income verification

[patavid]

The client works part time ( 2 or 3 days/week) as a bartender. She gets paid from the owner by either cash or check. She is treated by the owner as an independent contractor and tells her it is her responsiblity to keep records of her income. He refuses to issue her a 1099 MIsc or do any type of witholding. Now by all counts I know of, the owner should be treating the situation as W-2 income. But my question is this, since the owner will not issue her a 1099 and she is not sure exactly how much she was paid in 2011 ( although she can roughly estimate the amount...about $200 per week on average) how can she prepare a tax return without any documented income?Thanks for your input.

[taxea]

You are correct about the W-2 if the requirements are met. This must be a frequent thing in bars because I have an Iowa client in the same position. Actually not knowing where you hale from it may be the same TP shopping for a preparer that will let all this slide, heaven forbid.

First and foremost the TP is responsilbe to keep income/expense and tip records. Certainly she was aware when "hired" that this was the case. Did she not know that getting paid under the table isn't legal? How much did the owner tell her when she started the job in regard to her pay?

If he actually told her that she would be a contract employee then one would thing that he would issue a 1099.

Without records she can do an estimate of income etc and it would be reported on a substitute
W-2 with the information that the employer paid her in cash and refused to issue either a 1099 or W-2. You'd best hope they are not friends because he is going to be on the radar once the IRS gets her tax return.

[KBTS]

Agreed that she is an employee and should have received a W2. Since the owner refuses to do this, she could file an SS-8 with the IRS and ask for a determination of the correct status. However, this will most likely result in her being terminated as the owner obviously does not want to treat her as an employee.

It sounds like she already knew about this, so she was responsible for keeping track of her income. She will have to go back and re-construct her income as best she can and then you will have to determine if you are comfortable with the amount she has calculated. You could then file a Schedule C as if she was self-employed; of if she chooses to go the SS-8 route, you can file Form 8919 and pay her share of SS & Medicare taxes on the return and wait for determination from the IRS on employee status.

By the way - if this is an EIC situation, you may want to run away as fast as you can from it.

[DonPriebe]

By the way - if this is an EIC situation, you may want to run away as fast as you can from it.

Yep. The tax preparer fine for lack of due diligence has been raised to $500 this year. The CBO estimates that this will result in an additional $9,000,000 to offset expenses of the Korean Free Trade Act. And the "undocumented earnings" situation is used as an example of lack of due diligence in the IRS presentation on the subject.

[JohnH]

All good responses. Personally, I'd refuse to prepare the return and recommend that she go to HRB or JH. They have the deep pockets to absorb $500 fines - I don't.

Besides, given the circles that many bar owners travel in, I'd have another concern --> The risks associated with having the wrong bar owner angry with me over getting him audited might be greater than the piddly $500 the IRS wants.