The idea for this post came from a similar one about people who declare losses on Schedule F year after year. I am persuaded that at least some people get by with doing that. Can Schedule C Filers do the same thing? Here are the particulars of a case I have.
I took the client last year but they had not filed for 2004 because of a disagreement with the CPA who prepared the 2003 return. They blamed him and he blamed them for the fact that on a previous return there was an error. The clients had an installment agreement in settlement of that situation, and by the time I took over their case they were in default. However, I was able to get the IRS to reinstate the installment agreement and as I understand it the client is current on these payments. When I took over the case the client was over a year behind on state sales tax payments, but I was able to get that straightened out. They tell me that they are again a month behind on those but that they expect to be current by the end of March including penalties and interest. This is a couple that clearly does not understand very much about how money works or how taxes work. At one point last year the taxpayer suggested to me that owing the government money is like owing yourself money, and not a problem.
They have a "niche" in the garage business and they pull in over 200K a year despite a huge amount of receivables. While I was straightening out their installment agreement last year a fellow drove off in his newly repaired car without paying anything toward the repair, despite the fact that his other car had been repaired four months previously and he had still paid nothing on it. Oh, on top of that, they frequently do work at their cost or even for free because they feel the need to help poor people. Anyway, for all these reasons, revenue is more than matched by expenses and I don't think the garage has ever shown a profit. I forget when they started, but 2003 was not their first year. The money to start the garage apparently came from cashing his his pension from 20 years as an NCO in the Army and her pension from a similar period as a business executive. Funds left over from that plus gifts from the children and credit are what they live on to date.
I have by the way helped them with their receivables. They hired a collection firm on the old ones and actually recovered quite a bit. They also began a policy of discounting bills ten percent if paid within ten days and of charging 18% interest after thirty days. They tell me that they may have a profit for 07 because these changes have resulted in most people paying when picking up their cars. They are sure that they have been profitable in the last six months of the year and that they will make a profit for 08. In this scenario, is there a problem with another year of loss in 07 particularly if it is a smaller loss than in previous years and is followed by a profit in 08? Furthermore, would it be ethical to leave expenses off a return and falsely show and pay tax on a profit as long as you avoid claiming the Earned Income Credit?
I took the client last year but they had not filed for 2004 because of a disagreement with the CPA who prepared the 2003 return. They blamed him and he blamed them for the fact that on a previous return there was an error. The clients had an installment agreement in settlement of that situation, and by the time I took over their case they were in default. However, I was able to get the IRS to reinstate the installment agreement and as I understand it the client is current on these payments. When I took over the case the client was over a year behind on state sales tax payments, but I was able to get that straightened out. They tell me that they are again a month behind on those but that they expect to be current by the end of March including penalties and interest. This is a couple that clearly does not understand very much about how money works or how taxes work. At one point last year the taxpayer suggested to me that owing the government money is like owing yourself money, and not a problem.
They have a "niche" in the garage business and they pull in over 200K a year despite a huge amount of receivables. While I was straightening out their installment agreement last year a fellow drove off in his newly repaired car without paying anything toward the repair, despite the fact that his other car had been repaired four months previously and he had still paid nothing on it. Oh, on top of that, they frequently do work at their cost or even for free because they feel the need to help poor people. Anyway, for all these reasons, revenue is more than matched by expenses and I don't think the garage has ever shown a profit. I forget when they started, but 2003 was not their first year. The money to start the garage apparently came from cashing his his pension from 20 years as an NCO in the Army and her pension from a similar period as a business executive. Funds left over from that plus gifts from the children and credit are what they live on to date.
I have by the way helped them with their receivables. They hired a collection firm on the old ones and actually recovered quite a bit. They also began a policy of discounting bills ten percent if paid within ten days and of charging 18% interest after thirty days. They tell me that they may have a profit for 07 because these changes have resulted in most people paying when picking up their cars. They are sure that they have been profitable in the last six months of the year and that they will make a profit for 08. In this scenario, is there a problem with another year of loss in 07 particularly if it is a smaller loss than in previous years and is followed by a profit in 08? Furthermore, would it be ethical to leave expenses off a return and falsely show and pay tax on a profit as long as you avoid claiming the Earned Income Credit?
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