Tax Preparation Presents Sticky Situation in Partnership

by MICPA | Jun 03, 2014   ()

This column highlights issues and questions submitted to the MICPA Professional Ethics Task Force. Responses may not consider all of the unique circumstances that are part of an ethical inquiry. 

Scenario: A CPA is engaged by a close friend (Partner A) and individual client to do monthly bookkeeping and prepare tax returns for a partnership (ABC LLC). Partner A and his brother (Partner B) are 50-50% partners. Partner A effectively controls the partnership and its finances and Partner B is a passive investor. The CPA worked with Partner A monthly and met with Partner B only once a year in connection with tax return preparation. The CPA becomes aware that Partner A is aggressively passing personal expenses through the partnership. What obligation or ethical responsibility does the tax preparer have to make sure Partner B is aware of his brother’s conduct and is there any authoritative literature supporting this ethics interpretation?

To restate the question, what obligations or ethical considerations does the tax preparer have with Partner B in making sure he is aware of Partner A’s conduct? And is there authoritative literature supporting this ethics interpretation?

First, the Professional Ethics Task Force of the Michigan Association of CPAs can only respond to the circumstances as they relate to Professional Ethics, as opposed to state law.

Based on this narrative, there are four main rules of the AICPA/MICPA Code of Professional Conduct which seem to apply. They are:

  • 1.130.010 (Integrity and Objectivity) A member cannot sign or permit or direct another to sign a document containing false or misleading information.
  • 1.110.010 (Conflict of Interest): Based on your judgment, can the service be performed with objectivity? Have potential conflicts of interest been disclosed
  • 1.130.001 (Compliance with Standards): In performing services for a client, a member must comply with standards for that service.
  • AICPA Statements on Standards for Tax Services, Standard 3, Paragraph 4 states, “[w]hen preparing a tax return, a member should consider information actually known to that member from the tax return of another taxpayer if the information is relevant to that tax return and its consideration is necessary to properly prepare that tax return. In using such information, a member should consider any limitations imposed by any law or rule relating to confidentiality.”
  • 301 (Confidential Client Information): Confidential client information shall not be disclosed without consent from the client.

Based on the above information, there seems to be three distinct clients to consider. Partner A, ABC LLC and Partner B (1.110.010). Even though all three are clients, confidential information/knowledge obtained while preparing one client’s information, cannot be shared with another client.

In this case, ABC LLC is a separate client and you were hired by Partner A to represent ABC LLC. If you only report to partner A on the ABC LLC books and tax return, then you cannot specifically share that information with Partner B, without prior consent from Partner A, on behalf of ABC LL (1.700.001).

If you believe Partner A is misrepresenting information, you are required to approach the service with integrity and objectivity (1.130.010). (i.e. Can you ethically represent the client and sign a tax return? [1.310.001]).
Source: The Michigan Association of CPAs

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