Question

Jack, a CPA and tax preparer, was preparing a return for a new client, Mary, who was a traveling insurance salesperson. She told Jack she claims standard mileage as a business expense. When asked, she said her company has always reimbursed her auto expense at half the federal mileage rate. While reviewing Mary’s return from last year, Jack noticed her preparer had used Form 2106-EZ and not subtracted any reimbursement from her business expenses resulting in an inflated refund. Since he had not prepared the return, Jack did not mention this to Mary and proceeded with her return for the current tax year. Were Jack’s actions related to this client ethically acceptable? a) Yes, his actions related to this client were acceptable. b) It was acceptable for Jack to prepare Mary’s current-year return, but unacceptable not to inform her of the error on last year’s return. Jack should inform Mary of the mistake on the prior year return, advise her of penalties, and offer to prepare an amended return. c) No, his actions were completely unacceptable. Jack should have told Mary he preferred not to prepare the return. d) His actions were not ethically responsible, but he cannot be penalized.

2.Jack, the tax preparer, interviewed a new client, Sam, who owned a home-building business.
Sam reviewed his business income and expenses, which included $27,000 in canceled checks
paid to 10 individuals for labor. Jack prepared Sam’s return, reporting this expense on
Schedule C as contract labor. Was Jack’s action ethically acceptable?
a) Yes, his action was acceptable under the circumstances.
b) His action was partially acceptable under the circumstances.
c) No, his action was completely unacceptable.
d) His action was not ethically responsible, but he cannot be penalized.

3. Bill was reviewing one of his client’s prior-year tax returns and noticed there was an error. Bill
had prepared the return last year, and there was $1,200 in interest income that was not
included on the return. What is the correct procedure Bill should follow?
a) Insist the client file an amended return before completing this year’s return.
b) Ignore the omission and see if the IRS catches the missing interest.
c) Notify the client, offer to amend the return, and explain the consequences of choosing not
to amend the return.
d) Include the interest on this year’s return.

Answer 1

1. Option c) No, his actions were completely unacceptable. Jack should have told Mary he preferred not to prepare the return.

Reason: It is completely unacceptable for Jack to prepare and submit a return without obtaining the clients signature on Form 8879, the efiling authorization. Also he filed off the return as the taxpayer which is illegal.

2. Option c) No, his action was completely unacceptable.

Reason : Jack filed the return inspite of knowing that the accounts were false and the prepare knowingly has disclosed incorrect information.

3. Option c) Notify the client, offer to amend the return, and explain the consequences of choosing not
to amend the return.