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BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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This is a wild one. I have a new client who decided to come

Customer Question

This is a wild one. I have a new client who decided to come clean and file his taxes. He was encouraged by friends to get honest and straight with the IRS. I told him to file the last 7 years. He did have some sort of windfall inheritance and may have been living off that. He now has Social Security. He owns an old car and has a small business property he rents. NO bank account. No real finance records. Very much below the IRS radar. So we went to do his back taxes and has the same gross receipts each year of 30000. He takes 7500 off each year as the cost of goods. He deducts 9000 annual business rent. Winds up with a meager income. It looks obviously very estimated. I was thinking of telling him to calculate it more precisely, and that what he is submitting is telling the IRS 'I AM ESTIMATING." The I realized I was not sure. Maybe that is the best approach. Does it matter. His records are really bad. But no way IRS can prove anything on him. Is it foolish to put 30000 as gross receipts for each year, or is it honest??? He DOES have some actual expenses that are real. What would you advise in this goofball situation. He now has a social security income. His business income was a few gs per year. Aslo, he live in Calfornia, so I guess I file state too.
Submitted: 7 months ago.
Category: Tax
Expert:  BK-CPA replied 7 months ago.

Hello and thank you for your question.

This may help him if he's living off social security because he'll have self-employment tax to pay which can increase his benefit...

Anyways, if that's the best he can do to reproduce records, then that's about all you can do for him. In more recent years he's probably still able to get bank statements and try to put together some records. With a total lack of records, the taxpayer generally loses their deductions, but like many your client can try to make use of the Cohen rule.

See Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930).

"(5) Board of Tax Appeals is directed to find some basis of allowance of deduction for entertainment and traveling expenses, the evidence showing that considerable sums were spent although no records were kept. "The Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.""

"The decision is modified as to the royalties of "Get Rich Quick Wallingford," and the cause is remanded to make some allowance for the expenses of travel and the like; otherwise it is affirmed."

Customer: replied 7 months ago.
Thank you. He literally has no records. He has NO bank account. He cashed any client checks in a grocery store.He can prove a business rent payment. He can prove some bills. He has some sort of receipts. In the end, his SE income was well less than 10000 per year. Indeed generally less than 5gs. Should tell him to go back and get some better records, so they are not so obviously phoney???? E.G. He reprots 30,000 gross receipts every year and COGS was always 7500. I can demand a better estimate and let him know all receipts always the same for 7 years and ending in 5 zeroes looks very estimated. Should I bother? Or should I take his figures as is? I am asking for a practical response, not a legal analysis. I do not want to get my client into trouble for blatantly estimating. He is an old guy and kind of poor. He is trying to get honest with the IRS. Shoud I make him do a better estimate than 30000 per year gross receipts????
Expert:  BK-CPA replied 7 months ago.

Yes, if the client wants to file that way go ahead. He's basically got no records so what else can you do other than make a good faith estimate? I would include a statement with each return acknowledging the fact that these are estimated amounts. It's not something you want to try and cover up because some protection is afforded for stating what is being done.

I would also go over the benefits and drawbacks of filing with my client. Those observations would have to include an acknowledgement of the potential for tax evasion charges if he doesn't come clean, going over the interest and penalties that will be assessed, etc. It's up to the client and other than stating the facts and the risks there isn't much more you can do.

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