CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresEasy
A CPA is preparing a federal income tax return for a client. The client informs the CPA that they received a Form 1099-DIV for dividend income but has lost the form and cannot recall the exact amount. The client estimates the dividend income to be approximately $500. What is the CPA's most appropriate course of action under Circular 230?
- AReport $0 for dividend income, as there is no official documentation.
- BSearch prior year returns for similar dividend income and use that amount as an estimate.
- CAdvise the client to contact the payer to obtain a copy or confirmation of the Form 1099-DIV.
- DReport the $500 estimate provided by the client on the tax return.
Show answer & explanationAnswer & explanation
Correct answer: C. Advise the client to contact the payer to obtain a copy or confirmation of the Form 1099-DIV.
Under Circular 230, practitioners must exercise due diligence. When specific income information is missing but known to exist (like a 1099-DIV), the preparer should advise the client to seek the correct information from the source rather than relying on an estimate or omitting it.
Why the other options are wrong
- A. Omitting income known to exist is incorrect and could lead to an understatement of tax liability.
- B. Using prior year data as an estimate for current year income is not due diligence when the current year's exact figure can be obtained.
- D. Relying on an estimate when exact information is available from a third party is not exercising due diligence.
Circular 230 Due Diligence for Missing Information
When specific, verifiable information (e.g., from a Form 1099) is known to exist but is missing, practitioners must advise clients to obtain the correct information from the source.
- Do not ignore implications of information known to exist.
- Make reasonable inquiries to obtain missing information.
- Advise client to seek official documentation.
Memory trick: When data's missing, 'Seek the Source' for truth.