How would you handle such a situation?

[RightOn]

I have an old client who have been with me for over 10 years. A few years ago, he retired. But he still need to file tax returns because of pension income.

This year, he came to see me as usual for his 2011 tax return. To my surprise, he handed me a Form 1099-B with hundreds of stock transactions. Before this year, he has not had one single stock transaction.

Later, when I was reviewing his tax information, I suddenly remember he has mentioned to me before that his son-in-law works in the securities industry (a trader or something) and he is not allowed to do his own tradings. So I start wondering if his son-in-law is actually using his account to do all those tradings.

Of course, it is purely my speculation and I have no facts at all to substantiate the suspicion. I hope you can share your opinion as to how you would handle the situation. Would you give your old client the benefits of doubt? Or would you walk away from preparing his tax return? Would it put me in deep trouble to prepare his tax return if my speculation is unfortunately true? Please share your thoughts.

[Jiggers]

I would ask him about the source of funds that had to be used to have this kind of activity.

Did he sell something that needs to be reported? You want to be sure that if he received a 1099S or something that you need "to keep the IRS off of his back with a CP2000"....

Did he inherit this account? You need to know that information "to save him taxes in the future because of a probably step-up in basis"....

Did someone gift him the funds or this account? You want to be sure that you "have the basis to save him taxes in the future because of the need for the correct basis".....

If this is his son's account, being reported in his name and SS#, I would remind him of the laws and penalties (you have to google that) for insider trading.

If his answers are reasonable, let it go and do the return.

[RightOn]

If his answers are reasonable, let it go and do the return.

Thank you for your opinion. Here is an update.

I met with his son this morning. I expressed to him my concern and speculation. And I think he gave me a very reasonable explanation. He said his father had just retired and therefore started having the spare time to learn how to invest. And he was there to coach his father on trading stocks. He also said all the investment funds belong to his father and his father took all the gain or loss. He also said his father had actually lost interest already during the market downturn last year so the tradings had stopped. And his father at the current time does not plan to play with stock transactions again. I did explain to him it is a sensitive issue and they should be careful with it because of the profession of his wife. And he said he understands so he will advise his father not to trade stocks again. And he came across to me as very honest and sincere. So I incline to prepare the tax return. Thoughts?

[JohnH]

You have to go with your intuition - is what he said believable? Was his demeanor and body language convincing to you? If so, then prepare the return and move on.

Be sure to document everything that was said and with/by whom, so you don't have to trust your memory if you find yourself talking to a regulator at some point in the future.

If you still have doubts, tell him you can't help him. There are plenty of other tax preparers he can consult. If he needs to change his story, at least now he knows what to say to them.

[RightOn]

You have to go with your intuition - is what he said believable? Was his demeanor and body language convincing to you? If so, then prepare the return and move on.

Be sure to document everything that was said and with/by whom, so you don't have to trust your memory if you find yourself talking to a regulator at some point in the future.

If you still have doubts, tell him you can't help him. There are plenty of other tax preparers he can consult. If he needs to change his story, at least now he knows what to say to them.

Thank you for your input.

Well, I have practically documented everything he said this morning in the previous post. Maybe I should print a copy of it and keep in his father's folder.