Help me plan for potential pitfalls

[erchess]

I had a call from a new client on Thursday and below is what she told me and my thoughts in response. What I would like is for the nice people here to suggest other pitfalls. By the way, I deliberately try to get face to face with almost every caller because I am not as busy as I would like to be and so if I am going to decline to handle a client I want to at least get in front of them first. I am sure the day will come when screen out more clients on the phone.

Anyway, she worked a regular job and she has a W-2 but no expenses related to it and she has never itemized. (OK I need to see if itemizing would be a good idea but I have never yet lost a client because I saved too much on their taxes.)

She has a loss on a side business that she can take for one more year. (Ok is it a business or a hobby and is it a going concern or does she have an NOL Carryover? She did seem pretty clear that she "knows" the loss is deductible but I am not going to treat it as a business without reasonable financial records and some hint that she works at it regularly and has some reasonable chance at a profit in 08. If she should tell me that she has disbanded it I may walk away if I can't talk her into treating it like a hobby. A recent thread on this board tightened me up on this issue.)

She had a rental property that was rented at a profit Jan through Oct and then something happened and she could no longer do the work involved so she let someone buy it from her by simply assuming the mortgage. In her mind because she did that she doesn't have to pay tax on the sale. (She does of course have to report the sale on F4797 and her basis will be reduced by the depreciation allowed or allowable. If she depreciated it very long her entire contract sales price could be taxable profit.)

[JohnH]

Early AM brainstorming

I assume you told her to bring at least the last 3 years' tax returns with her because you want to see how she treated the rental property in the past - did she report it properly, how much depreciation was claimed, etc. If not, I'd call her back & tell her to bring them.

You might also get lucky & find some underreporting of expenses or overreporting of income that could be amended & get her a refund. I'd guess 1/4 to 1/3 of my new clients have some sort of potential amending issue, especially self-preparers.

The old returns may also be helpful in pointing out to her how she has already received a tax benefit from the depreciation and this is why she must settle up on that basis adustment now that she has sold the property, even though she didn't necessarily receive any cash at closing. I'd also want to see the original closing statement on the purchase of the property and also the clsoing statement on the sale. Sometimes some wierd things pop up on page 2 that the client "forgot" to mention or didn't think were important.

I'd have something in print handy to show her concerning hobby losses, just in case that's needed. People seem to be impressed with written summaries, no matter the source, and if you need to go there you can always point out the requirements and ask "How is it that you don't need to follow these requirements?" or whatever you need to say in those circumstances.

Finally, you didn't mention whether she was a self-preparer or used another tax pro in the past. That's crucial info, IMO. I want to find out (as diplomatically as possible) if they used someone in the past, how long they were with them, and why they are changing. It might be a fee issue or it might be that they've already been told something they don't like and they are opinion shopping. If they were a self-preparer in the past, I want to be sure I understand why they decided to use a preparer this year. Could simply be that they don't understand something, or there could be much more sinister motives.

[erchess]

Good Ideas John

But what kind of sinister motives could she have? The worst I have run into was clients who "knew" that they could do something and were person shopping until they found someone who agreed. I sense that you fear that she is trying to get away with something she knows to be illegal but without my quite understanding what is going on and with a backup plan of if caught telling the IRS she disclosed all pertinent facts. I have heard of such but to my knowledge never encountered it. Is this actually common client behavior?

I will call her back and ask for the last three years' returns. I will have TTB to show her for hobby loss rules and anything else she questions.

[Jesse]

I think the "sinister motives" may be more that of tax avoidance whether it be intentional or not.

She "knows" a lot - this is where I first cringe. She has a side business that she can take a loss on for one more year? Why? Because she read you can have losses only 3 out of 5 years? If it's not a business but rather a hobby what she knows is not true.

In "her mind" she doesn't have to pay tax on the rental property she sold. Does she understand the concept of depreciation or basis? Just because she sold it for what she owed on it doesn't mean she doesn't have a gain. With a business and rental property I would ask for at least 3 years of tax returns.

I have a client now that I tried to explain the hobby/business loss rules. She has a side business and she went online and she "knows" she has 3 out of 5 years to claim a deductible loss. I try to explain the hobby loss rules and of course she has a profit motive, she just hasn't had time - so of course her expenses are more than income. Try to explain that time spent is another issue to determine hobby or business. Well she has another job so she doesn't have the time..........we go in circles. I told her I just didn't think we were a good fit for each other and she needs to find someone else. Maybe she went to you?

I think JohnH gave some very good advice.

[ChEAr$]

new client

We all over a period of time become a bit cynical regarding new clients who have been
filing complicated returns for a number of years; just goes with the trade.

If she shows up for the interview without the three years of returns, saying that she couldn't
find them, you're put on notice that you MAY not want her as a client.

Also, when interviewing and coming to the deduction for tax return prep fees, ask to see the
bill from last year.

[JohnH]

Sinister motives

Harlan & Jesse elaborated very well on what I didn't explain very well in my original post about the "sinister motives." I was reacting to the original facts you stated , it was before my first cup of coffee, and for some reason my antennae went up - they're still up.

She knows about NOL's but doesn't understand the basics about selling a rental property - red flag. (I know lots of tax preparers who don't understand NOL's, much less your average taxpayer).

She owned a profitable rental property and just out of the blue she sold it for the remaining loan balance because she didn't want to fool with it any longer - red flag. (People don't just say bye bye to investments without good reason, even in this declining market)

There may be logical explanations for all this and I don't want to prejudice you before the interview. But you asked for potential pitfalls. I'm wondering if we've even scratched the surface.

IMHO, she knows way more than she's telling you, or else she has such a mess you'll get deep into it and then wish you'd never met her. Maybe she's already been through this with another preparer and she thinks she's learned what to hide from you in order to get a more favorable outcome. As I said, all IMHO.

I hope you'll follow up on this thread & let us know how it went. I'd like to know if our intuition was on target or if I overreacted.

[Nashville]

Mixed Response

Chessman - Mixed news for you and her.

I will continue to take losses on a business for as many years as I can. If in fact she CAN take another loss, I would be inclined to do so. I would not, however, take another loss if the business had absolutely no chance to make a profit. However, keep in mind that she is entitled to another loss year in her own mind. She could be right about this, or she could be wrong -- many times people believe what they only wish to be the case.

Fact of the matter, I will go beyond the "three of five" guideline if I believe there is compelling evidence that the profit motive is clear and profits are not too far away. One telltale sign: the owner contends there will eventually be profit, so I begin in year 3 taking alternate depreciation lives and methods to preserve the depreciation expense for the future. If the owner doesn't want to do this and insists on maximizing his loss, then he probably does not believe in reporting a profit down the road.

An assumed mortage or wraparound mortgage is considered sales proceeds in the year in which the loan is absolved to the seller. Period. She is NOT entitled to forego reporting sales proceeds because she "knows" differently.

Like other people posting, I agree she might be shopping around to find someone who agrees with her, and there are so many bad preparers out there she just might find someone. Unfortunately, if she doesn't want to do things the right way, you must let her find this person. You can't let her take the position of authority in telling you what is right and wrong on her tax return.

[DaveO]

Good Advice all around

One of the questions I have learned to ask is "Why are you leaving your current tax pro?" The answer can tell you alot. If the old pro died or retired or they moved then no red flag. If it's something on the order of "I just didn't feel I got enough attention from them" that tells me they expect me to hold their hand and call them when quarterly payments are due or remind them it's time to bring in their sales tax. "We had a disagreement over a bill" is another red flag, they will question every invoice.

Wanting to know in advance of me seeing their return what the charge will be is the biggest red flag of all. Had a woman call in and explain her situation and I quoted a price range. At the end she said "Oh and my husband has a W-2"(they had been married about 3 months). She indeed had just what she said a simple W-2. He had a new house along with the old house which was turned into a rental, a mid six figure w-2, stock options, schedule "D" and a k-1. When he picked up the return he asked "Why is it so much more than what you quoted my wife" to which I replied "Because you brought in so much more return than she described." He laughed and all was well.

[geekgirldany]

Yes very good advice. I've become very cynical this year. I've had so many new people come to me about bankruptcy and not tell me up front. I've finally learned that if they are asking for several years of tax returns to be completed then something is going on.

I really can't add anything to what the others have mentioned. I really agree with them. I would probably allow one more year of loss. But something is going on if they are not pulling a profit by that time.

Something to add on new customers.
I've had several conversations this week with as customer asking me to:
"fix the number so I get back a refund"
"get creative with the numbers"
"I have contributions but I don't have time to get the receipts".

To which I replied I don't "fix numbers" I go by what I am given. If I see there is a deduction that can be taken then I will call and ask, if for instance they had contributions last year. If so they need to let me know and bring by the receipts and/or letters. I try to tell people about the contributions but many don't listen

I am not sure if people are looking to cheat or just don't know enough about taxes and put things the wrong way.

Its really amazing what people will say.

Hope I didn't hijack your thread. Just my experience with new people.

[Jesse]

....... If in fact she CAN take another loss, I would be inclined to do so. I would not, however, take another loss if the business had absolutely no chance to make a profit ........

Fact of the matter, I will go beyond the "three of five" guideline if I believe there is compelling evidence that the profit motive is clear and profits are not too far away.

Key word throughout is IF.

[Nashville]

People appear Honest

Geeky, people just want to make a big show of being honest. Like politicians.

They don't use words like "cheat" or "lie" or do something "crooked." This doesn't sound very polite. But they will use words such as "creative accounting", "adaptable", "fix." I have become an intense observer over my career of the "Great Perception" game. Glaring differences in the image versus the substance. This is NOT the same as "putting your best foot forward" as I am a firm believer of that doctrine.

This isn't a forum for Bible-thumping, but whatever your perception of the Devil, we are warned in this Good Book about Lucifer being the "Master of Lies." Deception is at the very source of this power whether you believe in the seduction of Eve or the selling-out of our elected officials to the powerful special interests. In fact, Apostle John tells us the Devil has the power to deceive the entire world except the "chosen."

This isn't an appropriate place to discuss who the "chosen" are, but so long as our own feet are rooted in truth we will know the Devil when we see him, and this will be true regardless of your religious or ethnic calling. A Lie by any other name is still a Lie. Those who only "act" honest are part of the deception itself and are especially dangerous.

Not exactly a tax discussion but for better or worse, the great Cosmic Struggle affects us no matter what we do or how we function.

[JohnH]

Yes very good advice. I've become very cynical this year. .

A little cynicism is a good thing in this business.

Reminds me of the quote:

"No matter how cynical I become, I just can't seem to keep up with reality".

[geekgirldany]

Nashville I see where you are coming from and I agree.

John, I use to be so trusting of people and really too nice. After a few things that happened in my business I've had to become more cynical. I am not saying that everyone is out to pull a fast one but you have to be ready if they are.

[erchess]

Not Quite

Harlan & Jesse elaborated very well on what I didn't explain very well in my original post about the "sinister motives." I was reacting to the original facts you stated , it was before my first cup of coffee, and for some reason my antennae went up - they're still up.

She knows about NOL's but doesn't understand the basics about selling a rental property - red flag. (I know lots of tax preparers who don't understand NOL's, much less your average taxpayer).

She owned a profitable rental property and just out of the blue she sold it for the remaining loan balance because she didn't want to fool with it any longer - red flag. (People don't just say bye bye to investments without good reason, even in this declining market)

There may be logical explanations for all this and I don't want to prejudice you before the interview. But you asked for potential pitfalls. I'm wondering if we've even scratched the surface.

IMHO, she knows way more than she's telling you, or else she has such a mess you'll get deep into it and then wish you'd never met her. Maybe she's already been through this with another preparer and she thinks she's learned what to hide from you in order to get a more favorable outcome. As I said, all IMHO.

I hope you'll follow up on this thread & let us know how it went. I'd like to know if our intuition was on target or if I overreacted.

She didn't mention NOLs. She said she had a side business loss that she could claim for one more year. That got me to thinking that she either knew a little bur prob not much about the three out of five rule or she had an NOL and either this will be its statutory last year or it will be exhausted.

I will let the group know how things turn out but remember I am not seeing her until Tuesday.

[erchess]

I am going to call her on Saturday

and tell her that I need her to give me:

the last three year's tax returns;

the paperwork from the sale of the house;

her records from the business; and

the W-2.

I think I won't demand records for SCH A if she is comfortable with the assumption that she can't profitably itemize.

It seems very clear that she has some wrong ideas about her taxes but the open question at this point is whether she is looking for a yes man or a man who will tell her the truth. I am a blunt and plain spoken fellow and I won't knowingly prepare a return that is not supported by the facts of the taxpayer's life and by the law.