Tax Case Study

Susan Smith accepted a new corporate client, Winter Park Corporation. One of Susan’s tax managers conducted a review of Winter Park’s prior year tax returns. The review revealed that an NOL for a prior tax year was incorrectly computed, resulting in an overstatement of NOL carrybacks and carryovers to prior tax years. Apply the Statements on Standards for Tax Services (SSTSs) to the following situations. The SSTSs are in Appendix E of this text.

a. Assume the incorrect NOL calculation does not affect the current year’s tax liability. What recommendations (if any) should Susan make to the new client? See SSTS No. 6.

According to Statements on Standards for Tax Services (SSTS) No. 6, Susan should inform her client Winter Park’s management promptly of the mistake discovered and the potential consequences for doing nothing after discovery. Advising Winter Park’s to filean amended return would be the correct approach to take in this case. This advice may be given orally, however, Susan is not allowed to inform the IRS of the error without her client Winter Park’smanagement permission except when required by law.

b. Assume the IRS is correctly auditing a prior year. What are Susan’s responsibilities in this situation? See SSTS No. 6.

Again, According to Statements on Standards for Tax Services (SSTS) No. 6, Susan should inform her client Winter Park’s management promptly of the mistake discovered and the potential consequences for doing nothing after discovery. If Susan is representing Winter Park Corporation, she should request if Winter Park’s agrees, to disclose the error to the IRS as to the NOL. Susan is not allowed to inform the IRS of the error without her client Winter Park’s management permission. If Winter Park does not agree, she should consider whether to withdraw from representing them and whether to continue a professional or employment relationship with them.

c. Assume the NOL carryover is being carried to the current year, and Winter