A client did not file his 2002 income tax returns. He knows his gross receipts for schedule C, but has no expense records. Based on exhaustive research, his return can be prepared based on the best available information including Bureau of Labor Statistics statistical information to estimate expenses. Do you know where there are expense ratios as a percent of gross receipts for a self-employed finish carpenter? In general, do you know where to find such ratios for other self-employed businesses?
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Reconstruct
Have your client reconstruct his expense records from his check register. He can ask his bank for copies of his business account statements and his credit card company for copies of his business credit card statements or annual report. If he bought most of his supplies from one or a few suppliers, he can ask them for a print-out of his purchases for that year. Considering the year, he might have to pay fees to obtain past statements. It's probably worth it to have back-up documentation if the IRS asks. If his calendar shows working times, maybe he can back out labor charges from the invoices he issued to calculate supplies. He needs to work from reality, not from national averages. -
Estimating
Mr. Frog, we all understand that records and receipts are preferable, and that your client doesn't have any. Cover yourself, and make sure he understands he will be low-hanging fruit for a hungry auditor.
Going to the bank can be expensive, as most of them have fees for going back and providing statements, documents, etc. But you are departing from due diligence if you just pull expenses from geographical surveys, etc. Although we are not the agent of punishment for non-filers, it should be remembered that it is by his own hand that he has neglected to file, and we should not resort to inferior practices just because he doesn't want to retrieve records from the bank.
In a partial answer to your question, if you can get hold of an industry-specific IRS audit manual, it might serve to stop your client from taking excessive or inconsistent expenses. Although it is not the tax practitioners' job to be a detective, you should make issues of things that simply don't stack up, and avoid filing such things unless there is a good explanation.Comment
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Lion Has it exactly right
What she describes is the gold standard and it will give you a correct return. It is probably better in the long run for a small business to have expenses without deducting them than to deduct expenses for which it lacks proof.
For a very experienced tax pro there are ways to reasonably estimate numbers that are not known. For example if your client knows that before it closed he bought his lumber at Acme Lumberyard but now cannot obtain any records, an experienced professional can compare revenue for the Acme months with revenue for months where lumber purchases are known and estimate the amount of lumber bought from Acme. (The point is that his ratio of lumber purchases to revenue probably did not change much over a five year period.) I would get help with this the first two or three times I did it and I would bear in mind that when the Authorities agree that a number helpful to the taxpayer clearly existed but cannot now be known with certainty, they allow the least favorable to the taxpayer figure that might conceivably be correct. So if you have taken a more generous approach your work will not stand examinationComment
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suggetion
It has been suggested to me that due to all the new preparer penalties that you should disclose, on the return in a note, that Scheudle C deductions were estimated and how you arrived at them. Truthfully, I don't know if this is a must do, but I thought I would share with you what I heard from a knowledgeable source.Comment
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By all means
use the form IRS gives us for such. it's a Disclosure .. something or another, numbered in the 8xxx series. I had to use estimated subcontractor payments once for a client since his (former) cpa refused to release his records due to non payment. Using past returns for a labor percentage the figure shown was obviously rounded to nearest thousand and full disclosure made on the form.Originally posted by Kram BergGold View PostChEAr$,
Harlan Lunsford, EA n LAComment
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Non-Payment to CPA
Harlan, I get a real uneasy feeling dealing with someone who hasn't paid last year's tax preparer. If I know the tax preparer, I usually send the guy packing.
There are usually telltale signs of this kind of behavior. Often, someone who hasn't filed, or comes to you as a new client. Coming to you because last year's tax guy screwed him and didn't follow through with all the work he was supposed to do. Or last year's tax guy didn't know what he was doing.
Early in my practice I would become excited about getting a new client, especially one who had a business or a good deal of billable work. After going through this above-described experience with a few of them, I always viewed new work with a degree of trepidation.Comment
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I agree
Originally posted by Corduroy Frog View Post
with all you've said. But as you know, every case is different. I had already been
doing this guy's payroll for a while, and his last two years current schedule c's, and now IRS was on him calling for unfiled returns from before that.
A new client who comes for unfiled returns however will have to jump through all the hoops
and produce records.ChEAr$,
Harlan Lunsford, EA n LAComment
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