please make a reply of 200-250 words to this thread with two citations. When replying, try to address different aspects of the ethical argument. Often, these situations are not as black and white as they seem, particularly when responsibilities such as independence and confidentiality come into play.
AICPA Code of Ethics Related Parties
In this scenario the issue is the monthly rent being paid is three times the normal rate for comparable rentals in the area. When the issue was mentioned to the clients, they replied the rent is deductible as they have been doing it for years without issue. Where this may be true that does not make it right nor does it mean the IRS will not catch it. Where I would not necessarily be comfortable signing the return, the answer would be yes, with full disclosure to the clients. This statement sets forth the applicable standards for members when recommending tax return positions or preparing or signing tax returns (including amended returns, claims for refund, and information returns) filed with any taxing authority (AICPA.org n.d.). With the information provided I feel that dealing with related parties is fine, only the rental rate raises concern. Where they have gotten away with it in the past, I will make sure they are aware of the consequences if the IRS chooses to adjust the rental amount. Income in excess of market rents from self-rentals can be re-characterized as dividend distribution income (IRS.gov n.d.).
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Which AICPA Code of Professional Conduct rule(s) apply in this situation? Article 1 refers to responsibilities to exercise sensitive professional and moral judgements in all activities. Article 3 refers to integrity, members should perform all professional responsibilities with the highest sense of integrity. I feel both apply as they refer to using moral judgements, in this case pointing out and discussing the rental issue, as well as professional responsibility and integrity. Article 5, Due Care, I feel is most relevant. A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability (AICPA.org n.d.). I feel by discussing this issue with the clients and informing them of the consequences shows my competence and improves my quality of service. I would also inform them of ways to investigate tax laws for themselves. For example, the IRS offers links to free access to the Internal Revenue Code (IRC) , Treasury Regulations, and anything published in the Internal Revenue Bulletin on it’s Website www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance (Knapp, 2018).
There are seven statements on standards, numbers three, six, and seven are most relevant to this discussion. Number three is certain procedural aspects of preparing returns, as it refers to my obligation to verify information related to the tax return. It seems this was done as the rental amount was examined and brought to attention. This also covers number seven, knowledge of error, where it wasn’t exactly an error it very well could have been. Last is number seven, form and content to advice of taxpayers. It was the members obligation to provide advice to this taxpayer on the ramifications of the rent amount and what could become of the adjustment if it were made.
I would not only do these things to abide by policies and procedures I do my best to live by a Christian worldview, to do right by others, and to do right by the Lord. I would far rather be upfront, honest, and ethical with a client and loose them as a client than to mislead them and have them wondering why they were not informed. Whatever you do, work at it with all your heart, as working for the Lord, not for human masters (Colossian 3:23).