Question

You are a CPA working for a local firm and have been assigned the 2020 tax return of Bobby Crosser. In going over the data that Bobby gave the firm, you are surprised to see that he has reported no dividend income or gains from the sale of stock. You recently prepared the 2020 gift tax return of Bobby’s aunt Ester. In that return, Ester reported a gift of stock to Bobby on January 6, 2020. The stock had a fair market value of $50,000, and Ester’s basis in the stock (which became Bobby’s basis) was $5,000.

1. What are your obligations under the Statements on Standards for Tax Services? In your discussion, state which standard(s) may apply to this situation and what might result from applying the standard(s). This can be done in approximately one single spaced page.

2. Based on your findings, write an appropriate one-page single spaced letter to Bobby Crosserthat explains your findings and requests any additional information.

Skim The Statements on Standards for Tax Services to determine which have applicability to this case and then include references to those statements in your memo.

Answer 1

Answer :

SSTS #3 and SSTS #1 apply to the CPA in this situation.  SSTS #3 allows a CPA to rely on information provided by a client, unless the CPA has reason to believe that the information presented is incorrect, incomplete, or inconsistent.  In this case, because the CPA knows that Bobby received the stock from his aunt early in the year, there is reason to believe that some form of income should have been reported from the stock - either dividends received or income from the sale of the stock.  In such situations, SSTS #3 advises the CPA to use the client's prior year returns whenever feasible to resolve the situation.  However, in this case the stock was received during the current year and would not have affected Bobby's prior year return.

            SSTS #3 also advises the CPA to use information in the return of another taxpayer when the information in the other return is relevant and the use of the information would not violate any law or rule relating to confidentiality. Therefore, if the CPA's firm prepares Aunt Esther's income tax return, it should be examined to determine whether any dividend income is reported from any shares of the stock she still holds.  There are several possible results from such an inquiry.  First, Esther may have reported dividend income from the stock.  Second, there may be no reporting of any dividend income from the stock; Esther may no longer own any of the shares, the stock may have paid no dividends during the year, or the income may have been improperly omitted.

If Esther reported dividend income from the stock during the year, the CPA should discuss with Bobby why no income is being reported and explain the implications of not properly reporting any income received from the stock.  Based on this discussion, the CPA will have to determine whether he or she can prepare and sign Bobby's return.  Under SSTS #1, a CPA cannot prepare or sign a return if the CPA knows that a position taken on the return does not have a realistic possibility of being sustained upon audit.  Therefore, if the discussion with Bobby reveals that he did in fact have either dividend income or income from the sale of the stock, the CPA would not be able to prepare or sign the return if Bobby insists on omitting the income.  Again, the CPA is obligated to explain the potential penalties Bobby could incur if he fails to properly report the income.

            If an examination of Esther's return does not reveal any income reported from the stock, the CPA's obligations are less clear.  Because there is still a possibility that Bobby may have received dividend income or sold the stock at a gain, the CPA should still discuss the matter with Bobby and explain the implications of not properly reporting income from the stock.  Under SSTS #3, the CPA should encourage Bobby to provide any underlying documents relating to transactions in the stock.  If the CPA is convinced that Bobby did not receive any income from the stock, then there is no problem.  However, if after consulting with Bobby, the CPA believes that the information he or she received regarding the stock is still incorrect or incomplete, the CPA will have to determine whether to prepare and sign the return under SSTS #1. There is no hard and fast answer in this situation.  However, if the CPA has made the required client notifications and discussed the implications of failure to report income, the CPA would probably be deemed to have met his or her obligation under SSTS #3 and could prepare and sign the return.