Taxpayers who we suspect are omitting income

[dyne]

What should we do with clients or taxpayers who we suspect are omitting large amounts of income? I tend to refer them to a CPA as I do not wish to be involved with a taxpayer who I believe is cheating on his taxes. Recently a retired man asked me to start preparing his tax returns. He reported $20,000 business losses for each of the prior two years although he bragged that in the past he earned $50,000 profit each year. It appears to me that he is still earning about $50,000 business profit each year but reporting a $20,000 loss. He could be withdrawing $20,000 per year from savings to pay for the business losses but his interest income reported has doubled from the prior year suggesting that he is instead putting huge amounts into savings accounts. He reported Zero AGI and paid Zero tax for each of the last two years.
His office in the home expense form reported about $50,000 of total personal living expense which suggests that his AGI should have been about $50,000 or more, NOT Zero. I did NOT accept him as a client.
Of course there may be explanations but I am very leary of such taxpayers. I have come to realize that the office in home expense form is a good indication of a taxpayers actual income.

[Uncle Sam]

Suspect Clients

So your first inclination is to pawn these type clients to CPAs and knowingly let the CPA
get into trouble?.

If I don't accept clients as to their credibility - I don't dare refer them to
someone I know. I leave it to that person to make their own choice as
to where to get his/her tax return prepared.

[ttbtaxes]

If ever you're uncomfortable with a prospective client I would simply tell them you can't do work with them and leave it at that. I would certainly not refer them to someone you know or to any other practitioner by name.

Let the prospective client chose the practitioner they want.

[Golden Rocket]

Dump on a CPA?

Dyne, I didn't read a question in your post. Is there one, like maybe "What would we do?"

I hope the verbage does not suggest that a CPA would be more likely to take this client than you would. Instead I hope you are suggesting that a CPA might be in a better position to advise this crook, but I don't know why this would be the case either. We are all held to the same standards.

With respect to professional expertise, the one I absolutely cannot stand is the guy who says, "Mr. Joe Mangrum said I could deduct this and he's a LAWYER!!" Some of the most tedious messes I've ever had to wade through were the result of Attorney advice, particularly in the area of tax planning.

[dyne]

The first sentance in my post was a question: "What should we do with clients or taxpayers who we suspect are omitting large amounts of income?"

[Mo Sheets]

Same here....

As a CPA, I can tell you that I do not do tax returns where I have an inkling of any unreported income. I also do not refer these folks to any other preparer. I tell every potential client that walks through my door that I will work to make sure their return is prepared accurately, but it is up to them to disclose ALL income, not just the income they choose to report. I tell them I want to lay my head on my pillow each night and get a good night's sleep and I want them to be able to do the same.

I have declined to prepare many returns such as...

1) the person who has a "business" with only business losses for numerous prior years that is actually a hobby. They continue to insist it is a business because "it's not like I'm taking million dollar losses every year".....

2) the person who says "oh, I received less than $600 on that job so I'm not going to include it as income"......

Sorry....my name means something and I won't knowingly prepare a return for someone who is trying to cheat and I will drop anyone that I find is doing anything illegal or unethical.

I applaud the fact that you are not choosing to do their return either....but PLEASE don't refer them to your local CPA. I'm sure that person has no desire to prepare their return either.

Mo

[oceanlovin'ea]

I am hoping that Dyne was just saying he would suggest they go to a CPA (general terms) as he couldn't do the return. But I don't see him defending himself.

Personally, I would just say that I was not comfortable doing the return and suggest they find someone else, without naming a specific person. If they asked who I suggested, I might just say there are the national chains all over town. BUT I would not be suggesting that they would do something that wasn't legal either. Sometimes people do push you for a name but you don't have to give it.

Linda, EA

[Golden Rocket]

Indeed It Was

Dyne, indeed it was. My apologies. Guess I got carried away with the CPA thing.

[Uncle Sam]

Clients Omitting Income

Yes - the first sentence was a question.

However - I interpreted the following:

"I tend to refer them to a CPA as I do not wish to be involved with a taxpayer who I believe is cheating on his taxes"

to mean that he knowingly referred questionable clients to another practitioner to
get himself off the hook but possibly implicating that practitioner for eventual trouble.

[BHoffman]

Ask them

The first sentance in my post was a question: "What should we do with clients or taxpayers who we suspect are omitting large amounts of income?"

I don't like to point out the obvious, but you might possibly consider asking the client how they pay for large expenses and show no income. A CPA would probably do that.

For example, if the OIH mortgage interest is high and the AGI is low, one might wonder whether the client is paying living expenses with their home equity.

You might perhaps tell the clients why the IRS - NOT YOU - might suspect they are hiding income.

Sometimes a potential client is actually a crook. We do not refer them to anyone. We don't confront them. We just tell them we can't do their work.

Sometimes a client is able to show us that their loss is real, and there is an explanation. We get substantiation and assure the client our goal is to be able to answer any question they might get from a taxing authority.

[Gary2]

I don't like to point out the obvious, but you might possibly consider asking the client how they pay for large expenses and show no income. A CPA would probably do that.
...
You might perhaps tell the clients why the IRS - NOT YOU - might suspect they are hiding income.
..

These are skills that I think most people learn through experience. It would be nice to have some written materials on interview skills for the tax office, but I don't know of any other than the occasional notes.

The IRS Due Diligence videos have some useful examples, but they're limited.

[ChEAr$]

So after meeting with prospective new client, and you have this gut feeling we've all had before, one thing you might do is to inform him that in order to prepare his returns you will have to have all bank statements and checkstubs, including personal accounts of him and his wife. After all, IRS would want this in case of audit.

If he asks why you would tell him the truth, in order to construct (reconstruct actually) all his income and to keep him out of trouble with IRS. Don't forget to quote him an estimated fee for all this work. At this point he'll probably apologize for wasting your time leave.

[geekgirldany]

When it is so obvious I ask them questions. I explain if it is jumping out at me then it will jump out at the IRS. I've asked several clients how they live on what they make? How do they pay so much mortgage interest but only make this much? How are you buying this for the business but you only gross this much? When in doubt ask for bank statements. I've had a couple run out the door when I ask for them.

Most of the time the answers make sense. They have got loans from relatives, they had cash money saved up, etc. I've only had a few where I had my doubts. I told them to find someone else. When asked who to go to I tell them to look in the yellow pages.

[kpangelinan]

As a CPA, I can tell you that I do not do tax returns where I have an inkling of any unreported income. I also do not refer these folks to any other preparer. I tell every potential client that walks through my door that I will work to make sure their return is prepared accurately, but it is up to them to disclose ALL income, not just the income they choose to report. I tell them I want to lay my head on my pillow each night and get a good night's sleep and I want them to be able to do the same.

I have declined to prepare many returns such as...

1) the person who has a "business" with only business losses for numerous prior years that is actually a hobby. They continue to insist it is a business because "it's not like I'm taking million dollar losses every year".....

2) the person who says "oh, I received less than $600 on that job so I'm not going to include it as income"......

Sorry....my name means something and I won't knowingly prepare a return for someone who is trying to cheat and I will drop anyone that I find is doing anything illegal or unethical.

I applaud the fact that you are not choosing to do their return either....but PLEASE don't refer them to your local CPA. I'm sure that person has no desire to prepare their return either.

Mo

I do exactly as Mo does in #1 and #2 above.

I don't like to point out the obvious, but you might possibly consider asking the client how they pay for large expenses and show no income. A CPA would probably do that.

For example, if the OIH mortgage interest is high and the AGI is low, one might wonder whether the client is paying living expenses with their home equity.

You might perhaps tell the clients why the IRS - NOT YOU - might suspect they are hiding income.

Sometimes a potential client is actually a crook. We do not refer them to anyone. We don't confront them. We just tell them we can't do their work.

Sometimes a client is able to show us that their loss is real, and there is an explanation. We get substantiation and assure the client our goal is to be able to answer any question they might get from a taxing authority.

Agreed as well.

[JG EA]

A case of modesty

I have done just what Dyne did. Referred to a CPA.

Reasons:

Something may "seem" not quite right, but I have found that there are so many things which may seem wrong to me and yet with further research and discussions found there are more extenuating circumstances and ways of looking at things.

CPA's perhaps have a bigger office and more time and I don't wish to spend the time involved. I do not follow through on charging more for extra research as I should - thinking that I should know these things. CPA's may charge more for their time and the taxpayer will gladly pay knowing that they had now a more complicated return.

I maybe don't want to deal with the problem, but realize someone else may want to deal with it.