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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16544
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I had a land development from 2006 to 2009 and 3 people bought

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I had a land development from 2006 to 2009 and 3 people bought lots for "half price" $300,000 each) and released $285,000 up front through escrow. These escrows were due to close "within 10 days of the lot recordation" by the County. The recording of the lots was to take place in 2008 or 2009. My husband and I did not claim these case disbursements as income in the year received (2007 & 2008) because we did not have the full amount of each sale. I also thought we needed a "HUD" closing statement to claim the income when the escrows were completely closed and all the funds were disbursed. Our plans was to claim the income when the project was finished and all the funds were received. The funds were used for the costs of development and project mortgages. The expenses were also not written off because we were saving all the expenses to write off when the project was finished. In 2009 the project failed and the lots were never completed. We refunded one of the lots, and the other two we signed notes for. We did not claim the two sales of $285,000 because they were converted to debts. My question is; were we required by any law to claim these as income when they were received or were we correct in waiting for the escrows to close to claim the full amounts? Was the reporting requirement waived once the income was converted to debts? If we file an amended return, our receipts are more than these incomes, but was this tax evasion when we just didn't know?

MyVirtualCPA :

Thank you for your question, and thanks for using JustAnswer.com

MyVirtualCPA :

First and foremost, do not worry - you have not committed tax evasion. Tax evasion occurs when you willfully fail to report income

MyVirtualCPA :

You have not done that here.

MyVirtualCPA :

In this case, your income needed to be reported in the year of the sale when funds were received.

MyVirtualCPA :

You would apply any expenses against that income in the year incurred

MyVirtualCPA :

You could not wait until the end of the project and then claim all income and expenses in that particular year

Customer:

I thought it was like a house that you save all your improvement receipts and when you sell the house you claim the receipts against any profit. I am being accused of tax evasion and our accountant has been forbidden to discuss this with us. When the income was converted to a debt, doesn't that remove the income reporting requirement? How can we pay income taxes on amounts we owe?

MyVirtualCPA :

Thanks for your follow up. First, I would recommend hiring a tax attorney to help you with your situation. It sounds extremely complex, and attorneys are better suited to handling claims of tax evasion

MyVirtualCPA :

When the sale was complete, that's when the reporting requirement became applicable

Customer:

The sales were never completed, then the income was converted to debts. How can you pay income taxes on a debt?

MyVirtualCPA :

If this is the case, then you show documentation of that to your tax attorney and they will be able to amend your returns to properly reflect the situation

Customer:

Thank you for your efforts. I'll contact a tax attorney.

MyVirtualCPA :

But I will say that the title never passing through would mean that there could not be a sale

MyVirtualCPA :

And when you say the project 'failed' - could you elaborate more on that?

MyVirtualCPA :

What's going on with the notes that you signed for the other two lots?

MyVirtualCPA :

More details are needed for a comprehensive answer.

MyVirtualCPA :

If you can provide more details, then we can revisit and possibly get you some resolution to this matter

Customer:

We ran out of money in 2009 and could not finish to sell the other lots. We were sued for breach of contract so we filed for bankruptcy to protect our personal residence. The debts were discharged in bankruptcy, but we lost our home as well.

MyVirtualCPA :

Okay then you really don't have income here. You never really closed on the lots, and when it comes to the debt when it's canceled by bankruptcy there's no income

MyVirtualCPA :

You may have a loss on the disposal of the asset. You're not sitting as bad as you think.

MyVirtualCPA :

Is there anything else that I can help you with today?

Customer:

That was great and I appreciate your help. Thank you.

MyVirtualCPA :

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MyVirtualCPA :

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Thanks, Laura for your positive rating. Please come back and visit MyVirtualCPA for any of your tax, finance, or social security needs. It was a pleasure working with you today.