For tax accountants, whether in public or private accounting, tax research is critical. However, in the age of Google, Siri and Alexa, many younger tax accountants (me included) rely on sources that don’t have ultimate authority.
Although these sources act as a great starting point, nothing can replace tax research backed by authoritative sources. This article will break down effective ways to conduct tax research without having to invest money in expensive subscriptions or invest hours sifting through articles from Google searches.
US Federal Tax Hierarchy
For starters, it’s important to understand the hierarchy of federal tax law to conduct effective tax research. The higher up the chain you go the more authoritative your citations will be.
For a quick reference guide here’s a link to the AICPA U.S. Federal Tax Law Hierarchy Quick Reference Chart. Here you will see what sources have the highest authority and which sources are more like the Wikipedia of a work cited.
- U.S. Constitution – Highest authority
- U.S. Internal Revenue Code (IRC) – Foundation for all federal tax authority
- U.S. Treasury Regulations – Additional guidance and interpretation of the IRC issued by the Treasury and binding on the IRS.
- Legislative History – Prior court rulings on tax law cases.
- Judicial Authority – The higher the court decision the higher the authority (U.S. Supreme Court highest authority).
- IRS Positions – Revenue Rulings, Revenue Procedures, Private Letter Rulings, IRS Forms & Publications that interpret the IRC and provide guidance.
- Secondary Sources – Tax journals, publications and online articles. Lowest authority.
Although online articles can be helpful in better understanding a specific tax topic it carries the lowest weight and should not be cited as authority.
Article I, Section 9 of the U.S. Constitution states: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.”
This is an issue when it comes to U.S. tax law because most of the tax law we study is derived from some sort of direct tax. This issue was first contested in 1894 when Congress passed the Wilson-Gorman Tariff, which created an income tax of 2% on income of over $4,000.
Charles Pollock contested the tax under the grounds that such tax violated Article 1, Section 9 of the U.S. Constitution. The Supreme Court in Pollock v. Farmers’ Loan and Trust Company, 157 US 429 (1895) agreed with Pullock and held that the Wilson-Gorman Tariff was unconstitutional as the act created a direct taxation on property owners, not a tax apportioned among the states.
However, in 1913, the passage of the Sixteenth Amendment effectively overturned the holding in Pollock. It states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
The Revenue Act of 1913, passed after the ratification of the Sixteenth Amendment, reinstated the federal income tax.
With all that being said, no tax accountant is going to read the U.S. constitution to do any sort of tax research. However, it’s important to know the basis for all tax law and understand that Congress has the power to lay and collect taxes on incomes from whatever source derived.
U.S. Internal Revenue Code (IRC) Brief History
Now that you understand the basis of all tax law we can dive into the meat and potatoes. Firstly, the Internal Revenue Code (IRC) is the highest authoritative source which you can directly reference when conducting specific tax research.
The 16th Amendment gives Congress the power to lay and collect taxes from income, whatever source derived, and the IRC is the mechanism by which income is defined.
Prior to 1939 the IRC as we know it today did not exist. In fact, after the passage of the 16th Amendment the income tax of 1913 only consisted of 14 pages of statutes (if only tax law was still that simple).
From 1913 to 1939 Congress added so much to the body of tax law that it needed to assemble all of the revenue statutes, including the income tax statutes, into one comprehensive source called the Internal Revenue Code (IRC) of 1939.
Since then there has been several major enactments of the IRC including the 1954 Code, the 1969 Code, 1976 Code, 1981 Code, 1982 Code, the 1984 Code and finally the 1986 Code (the 80’s were a crazy time for tax law).
How to Navigate the IRC?
Title 26 of the U.S. Code, commonly referred to as the IRC, contains nearly all of the federal tax laws.
The IRC is organized into subtitles, chapters, subchapters, parts, subparts, sections, subsections, paragraphs, subparagraphs, clauses and subclauses.
The IRC may seem intimidating at first but if you can understand it’s structure then you can answer any and all of your tax questions.
Here’s a link to the Cornell Law School online IRC if you want to follow along.
For most tax accountants the magic of the tax code will happen in Subtitle A: Income Tax, Chapter 1: Normal Taxes and Surtaxes. As you glance through these subchapters you might already be familiar with their names.
For example, Subchapter K contains the tax laws governing partnerships. You might also be familiar with Subchapter S which contains the tax laws governing S-Corporations. As you browse through these subchapters you’ll clearly see that the IRC is organized in such a way that information can be easily found.
Now what about these code sections that these smart accountants keep referencing? What is section 1031? Why do people keep talking about section 199a or 163j? The codes they speak of are hidden in these subchapters and are in order so you can easily locate a code section.
for example, sections 701 to 771 contain all the tax laws relating to partnerships. So when you hear someone make reference to section 754 you know it has something to do with partnership taxation.
Once you understand the IRC is just like a menu you’ll realize how easy it is to navigate. When you go to a restaurant and you want to order dessert what page is it usually on? If you want to order breakfast at a diner you can probably guess where it’s located.
For the IRC you’ll see the various menu options and you can select which is best to answer your tax question.
Here’s an example, let’s say you have a tax question about charitable deductions. Simply dive into Subchapter B: Computation of Taxable Income, Part VI: Itemized Deductions for Individuals and Corporations, Section 170: Charitable, etc. Contributions and Gifts.
Understanding the Language of the Code
If you want to sound like a smart tax accountant you’re going to have to learn how to read code. Just like computer code, the Internal Revenue Code has its own language. The code will use specific words when you should add, subtract, multiply or divide.
Addition “The Sum of  Plus ”: Whenever the code requires you to add two or more numbers it will use the phrase, “the sum of  plus ”. This should not be mistaken with the use of the word “and.” The code will reference “and” only when both parts of a specific test need to be met.
Subtraction “The Excess of  Over ”: Whenever you see the phrase “the excess of” you know it’s time to subtract.
Multiplication “Multiply By”: This one is simple enough to understand.
Ratio “An Amount Which Bears the Same Ratio  as  bears to ”: This is by far the trickiest concept to understand but if you’ve ever taken a logic class then it makes perfect sense. Essentially, the ratio between two numbers will be the same ratio you apply to the third.
Since ratios are difficult to comprehend let’s look at an example. Section 453 deals with installment sales and within this section the use of a ratio is required:
“For the purposes of this section, the term ‘installment method’ means a method under which the income recognized for any taxable year from a disposition is that proportion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price.”
In simpler terms, you will multiply the payments received each by the ratio between gross profit and total contract price to determine taxable receipts.
If you sold property for $100,000 and realized a gain of $50,000 then your ratio is 50% (50,000/$100,000). If you receive payment of $10,000 in the current year then 50% of that payment is taxable under the installment method.
All Must be True “And”: If you see the phrase and being used then you know two or more conditions must be true to pass a specific test. For example, you need to provide your driver’s license and $50 to get into the party. If you fail one of these test then you’re not getting in the party.
At Least One Must Be True “Or”: If you see the phrase “or” being used then you only need to meet one condition to pass the specific test. To enter the party you need to bring cookies or cupcakes. You can bring either one or both to enter the party.
Only applies to this section/subsection “For The Purposes of”: If you see the phrase “for the purposes of” you know you’re reading a general disclaimer. This means that anything you’re about to read only applies to this section and this section alone.
“Shall” vs “At the Election of”: when you see “shall” you know it’s required and when you see “at the election of” you know it’s optional.
There are many more phrases you’ll see along the way in the tax code but this list will give you a good start.
Reading Regulations For More Context
If the code is too complex for you to read then you can always refer to the regulations. The regulations have more authority than IRS publications and much more authority than any article you’ll read online.
The regulations will give context to the code sections and give detailed examples so you can see how the code would be applied in a real world example.
Sometimes the regulations will be more helpful than the code sections especially when Congress defers to the IRS to make rules governing the implementation of a law. If you see reference to rules and forms prescribed by the secretary then you know the code is deferring to the IRS for additional guidance on a particular section.
When you’re looking for regs to a particular code section you can easily find them by the regulation citations that will mirror the code section reference. For example, §1.199A-1 are the regulations to code section 199A.
Reading Publications For Clarity
If you’re reading through the code and have skimmed through the regulations but don’t have a clear understanding of the law then it might be helpful to checkout the publications.
Publications aren’t as authoritative as the code or the regs but they can provide clarity especially when you’re looking at the impact of many code sections.
Publications are easy to read manuals that unpack many code sections in an easy to understand way. Some common publications are Pub 523 selling your home, Pub 526 charitable contributions and Pub 415 where accountants can drink after tax season (not a real publication).
Reading Instructions to Apply the Law to the Form
Doing tax research is great and all but at the end of the day you’re trying to apply law to the forms. It’s great to know that you can deduct charitable contributions but where is it reported on the forms?
Reading the instructions to the forms pulls together all your tax research and helps you understand how a specific form is being calculated. The instructions may not give you all the tax law or regulations but it will give you enough information to ensure proper reporting.
Other Forms of Federal Tax Research
This article should give you more than enough information to get you started on the road to becoming a tax expert. You can now give tax opinions using authoritative sources instead of saying, “Janice from accounting said to do it this way.”
This is not an all encompassing guide to tax research and does not include researching specific tax court cases, private letter rulings, revenue ruling, etc. For more complex issues that relate to specific facts and circumstances you may need to dig a little deeper.
For all other tax issues you can rely on the code, the regs, the publications and the instructions to get you all the answers you’re looking for.
thank you for this publication , it help me a lot to understand how to research in the tax code.
Thanks a lot.
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