Question

5] A member of the AICPA who is engaged to prepare an income tax return has a duty to prepare it in such a manner that the tax is A. The legal minimum. B. Computed in conformity with generally accepted accounting principles. C. Supported by the client’s audited financial statements. D. Not subject to change upon audit. The correct answer is A. A. A member of the AICPA should serve to the best of his or her ability and with professional concern for the taxpayer’s best interests, consistent with responsibilities to the tax system. According to TS 100, “It is well established that the taxpayer has no obligation to pay more taxes than are legally owed, and a member has a duty to the taxpayer to assist in achieving that result.” Within the limits of the law and ethical practice, the member should strive for the legal minimum tax, not for tax evasion. B. The tax is computed based on statutes and pronouncements of the taxing authority, not GAAP. C. The tax expense, according to the statements, is based on GAAP. Moreover, the tax preparer need not audit the client’s statements. D. Discovery of errors may necessitate a change.

Explain how this question relates to Learned Hand and how you better understand the answer now.

Answer 1

As already stated in the question, the responsibility of a member of the AICPA as a tax preparer is to help the taxpayer in paying only that much amount of taxes that is owed by the taxpayer as per legal provisions in force in this respect. When it comes to a taxpayer bringing down his tax liability using the tax provisions and stautes applicable to his case, the judgements given by the most famous taxation judge Learned Hand become highly relevant. This question relates to the ruling given by Learned Hand, "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible." Learned Hand had also judged that "Taxpayers are free to minimize their tax obligations by chosing one legal form rather than anuther as the vehicle for a transaction... " and "It is vital for a tax consultant to consider and evaluate all of the possible routes to his client's destination."

"Destination" here refers to the goal of a taxpayer to pay the minimum taxes legally. It is therefore necessary for a tax preparer to evaluate all those options which result in bringing down the tax payment liability of his client to only the minimum legal requirement of payment of taxes by him. The tax preparer has however, also a responsibility towards the tax system. He is expected to ensure that he encourages neither tax evasion nor the use of tax laws in any ways other than those leagally permitted or for the purposes other than those for which they were enacted. The tax preparer should prepare the return based upon the information provided by the taxpayer in good faith. A tax preparer should not act as an enforcer of the tax laws nor should he consider himself or act as the auditor of his client's accounts and financial statements. While he needs to ensure that the expenses claimed by his client are as permitted under the provisions of GAAP, he should not don the garb of an auditor to investigate or audit them. However, it is the responsibility of a tax preparer to ensure that the tax return prepared by him for submitting to the taxation authorities is true, correct, and complete in all respects. Hence, if he finds any mistakes, inconsistencies, discrepancies, or errors in the information provided by the client, he should discuss them with the client so that the same can be rectified and corrected in order to prepare a tax return free of any defects.