How to research tax topics this tax season

Tax research goes beyond finding the right Internal Revenue Code (IRC) section or IRS guidance. It requires sound professional judgment and careful evaluation of client-provided information. Circular 230 sets standards governing this process and defines expectations for tax professionals who prepare returns or provide tax advice.

A central concept within Circular 230 is reasonable inquiry, often described as due diligence. Understanding what qualifies as a reasonable inquiry and what does not is essential for conducting effective tax research.  

What is a reasonable inquiry search?

Under Circular 230, “reasonable inquiry” refers to the obligation of tax professionals to make appropriate efforts to verify the accuracy of information provided by clients. This obligation applies when preparing tax returns, signing submissions, or offering tax advice. Sections 10.22 (Diligence as to Accuracy), 10.34 (Standards with Respect to Tax Returns and Documents) and 10.35 (Competence) establish this requirement.

Reasonable inquiry does not require exhaustive audits or absolute certainty. Instead, it requires attention to detail and professional judgment based on the facts and circumstances of each engagement.

Understanding the client’s situation

Effective tax research begins with understanding the client’s financial situation. Practitioners must gather enough information to understand income sources, deductions, credits, filing status and other relevant factors. In addition, look for any changes from prior years or other unfamiliar activities. Without a clear understanding of the client’s circumstances, even technically correct research can lead to incorrect conclusions or unsupported positions.

Verifying client information

Circular 230 allows practitioners to rely on client-provided information unless it appears incorrect, inconsistent or incomplete. When information raises questions, such as unusually large deductions or missing documentation. Reasonable inquiry requires follow-up.

Verification may include requesting additional documents, asking clarifying questions or reconciling discrepancies. The goal is not to challenge clients unnecessarily, but to ensure that the facts supporting the tax position are reasonable and complete.

Identifying and questioning red flags

Red flags signal the need for additional inquiry. These may include unexplained discrepancies, large undocumented cash transactions, inconsistent reporting across documents or patterns that suggest potential compliance issues.

Ignoring red flags undermines the reliability of tax research. Reasonable inquiry requires practitioners to pause, ask questions and resolve concerns before relying on the information to support a tax position.

Applying professional judgment

Not every return requires the same level of inquiry. Circular 230 emphasizes professional judgment to determine when further investigation is necessary. Simple returns may require minimal verification, while complex returns involving pass-through entities, international activity or aggressive tax positions require greater scrutiny.

Documenting the inquiry

Documentation is a critical part of reasonable inquiry. Practitioners should maintain records of the information received, questions asked and responses provided. Documentation supports the tax position taken and demonstrates diligence if the IRS later questions the return.

From a research standpoint, documentation establishes the factual foundation that supports legal analysis and conclusions.

What is not a reasonable inquiry search

Understanding what does not qualify as a reasonable inquiry is equally important. Many compliance issues arise not from intent, but from assumptions, shortcuts or failure to question information.

Ignoring inconsistencies

Failing to address conflicting information provided by a client is not reasonable inquiry. Discrepancies between reported income and financial records, or between deductions and documentation, must be resolved before relying on the information.

Tax research based on inconsistent facts is unreliable and exposes both the practitioner and client to risk.

Accepting client statements at face value

Blindly accepting client statements, particularly for significant deductions or credits, without verification is not reasonable inquiry. Unsupported claims should prompt additional questions or requests for additional documentation.

Overlooking red flags

Neglecting to investigate unusual transactions, recurring losses or undocumented activity violates Circular 230 standards. Red flags exist to alert practitioners that further inquiry is necessary.

Ignoring them increases the likelihood of penalties and disciplinary action.

Relying solely on prior-year returns

Using prior-year returns as the sole basis for current-year reporting without confirming changes is not reasonable inquiry. Prior returns may contain errors and client circumstances often change. Effective tax research requires current-year facts and verification.

Failing to document

Not maintaining records of inquiries and responses weakens the ability to defend a tax position.

Documentation is essential to demonstrate diligence if the IRS questions the return.

Ignoring professional judgement

Failing to apply professional judgment, whether by avoiding difficult questions or treating all returns the same, does not meet Circular 230 standards. Reasonable inquiry requires thoughtful evaluation and ethical decision-making.

A step-by-step approach

A strong tax research process follows a consistent method that starts with the facts and ends with applying the findings to the client’s situation. 

• Identify the relevant facts and documentation, including what the client told you and what you can verify through records. 
• Determine key words based on the issue, the tax form involved and any related terms that appear in IRS guidance. 
• Research the topic using authoritative sources, focusing on the most relevant guidance for the client’s facts. 
• Evaluate authority and credibility of the resource used. For example, NATP uses Blue J as an external trusted online resource. In all cases, review the reliability and applicability of the source, especially when using online tools and summaries.

Finally, complete the process by applying the information, ensuring the authority supports the conclusion and that the position is reasonable given the facts and the Circular 230 due diligence requirements.

IRS Resources and FAQs

Guidance and regulations issued by the IRS and the Treasury are generally the most authoritative sources on tax topics. However, make sure the IRC or guidance you are reviewing includes any current tax law changes. For many popular tax topics, the IRS issues frequently asked questions (FAQs) to provide answers to the most common concerns. If the FAQs have been published, they can be regarded as authoritative and valid.

Using AI and internet searches

AI and internet searches can enhance tax research by improving efficiency and expanding access to information, but they must be used carefully. AI tools can assist with data analysis by quickly processing large volumes of information and identifying patterns and insights. They can also help automate literature reviews by summarizing articles and identifying key themes. 

While AI improves efficiency, it raises concerns about data privacy and the reproducibility of AI-driven research results. Tax professionals must exercise caution and ensure that any online information used in practice comes from credible, authoritative sources and is thoroughly verified and documented. AI and internet tools should support, not replace, professional judgment and reasonable inquiry.

Final thoughts

Reasonable inquiry is fundamental to effective tax research and professional compliance. It ensures that tax positions are based on accurate facts, sound judgment and proper documentation. By understanding the difference between reasonable and unreasonable inquiry, tax professionals strengthen their research, protect their clients and uphold the standards required under Circular 230.