Michael Scott is a seasonal tax preparer. Each February, he volunteers at the local shelter. Michael goes to the shelter and prepares income tax returns for the shelter residents. Most of the shelter residents are married filing separately, and they claim the child tax credit and the earned income tax credit. Most of the residents have wages and no other sources of income. The average return takes Michael about 30 minutes. Michael acknowledges that the residents have limited resources to pay him, so he charges a reduced flat rate of $350 per return. In addition, he provides a money-back guarantee whereby if a claimed refund is not granted; he refunds the fee up to the amount of the refund that was not granted. For example, in 2017 Scott prepared a return for Creed Bratton. The return showed that Creed was entitled to a $450 refund since he claimed a dependency exemption and child tax credit for his son. However, upon review of the return, the IRS determined that Creed was not eligible for the child tax credit because his ex-spouse claimed their child as a dependent. Creed received a $250 refund instead of $450, and Michael refunded $200 to him.
1. Is Michaels $350 flat fee allowed?
3. What are some ways that Michael can improve how he charges clients?
4. What are some ways Michael can ensure he has the correct information to prepare the returns
for his clients? (You may want to read the instructions to Form 8867 to assist with your response.)Required:
Write a memo identifying the issue(s) raised in this situation.
Identify and cite the specific provisions of the AICPA Statements on Standards for Tax
Services (SSTS) and Circular 230 that apply to address the issues.
Analyze the situation using the SSTS and Circular 230 provisions you have identified.
Provide your conclusion and recommendations related to this situation.
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