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Q 56. Tom Anderson is a CPA who is engaged to prepare the annual tax return for Mary West, the CEO of a company to which Tom provides regular consulting services. Each year Mary brings Tom several brown bags full of documents relating to her income and expenses. This year, when Tom is sorting through the documents, he finds something he hadn't seen in previous years: a deposit receipt from a foreign trust in the Cayman Islands. The receipt for $50,000 was written by a Cayman Islands attorney, with a notation that it was for deposit in a trust account for the benefit of Mary West. Tom asked Mary about the receipt. "What is this?" he asked.

"Forget about it," she said. "I want you to act like you never saw this."

Tom is concerned that Mary may be evading taxes by not reporting income from the trust, and he is also concerned about the need to disclose the existence of the foreign trust on her tax return.

Should Tom immediately withdraw from the engagement without discussing it further, try to convince Mary to report the foreign trust and any related income, or report the incident to the IRS or other authorities and continue to do consulting for the company?

Tom should not withdraw immediately from the engagement without discussing further. Tom should continue with the tax preparation and try to gather more information and guide Mary into making the correct decisions with her filing. If Mary is evasive or admits to deception Tom should then report his findings to the IRS or other authorities.

Q 57. Sonya Fuentez, an IRS-enrolled agent, has been contacted by Carlito Alverez, who is interested in having her prepare his annual income tax return. Sonya is a little apprehensive about the engagement because she's heard rumors that he is a major drug trafficker with roots in Colombia.

At Carlito's request, Sonya visits his home to discuss the details of his return. When she arrives, she's shocked by the opulence she sees. The house is on 2 acres of land just west of the Intracoastal Waterway in Miami Beach. The land is completely surrounded by canals and connects to the rest of the city only via a narrow bridge that has a small guardhouse and security team protecting the entrance to the driveway. She sees other uniformed security guards walking around the perimeter of the property.

The three-story house appears to be as large as a small city block. Sonya is escorted by a housekeeper to a rear patio and garden where Carlito is sipping a martini and watching the large boats go by.

"Welcome to my humble abode," he says. "I hear you're really good. I hate paying taxes, so I need an accountant who can save me as much money as possible."

Sonya smiled and accepted a martini from a tray brought to her by a man wearing crisp black and white tuxedo-type clothes.

"I'll pay you $50,000 for your help," he said. "All in cash, if you want."

Sonya needed the money, so she said, "Okay, I'll accept your very generous offer."

"Great," he said. "Let's get started."

"One thing first," she said. "I must ask you before we start not to tell me about any illegal activities. I won't be able to help you if you do that. I must also tell you that you must be completely truthful in your tax return, and you must report all income."

"Okay," he said, "I get most of my money from commissions on my international import and export business." He grinned from ear to ear. "I don't mind paying my taxes on that. The U.S. has been good to me, and I'm happy to domy part in the tax system here."

"You're a Colombian citizen?" she asked.

"I'm a naturalized U.S. citizen," he replied.

He went on to show her detailed records of income and expenses. Most of the incoming funds had been deposited directly into foreign banks.

"I'll take these documents back to my office," she said.

She returned to her office and spoke to Julia Whitaker, her partner.

"Don't even think about doing this guy's tax return," said Julia.

"What do you mean?" asked Sonya. "He wants to pay his taxes. All I want to do is help him."

"Yes, but we both know what he imports and exports."

"You don't know anything for sure," snapped Sonya. "Just because he's rich and has a reputation doesn't make him guilty of anything."

"Forget that," said Julia. "Let's just assume he's a drug trafficker. Given that, can you accept this engagement?"

Can and should Sonya accept the engagement with Alverez? Why or why not?

There are legal, professional, & personal considerations Sonya should be looking at when deciding on working with Alavarez. As an IRS-enrolled agent Sonia must maintain integrity and ethical behavior in her practice and in her professional relationships with clients.

Before she accepts Alvarez as a client, Sonya should conduct thorough due diligence on Alvarez, the sources of his income, & his activities to uncover anything questionable or illegal. Sonia should consult with a legal advisor who is familiar with taxes and international law if she is uncertain of the legal implications of her findings as well as anyprofessional bodies who provide guidelines for ethical conduct, to ensure the decision she is making are legal and ethical. Sonia also must consider the impact on her own personal safety with either decision she comes to.

If Sonia has not found anything worrisome during her due diligence, she should be able to proceed in the arrangement with Alvarez with confidence.

If she does believe this client is partaking in illegal activities and continues to work for him, she would knowingly be in conflict with her obligation. Knowingly being involved in fraud and money laundering would have serious professional and criminal consequences.

However, if Sonya believes this client is partaking in illegal activities and decides to not continue working for him, she should quickly, & politely decline the position in order to maintain her ethical duties and obligations.