A taxpayer works for a law firm. You are working on her tax return. She tells yo

Question

A taxpayer works for a law firm. You are working on her tax return. She tells you that she does not have any receipts for her daily parking because the firm pays the parking lot directly for an annual spot for her. She tells you not to worry about it because she knows that employees do not have to pay tax on the value of parking privileges.
a. What is your role in this situation?
b. How does your role affect the four steps in the research process?
c. What are the questions you need to ask the taxpayer?
d. What is your initial research question?

e. After you speak with her, you discover that the Internal Revenue Code does not consider a partner in a firm to be an employee.

                    i.            How does this new information affect your research?

                  ii.            Are there some additional questions that you now need to ask? What is the danger here of failing to gather all the relevant facts?

                iii.            Does this information change or add to your initial research question?

                iv.            You explain to her that, given the facts, she will need to report the value of the parking as income. She tells you just to forget she told you about the parking. Without getting into detail, what issues does this raise?

Explanation / Answer

a. As a tax preparer my role in this situation is to determine the truthfulness of my client’s statement that she does not have to pay tax on the parking privileges. I will have to analyze the completeness as well as truthfulness of her claim. I will go for additional questioning and if I found that she is incorrect then I will ascertain whether she is fully disclosing all her tax facts or not.

b. My role will affect the four steps in the research process. I will have to make more inquiries and support to establish the facts and to determine if the client can be trusted (or not) in her disclosures. Once a satisfactory level of trustworthiness is established with the client then I can proceed to research the issues as I would have done otherwise.

c. The first question that I will ask her is whether she is an employee or an independent contractor of the law firm. Secondly I will ask her if the parking perk is offered only to her or to all other employees. Thirdly does the W-2 of the taxpayer show fringe benefits. Lastly I will ask her that if she is an employee then is she a full time employee or not.

d. My initial research question would be - Is parking provided for employees a tax free fringe benefit? What disclosures, if any, are required by the employer and employee?

e. (i) This new information will affect my research as I will now have to research and determine if the client is a partner and if the law firm is a partnership firm or LLC.

(ii) Additional questions that I need to ask is the mode of her payment i.e. how she is paid. The danger here is that I could end up researching the wrong question and that the questions can tangibly influence the applicability of the research performed.

(iii) This information adds, in a significant manner, to my initial research question. Scope of my question increases significantly.

(iv) The value of parking is a small item and hence will be a relatively easy audit item. Discovery of this item will put both the client and me at risk. Preparer accuracy penalties and professional licensure defense must be considered. This omission is an audit risk that the client is unnecessarily undertaking. The cost of audit defense, tax, interest and penalties is likely several times the amount of tax.

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