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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3840
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am a tax preparer and I have filed a business tax return

Resolved Question:

I am a tax preparer and I have filed a business tax return (1120) for a client in 2010.
This return was picked for examination/audit by the IRS.
No problem until here.
The problem lies on the fact that the taxpayer/client provided me with his bank statements which were the support for the tax return preparation.
By the bank statements the company's income was about $350,000.00 but the client sent me an email saying that they had an additional CASH income of more than $700,000.00 totaling more $1,000,000.00.
I relied on that information and did the return with that amount.

Later I found out that the client didn't REALLY had that income. He only wanted to show more income for a loan he was trying to get from a bank.

Now the auditor is requesting records/proof of the income and is even threatening me to report me as a tax preparer to the IRS for filing a frivolous return.

Any insights on how do I handle this situation?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

First, stick to your guns that you were trying to err on the conservative side, by reporting income that others might try to hide.

NPVAdvisor :

Point out to the auditor that IRS now requires even bartering income to be reported ... YOU hd no choice but to rely on your client's information

NPVAdvisor :

Frivolous returns are returns that they to report less income than was earned, not more.

NPVAdvisor :

Point out that yu provided no information to the bank and had no knowledge that thius was anything other than, what you do for a living, preparation fo a tax return

NPVAdvisor :

sorry for the typos (OF) a tax return

NPVAdvisor :

Cash transactions don't have paper trails

NPVAdvisor :

And for a client to come forth and report cash receipts is, in your opinion, cmmendable

NPVAdvisor :

If you can produce anything written, receipts, emails, letters from the client that would be excellent documentation

NPVAdvisor :

And finally, having an engagement letter on file that indemnifies you from any liability because you must rely on information from the client ... that you have sent to the client, in your files would also be helpful

NPVAdvisor :

Note that in this documentation from IRS regarding frivolous tax arguments, its is OMISSIONS of income or CREATINV deductions that are being looked for, not EXTRA income:

NPVAdvisor :

"When the IRS later matches the payment records from employers, banks, brokerages, etc., and finds the omission, it notifies the taxpayer about the proposed additional tax, plus interest and any applicable penalty" ... from: http://www.irs.gov/uac/Tax-Return-Errors-and-Frivolous-Tax-Arguments

NPVAdvisor :

Hope this helps

NPVAdvisor :

Lane

NPVAdvisor :

I sill don't see you coming into the chat .... In a few minutes I'll move us to the "Question and Answer" mode ... maybe that will help ( We can still continue a dialogue there, just not in real time as we can here)

Customer:

Sorry this chat thing is new for me. I've used Just Answer before but only in the "Question and Answer" mode.

NPVAdvisor :

sOK

NPVAdvisor :

not sure what it looks like from your side, but bsure to use your scroll bar to look back up through what I've typed

Customer:

Give a minute. I am reading the publication you sent me

NPVAdvisor :

no problem

Customer:

What about the expenses?. He also informed me about some expenses that were "cash" expenses. Do I have the same argument?

NPVAdvisor :

... that he provided the info, yes, but it's fake expenses that fall more in line with the idea of a frivolous argument

NPVAdvisor :

What's interesting is that the expenses would NOT help build the case for a loan ... so there might be more validity to the expenses?

Customer:

Yeah, I agree, but in his case he wanted to prove just the gross income not the net income.

NPVAdvisor :

Most loan underwriters want both (ability to pay)

NPVAdvisor :

IS the business one that typically HAS a lot of cash transactions? ... THAT would help

NPVAdvisor :

a TYPE of business that would normaly have a lot of cash...

Customer:

yes. he is a used car dealer with a lot of buy-here-pay-here deals and lots of people coming with their tax refunds to buy used cars.

NPVAdvisor :

aaahhhhh

NPVAdvisor :

very good

NPVAdvisor :

definitely want to write that one down somewhere

NPVAdvisor :

the fact tat these guys don't have the best rep for telling the truth ..........

Customer:

I know.

NPVAdvisor :

I think you just have to hang your hat on, your understanding that this is a cash business,and that you never created or advised any of the income or expenses

Customer:

Well, wish me luck. Tomorrow I have meeting with the auditor.
Definitely your insights helped me a lot.
I have to confess that I was a little scared.
But thank you a lot

NPVAdvisor :

be open, cooperative and I'm sure you'll be fine

Customer:

OK. is this conversation saved somewhere that I can refer later if I need?

NPVAdvisor :

you have some options there .... copy and paste to a word document ... save this site as a bookmark (Favorite place... all the links will stay active) or you can file-print from your browser

NPVAdvisor :

the links will stay active as well, so just bookmarking this page, works well

NPVAdvisor :

Good luck .. and et me know how it goes and if I can help further

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

NPVAdvisor :

(You should als just be able to "save and exit," and it'll stay with your account

NPVAdvisor :

Can I help you with anything else this evening?

NPVAdvisor :

ok gotta go, but I'll be her if you want to check back in

Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 1 year ago.

Hi Jose,

... just checking back in, as I never saw you come back into the chat.

Let me know how it goes.

and let me know of I can help further,

But if this HAS helped , I appreciate positive feedback, it's the only way we get paid.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3840
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks so much Jose.

Make the statement that you want to be cooperative, and do so, but if it gets out of line, ask very quickly to speak to their manager. (you'll know what that feels like).

Like any other profession. There are good ones and bad ones.

Take it one day at a time

Lane




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