Exam 1: Introduction to Ethics

Correct Answer:

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Certainly, a tax accounting decision that requires a tax return preparer for individual clients to make an ethical choice involves the handling of ambiguous tax situations where the tax law may not be clear or is open to interpretation. One common scenario is the decision on whether to claim a deduction or credit that the tax preparer believes has a legitimate basis but is not unequivocally supported by the tax code or existing regulations.

For example, suppose a tax preparer is working with a client who has a home office and wants to claim a deduction for expenses related to that office. The tax code allows for such deductions under certain conditions, but the specific circumstances of the client's use of the home office may not be entirely clear-cut as to whether it qualifies. The preparer must decide whether to claim the deduction, which could result in a lower tax liability for the client.

The ethical choice here involves a careful consideration of the following:

1. **Due Diligence**: The preparer must exercise due diligence in determining the accuracy of the tax return. This includes investigating the facts and the applicable law to ascertain the likelihood of the home office deduction being allowable.

2. **Honesty and Integrity**: The preparer should be honest and not knowingly prepare a return that claims a deduction or credit that is not warranted. This would be in violation of ethical standards and could potentially lead to penalties for both the preparer and the client.

3. **Professional Judgment**: The preparer must use professional judgment in interpreting the tax laws and applying them to the client's situation. If there is a reasonable basis for the deduction and it is well-documented, the preparer may decide to claim it, but they should also advise the client of the potential for audit and the associated risks.

4. **Client Advisement**: The preparer should fully inform the client of the implications of claiming a questionable deduction, including the possibility of additional taxes, interest, and penalties if the deduction is later disallowed upon review by the tax authorities.

5. **Compliance with Circular 230**: For preparers in the United States, adherence to the Treasury Department's Circular 230, which governs practice before the IRS, is mandatory. Circular 230 outlines the duties and restrictions relating to practice before the IRS, including the need to provide competent representation and the prohibition against endorsing or negotiating any refund check issued to the client.

In making the ethical choice, the tax return preparer must balance the client's desire to minimize tax liability with the legal and ethical obligations to file a correct and compliant tax return. The preparer's decision should ultimately be guided by a commitment to uphold the integrity of the tax system while acting in the best interest of the client within the bounds of the law.