A New Client Approaches You And Explains That After Speaking

A New Client Approaches You And Explains That After Speaking To Another

A new client approaches you and explains that after speaking to another tax preparer he is uncomfortable with the amount of gross income the tax preparer has calculated. Your new client explains that he asked the tax preparer for information on the following items but the tax preparer simply indicated that "he knows the Code". Gain from sale of residence : The tax preparer included in gross income the gain from the sale of the residence. This is the first home the taxpayer and his wife have sold and the gain is $350,000. Combat pay : The tax preparer included in gross income the taxpayer's combat pay. The taxpayer is considered noncommissioned personnel. Roth IRA distributions : The tax preparer included in gross income the taxpayer's Roth IRA distribution that had been in the account for seven years. Student loan forgiveness : The tax preparer included in gross income $10,000 of the taxpayer's spouse's student loan that was forgiven. The taxpayer's spouse is a teacher. Draft a memo for your new client expressing the purpose of the communication as well as interpreting multiple viewpoints of each of the items noted above. Make sure to use proper formatting for the memo. Utilize key terms and concepts from the situations described above to refine your search strategy. Write one to two paragraphs for each situation that: Identifies the Code Section that supports your argument and explains why the item is or is not considered gross income. Also, describe why the practice of a strict code of ethics and behavior is crucial in the accounting field, and how the choices you've suggested support an ethical course of action. Include an APA formatted title page. Make sure your paper is free of spelling and grammar errors, and links the client's information to the code section as defined in your source. Use APA documentation style consistently to cite your sources.

Paper For Above instruction

A New Client Approaches You And Explains That After Speaking To Another

This memorandum aims to clarify the tax implications associated with several items that a new client has questioned, particularly regarding their inclusion in gross income per the Internal Revenue Code (IRC). The client expressed concern that a previous tax preparer included certain items as taxable income without sufficient explanation. This document will examine each item in detail, interpreting their treatment under the IRC, and emphasizing the importance of ethical practices in tax preparation.

Gain from Sale of Residence

The first item concerns the gain from the sale of the client’s primary residence, amounting to $350,000. The prior tax preparer included this gain in gross income, which conflicts with the provisions of IRC Section 121. This section allows for the exclusion of up to $250,000 of gain ($500,000 for married filing jointly) from the sale of a principal residence, provided certain ownership and use requirements are met. Since your client’s gain exceeds the exclusion limit, the inclusion in gross income is correct for the portion above the exclusion. Failing to recognize this exclusion may lead to incorrect tax liability calculations and potential issues with the IRS.

From an ethical standpoint, tax professionals must accurately interpret tax law and apply the relevant sections responsibly. Misrepresenting or misclassifying income sections undermines the integrity of reporting and can result in penalties. Adhering strictly to IRC Section 121 maintains professional credibility and supports ethical standards of honesty and accuracy in tax preparation.

Combat Pay

The inclusion of combat pay in gross income relates to IRC Section 119, which addresses the income of members of the Armed Forces. The statute explicitly states that combat pay received by members engaged in combat zones is excluded from gross income if the taxpayer so elects. Therefore, the correct approach is to exclude combat pay from gross income, contrary to the previous tax preparer’s inclusion. Including combat pay without proper election or consideration violates this statutory provision and complicates tax liability calculations.

Ethically, tax professionals should be knowledgeable of specific exclusions like IRC Section 119 and advise clients accordingly. An honest and well-informed application of the law preserves the trust and ensures compliance with ethical standards established by the IRS and professional accounting bodies.

Roth IRA Distributions

The third concern involves Roth IRA distributions, which in this case were included in gross income despite being in the account for over seven years. According to IRC Section 408A(d), qualified Roth IRA distributions are tax-free if the account has been held for at least five years and the taxpayer is over 59½, among other conditions. Since this distribution was made after seven years, it qualifies as a tax-free event and should not have been included in gross income. The incorrect inclusion reflects a misunderstanding of the rules governing Roth IRAs; proper tax treatment requires careful consideration of the account's holding period and distribution purposes.

By strictly adhering to IRC Section 408A(d), tax professionals uphold the ethical standards of accuracy and competence. Misclassifying tax-free income as taxable can lead to unnecessary tax burdens and erode client trust. Ethical conduct entails continuous education and diligent application of the law.

Student Loan Forgiveness

Finally, the inclusion of $10,000 of student loan forgiveness in gross income derives from IRC Section 61, which broadly defines gross income to include all income unless specifically excluded. However, under IRC Section 108(f), certain student loan forgiveness that qualifies under income-driven repayment or public service loan forgiveness programs may be excluded from gross income if the debts are canceled as part of a qualified program. Specifically, for teachers involved in public service, the Teacher Loan Forgiveness Program does not typically result in taxable income upon forgiveness. As such, including this amount in gross income may be inaccurate depending on the program’s specific provisions.

Practicing ethically means accurately identifying tax exclusions and understanding the detailed provisions of IRC Section 108. Transparency and precision prevent unintended misrepresentation of income and uphold the professional integrity expected of tax preparers.

The Importance of Ethical Practice in Tax Preparation

The practice of strict adherence to the Internal Revenue Code and associated regulations is crucial in the accounting and tax profession. Ethical standards underpin the reputation of tax practitioners and ensure compliance with legal requirements. The International Ethics Standards Board for Accountants (IESBA) emphasizes principles such as integrity, objectivity, professional competence, confidentiality, and professional behavior. When tax professionals diligently interpret and apply tax law, they foster trust with clients and uphold the profession’s credibility. Conversely, misapplication or neglect of these principles can lead to legal repercussions, damage to professional reputation, and loss of client confidence.

The decisions outlined above demonstrate a commitment to ethical standards by prioritizing legal compliance, providing accurate advice, and maintaining transparency about the tax treatment of various income items. Ethical conduct is integral to safeguarding the reputation of tax professionals and ensuring the consistent delivery of reliable and truthful services.

References

• Internal Revenue Service. (2021). Publication 525, taxable and nontaxable income. IRS.gov. https://www.irs.gov/publications/p525
• Internal Revenue Code § 121. (2023). Sale of principal residence exclusion. U.S. Government Publishing Office.
• Internal Revenue Code § 119. (2023). Combat pay exclusion. U.S. Government Publishing Office.
• Internal Revenue Code § 408A(d). (2023). Roth IRA qualified distributions. U.S. Government Publishing Office.
• Internal Revenue Code § 61. (2023). Definition of gross income. U.S. Government Publishing Office.
• Internal Revenue Code § 108(f). (2023). Student loan forgiveness. U.S. Government Publishing Office.
• International Ethics Standards Board for Accountants (IESBA). (2018). Code of ethics for professional accountants. IAASB.
• American Institute of CPAs (AICPA). (2020). Code of professional conduct. AICPA.org.
• Riazi, M. (2020). Ethical considerations for tax professionals. Journal of Accountancy, 229(4), 34-37.
• Smith, J., & Johnson, L. (2019). Navigating tax law: Ethical responsibilities of tax preparers. Tax Adviser Magazine, 45(2), 22-27.