You are the chair of the Ethics Committee of your state’s Board of Accountancy. The following issues come up at today’s meeting. Help the committee interpret the controlling AICPA authority and determine the applicable Statements on Standards for Tax Services 1-7 (PDF).
Angie
Angie says that when a CPA has reasonable grounds for not answering an applicable question on a client’s return, a brief explanation of the reason for the omission should not be provided, because it would flag the return for audit by the IRS.
What statement from the AICPA will help determine whether Angie’s assertion is correct?
Correct Answer: Statement No. 2: Answers to Questions on Returns
Incorrect. Please try again.
Incorrect. Here is the correct answer: Statement No. 2: Answers to Questions on Returns
Is Angie correct?
Correct. Angie has made an incorrect assertion. Although according to Standard 2, “If reasonable grounds exist for omission of an answer to an applicable question, a taxpayer is not required to provide on the return an explanation of the reason for the omission” (AICPA Statements on Standards for Tax Services, p. 8), the actual rationale Angie provided is because the explanation could trigger an audit. Audit probabilities do not modify disclosure requirements. “A member should not omit an answer merely because it might prove disadvantageous to a taxpayer” (AICPA Statements on Standards for Tax Services, p. 8).
Incorrect. Angie has made an incorrect assertion. Although according to Standard 2, “If reasonable grounds exist for omission of an answer to an applicable question, a taxpayer is not required to provide on the return an explanation of the reason for the omission” (AICPA Statements on Standards for Tax Services, p. 8), the actual rationale Angie provided is because the explanation could trigger an audit. Audit probabilities do not modify disclosure requirements. “A member should not omit an answer merely because it might prove disadvantageous to a taxpayer” (AICPA Statements on Standards for Tax Services, p. 8).
Yoel
Yoel comments that if, during an IRS audit, a CPA discovers that the client has a material error in the return under examination, he should immediately withdraw from the engagement.
What statement will help determine whether Yoel’s assertion is correct?
Correct Answer: Statement No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
Incorrect. Please try again.
Incorrect. Here is the correct answer: Statement No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
Is Yoel correct?
Correct. Yoel has made an incorrect assertion. The CPA should withdraw only if the client refuses to correct the error or if continuing in the engagement would compromise the client’s case. “If a member is representing a taxpayer in an administrative proceeding with respect to a return that contains an error of which the member is aware, the member should request the taxpayer’s agreement to disclose the error to the taxing authority. Lacking such agreement, the member should consider whether to withdraw from representing the taxpayer in the administrative proceeding and whether to continue a professional or employment relationship with the taxpayer” (AICPA Statements on Standards for Tax Services, p. 14).
Incorrect. Yoel has made an incorrect assertion. The CPA should withdraw only if the client refuses to correct the error or if continuing in the engagement would compromise the client’s case. “If a member is representing a taxpayer in an administrative proceeding with respect to a return that contains an error of which the member is aware, the member should request the taxpayer’s agreement to disclose the error to the taxing authority. Lacking such agreement, the member should consider whether to withdraw from representing the taxpayer in the administrative proceeding and whether to continue a professional or employment relationship with the taxpayer” (AICPA Statements on Standards for Tax Services, p. 14).
Inge
Inge says that if the client tells you that she paid $500 for office supplies but has lost the receipts, you should deduct an odd amount on her return (such as $499), because an even amount (such as $500) would indicate to the IRS that her deduction was based on an estimate.
What statement will help determine whether Inge’s assertion is correct?
Correct Answer: Statement No. 4: Use of Estimates
Incorrect. Please try again.
Incorrect. Here is the correct answer: Statement No. 4: Use of Estimates
Is Inge correct?
Correct. Inge has made an incorrect assertion. Reasonable estimates are acceptable. “Unless prohibited by statute or by rule, a member may use the taxpayer’s estimates in the preparation of a tax return if it is not practical to obtain exact data and if the member determines that the estimates are reasonable based on the facts and circumstances known to the member” (AICPA Statements on Standards for Tax Services, p. 11).
Incorrect. Inge has made an incorrect assertion. Reasonable estimates are acceptable. “Unless prohibited by statute or by rule, a member may use the taxpayer’s estimates in the preparation of a tax return if it is not practical to obtain exact data and if the member determines that the estimates are reasonable based on the facts and circumstances known to the member” (AICPA Statements on Standards for Tax Services, p. 11).
Tricia
Tricia states that if a CPA knows that the client has a material error in a prior year’s return, he or she should not, without the client’s consent, disclose the error to the IRS.
What statement will help determine whether Tricia’s assertion is correct?
Correct Answer: Statement No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
Incorrect. Please try again.
Incorrect. Here is the correct answer: Statement No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
Is Tricia correct?
Correct. Tricia has made a correct assertion. The error should not be disclosed to the IRS without the client’s consent. “A member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken. Such advice and recommendation may be given orally. The member is not allowed to inform the taxing authority without the taxpayer’s permission, except when required by law” (AICPA Statements on Standards for Tax Services, p. 14).
Incorrect. Tricia has made a correct assertion. The error should not be disclosed to the IRS without the client’s consent. “A member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return. A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken. Such advice and recommendation may be given orally. The member is not allowed to inform the taxing authority without the taxpayer’s permission, except when required by law” (AICPA Statements on Standards for Tax Services, p. 14).
Niko
Niko comments that if a CPA’s client will not correct a material error in a prior year’s return, the CPA should not prepare the current year’s return for the client.
What statement will help determine whether Niko’s assertion is correct?
Correct Answer: Statement No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
Incorrect. Please try again.
Incorrect. Here is the correct answer: Statement No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
Is Niko correct?
Correct. Niko has made an incorrect assertion. The CPA should refuse only if the error has a carryover effect so as to preclude the correct determination of the tax liability for the current year. “If a member is requested to prepare the current year’s return and the taxpayer has not taken appropriate action to correct an error in a prior year’s return, the member should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer. If the member does prepare such current year’s return, the member should take reasonable steps to ensure that the error is not repeated” (AICPA Statements on Standards for Tax Services, p. 14).
Incorrect. Niko has made an incorrect assertion. The CPA should refuse only if the error has a carryover effect so as to preclude the correct determination of the tax liability for the current year. “If a member is requested to prepare the current year’s return and the taxpayer has not taken appropriate action to correct an error in a prior year’s return, the member should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer. If the member does prepare such current year’s return, the member should take reasonable steps to ensure that the error is not repeated” (AICPA Statements on Standards for Tax Services, p. 14).
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