Eric is a self-employed architect. He recently hired Jessica, who is a Certified
ID: 2332308 • Letter: E
Question
Eric is a self-employed architect. He recently hired Jessica, who is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants, to prepare his 2017 federal income tax return. An automatic extension to file Eric's 2017 federal income tax returm was prepared and filed with IRS on April 14, 2018. Eric's 2017 individual income tax return is due October 15, 2018. Jessica did not prepare his 2016 federal income tax return. In reviewing his 2016 federal income tax return and related tax information, Jessica noticed that Eric's bookkeeper added three very costly pieces of artwork to Eric's depreciable business assets, but no cash or checks had been written to purchase the artwork. Eric's bookkeeper told Jessica that Eric regularly asks certain clients to send payment for his architecture services to exclusive art galleries in lieu of payment to him. The art galleries then send the artwork to Eric, who hangs the pieces in his office and at home. The bookkeeper never records income from these clients, because the bookkeeper never receives cash or checks, but the bookkeeper does add certain pieces of artwork to Eric's depreciable business assets when Eric directs the bookkeeper to do So. Jessica asked Eric for a copy of his 2015 federal tax return and noticed two pieces of artwork were also added to his depreciable assets in that year but no corresponding income was reported on his 2015 federal income tax return in that year either. suming that Eric failed to report self-employment income on his 2015 and 2016 federal income tax returms, what are Jessica's ethical responsibilities in this situation? Please explain by specifically mentioning the ethical rules that would govern Jessica's conduct. AsExplanation / Answer
As per IRS, if you are self-employed and received money in the line of business, you must report all monies received to the IRS.
Section 1.000.020 of the AICPA code of professional conduct says that in a situation where CPA believes that the client is engaged in a fraud, the CPA would be required to take the necessary steps to gain a better understanding of the activity to determine if it was indeed fraudulent. If that investigation does not provide appropriate clarification, the CPA would alert the client to his or her concerns in an effort to rectify the issue. If the client refuses to engage in discussion or to take appropriate action, the CPA would need to consider whether to discontinue the client relationship.
The AICPA proposal provides that, when a member, including a CPA tax practitioner, encounters a client engaged in illegal or suspected illegal conduct during the course of performing professional services, the member is required to obtain an understanding of the matter consistent with the professional services the member was providing. The member is not expected to search for illegal or suspected illegal conduct of the client outside the scope of the professional engagement or have an understanding of laws or regulations beyond the member's area of expertise or professional judgment.
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