate tax departments, independent tax consultants, and CPA firms alike. 

For instance, corporate tax departments must frequently research the implications of new tax laws, such as changes in corporate tax rates or new incentives introduced in legislation like the Tax Cuts and Jobs Act (TCJA). 

Whether resolving a complex corporate issue or providing due diligence for an individual’s tax filing, professionals must rely on accurate research to offer sound, compliant advice.

Different Purposes for Conducting Tax Research

Clarification of Legal Texts

Tax laws are detailed and complex, with numerous regulations, court decisions, and revenue rulings potentially affecting a single tax issue. Research helps clarify these legal texts, ensuring that professionals apply statutes and regulations accurately to specific fact patterns. This guarantees that decisions are backed by precise legal interpretations rather than assumptions.

Application of Tax Law

Each client’s situation may involve different layers of tax implications. Research helps pinpoint relevant authorities and apply them to the unique circumstances at hand. For instance, if a client is engaged in a small business, tax research may help in specific application under IRC Section 199A, the Qualified Business Income Deduction. This process ensures that tax positions minimize risks and remain compliant with IRS standards, helping professionals develop defensible strategies.

Interpretation for Client Strategy

Beyond compliance, tax research helps develop strategies for minimizing tax liability. For example, research into tax treaties between the U.S. and foreign countries can help multinational corporations structure their cross-border operations in a tax-efficient way, avoiding double taxation while staying compliant with both domestic and international laws.

Tax Research Methodologies

Step 1: Establishing Facts and Circumstances

The first step in tax research is gathering all relevant facts about the client’s situation, including financial transactions, business structures, and personal circumstances. Even minor details can affect tax law interpretation. For example, when a business considers a merger, tax professionals must collect financial details, entity structures, and jurisdictions to determine if the merger qualifies as a tax-free reorganization under IRC Section 368.

Step 2: Identifying Tax Issues

Once the facts are established, the next step is to identify the tax issues they raise. Tax professionals analyze how laws apply to the client’s scenario, considering both broad and specific issues. This process may uncover new questions that need further exploration before drawing conclusions.

For instance, if a client is claiming a foreign tax credit, the tax professional must determine which aspects of the credit apply based on the facts, such as the country of income generation and the taxes paid. Misidentifying an issue can lead to inaccurate filings and penalties.

Step 3: Locating and Analyzing Relevant Authorities

Tax professionals then locate the binding authorities, such as statutes, regulations, and case law, that directly relate to the identified issues. Secondary sources like journals may offer additional insights, but the focus remains on primary authorities to ensure legally sound advice. The goal is to thoroughly analyze these sources to address the client’s issues comprehensively.

Step 4: Resolving the Tax Issues

Once the research is complete, professionals apply the law to the facts, resolving the tax issues. This step involves weighing interpretations of the law and reaching defensible conclusions. For example, if research shows that a client’s income qualifies for a foreign-earned income exclusion under IRC Section 911, professionals can confidently apply that exclusion to reduce the client’s taxable income.

Step 5: Communicating Findings and Recommendations

The final step is to clearly communicate the findings and recommendations to the client. This communication must be straightforward, summarizing complex legal research in a way that non-experts can understand. Clear communication ensures clients can make informed decisions based on the research.

Types of Tax Research Methodologies

Academic Research

Academic research explores the development of tax laws overtime and their potential future interpretations. While more theoretical, it provides valuable insights into broader tax policy discussions. For example, academic papers may explore the long-term impacts of the TCJA on corporate tax planning or compare the U.S. tax system with those of other countries.

Case Law Research

Case law research focuses on court decisions that interpret tax law. One prime example is the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. that significantly impacted state sales tax laws. Reviewing past rulings helps tax professionals understand how courts have applied statutes in similar cases, offering guidance on how to address current issues.

Policy-Driven Tax Research

Policy-driven research examines the impact of tax law changes on different stakeholders. It is particularly useful for clients affected by potential legislative or regulatory shifts, helping them prepare for future changes in tax policy.

Types of Tax Authorities

Primary Sources of Tax Law

Primary sources, such as statutes and regulations, are binding authorities in tax law. These sources include statutory, administrative, and judicial authorities, which serve as the foundation for all tax research.

Statutory Authority

Statutory authority consists of laws passed by Congress, compiled in the Internal Revenue Code (IRC). This is the foundation of all federal tax decisions and provides the framework for tax obligations.

Administrative Authority

Administrative authority includes interpretations of tax statutes issued by the Treasury Department and IRS. Treasury regulations and revenue rulings clarify how the IRC should be applied. Case-specific guidance, like Private Letter Rulings and Technical Advice Memoranda, also offers insights but applies only to the specific cases they address.

Judicial Authority

Judicial authority arises from court decisions that interpret tax law. Courts such as the U.S. Tax Court and the U.S. Supreme Court set precedents that help resolve ambiguous laws, offering clarity on how statutes and regulations should be applied.

Secondary Sources of Tax Law

Secondary sources, such IRS publications and guides, offer valuable interpretations and guidance but lack legal authority. They help professionals understand emerging trends and support the development of sound tax positions. For example, publications from the American Bar Association offer detailed commentary on emerging tax issues, such as cryptocurrency taxation or transfer pricing rules in cross-border transactions.

Tools and Resources for Effective Tax Research

Online Research Platforms

Online research platforms provide tax professionals with up-to-date access to statutes, regulations, and case law. These platforms offer comprehensive coverage of federal, state, and international tax rulings, allowing professionals to access authoritative sources quickly and efficiently.

AI Tools in Tax Research

AI tools provide accurate, data-backed insights, offering summaries and recommendations that help professionals stay compliant with the latest tax regulations. AI tax research tools like TaxGPT enhance research efficiency by scanning vast amounts of data and summarizing key tax insights. For instance, TaxGPT can analyze a client’s tax scenario and provide recommendations on applicable deductions or credits, drastically reducing research time. 

Government Resources

Government resources, like the IRS and Treasury Department websites, offer direct access to statutes, regulations, and other critical documents. These are reliable sources for staying informed about changes in tax law and compliance guidelines.

Professional Publications and Journals

Publications and journals offer expert commentary on complex tax issues. While not legally binding, they provide valuable insights and help tax professionals stay up to date with emerging trends and interpretations.

Cross-Border Tax Research Tools

For international tax issues, cross-border tax research tools are required. They provide access to tax treaties, regulations, and rulings from foreign jurisdictions, allowing professionals to navigate global tax complexities.

Understanding Tax Opinion Standards

Levels of Assurance in Tax Opinions

Tax opinions provide varying levels of assurance based on the likelihood that a position will be upheld if challenged by tax authorities. These levels help guide both tax professionals and clients in determining the level of risk associated with a particular tax position. 

The main levels of assurance include:

• Will: A 95% or greater chance of success.
• Should: A 70% or greater probability of success.
• More-Likely-Than-Not: A greater than 50% chance of success, often required to avoid penalties under IRC 6662A.
• Substantial Authority: A lower level of assurance, generally 40-50%.
• Reasonable Basis: Offers minimal assurance, with a 20-40% probability.

Implications for Tax Professionals and Clients

Understanding these assurance levels allows tax professionals to help clients manage risk. For example, taking a "More-Likely-Than-Not" position when filing a complex tax return ensures the client can avoid accuracy-related penalties if the IRS challenges the position. Filing a Form 8275 disclosure form may also be recommended for positions with lower assurance to avoid penalties.

Best Practices in Tax Research

Documenting Your Research

Thorough documentation ensures transparency and accountability. Keeping detailed records of all sources and conclusions mean that the research process is traceable and defensible in the event of an audit or dispute.

Staying Current with Tax Law Changes

Tax professionals must proactively monitor tax law changes to remain compliant. Tax Journals, IRS e-news updates and automated alerts from authoritative sources can help professionals stay updated on amendments to the IRC and other regulations.

Ethical Considerations in Tax Research

Maintaining integrity in tax research holds much importance. Tax professionals must use credible sources and avoid aggressive strategies that could lead to penalties or legal issues. High ethical standards build trust and credibility with clients.

Collaboration with Legal Experts

Collaboration with legal experts strengthens complex tax positions by providing insights into judicial interpretations. For example, a tax professional may work with a legal expert to navigate U.S. and foreign tax laws in an international tax dispute for a client.

Economic and Policy Analysis in Tax Research

Incorporating economic and policy analysis helps tax professionals provide more comprehensive advice, especially for long-term planning and cross-border transactions. For example, understanding the impact of proposed capital gains tax changes allows for better investment strategy guidance.

Challenges in Tax Research and How to Overcome Them

International Tax Research Challenges

Cross-border transactions and varying local tax laws complicate international tax research. To overcome these challenges, professionals can use specialized platforms and consult experts in foreign tax law to ensure compliance.

Addressing Ambiguities in Tax Laws

Ambiguities in tax laws create uncertainty. Tax professionals can resolve this by analyzing binding authorities and consulting secondary sources or legal experts. For example, interpreting the tax treatment of virtual currencies is challenging due to evolving IRS guidance, but consulting revenue rulings and legal counsel can provide clarity.

Rapid Legislative Changes and Adaptation

Tax professionals must adapt quickly to legislative changes. For instance, the TCJA significantly altered the tax landscape, and professionals had to adjust their strategies for corporate and individual clients. Real-time tax research tools are helpful in staying compliant. 

Accessing Non-Public Rulings

Access to certain rulings, such as Private Letter Rulings, may be restricted. Tax professionals can access summaries or similar cases through legal databases, or consult legal experts with experience in these rulings.

FAQs

What are the key resources for tax research?

The most important resources for tax research include primary sources like the Internal Revenue Code, Treasury regulations, revenue rulings, and court decisions. Secondary resources such as tax treaties, journals, and commentaries provide additional guidance.

How do I use AI for tax research?

AI has become a valuable tool for tax research. TaxGPT is an AI-powered tax research tool that quickly analyzes large volumes of tax data, providing insights and summaries that save time and improve accuracy. These tools help professionals stay compliant with current regulations and case law. To try TaxGPT for tax research, sign up on our website and start your 14-day free trial.

How do I resolve conflicting tax rulings?

When dealing with conflicting tax rulings, tax professionals should prioritize binding authorities like statutes and regulations, followed by relevant judicial precedents. Reviewing legislative intent or consulting administrative guidance, such as Private Letter Rulings, can help. If conflicts persist, seeking a legal opinion or an IRS ruling may provide clarity.