Chapter 2: Income Tax Concepts
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ETHICS DISCUSSION CASE 82.
You are a CPA who has been preparing tax returns for Sign, Seal, and Deliver, a mid-size CPA Firm for the last 5 years. During the current year, you are assigned the individual return of a new client, Guadalupe Piaz. Guadalupe has completed and returned the tax return questionnaire that the firm sent to her. In reviewing the questionnaire, you notice that Guadalupe has included an entry for $10,000 in cash dividends received from Quinn Corporation. However, there is no supporting documentation for the dividend payment in the information Guadalupe provided. What concerns you is that until this year, you had prepared the tax return for Quinn Corporation. (It was reassigned to another firm member when you were promoted late last year.) You know that Quinn Corporation was organized as an S corporation during the years that you prepared the return. During that period, Quinn was equally owned by 3 shareholders, and Guadalupe was not among them. In addition, the Corporation was highly profitable, averaging approximately $6,000,000 per year in taxable income. Given this information, what are your obligations under the Statements on Standards for Tax Services (Appendix D)? Write a memorandum to your supervisor explaining your concerns and what actions, if any, you will need to take before you can prepare Guadalupe’s return. SSTS #3 allows a CPA to rely on information provided by a client. However, if the information appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the CPA, SSTS #3 requires the CPA to make reasonable inquiries about the information provided. Paragraph .06 of SSTS #3 discusses the CPA's obligation in regard to unsupported lists of tax information. Although there is no absolute obligation to examine underlying documentation (paragraph .07), SSTS #3 advises the CPA to encourage the client to provide supporting data where necessary. That is, if the CPA has reason to believe, based on other information known to the CPA, that the amounts reported may be incorrect, the CPA should ask the client to provide the supporting documentation to avoid misunderstandings, inadvertent errors, and possible administrative actions (i.e., audits) in the future. The CPA should also consider relevant information from the returns of other clients if the information is necessary to properly prepare a return and the use of the other information does not violate any law or rule relating to confidentiality. Applying these requirements to Guadalupe, the CPA's knowledge of Quinn Corporation would require the CPA to examine Quinn Corporation's return (assuming that Sign, Seal, and Deliver still prepares the return). Because Quinn is an S corporation, Guadalupe should report her share of Quinn's income on her return. Cash dividends received from an S corporation are not taxable. It is quite likely that Guadalupe does not understand the conduit nature of an S corporation and has incorrectly reported the amount of cash dividends that she received in the tax return information questionnaire. There is also the possibility that Quinn is no longer an S corporation and that the cash dividends that Guadalupe received is the correct amount of income that should be reported. An examination of Quinn's return will show the correct of amount of income that Guadalupe should report from her investment in Quinn. If the $10,000 is not the correct amount of income to be reported, the CPA should discuss the problem with Guadalupe and advise her that the amount is incorrect. Š 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.