Assignment Problem Two - 7

(Tax Preparers Penalties)

For each of the following independent cases, indicate whether you believe any penalty would

be assessed under ITA 163.2 on any of the parties involved. Explain your conclusion.

Case 2 A very successful accountant lives next door to what appears to be a wealthy neighbour. Based on similar properties, his house appears to be worth more than $2 million and he has three cars, including a Ferrari and a Mercedes-Benz. In the last two years, the two neighbours have become friends. As his accountant has retired, the neighbour asks the accountant to prepare his tax return. To this end, the neighbour provides a T5 that shows income of $90,000. As this appears to be on the low side, the accountant asks if he has any other source of income. The neighbour indicates that he does not, but also noting that, a few years ago, he won $20 million in the provincial lottery. The accountant does not ask any further questions and prepares and files the return. When the friend is audited it is discovered that he has over $500,000 in unreported income. Case 3 In preparing a tax return for one of his clients, an accountant uses the financial statements of another accountant to determine the clients business income inclusion. The accountant does not see anything in these statements that seems unreasonable. When his clients return is audited, the CRA finds that the business income financial statements prepared by the other accountant contained material misrepresentations. Case 4 In preparing a tax return for a new client, an accountant uses the clients accounting statements to calculate the clients net business income. As part of this engagement, the accountant reviews both the expense and revenue information that has been provided to him by the new client. The expenses seem to be related to the type of business of the client and the revenue and expense figures contained in the accounting statements seem reasonable. Given this, the accountant files the required tax return. When the client is audited, the CRA finds a large proportion of the expenses claimed cannot be substantiated by adequate documentation and may not have been incurred. Furthermore, it appears that the client has a substantial amount of unreported revenues. Case 5 In preparing a tax return for a new client, the accountant determines that his only income is $75,000 in business income. In preparing the Tax Payable figure, the accountant is advised by the client that he made a $110,000 charitable contribution during the current year. However, he has lost the receipt. He has requested a replacement but has not received it yet. As it is now April 29, to avoid a late filing penalty the accountant files the tax return, claiming a tax credit for the contribution without seeing the receipt.