Case 1
Case 1
Case 1
M S. B ·F A. B ·S M. G ·D F. P
LE AR NI NG O BJ E CTI V ES
After completing and discussing this case you should be able to
[1] Identify business risks for Internet-only business [5] Recognize issues surrounding the privacy of
models customer information
[2] Recommend internal control improvements for [6] Describe audit implications when
an eBusiness-based company transaction evidence is solely electronic
[3] Understand selected eBusiness related revenue [7] Recognize threats to eBusiness strategies, which
recognition issues rely solely on the delivery of services via the
[4] Identify accounting issues that arise when Inter- Internet
net-only companies exchange banner ad services
INTRODUCTION
After being in business for only two years, Your1040Return.com has quickly become a leading
provider of online income tax preparation and filing services for individual taxpayers. Steven
Chicago founded the company after a business idea came to him while shopping for individual tax
preparation software. As he stared at all the software packages on the shelves at a local computer
supply store, the following thought kept racing through his mind:
“With all of the tax law changes from year to year, why should I shell out $50 for a CD
that will be obsolete next year, not to mention the $20 I have to pay to file my taxes
electronically over the Internet? I’d rather pay a company a small membership fee to use
continually updated tax preparation software.”
Not long after his shopping experience, Chicago, an entrepreneur at heart, decided to create such a
company. Less than one year later, Your1040Return.com began operations in time for the next tax
season.
The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and
Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. Your1040Return.com is a fictitious company. All characters
and names represented are fictitious; any similarity to existing companies or persons is purely coincidental.
© 23
For a minimal fee, Your1040Return.com provides an interface for individuals to electronically
file their returns with the appropriate federal and state regulatory bodies. Typical users come from
middle class households wanting to simplify yearly tax return preparation tasks. These users are
generally searching for an accurate, easy, and economical alternative to other professional tax
services.
Individuals can access these services through Your1040Return.com’s website. To log on,
customers must first register for a user name and password. Once the customer indicates that he
or she wants to register, the website asks the customer to provide information including full name,
mailing address, Social Security number, birth date, phone number, email address, and a major
credit card number. This registers the individual on Your1040Return.com’s website and initiates
the credit card approval process. Once the credit card number is validated, customers select from
one of three service packages: Silver, Gold, or Platinum.
The Silver package provides basic tax services, including electronic access to tax forms,
schedules, and publications. Customers can enter tax return information directly onto the forms and
schedules, and Your1040Return.com will file the completed materials electronically, eliminating
the need for mailing paper copies to tax agencies. The Silver package also provides a service that
allows customers to apply electronically for a return extension. The Silver package, however, does
not give subscribers access to the tax preparation software package.
In addition to the benefits of the Silver package, the Gold package grants customers online
access to a commercially developed and continually maintained tax preparation software package.
The package helps customers easily prepare tax returns ranging from the simple 1040-EZ to a
complex return, such as one filed by a self-employed businessperson with nationwide real estate
investments and actively traded securities. Both the Gold and the Silver packages provide access to
services for one tax season only.
Premium services are offered through the Platinum package, which allows customers to sign
up for Your1040Return.com membership ranging between two to five years. Through this multiple-
year package service, customers receive year-round access to the tax preparation software provided
to Gold customers, which allows them to continually track changes to their tax basis in securities and
periodically evaluate tax implications of possible transactions. Furthermore, Platinum customers
receive personalized attention and real-time tax support from qualified income tax specialists, who
work on a contract basis, via an online instant messenger program.
Your1040Return.com experiences high seasonal demand for its services from early February
to the filing deadline of April 15. Because Your1040Return.com allows customers to apply for filing
extensions online, the company also experiences strong demand for its services just before extension
deadlines.
If the IRS finds a problem with a return submitted through the company’s Web service,
Your1040Return.com does not correct the problem, but informs the customer of the problem so
that the individual can correct the error and refile the return free of charge. The estimated frequency
and cost of expected refilings are factored into the price of the service packages.
Your1040Return.com does not handle tax refund or tax liability payments. If a customer is
eligible for a refund, the IRS remits the payment directly to the taxpayer. If a customer is required
to pay income taxes, the IRS simply charges the appropriate amount to the customer’s credit card
number that is electronically submitted with the income tax return or the customer can provide
bank draft information to electronically transfer funds from the customer's bank account to the IRS.
Your1040Return.com assumes no liability for inappropriately filed returns or the tax positions of its
customers. All liability resides with the customer who prepared the return.
Your1040Return.com recognizes revenue differently for each product. The revenue for the
first year of Platinum service is recognized immediately after the customer selects this option. The
company assumes customers will use the package for an entire year without cancellation even though
Your1040Return.com has a fairly simple cancellation policy. All revenues from subsequent years of
Platinum service are recognized in like manner. For the Gold package, a portion of the revenue is