AM I ETHICAL?
You were thrilled to be your friend Amy's bridesmaid when she married Ryan, and you were ecstatic when they later had a child. Your memories turned bittersweet, though, when you recently learned that they now are divorced.
Although Amy and Ryan no longer file a joint tax return, they both have expressed a desire for you to continue as their tax accountant. You agreed and assured them that you will remain impartial.
Ryan regularly pays $700 per month to Amy, who has primary custody of their child. Ryan and Amy have never documented whether these payments are classified as alimony or child support. Under the tax law, this distinction is important because alimony payments are taxable to the recipient and tax-deductible by the payor, but child support has no tax effects. Also, courts frequently modify child support payments if either parent's income changes materially, but rarely alter alimony agreements. Can you ethically continue to prepare individual tax returns for Amy and her ex-husband Ryan?
- Yes, because you have an ethical duty to honor your agreement with them
- Yes, because both parties have given their consent
- No, because your longstanding friendship with Amy inherently creates the appearance of favoritism toward her
- No, because your knowledge of each client's earnings creates a potential conflict of interest
The SOLUTION is revealed at the end of the chapter.