(L01) Underreported Income Anthony Johnson, who owns a local bar and works as its bartender, is a new client of yours and would like to meet to discuss his financial statements and tax return for the current year. He operates the bar as an S corporation and is the sole shareholder. Anthony indicates that business has been slow; he expects a loss and feels he shouldn't owe any taxes this year. While reviewing the manual business records and Anthony's personal tax information, you see that there are very few cash receipts and no recording of tips. Anthony also has a large mortgage on his home, generating \(\( \$ \) 28,000\) in mortgage interest expense, and \(\( \$ \) 25,000\) in property taxes. You continue to dig through previous tax returns for the S corporation and Anthony's Form 1040 and notice very little income for the last 5 years. You wonder how Anthony can afford such a nice home. During your next meeting, you ask him about the cash receipts, the tips, and his large mortgage and property taxes. Anthony is vague and says no one in his line of work reports all the cash receipts and tips. What should you do?

In addition to the chapter content, see Statements on Standards for Tax Services at https://future. aicpa.org/resources/toolkit/statements-on-standards-for-tax-services, Circular 230 at www.irs.gov/taxprofessionals/circular-230-tax-professionals, and Chapter 3, LO4, Tax Professional Responsibilities.