MEMORANDUM

TO: Tom Brown

FROM: Greg Dittman

DATE: November 16, 2017

RE: Tom Brown Tax Return

Hello Tom Brown:

I am writing to you regarding the information you provided me to assist me in the preparation

of your 2016 individual tax return. I would like to address some concerns that I have with the

information you provided me before I can begin its preparation.

First, instead of filling out the questionnaire, you provided me a copy of your previous years

tax return. According to Section 10.22(b) of the Treasury Department Circular No. 230, [I] will be

presumed to have exercised due diligence [] if [I] rely on the work product of another practitioner

used reasonable care in evaluating the person, taking proper account of the nature of the relationship

between the practitioner and the person. As a new staff accountant, relying on the judgement of

another practitioner while not being aware of the relationship that existed between you and the

practitioner, would not be the exercising of due diligence. (IRS Form 8667).

Second, you stated that you would like to claim your niece and nephew as dependents so you

can get the Earned Income Tax Credit (EITC). According to the IRS, to qualify for the EITC you

must either meet the rules for those without a qualifying child or have a child that meets all the

qualifying child rules for you. To claim your niece and nephew as qualifying children for EITC, they

must meet the relationship, age, and residency tests. As your nephew and niece, they pass the

relationship test. To pass the age test, they must be younger than 19 at the end of 2016 or younger

than 24 but be considered a full-time student. To pass the residency test, they must have lived with
you for more than half of 2016. If the remaining two tests were passed, your nephew and niece are

qualifying children. To meet the rules for those without a qualifying child, your business must have

received less than $20,430 in 2016.

That leads me to address my next concern. In the information you provided me, you listed

that your 2016 business income was $18,000just under the $20,430 EITC requirement for those

without a qualifying child. Your previous years business income was significantly higher at

$80,000. IRS audits are sometimes triggered by red flags such as rounded numbers ($18,000),

unreported income, charitable donations, low income for the profession, or a large swing in income.

To prevent triggering an IRS audit from your 2016 tax return, I would need to receive more detailed

information explaining your large swing in income from $80,000 down to $18,000 as well as

payment slips confirming your specified business income amount. Prior to receiving this

information, I would be in violation of the Paid Preparers Diligence Checklist Form 8867 by not

having reviewed adequate information to determine if you are eligible to claim the EITC. (IRS Form

8867).

Lastly, you stated that you donated a painting to a local museum worth $10,000. You also

indicated that you do not have appraisal documentation confirming its value. Noncash charitable

contributions require the completion of IRS Form 8283 in which a Declaration of Appraiser must

be completed for all donated items over $5,000. Your charitable donation exceeds the $5,000 and

requires an appraiserthat is not you, the museum, a party to this transaction in which you acquired

the painting, employed by, or related to any of the foregoing persons, or married to any person who is

related to any of the foregoing persons. (IRS Form 8283).

I look forward to working with you and completing your 2016 individual tax return. Please

do not hesitate to reach out to me if you have any questions or if you have additional information to

aide in my preparation of your tax return.