Case Study

Major "Big 6" Certified Public Accounting firms are known for their accuracy and competence in preparing 1040 tax returns. Each return is reviewed three times for accuracy in the tax department before it is finalized. Thus major CPA firms must charge high hourly rates, which average $75 per hour or approximately $1,000 per return, for the preparation of returns. Clients expect the best service and advice that money can buy.

During April of a specific tax year B.G., the Tax Partner of a "Big 6" firm, assigned a young staff tax preparer, John, the responsibility of preparing a tax return for a very wealthy client who lived in Honolulu, Hawaii. In preparing a return the first step is always to look at the client's prior year's tax return to familiarize oneself with the client's sources of income and deductions.

In reviewing the prior year's tax return, Schedule A, John noticed that the client had a $10,000 home mortgage interest expense tax deduction recorded. He telephoned the firm's client and asked very diplomatically if the client had any mortgage interest tax deduction for the current year. The client answered that he had "never had a mortgage on his home."

John thanked the client and immediately walked into B.G.'s office and asked if an amended prior year's tax return should be prepared. B.G. said "No! Turn right on around and walk out. And remember I will deny ever having had this conversation. Have a good day!"

Questions:

A. What should John's course of action be?

B. What would you do?

C. Are there any legal consequences in this situation?

D. What is the best solution morally?

E. How should it be implemented?

F. Why was the Tax Partner against amending the prior year's tax return?

G. What could the consequences be if it was amended or if it was not amended?