Shady question about receiving cash

[tacks86]

A retired guy is living off his pension. But he's still very healthy and does electrical work on the side. I'm not sure how much cash he pulls in-- maybe a couple grand-- maybe a little more than 'beer money.' But he has no 1099.

How would you approach this guy?

I know the IRS regulation that miscellaneous income over 200$ or whatever needs to be reported. I also know that a bar owner who buys a new porsche better darn well show some income.

But would you, off the record, advise this retired guy to show some income on a schedule C??? Or would you just say that a couple grand of cash doesn't merit a schedule C -- and therefore he's better off NOT having a CPA(me) do his tax. And he's better off going to 'Quickie Tax' because his return is so simple.

(I've prepared plenty of returns while working for a CPA firm. But I am very inexperienced at bidding on my own jobs and haven't been very profitable.) I would also expect that several of you would be hesitant to comment on this subject (unless you use an alias). Thanks for reading. Any advice on how I might approach this and similar jobs will be appreciated.

[Uncle Sam]

Shady Question

I would suggest that if he's a LICENSED electrician-he'd BETTER report that money - because he'd have no protection at all if he were ever sued for "shady work".
But that aside, whatever he "pockets" better not show up in any bank account, and explain to him that the less you know about it, the better, as you're not in a position to advise him not to report income he makes.
It's like admitting to a police officer that you robbed a bank.

[Ken]

A retired guy is living off his pension. But he's still very healthy and does electrical work on the side. I'm not sure how much cash he pulls in-- maybe a couple grand-- maybe a little more than 'beer money.' But he has no 1099.

How would you approach this guy?

I know the IRS regulation that miscellaneous income over 200$ or whatever needs to be reported. I also know that a bar owner who buys a new porsche better darn well show some income.

But would you, off the record, advise this retired guy to show some income on a schedule C??? Or would you just say that a couple grand of cash doesn't merit a schedule C -- and therefore he's better off NOT having a CPA(me) do his tax. And he's better off going to 'Quickie Tax' because his return is so simple.

(I've prepared plenty of returns while working for a CPA firm. But I am very inexperienced at bidding on my own jobs and haven't been very profitable.) I would also expect that several of you would be hesitant to comment on this subject (unless you use an alias). Thanks for reading. Any advice on how I might approach this and similar jobs will be appreciated.

You need to do a schedule C if its over 400 dollars.
Ken

[jainen]

$400 is the threshhold

>>You need to do a schedule C if its over 400 dollars<<

$400 is the threshhold for Schedule SE. For Schedule C it's $1.

[Kram BergGold]

Watch Out!

Here is my understanding of your post. You are about to start a relationship doing the taxes for someone who you know has Schedule C income. To me you only have two good choices. Make it clear to him that he needs to file Schedule C or tell him you can't do his return. Your third option is to conspire with him to under report his income. How you can even consider this is beyond me. You are going to risk your livelihood and reputation so as to do one tax return. That is a scarry concept. PS. my feeling is, if he is ever caught he will turn on you faster than you can blink.

[Jiggers]

Reporting any income

[QUOTE=tacks86;27163]
I know the IRS regulation that miscellaneous income over 200$ or whatever needs to be reported.QUOTE]


Where is this in the regulations? "ALL" income must be reported. While there are levels for determining taxability, SE income, filing requirements, etc., "ALL" income must be reported if it meets one of the requirements.

Remind your client that while he may be using "Hip-pocket National Bank" for his cash operation, there are no hip-pockets on prisoner uniforms!

People that do this cash thing is why my engagement letters have the following: "By signing this letter you are certifying that you have reported all of your income."

[Brad Imsdahl]

Tacks86,

Now that you are out on your own, it is important for you to understand liability issues that face all of us sole practitioners. Hiding behind a big CPA firm with a cazillion malpractice insurance policies shielding you from responsibility no longer applies.

As others have already suggested, you need to look out for yourself, not your client. You are not in the business to help taxpayers get away with anything. Your job is to help taxpayers apply the rules and pay the least amount of tax under those rules.

I remember many years ago a rule where a spouse working for a taxpayer in a Schedule C business was not subject to FICA. It was common for Schedule C businesses to hire the spouse for the sole purpose of reducing SE tax. There was a catch. The spouse had to be a legitimate employee, do actual work for the business, and be paid a wage. Many practitioners at the time side stepped the rules and filed W-2’s for a spouse based on shared expenses in a joint checking account. I remember a friend who did this, was audited, and of course the deduction was thrown out. The auditor asked the taxpayer if it was the tax preparer who told him to do this. The IRS subsequently audited every return prepared by that tax preparer.

Talk about putting a guy out of business. “Why am I getting audited by IRS? Because of my tax preparer?”

There are very few quicker ways to destroy your business than to have an auditor pull all of your clients for audit.

[Black Bart]

Approaching it

But would you, off the record, advise this retired guy to show some income on a schedule C??? Or would you just say that a couple grand of cash doesn't merit a schedule C -- and therefore he's better off NOT having a CPA(me) do his tax. And he's better off going to 'Quickie Tax' because his return is so simple.

...Any advice on how I might approach this...

I know taxpayers who do this -- and I'm fairly sure that everybody else here (maybe even including a few IRS agents) does too. Moral judgments aside; you can't safely have anything to do with such, even if the circumstances are compelling (he's "pore folks"/"the baby's sick"/he's "desperate"/etc., etc.). Once he's told you about the "C" work; you're obligated.

But more than that, don't tell him to go elsewhere else for a quick 1040A (he'll figure that part out for himself). And especially don't say anything like "a couple of grand doesn't merit a schedule C" or he's "better off not having a CPA do his tax." If he's later caught (rare, but it happens), he'll be casting about for an excuse. He''ll really be desperate then and will remember what you view as a "helpful remark" to be "tax advice."

As retired generals say, such situations are "fraught with peril." I've told this story before, but it's worth repeating. At an audit over 20 years ago, the IRS agent told me he'd been involved in 37 criminal tax evasion cases. In all 37 cases, the defense was "The accountant did it." That's because this question always arises -- "Who's going to get in very serious trouble with the authorities? Me? Or somebody else?" Usually, there's just "no question" how "that question" is going to be answered.

If he insists on leaving it off; just say "I can't do your taxes" without further comment or advice. He'll understand.

As to "getting profitable," post and ask for business-building tips, as the boarders here have generally got lots of pretty good advice.

[tacks86]

Thanks very much to everyone who has replied.

Especially you, Brad. I never considered that horrible scenario which your friend got into. His signature became an audit flag?? What a nightmare! I wouldn't be able to live with myself. I can't say that I've done a lot on my own. But at least I can say that what i did was quality.

I'm not fully out on my own. I have my own clients on the side to supplement my regular income. And i have, by the way, already walked away from a few clients and passed on potential jobs. As I'm sure all of you have, also. I've actually been pretty conservative.

Make it clear to him that he needs to file Schedule C or tell him you can't do his return.

That's really not too far from what I was thinking. And I would certainly make this guy use an organizer. I would have this guy quantify his income in writing.

[tacks86]

Thanks Bart, much appreciated.

[oceanlovin'ea]

Good advice

You have gotten good advice from all these very professional people. If a person tells you about income, you are obligated to put it on the return. Even these people that answer about interest income from the bank, only I only got $3.00. You don't have to report it unless it is at least $10, do you?" The answer is yes, and you put their $3 on the tax return.

My neighbor has a similar situation. He retired early from telephone company, but doesn't like to be idle. So he does handyman work but always gets paid in cash. Then he started working 3 days a week for a guy who owns some mobile home parks that rent trailers to migrant workers. I told him that for this guy to write off what he pays my neighbor he has to report it on a 1099 or he can't expense it. If the guy does the 1099, then IRS is going to look for income on his return. Now he needs to amend a couple of years returns to claim the income or at least start claiming it now.

Sometimes all you can do is tell them that they have to report the income and it is up to them to do so, but you can't do the return without including it as income.

Your credibility as a tax practioner is at stake. If you become an enrolled agent, it is even a bigger deal. Always do the right thing and you will always be able to sleep at night. You will also be successful in your business because most people really do want to deal with an honest tax professional.

Linda F

[sea-tax]

Not to beat a dead horse but I strongly agree with all the others. Tack it is not worth the headache. If the client chooses to break the law do not follow him. Trust us we have seen and heard of others who have followed and right now they are sitting in jail or out on the street. Dont be another statistic , you only have your integrity in this profession and when that is comprimised you might as well pack it all up.

[jainen]

great moral-booster

>>I strongly agree with all the others<<

Uh-oh. My name is in this thread too, so I can't let such a statement go unchallenged. I'm not taking a position on whether tack should leave income off the return. I have another problem about his original post.

Tack is asking if he should let Quickie Tax do a simple return, rather than taking on the client in a more complete way. He has "already walked away from a few clients and passed on potential jobs," so this is not a new issue for him.

When a client comes to me, I assume they want the benefit of my expertise. Why would he tell you about income if he expects you to ignore it? He obviously wants to be straight and he needs you to make it so. You best serve your client by setting up properly in terms of the many tax advantages of self-employment. He's lucky he ran into you before Quickie Tax got hold of him. They're nothing but trouble.

Besides, the fees for those small Schedule C's are a great moral-booster for yourself!

[Ken]

self employment tax

>>You need to do a schedule C if its over 400 dollars<<

$400 is the threshhold for Schedule SE. For Schedule C it's $1.

Jaenen I was in no way implying that if the client had under 400 dollars he didn't have to claim it.

It doesnt matter the amount, any income has to be claimed, I KNOW that.
I dont always use a schedule C for small amounts unless it is over 400 dollars. Thats why they have line 21 (other income).

However after reading the post again, He should file a schedule C. I had thought maybe it was just a onetime thing, but apparently he does more of this than I thought.

[sandysea]

Enrolled agents, CPA's

We are required by law to inform our clients of their failure to disclose information and the penalties that arise from not doing so. That being said, I would NEVER report something on my client's return without their full knowledge. If they tell me about something but refuse to give me information to place on the return, I tell them what they could face and I then prepare the return per my engagement letter:

I am preparing your return on information you provided to me. yadayadayada.

Now if that client tells me he earned money and refuses to report it I have two choices....do the return and tell him what consequences he can face or fire the client. I have gotten GOOD at firing clients...sometimes shooting myself in the foot, but I sleep at night....GO AMBIEN...hehehehe