Illegal Transactions

[Nashville]

This comes from the DTS thread, and involves the spectre of unusual and possibly suspicious transactions which may (or may not be) illegal. He has been advised by some of our more experienced people to avoid the assignment. This may be excellent advice.

My question involves the tax preparation for a firm which may be in violation of some kind of securities law, criminal law, international law, state law, etc. So long as we are not violating tax law, should we shrink back and not accept the work?

Some of these things are so obvious that you should know the devil when you see him, and simply refuse any dealings with him. However, in addition to knowing tax codes, regulations, rulings, etc. do we also have to know corporate law? international law? state and local laws? and maintain enough knowledge to thus screen our clients?

The situation described by DTS may serve as a good question. Investment basis has grown from a handful of partners and a few thousand dollars to many more "silent" partners and several million dollars.

Seeking new "silent" partners is not a transgression of any law that I know of. If they are selling to the public, this involves the Securities and Exchange Commission, but doesn't make it illegal by itself. I'm sure his state has laws governing LLCs and corporations, as well as possible "Blue Sky" laws. Raising money by seeking new investors is not a crime on the face of it.

At what point do we walk away when we're not even aware of illegalities?

[David1980]

At what point do we walk away when we're not even aware of illegalities?

When I do not feel comfortable with the engagement. I accept that there are things I do not know & am not qualified to handle. If I feel that I'm in over my head, I will pass the job to someone else - even if it's 100% legal. Legality is not the only issue.

[Mo Sheets]

FINRA Broker Check

It might be helpful to lookup and verify whether the broker is licensed. If not licensed, I would run the other way. The website for Financial Industry Regulatory Authority is: http://www.finra.org/index.htm. My understanding is they took over from the National Association of Security Dealers (NASD)


Frequently Asked Questions from their website:

Question:

How can I check the background of my broker or brokerage firm?

Answer:

We strongly encourage investors to check the background of brokers and brokerage firms. The easiest way for you to check the background of brokers and brokerage firms you plan to work with is through FINRA BrokerCheck, an online database that provides information about brokers and brokerage firms. FINRA provides information (1) on brokers who are currently registered with FINRA or who have been registered within the last two years and (2) firms who are currently, or were previously, registered with FINRA. You can find out, among other things, whether your broker is licensed in your state to conduct business or whether he or she has been sanctioned by securities regulators for violations of investment-related regulation(s) or statute(s). While FINRA BrokerCheck should be your first stop for information, you should also consider consulting your state securities regulator, local consumer and investment groups, or others who have established business relationships with a particular broker.

[thomtax]

Playing Devil's Advocate

Disregarding the above discussions, the IRS expects each person to report income, even if from illegal activities. After all, what did Al Capone get put away for. It wasn't robbing banks.

LT

[erchess]

In the OP

as I understood the concern it was that the owners had sought and brought in additional equity in a manner that might not have been permitted for an LLC, which it was. Even doing that might have been fine if the entity had first reorganized in a form that would allow what it wanted to do. If I felt that a client had done something like what DTS thinks his client has done, I would want the clients to consult a tax attorney even though I would most likely lose the tax filing business to the tax attorney.

[BOB W]

I guess I would like to know if it was a legal business because, if I recall correctly, an illegal business can not deduct any expenses. They can only report income.

[DTS]

Nashville

Thank you for extending the conversation on this. Got home very late tonight to send out a "thank you" to you and the others. We might get some add'l opinions in the next day or two.

Another long day out on the road tomorrow, so I will check in tomorrow night when I get in.

D