Question

Facts:

Shortly after Murray began working in the tax department of the public accounting firm of Dewey, Cheatham, and Howe, he was preparing a tax return and discovered an error in last year’s work papers. In computing the gain on the sale of the taxpayer’s duplex rental property, the preparer had failed to increase the amount realized by the $50,000 mortgage assumed by the buyer. Apparently, the mistake was overlooked during the review process. Upon discovering the mistake, Murray went to his immediate supervisor, Norm (who actually prepared last year’s return), and pointed out the error. Norm, knowing the client would probably flip if he found out he had to pay more tax, told Murray “let’s just wait and see if the IRS catches it. Forget it for now”. What should Murray do?

Assignment:

            You are an independent consultant who must compose a concise business memo summarizing the facts as you understand them, reviewing possible options for Murray, and conclude with your assessment of the best option.

Answer 1

MEMO

To:

From: Murray

Date:

Subject:

I write to share the problem of one of our tax payer who is failed to show the amount of 50000 as mortgage in sale of his duplex rental property.

As when I am preparing tax return of our client I found an error occured in last year tax return. Apparently the mistake was also overlook during review process. The error is that, In computing the gain on the sale of the taxpayer’s duplex rental property, the preparer had failed to increase the amount realized by the $50,000 mortgage assumed by the buyer.

Possible options are we can revise last year income tax return and taxpayer have to pay additional tax on such amount. Another option is that we just wait and see if IRS cathches this error. But if IRS Catch it then taxpayer have to pay tax along with interest and fine.

So, as per my view best option is to revise the last year income tax return and to pay any additional tax liabilty that arises.

Thanking You.