Sch A medical deductions

[JenMO]

Client had major medical expenses. He is self employed. His Sch A is now more than his income. Will that fly, or will we get a letter? He is not getting a refund, just doesn't owe

[New York Enrolled Agent]

Client had major medical expenses. He is self employed. His Sch A is now more than his income. Will that fly, or will we get a letter? He is not getting a refund, just doesn't owe

Will it fly? What a lovely question to ask people like us who have no (like in zero) knowledge of what's going on. Did you do something along the lines of a cash-t analysis to determine how he was able to get through the year with apparently no net income?

Why don't you provide the facts? Did he have savings to use? Did he have an inheritance? Did he have a rich uncle? Did he ...?

[JenMO]

sorry, client is a farmer with assets and depreciation. i didn't ask him how he paid, i just know he did. the figures are not made up. he has all receipts.

[Lion]

You still need to do your due diligence. Are the numbers he gave you reasonable? When you separate out non-cash deductions, such as depreciation, did he have positive cash flow to eat, heat, live? Did he actually pay all the medical expenses, or just owe them and pay them over time in later years? Did he borrow, dip into savings, get help from family, etc.? Our requirement is Know or Should Have Known.

[Rapid Robert]

One simple yet critically missing piece of data is the AGI. Do you have any idea what that number is?

Since you are concerned about "a letter", it seems you should at least figure out if it is going to be because of under-reporting income, or over-reporting itemized deductions. Or maybe you had something else mind?

[Roland Slugg]

I believe JenMO was simply asking if the scenario she described is likely to trigger an audit.

It might, but so what? If the client is reporting all his income, and if he paid all the medical expenses and other amounts deducted on Schedule A, what is there to fear? He may have had tons of savings to use, he may have borrowed money from banks, relatives or friends, or even received gifts from well-wishers wanting to help out.

As far as due diligence is concerned, as tax preparers we have a few mandated due diligence responsibilities, such as the EITC and the CTC ... but we are not required to perform a cash flow study or demand a reconciliation of any client's financial affairs. If one of my trusted clients tells me he paid X $$$ in deductible expenses, I put them on his return. Please note the term "trusted clients." If a new client came to be with facts similar to those in the OP, I would make reasonable inquiries.

[Burke]

I had a client with a wife and kids, who for years had expenses that exceeded income, and I finally put down my pencil in the interview process and said, "I need to ask you a question." Before I could do so, he replied, "what am I living on?" And I said yes, that he could not conceivably continue like this without some explanation to me since I was signing off on his return. Turns out, his father was subsidizing his lifestyle and had for years. He was an only child. I also did the father's return, he agreed that this was the case, and he could afford it. We did come to an agreement, however, that one item the son was treating as a gift, was really compensation and we rectified that.