SCENARIO

You work for a CPA firm. Part of your responsibility with the firm is the preparation of individual income tax returns. A new client enters your office and indicates to you that in 20X1, he or she inherited $300,000 from his or her father's estate. The client wants to invest the money in a way that will result in the least amount of gross income in the current and future years. In addition, the client received $75,000 from the settlement of a sexual discrimination case. The client indicates that the settlement was for damages as a result of sexual harassment, and that it did not include back pay or vacation pay. You have a small tax accounting preparation and bookkeeping practice. The client in your initial meeting did not provide you any documentation regarding the inheritance or the settlement.

Your role in this scenario is to decide on what you will do, what you can do, and how to proceed.

What would you advise the client with respect to the inheritance received?

What would you advise the client to do if asked how to invest the future inheritance proceeds?

Is the client trying to evade the payment of taxes?

What would you advise the client as to the treatment of the settlement? Please provide support for your answer.