The Green Chef is an exclusive restaurant in your city. Reservations are difficult to secure and the menu is expensive. The owner, Chef Jorge, is rumored to be running an illegal gambling operation on the side, with revenue flowing through the restaurant to ensure there will be appropriate reporting of revenue and thus, no consequences for tax fraud. 

Donna prepares the corporate tax return for the Green Chef, based on amounts from Chef Jorge's computerized general ledger, which he shares with her at year-end. After 10 years of working for Chef Jorge in the preparation of his corporate tax returns, she feels she understands the business fairly well.

Donna, a licensed CPA in the state and a member of the AICPA, heard stories of the gambling operation, but having worked with Chef Jorge for so long, she dismisses the accusations as rumors. This year, however, the business showed a sharp increase in net income as well as revenue, including a large tax liability. Chef Jorge did not complain about the taxes due, as he typically did when he first started.

Here is the information that Donna worked with:

Information for the prior five years
Year	2011	2012	2013	2014	2015
Revenue	$750,000	$875,000	$1,200,000	$1,700,000	$2,000,000
Cost of Goods Sold	240,000	262,500	324,000	442,000	400,000
Operating Expenses	375,000	410,500	506,250	690,500	625,000
Net Income Before Taxes	$135,000	$202,000	$369,750	$567,500	$975,000
Income Tax (34%)	$45,900	$68,680	$125,715	$192,950	$331,500

Required:

1. What caused Donna to question her client's tax return?
2. Using data provided, does Donna have any support for her concerns?
3. What is Donna's responsibility, under Circular 230 and other tax preparer ethics guidelines, regarding her suspicions?
4. What were the "red flags of fraud" that you noticed as you read through the case?
5. What are the fraud triangle issues associated with The Green Chef restaurant?

Answer rating: 100% (QA)

Given the scenario you described lets address the questions raised 1 What caused Donna to question her clients tax return Donna became suspicious because she noticed a sharp increase in net income and ... View the full answer