Troubled Client

[erchess]

Client came to me with what he said were turbotax Federal returns for 2002 an 2003 and while he thought he had done the state the state was now saying they hadn't gotten anything and he couldn't find anything either in his paper file (that he brought me) or his computer file (that I have not seen). He wanted to pay me my normal preparation fees for entering the Federal and preparing State. I have since been through his stuff and found the state return for 2003 but I agree that it doesn't look like he did one for 2002. However, I have concerns about the accuracy of his federal return. My question for the board is whether he has done right and if not, has he done sufficiently wrong that I should not take this job?

MFJ Return with two dependents. He sells insurance products. He has a W-2 labeled statutory employee for about half of his income and five or six forms 1099 misc for the rest all indicating non employee compensation from insurance companies. He has all of this on a Sch C but what bothers me is that his expenses are on F 2106 and carry to a Sch A that without them does not beat the standard deduction. I have never before seen a W2 with the Statutory Employee box checked but I do know that many insurance sales people are Statutory Employees but I do not know how their taxation is different from that of other people. His wife has a normal W-2 that is correctly reported and one 1099 Misc for selling real estate that is also reported without expenses on a C but she has no expenses reported anywhere. They each have a Sch SE. Total income is around 52K. The only credit claimed is Hope. There is the non cash donation of an unspecified number of men's suits costing $4-500 each as well as numerous items such as used bed linens that couldn't have been worth much and it is alleged that basis in these items is $2K and their thrift store value claimed is $750. That seems high to me but by perhaps not high enough for me to do more than warn him he is trolling for an audit. I know both members of the couple and I am convinced that they would not intentionally cheat on their taxes but their understanding of tax and accounting issues has always struck me as surprisingly limited given their overall education and business experience.

[Uncle Sam]

Troubled Client

I would correct the 2106/A expenses - and allocate on the C for the 1099 expense portion. Wouldn't you be lowering the AGI and be availing client for more employee business expenses if you have to allocate the employee portion vs contractor portion of the expenses?

[erchess]

ooops

I mis stated my facts. His W-2 has only $4 of income. I have not run the figures to see if that carried to line seven or his Sch C but naturally all of the expenses would seem to go on C rather clearly which in turn means he can't itemize and would owe additional tax.

So, the return is wrong by leaps and bounds. Since State starts with Federal AGI (which is wrong) I can't sign the State return as being complete and accurate to the best of my knowledge and belief unless of course I do amend the Federal. Any dissent from that conclusion?

However if I moved the expenses to Sch C, perhaps encouraged her to give me some expenses, and put the Standard Deduction in place of Sch A, I would most likely show a refund wouldn't I? Too bad the statute of limitations has passed for 02 and 03.

[JohnH]

Be sure to cover as much as possible in the engagement letter. By all means start by amending the Fed return - you can't make them file it but you should make it cleare that you expect them to do so. This may work out OK, but it's more likely that there will be problems down the road and you'll be the one they complain to when they get push-back on any items on the return. I'd probably consider giving them a worksheet showing the original amounts reported on their self-prepared return and the adjusted amounts per the one I prepared, and have them sign off on any changes.

[GRich0656]

Maybe I don't understand the situation correctly, and if that is the case please correct me.
But, if he would not have been able to itemize without incorrectly placing his legitimate Sch C decuctions on his Sch A, it seems that moving them to Sch C should offset his stautory and 1099 income, reduce his SE liability, and allow him to claim the standard decuction, which should result in an overall reduction in AGI and have the added benefit of getting the questionable noncash donations off the return. Am I missing something?

[erchess]

Point of View

I see things the way the last poster does but I am not sure I will be able to sell this point of view to my new client. He knows that the years in question are 02 and 03 and he is therefore barred from getting any additional refund. On the other hand, following this course will reduce what he has to pay NC if indeed he has not filed NC for one or both years and does owe something.

I am going to make him an offer that I hope will win me a lifelong and perhaps vocal client from within my parents' church, where I am well known but currently have no clients. I previously told him I would do the NC returns if he would pay me a certain sum for each plus the $25 to buy software I don't have but would need in order to go back that far. He agreed with that at a time when we both thought his Federal Returns were ok. I am going to tell him that the Federal returns are NOT OK and that without amending them I cannot prepare his NC returns as we had agreed. On the other hand the additional work I will have to do over what I bargained for is minimal and I am going to offer only a minimal increase in my fee. There will be my usual handshake agreement with someone for whom I do amend, prior year, or representation on a return I did not prepare that they intend to be my client for all future income tax matters and look me in the eye to tell me why if they ever make a change. So far no one has let me down. I do live in an area where most peoples' word is their bond and they would die the death rather than deceive another person.

[erchess]

Just talked to him

He is very glad to let me do what I need to do and he is just glad he took the step of hiring a Pro.

I really appreciate the support and advice I have gotten on this forum on this issue and many others.

[Burke]

I mis stated my facts. His W-2 has only $4 of income. I have not run the figures to see if that carried to line seven or his Sch C but naturally all of the expenses would seem to go on C rather clearly which in turn means he can't itemize and would owe additional tax.
and 03.

Normally, a W-2 with statutory employee box checked will carry to a separate Sche C automatically by the software, and the net is not subj to SE tax. And that is where the expenses go. He is considered self-employed for expenses attributable to that income. If the income is substantial, I pro-rate the expenses on two Sche C's, one for the statutory W-2, and one for the 1099MISC income. This procedure has withstood audit. Normally the great majority of expenses (like mileage) are not kept separately by source, although you may be able to allocate a few directly to one source or another. In this case, since it is only $4, I would not bother allocating and force the W2 income directly to Line 7. I have had agents who had 3 -- one regular W-2, (expenses go on 2106), one statutory W-2 and 1099MISC's, and expenses had to be pro-rated three ways.