Maria Garcia is a CPA whose firm has prepared the tax returns of Stanley Corporation for many years. A review of Stanley’s last three tax returns by a new staff accountant, who has been assigned to the client for the first time, reveals that the corporation may be paying excessive compensation to one of its key officers. The staff accountant feels that the firm should inform the IRS and/or report the excess amount as a nondeductible dividend. Although the facts are ambiguous, they tend to support the contention that the compensation paid in current and prior years is reasonable.
Required:
In a client letter, discuss Maria’s role as an advocate for Stanley, and discuss the possible tax consequences resulting from a subsequent audit.