Question

A brand new client takes salary advances from his professional corporation, showing them as loans throughout the year. In December of every year, he shows the amount as salary and pays the taxes. As the new CPA you are aware that this is fairly common, but, if audited, the IRS would probably assess penalties. What ethical issues does this present? Does the precedent of the prior CPA factor into your decision as to how you would handle this situation?

Answer 1

This is a mis- reporting of income and this is called window dressing in accounting of recording incomes during such periods will attract the lower rate of taxes.

This is not a tax management but in fact it is a tax evasion, and this will attract penalty from IRS. This is recording of income under other heads, which are not appropriate in nature like advance salary has been recorded as loans

Yes, the precedent of Prior CPA would help me in consideration of how to handle the situation in a better way and how to not evade taxes by better management of the taxes and proper disclosure of all those loans which are actually advance salaries and recording them in their true nature.