Overview
Michael Cunningham is a psychiatrist that recently finished his education and obtaining his certifications. He started a practice out of his four-bedroom, 3,200 square foot home as the sole owner of the practice five years ago. He frequently has clients come to his personal residence where he has a segregated office space. He typically has 1 or 2 hour sessions and his clients are required to pay via cash or check at the time of their visit as he does not accept insurance. Michael employs his brother James to assist him with the bookkeeping for his practice. Although Michael historically hasn’t done any marketing for individual patients and relies mostly on word of mouth from current and former patients, his practice has grown to a reasonable size.
At the end of the year, he calls his tax accountant, Ms. Amelia Williams, at Accountants, P.A. to compile all of his income and expense items and prepare his tax return. They take the information provided by James and enter it into the required tax forms. They don’t perform any due diligence related to the information provided and file the taxes based on the assertions of James.
In 2020, the IRS decides to audit Michael and his practice for potentially filing fraudulent tax returns. Additionally, the IRS performs an investigation of the work performed by Amelia of Accountants, P.A. for preparer fraud. The IRS has assigned these tasks to Ms. Kaylee Frye and asked her to gather documentation and prepare cases against each party.
Facts of the Case
· General Psychiatry, LLC’s gross receipts for income tax purposes for the most recent three years are $70,000 in 2018, $90,000 in 2019, and $80,000 in 2020.
· Michael has a mortgage expense (including mortgage payment, interest, PMI, lawn care expenses, real estate taxes, utilities, and home owner’s insurance) of $7,500 per month and claims a deduction for the business use of his home of $2,000 per month.
· Michael had minimal family assistance for his education and incurred substantial school loans.
· Other deductions include cell phone, utilities, landscaping, subscriptions and average $2,000 annually.
· Average meals and entertainment expense has been $5,500 annually.
· Average business charitable donations are $4,000 annually.
· Average auto expense (payment, insurance, maintenance, gasoline) is $12,000 annually.
· As James works part time, he pays him $10,000 annually.
· Average professional dues of $750 annually.
Prepare a report detailing the charges you agree with, if any, against Michael and Amelia, arguments why the charges are or are not valid, and support from external resources (IRS website, peer reviewed articles, etc.) to support your opinion
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