Announcement

Collapse
No announcement yet.

Questionable Transaction

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Questionable Transaction

    I have this client that I've had for about 20 years, without any problems whatsoever. Client is 100% owner of an S corp. He had a disbursement on the S Corp bank statement in the amount of $76,000 in 2004. Apparently, he disbursed this from the corporate checking account by going to the bank and getting a certified check. He tells me that he purchased a piece of construction equipment(he's in construction) from another contractor with the money. I asked him to provide me with an invoice and to sign a statement attesting to these facts as he told them to me. He did sign a statement but the invoice he provided me with is not the best looking invoice tht I've ever seen-it looks like a piece of paper that two construction workers would use. Anyway, my gut tells me that there is something wrong with this transaction even though I have in my possession a signed statement from the client attesting to the purchase and a "so-so" invoice. What would you people do in this situation? Have I done everything I need to do to cover my a__ that I can do? Do I unload this client ? Remember, all I have here is a gut suspicion, nothing more! Your opinions would be greatly appreciated.

    #2
    Originally posted by Fred Norton
    Do I unload this client ? Remember, all I have here is a gut suspicion, nothing more! Your opinions would be greatly appreciated.
    No one can make the call for you on this one. As you say, it's your gut instinct that tells you something's wrong. However, reading between the lines, I'll bet this is not the first time you got indigestion looking at this client's tax return. You're asking for verification and backup verification of the transaction. That's doesn't sound like something you'd do to a client of 20 years if it was 20 years of a completely trusting relationship.

    In the NATP Standards of Professional Conduct it states: "The member should not be unreasonable in requiring proof of statements made by the taxpayer."

    What's unreasonable? Who knows.

    I don't think you need more than a signed statement from the taxpayer that the purchase was made if that's the whole story. However, one of the things that you sign as a tax preparer is that to the best of your "belief" the return is correct. I think the real question is whether this 20-year client has ever done anything to strain that "belief" provision.

    Comment


      #3
      Contractor

      I answered on that other board. If you feel uncomfortable, fire the client or tell him you won't deduct this purchase and let him go elsewhere if he wants. Probably my choice with a new client who makes me uncomfortable or one I've been wanting to fire. But after 20 years? We don't have to audit our clients. Don't file a return you know is wrong. But, if he provides you with the date, amount, and description, what more do you need from him? Do tell him what types of documentation he should keep and for how long and explain to him what will happen if he cannot substantiate that purchase. What exactly makes you suspicious?

      Comment


        #4
        Honor the Transaction

        It is not our job to audit the authenticity of the client's records. I would not have even asked for an invoice. If he were intentionally trying to fool anyone, he could have found enough money somewhere in $76,000 to provide a slick invoice. If he is legit, the reason for the withdrawal could have been because the seller didn't want to accept a check. I would be more suspicious of the seller's taxes than the buyer's -- the seller may simply not want to report the transaction. If so, that is not the tax preparer's problem unless the seller is also a client.

        However, I WOULD ask him specifically what he bought. A used bulldozer, a backhoe, etc. All of these are not unreasonable high-dollar purchases. I would get as much information from him in order to properly depreciate the product. Once claimed as an equipment purchase, the IRS would want to physically SEE such a bulldozer, etc.

        If the client tells you he bought a wheat combine, and he is NOT a farmer -- or if he tells you he bought a supercomputer, and he is a building contractor, THEN we are headed for trouble, and it becomes the tax preparer's responsibility to question and even disallow a deduction for such a stretch-of-imagination.

        I know we are in an era where the IRS wants to make tax collectors out of tax preparers. But your clientele should have the peace of mind to talk to his tax preparer without feeling like he's going through an audit. If my customer tells me he has bought a tobacco-harvester, then that's what goes on his depreciation list. The list is reviewed every year to assure that all of those assets are still there. If he has taken the money and bought a used houseboat with it, then I have still performed to the best of what has been required of me. If he gets in trouble with an IRS auditor - he knows I can't help him because he has lied to me -- and I have this understanding with all my customers up front:

        "I don't look under rocks for trouble. But you must live with what you tell me, and even then it must make sense."

        This is a tough area of discussion, and one with which we are all confronted from time to time. Regards, Ron J.

        Comment


          #5
          Shady transactions

          Since the client obviously wants to deduct the $76,000, I would take the opportunity to educate the client on how to substantiate the deduction. Write a brief letter to your client describing the proof your client provided, and then quote stuff out of IRS Pub 583, Starting a Business and Keeping Records.

          Assume in your letter that you believe the client is telling the truth, but that the proof provided will probably not hold up in an audit, based on what the IRS Pub has to say on the subject.

          Explain that it is easier now to try and reconstruct better records than waiting until and audit when it could be too late.

          Writing a letter provides two benefits:

          1) It is written proof that you as the tax practitioner exercised due diligence in trying to verify your client’s transactions. As others have suggested, it is not your job to prove deductions. But you do have to raise issues when things do not feel right.

          2) It gives your client notice that you are paying attention. If your client is telling the truth, he or she will appreciate the additional information and your concern over trying to win in an audit. If your client is lying, your client will know that it probably will not hold up in an audit and that he or she better come up with a better lie next time, because you are on the ball.

          Comment


            #6
            no need to jump to conclusions here

            Now I have some additional input after reading the advice from A Non A Mouse from the other message board.

            Why all the hostility? What is the purpose for assuming the client is lying? Why all the threats to drop the client?

            Nobody knows the client is lying. Not even you, who has done your client’s taxes for 20 years. So don’t act like a tax Nazi. Give your client the benefit of the doubt.

            I was traveling with a family over the weekend where the mother accused her teenage daughter of something she did not do. Teenagers do not like to be accused of things they did not do. I’m sure everyone knows what happened next.

            Your client was once a teenager. What if the client IS telling the truth? Until you know something more than just a gut feeling, the proper way to handle things is to assume the client is telling the truth, and then help them to see the need for better recordkeeping.
            Last edited by Bees Knees; 07-26-2005, 07:13 AM.

            Comment


              #7
              Originally posted by Bees Knees
              What is the purpose for assuming the client is lying?
              I don't believe we can say "take it" or "don't take it" based on the information in front of us. If this client has been around for 20 years, and the preparer is suspicious, that tells me there's a history. I think we're jumping to conclusions if we assume the preparer doesn't want to take the deduction because of less-than-perfect backup documentation. In reality, I'll bet there are other reasons the preparer does not trust the client. If that's not the case, shame on the preparer.

              Of two recent clients I've cut loose, both were based on what I considered suspicious circumstances. Not because of the amounts or the nature of the supposed transactions, but because of what had occurred in prior years. If you looked at the particular items in the particular tax year you might say "You need to take that deduction! Stop being a sissy and believe whatever your client says!" But that wouldn't be reasonable under the circumstances.

              In one case it was new clients who had huge noncash charitable contributions of clothes. I bought their story that they'd just moved (true), they were in professions that required nice clothes (true), and they'd both recently lost a whole bunch of weight. I took the deduction. The next year they came in with the same huge deduction for contributions of clothes. Sorry, the weight loss thing didn't wash this time. I cut them loose. I know who picked them up and they got audited after doing this for several years. Bammo.

              In another case I was doing parents who were financing a son who owned a restaurant. There were big losses every year for three years. I know it takes a while sometimes to earn a profit. They gave me income statements and all the paperwork looked fine. I went along with it, believing the client, until I got "suspicious." The losses were piling up fast, yet there was no change in lifestyle of either the parents or the son. Instead of blindly accepting the statements in front of me, I spoke with them about loan/gift issues. They didn't come anywhere near giving a satisfactory explanation of how the money was flowing. I cut them loose. A while later I spoke with a mortgage broker because the son was trying to refinance his house. The broker was questioning the payroll expense, which was around $3,000. It turns out that what I thought was a little hole-on-the-wall pizza place was a busy restaurant with more than a dozen employees. Once again, my "suspicion" was correct.

              I prepare every return as if I'm going to be explaining my actions to a revenue agent. It doesn't mean I'm going to passively let an agent roll my client, and I'm always up for a good argument. But when I get to the point that I don't trust the client, I'm not going to do the return, period.

              You can't just blindly accept everything a client puts in front of you.

              On the other hand you shouldn't jump to conclusions just because a number is big or documentation isn't perfect.
              Last edited by Lance Emerson; 07-26-2005, 09:46 AM.

              Comment


                #8
                Tax Nazi

                I sure like this term or should I say I don't like it? I struggle all the time with wanting to follow the letter of the code and not wanting to be a Tax Nazi. Also with wanting to do the best for my client and in my clients interest but still covering my but.

                In my fourth year now I relaxe a little more but the word "audit" still scares the heck of me.

                Some requirement are so "unreal", like for each business a separate Schedule C. I have a client who is a real estate agent and travel agent and when she is going around town she always does work for both. I will not make her filing two separate Sch. C's and then struggle with allocations.

                Comment


                  #9
                  Originally posted by Gabriele
                  In my fourth year now I relaxe a little more but the word "audit" still scares the heck of me.

                  I have a client who is a real estate agent and travel agent and when she is going around town she always does work for both. I will not make her filing two separate Sch. C's and then struggle with allocations.
                  Courage doesn't mean you're not scared, it means you're scared and stand up and do the right thing anyway. There's no reason to be afraid of an audit. It's a Royal Pain In The A**, but there shouldn't be any surprises unless there's something the client hasn't told you.

                  I don't see any problem with comingling the businesses. If the income and expenses are comingled and mingled with personal, it would be an artificial allocation anyway.

                  Comment


                    #10
                    middle ground

                    I think it unreasonable for a business person to NOT keep adequate, differentiated records. How can she identify and adjust non-profitable projects if she lumps everything together? Real Estate and Travel are two fields where it is common to not have a profit motive, that is, working on your own account. The hallmark of not acting in a business-like manner is poor record-keeping, usually hidden in an excuse similar to, "Everybody is a potential customer so everything I do is a business expense."

                    --- I take a middle ground. Client must provide sufficient information for me to complete the tax return, even if it does not meet audit standards. I take assertive positions if the client has a consistent and reasonable explanation. H&R Block calls this the smell test, and teaches that it is unethical to discourage a client with reference to the possibility of audit.

                    Comment


                      #11
                      Originally posted by jainen
                      I think it unreasonable for a business person to NOT keep adequate, differentiated records.
                      I agree. Unfortunately, about 60% of my business clients fall into that category.

                      Comment


                        #12
                        Profitable Projects

                        Jainen, unfortunately my client is not in a position to sort out profitable projects. She just struggles to make a living. As long as she has income with both businesses and the expenses are reasonable I don't have a problem.

                        Just like Lance I agree with you in theory. I am a perfectionist myself and would like to be anyone out there the same way so everything is nice and clean. It causes me a lot of suffering and only slowly do I learn.

                        Comment


                          #13
                          Audits

                          I had a new client come to me because he was getting audited. He was the type that pulled numbers off the ceiling and could only give you round figures on income and expenses. I thought for sure we were going to get killed in the audit. Plus, many of his transactions were with another guy as a business partner, who acted the same way. But they never filed a partnership return. Hardly any of it could be substantiated, but I did the best I could, trying to make sense out of the mess.

                          I went into the audit with the attitude that I represented the client, not the IRS. I knew plenty of dirt that I would disclose if asked, but I kept my mouth shut unless specifically asked about something, and I advised the client to do the same.

                          You could tell the auditor wasn’t very impressed with the shabby bookkeeping we tried to reconstruct. But at the end of the interview, I told the auditor to let me have a chance to go over some of the details before having him make a final determination. I said there were several items my client never deducted, like the standard meal allowance while he was traveling out of town.

                          The audit came back with no change. The auditor must have been impressed with my knowledge because several times he asked me tax questions on how certain transactions should be reported. I was shocked that there was no change with the poor substantiation we had going into the thing. But I’m sure if I hadn’t taken the attitude that I was there representing my client and not the IRS, things would have turned out differently.

                          In contrast, I had another client who never told me he was getting audited, until 5 months after the fact. The auditor threw out all deductions that did not have a cancelled check AND a receipt. He wound up paying several thousand in additional taxes and penalties. The experience was so horrible for him, he didn’t want me opening up a new can of worms when I said I could get all of his money back.

                          I had another client try to represent himself in audit, with the same results, IRS wanted an extra $3,000 when they were done with him. Before signing, however, he had the wisdom to call me and tell me what was going on. I got him off with zero change, after overwhelming the auditor with court case after court case as to why his position was bogus. My client was happy to pay me a couple hundred bucks to get him out of the $3,000 IRS wanted.

                          Moral of the story is, IRS agents will always try to get something out of you, unless you are represented by a tax professional who knows something about the rules.

                          Comment


                            #14
                            Originally posted by Bees Knees
                            Moral of the story is, IRS agents will always try to get something out of you, unless you are represented by a tax professional who knows something about the rules.
                            100% of people I've spoken with who went through an IRS audit without representation owed thousands because of bogus IRS positions. The can say anything they want if there's not a tax professional to keep them honest. I don't care how smart somebody is, they don't stand a chance of arguing tax law with a revenue agent if they're not a professional, and the IRS will take advantage of that every time.

                            Wonder why so many audits are scheduled during tax season?

                            That is a bit of a rub in the context of discussion about tax preparers becoming de facto government agents. They make us figure out how to apply tax law, make us responsible for correct reporting, turn us into investigators, then when it's time to represent our clients, they cynically try to keep us out of the loop by scheduling audits during tax season. Nice. Real nice. As in sneaky.

                            Comment

                            Working...
                            X