What Is Tax Research and Why Is It Important?

Tax research is the methodical process used to find answers to tax-related questions for individuals and businesses. Professionals use this skill to navigate the country’s complex and constantly changing tax laws. The Internal Revenue Code is exceptionally long, and when combined with administrative interpretations and judicial rulings, it creates a body of law that is impossible to fully memorize. This complexity requires a structured approach to finding accurate answers for tax reporting and financial planning. Because new legislation and guidance are issued regularly, even experienced professionals rely on research to ensure they are applying the most current rules to a client’s situation. This process is necessary for maintaining compliance and making informed financial decisions.

The Goal of Tax Research

The purpose of tax research is to determine the tax consequences of a transaction, which generally falls into two situations: tax compliance and tax planning. Each serves a different purpose and is initiated at a different point in a transaction’s timeline.

Tax compliance research addresses a “closed-fact” scenario, meaning the transaction has already occurred and the facts are fixed. The goal is to determine the correct tax treatment for past events to ensure accurate reporting on a tax return. For example, a business client may ask how to report the proceeds from the sale of equipment that happened during the year. The research would focus on identifying the character of the gain or loss and the specific forms required for reporting.

In contrast, tax planning involves an “open-fact” scenario, where the transaction has not yet happened. This proactive research allows a professional to help shape future events to achieve the most favorable tax outcome. A client might ask for the most tax-advantaged way to structure the sale of a business before signing any agreements. The research would explore options, like an asset sale versus a stock sale, and analyze the tax implications to provide advice that minimizes tax liability.

Sources of Tax Authority

Tax research relies on a hierarchy of sources to answer questions, which are categorized as either primary or secondary authorities. Primary authorities are the official sources of tax law and provide the basis for any formal conclusion. Secondary authorities are unofficial materials that explain and interpret the primary sources, serving as tools for understanding complex topics and locating the controlling law.

Primary Authorities

Primary authorities are generated by the three branches of the federal government. The legislative branch, through Congress, creates statutory law. The ultimate statutory authority is the Internal Revenue Code (IRC), which is the foundation of all federal tax law, and most other primary sources are interpretations of it.

The executive branch, through the Treasury Department and the IRS, issues administrative authorities that provide guidance on applying the IRC. The most authoritative of these are Treasury Regulations, which have the force of law and come in Final, Proposed, and Temporary forms. Other administrative sources include Revenue Rulings, which apply the law to a specific set of facts, and Revenue Procedures, which explain IRS practices.

The judicial branch produces legal precedents through court decisions that resolve disputes between taxpayers and the IRS. Key courts include the U.S. Tax Court, U.S. District Courts, and the U.S. Court of Federal Claims. Appeals may go to the U.S. Courts of Appeals and the U.S. Supreme Court, and the weight of a decision depends on the court and the taxpayer’s geographic jurisdiction.

Secondary Authorities

Secondary authorities are unofficial materials that analyze, interpret, and explain primary sources. While they should not be cited as the final authority in a formal conclusion, they are a valuable part of the research process. Their main purpose is to help a researcher understand a topic and locate relevant primary sources more efficiently. These resources make the vast body of primary law more accessible and include:

• Commercial tax research services like CCH, RIA, and Bloomberg Tax
• Professional journals
• Treatises written by tax experts
• Textbooks

Even IRS Publications are considered secondary authority because they provide helpful guidance but do not carry the legal weight of primary sources like Treasury Regulations.

The Tax Research Process

Effective tax research follows a structured, multi-step process to ensure a thorough and well-documented conclusion. This approach ensures the final recommendation is supported by controlling law.

Establish the Facts

The first step is to establish all relevant facts. A researcher must gather a complete and accurate understanding of the client’s situation, as any missing information can lead to an incorrect conclusion. This involves interviewing the client and reviewing documents to clarify details. For instance, in a property sale, it is not enough to know the sale price; the researcher must also know the original cost, how the property was used, and the duration of ownership.

Identify the Issues

Next, the researcher must identify the specific tax issues or questions that need to be answered. Based on the established facts, the researcher formulates precise questions. Using the property sale example, the questions might be: Is the gain or loss from the sale capital or ordinary? What is the property’s adjusted basis? Is the gain eligible for any exclusions?

Locate Authorities

With clear questions in mind, the third step is to locate relevant authorities. The researcher uses tax research databases to find primary and secondary sources that address the identified issues. This involves using keywords to search through the Internal Revenue Code, Treasury Regulations, court cases, and other official guidance. Secondary sources are often consulted first to gain an overview and find citations to primary authorities.

Evaluate and Analyze

Once the relevant authorities have been located, they must be evaluated. The researcher reads the sources to determine if they apply to the client’s specific facts and assesses their relative weight. If conflicting authorities are found—for example, a court case that contradicts an IRS ruling—the researcher must use the established hierarchy of authority to determine which source is controlling.

Develop Conclusions and Recommendations

Finally, the researcher develops conclusions and recommendations. After analyzing the applicable authorities, a definitive answer to the research questions is formulated. This conclusion should directly address the client’s issues and be supported by the primary sources found during the research process.

Communicating Research Findings

The final step in the tax research process is to effectively communicate the results. The format and tone depend on the intended audience, which is either internal personnel or the external client. Two common documents used are the internal memo to file and the client letter.

An internal memo to file is a comprehensive document created for the firm’s records. Its purpose is to detail the research performed, creating a clear trail that another tax professional could follow to understand the conclusion. The memo is structured with a statement of the relevant facts, a list of the specific tax issues researched, a thorough discussion citing specific primary authorities, and a clear conclusion.

A client letter communicates the research results directly to the taxpayer. Unlike the detailed internal memo, this letter is written in clear, non-technical language that is easy for a layperson to understand. It focuses on the practical implications of the research, presenting the conclusion and providing actionable advice, while omitting the exhaustive legal analysis and citations found in the internal memo.