Question

Kopel was engaged to prepare Raff's Year 4 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in Year 4. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raff had adequate records to support the deduction. Which of the following statements is correct?

1) Kopel should have requested underlying documentation before deducting the $3,000
2) Kopel should have verified the accuracy of Raff's property tax payment
3) Kopel is not responsible for the understatement of Raff's tax liability
4) Kopel should have relied on Raff's representation without questioning it

Answer 1

The correct statement is that Kopel should have requested underlying documentation before deducting the $3,000 to verify the accuracy of Raff's tax information and adhere to professional tax preparation standards.

Step-by-step explanation:

The correct statement is that Kopel should have requested underlying documentation before deducting the $3,000. As a tax preparer, it is Kopel's professional responsibility to exercise due diligence in preparing taxpayers' returns. This includes verifying the accuracy of the information provided by the taxpayer.

Even though Kopel may not be held responsible for the understatement of Raff's tax liability since he had no reason to believe the information was incorrect, it is best practice to request documentation for significant deductions to ensure the accuracy of the return. Therefore, Kopel doing so could prevent any potential issues with incorrect reporting, which can lead to penalties and interest charges if an audit were to occur.