Question

ueusprv-08bp Sue Wilson had just turned 25 when she completed college with an accounting degree and was hired in a full-time position with a large regional CPA firm. She was an excellent student and had great social skills. The firm specialized in assisting companies with their technology problems. Sue thought the experience she would gain working with such a firm would be invaluable in her career. She was very successful with the CPA firm and after one year one of the firm's largest clients offered her a position with them. Sue took the new position and within a short time she and two other recent hires were running the accounting department. However, it wasn't long before she noticed that something wasn't quite right. Sue realized the firm's executives were participating in illegal transactions. The company executives were importing expensive technological products from China and selling them under the table to contacts unknown to Sue. Once the firm received the products at the shipping dock, the executives "personal employees' marked the products and took them to a separate location. The entire operation was done with little paperwork. The money received from the special products received special attention. Sue was told to report this inflow of cash in an account called "Personal Executive Consulting Services". This allows the executives to personally use the money at their convenience. 1. Does Sue have a responsibility to report the apparent fraud? 2. If so, to whom should she report the fraud? 3. Assuming that the fraud has been continuing for several years, what would be the tax ramifications to the executives of not reporting earnings on their personal tax returns? 4. Even though the money is from illegal sources, are the executives required to report the income on their annual tax returns? 5. If you were Sue, what would you do about your position in the company?

Answer 1

AS AN EMPLOYEE, SUE HAS THE RESPONSIBILITY TO REPORT THIS FRAUD TO THE TOP LEVEL MANAGEMENT. THAT MEANS EITHER TO BOARD OF DIRECTORS OR TO THE MANAGING DIRECTOR OF THE COMPANY. ILLEGAL TRANSACTIONS MUST BE PROHIBITED.

TAXABLE INCOME MEANS ALL THE INCOME OF INDIVIDUAL OR CLAIMING CERTAIN TAX DEDUCTIONS AND EXEMPTIONS. IT MUST ALSO INCLUDE THE INCOME FROM ILLEGAL TRANSACTIONS. NOW INCOME TAX RAIDS ARE SUCCESSFUL TO CURB ILLEGAL WEALTH. THEY CONDUCT RAIDS, WHEN THEY SUSPECT AN INDIVIDUAL OR BUSINESS TRYING TO HOARD ILLEGAL MONEY.

IF I AM IN THE POSITION OF SUE, I DO NOT ENCOURAGE THIS TYPE OF ILLEGAL TRANSACTION. I WILL REPORT IT TO THE TOP LEVEL MANAGEMENT OF THE COMPANY.