The Ethical Dilemma of the Client's Cryptocurrency Gains
You are a CPA preparing the 2025 tax return for client John, who is a high-net-worth individual. During the engagement, John mentions that he sold cryptocurrency in 2025 for a significant gain but does not want to report it because he believes the government cannot track it. He provides you with a summary showing a $200,000 gain from various crypto trades. He insists that you omit this from his return, stating that he has consulted with another advisor who said it's not necessary to report. You know that the IRS has been actively pursuing cryptocurrency tax evasion and that the failure to report such income could result in substantial penalties and potential criminal charges. John is a long-time client and has referred many other clients to your firm. You are concerned about the ethical implications and the potential consequences for both John and your firm.
1. What are your ethical responsibilities under Circular 230 and the AICPA Code of Professional Conduct in this situation?
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Under Circular 230, you have a duty to ensure the client's return is correct and not misleading. You cannot sign a return that you know is incorrect. Specifically, Circular 230 §10.34(a) requires that you not sign a return or claim for refund if you know or have reason to believe that it contains a position that lacks a reasonable basis or is frivolous. Omitting $200,000 of income is not a reasonable position; it is illegal. You must advise the client of the consequences of not reporting the income, including penalties and potential criminal prosecution. Under the AICPA Code of Professional Conduct, you have a responsibility to act with integrity and objectivity. You cannot subordinate your judgment to the client's wishes. You should also consider the public interest. If the client insists on not reporting, you should withdraw from the engagement and consider whether to notify the IRS? Generally, you cannot disclose confidential client information without consent, except as required by law. However, you may have a duty to file a suspicious activity report? Not for tax. You should document your advice and the client's refusal. If you withdraw, you must provide the client with necessary information to file their return. You should also consider whether the other advisor's advice is competent; if not, you might have a duty to report? Not necessarily. The key is to not sign the return.
2. What steps should you take if John continues to insist on omitting the income?
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If John insists, you should: 1) Clearly explain the legal and ethical consequences, including penalties under IRC §6662 and §6663 for fraud, and potential criminal charges under IRC §7201. 2) Advise him that you cannot prepare or sign a return that omits the income. 3) Offer to prepare the return correctly, including the crypto gain. 4) If he refuses, withdraw from the engagement. When withdrawing, follow Circular 230 §10.28? Actually, withdrawal procedures: notify the client in writing, provide copies of records, and refund any advance fees for services not performed. 5) Consider whether you have a duty to inform the IRS? Generally, no, due to confidentiality. However, if you believe the client may commit fraud, you might have a duty to report under the AICPA Code? The AICPA Code allows disclosure of confidential information to comply with laws or regulations, but not voluntarily. You should consult with legal counsel. 6) Document all conversations and advice given. 7) If you are a member of a firm, consult with the firm's ethics committee or legal counsel. 8) Do not file the return. If the client files on their own, you are not responsible. 9) Consider whether to continue the client relationship for future years; you may choose not to accept future engagements.