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Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
Experience:  Former IRS Revenue Agent
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How to file tax returns when an account has been seized?

Customer Question

I am a CPA with a client who is in federal prison for parole violation (had a gun). They (I presume FBI) also seized his bank accounts and all his records as of Sept 1, 2015. The authorities are now looking for money laundering, which they will probably get. His step brother has POA and opened bank accounts to keep the businesses running. Now the "client" wants to file 2015 tax returns, except the FBI seized all accounting / financial records from Jan 1, 2015 thru Aug 31, 2015. What does the IRS want or expect in terms of period covered for 2015, when the gov't has the first 8 months of activity?. Only way to recreate Jan 1 thru Aug 30 would be to ask bank for bank statements and recreate the first 8 months then merge with last four. Suggestion?
Submitted: 8 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 8 months ago.
1) You probably want to get earning transcripts (W-2, 1099s) from the IRS for 2015 for both the business and the person.
2) The law allows for taxpayer's oral testimony as evidence.
Refer to IRM, Oral Testimony, for complete discussion and documentation requirements.
Actually, the entire IRM talks about what are considered as evidence.
3) We have to reconstruct income and expenses, and the balance sheet item. Because your client and you both have to sign, and he is under investigation for financial crime, I have known people under criminal investigation went without filing tax returns for over one decade. The return you prepare today will become court's evidence tomorrow.
4) That is, the return preparer has to have very good record to come up with the tax return. Therefore, unless you are 100% sure the return is relatively true and real, don't do it and advice your client not to file. First, he is late already. Second, he has a good reasonable cause for failure to file. The FBI has taken all his book record and financial record. The tax law does not allow us to file return based on "guessing" or "estimates". We can be considered as filing frivolous tax return or things to that nature.
"The penalty for filing a frivolous tax return is $5,000. The penalty is applied to anyone who submits a tax return or other specified submission, if any portion of the submission is based on a position the IRS identifies as frivolous.Aug 22, 2016"
In sum, at one hand, I am saying that this is how we prepare a return without records; on the other, I am saying not to do it. Simply provide a reason. You cannot do it because records are ceased.
However, if he still have money to pay and you think that he may owe tax. There is no law preventing him to pay. Go ahead and pay the tax for 2016 2015 and 20172016.
Customer: replied 8 months ago.
What a mess. If the first eight months are literally created from banks statements and the last four from their records, do you think this would be considered frivolous? Dr. Chen, you are well credentialed and gave a thoughtful answer. It's greed. I can have my bookkeeper do QuickBooks for 7 companies for 8 months. It's money. But, it sounds like you would drop this if it were you??? This guy is a friend and the convict is his step brother who he sees twice a year - no real relationship. This sounds like depositions that may never end. My client or contact (step brother with POA) would be (I think) willing to have an attorney look at this up close. He is scared (big time) and has retained a criminal defense attorney to cover his butt. That defense attorney told my client that the IRS will want full year tax returns or they could find another reason (like tax evasion) to convict him. No offense intended (this is internet - ask a lawyer), but there is enough $$ involved, that I think he would pay and want an expert opinion that will write a letter and he can pay $450/hour to get it done. It seems to me that I should consult a tax attorney (?) and get a letter. If this sounds scattered, it is because all of this was just dropped on me. Can I review the sources you reference and get back to you with another question or two? I know your response is subject to scrutiny. But if this were you, would you ask client if I can consult lawyer (tell me type) or save the hassle and risk and just drop the whole deal?
Expert:  Dr. Fiona Chen replied 8 months ago.
1) He needs a criminal defense attorney "FIRM" and not just an attorney.
2) You need to find an attorney first yourself. Do you want to be named as his accountant in the lawsuit and process? Can you find a good way to be protected?
The method you were thinking of, to type in software spending book record based on the bank statement, may not be sufficient and fit the current situation. It is the under the line, expenses.
For money laundering cases, cash transaction and unreported income are the key issue. Unless you have accurate date and confidence in covering cash income and transactions, depending on the bank statements will be insufficient. Once the return is prepared, the return may immediately become evidence of under-reported income.
This type of cases can last for years. Then, by the time, it goes to trial, no one will remember that the return was prepared under this circumstance.
Wait until your client comes out; he cannot be there for very long right? Then, prepare the tax return then. You can accept retainer and start the bank statement part. But don't finish it until you and he are 100%, the complete income for the year, cash and non-cash, legal and illegal income are all included.