Scenario – John Haddock owns 75 percent of Haddock Corporation. The other 25 percent of the stock is held by John’s wife, Marsha. You are a tax manager assigned to prepare the corporate tax return for Haddock. While working on the return, you note that Haddock Corp. pays rent to John for a building he owns with his son, John, Jr. The rent being paid is at least three times the normal rate for rentals of similar property in that area of town. You report this observation to the partner on the engagement. She tells you that it is all right to deduct the payments because Haddock Corp. has been doing it for several years, and the IRS never has objected. Under your firm’s policy, managers sign the tax return for clients.
1. Would you sign this tax return? Why or why not? Be sure to cite research that supports your position.
2. What potential ethics issues do you see in this situation?
3. Which AICPA Code of Professional Conduct rule(s) apply in this situation (explain how and why they apply)?
4. Which Statement(s) on Standards for Tax Services apply in this situation (explain how and why they apply)?
5. Cite the specific verse(s) for at least one Biblical principle that you feel is relevant to the situation (explain how and why it applies).
4 Scholarly Journals
- Would you sign this tax return? Why or why not? Be sure to cite research that supports your position.
As a tax manager, I would not sign the tax return. This is because there is some detected fraud and misrepresentation of facts in the financial statements of the Haddock Corporation. The management of Haddock Corporation has tripled the rental expenses so that the expenses can also increase. Increases in expenses imply that the income on which taxes are based on is reduced. This increases the gap between the actual taxes and the claimed taxes. There is a misrepresentation therefore of the income and the deductions of the Corporation…