a. John is an independent contractor working in the emerging cannabis industry,
ID: 2599400 • Letter: A
Question
a. John is an independent contractor working in the emerging cannabis industry, which requires him to travel extensively for work. Zoe, a California licensed CPA, is hired to prepare John’s 2016 tax return. John verbally informed Zoe that his total for cost for travel, meals and entertainment were $90,000 (yet he reported to her his total gross income was only $5,000). John has no receipts and very little other records, and Zoe never asked him for any evidence to substantiate his statements. Zoe takes John’s information and shares it with Andy – a staff accountant (and non-CPA) in Zoe’s firm who assists in the preparation of tax returns. Andy puts the full $90,000 deduction for travel, meals and entertainment as a single line-item deduction on John’s 2016 return and forwards the return to Zoe for review. Zoe reviews the draft return prepared by Andy, signs the return, forwards it to John, who eventually files it with the IRS.
If the IRS audit’s John’s return, describe if and how Zoe and/or Andy could face an IRS penalty themselves?
Has Zoe and/or Andy violated any (1) California, (2) AICPA, other (3) IRS ethical standards, and if so, how?
b. Same facts as (a) above. What would John need to show to blame Zoe and/or Andy and get out of facing any IRS penalties himself?
Explanation / Answer
- Zeo being a CAP have violated the ethical code of conduct of AICAP. Zoe signature over that draft proves that the deduction over john tax is valid. AICAP and sate authorities can suspend or expel your membership if there investigation concludes that Zeo has violated the ethical code of conduct.
- IRS( internal revenue services) is a burear of the department of the treasury that is tasked with the enforcement of income tax laws and oversee the federal income taxes. So penalties for the negligence of the work papers can be imposed on Zeo.
- Zoe have to show all the receipts and other proves his total cost of expenditure over meals or travels as his income as given in the question is $5,000. If he is not able to arrange his proves of the information he gave to Zoe he has to pay penalty for the same and would be blamed for the fraudulent representation of his expenses deductable from tax which can easily save his tax payments.
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