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Standards for Tax Service - Donations for Tax Reporting

A client, Mal Manley, fills out his client questionnaire for the previous year and on it provides information for the preparation of his individual income tax return. The IRS has never audited Mal's returns. Mal reports that he made over 100 relatively small cash contributions totaling $24,785 to charitable organizations. In the last few years, Mal's charitable contributions have averaged about $15,000 per year. For the previous year, Mal's adjusted gross income was roughly $350,000, about a 10% increase from the year before.

Required:

According to the Statements on Standards for Tax Services, may you accept at face value Mal's information concerning his charitable contributions? Now assume that the IRS recently audited Mal's tax return for two years ago and denied 75% of that year's charitable contribution deduction because the deduction was not substantiated.

Assume also that Mal indicates that, in the previous year, he contributed $25,000 (instead of $24,785). How do these changes of fact affect your earlier decision? Cite all sources.

Solution Preview

According to the Statements on Standards for Tax Services Number 3, a CPA "may in good faith rely, without verification, on information furnished by the taxpayer or by third parties" (Para. 2, reproduced in Appendix E of the text). Thus, one may accept at face value information about claimed charitable contributions unless it appears incorrect, incomplete, or inconsistent. Therefore, you would have accepted Mal's information in ...

Solution Summary

The decision whether or not to accept a person's tax information on their charitable contributions is discussed in 264 words with a reference cited.

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