Schedule C Due Diligence

[jainen]

>>putting in the expenses might may or may not make that big a difference<<

What expenses? This situation is basically the same as the original post. We don't audit our clients one way or t'other. And we sure don't base our tax work on non-tax issues like what is best for underwriting a mortgage.

Alimony is supposed to mean a specific thing, but it is used so generically and it's so uncommon anyway that I usually have to convince a client that support is NOT deductible. If they've already figured that out I don't try to embarass them by prying. As for business expenses, real estate transactions take months to play out. If she got a good start with lots of training and publicity last year why should you doubt that she spent her time this year reaping the harvest? That's the way it is supposed to work anyway, isn't it?

[Kea]

Very interesting. I sent an e-mail asking for more complete data and explained why I wasn't comfortable with the return in its present form. So she sent me her other work expenses & the alimony. There was still some confusion about the assets, so I tried to explain that better. We'll see what happens there.

She said she honestly didn't think IRS would have a problem with them not claiming all their expenses. And I have a hard time arguing that point while I'm also pointing out that they will disallow deductions for listed assets without a log. I basically said that it has to be as accurate but it also requires documentation. (My e-mail version was longer.)

OK, so I guess I don't have to fire her after all.

[joanmcq]

Listed asset logs are really a pain except for vehicles. Ok, here I am on my biz computer. Do I log out if I check my personal email, which sometimes contains biz emails since I only got my own biz email last year? I need to make a personal copy or fax, but almost all of the time my copier/printer/fax is used for biz. Do I log the time I printed directions to a party from the printer usage? That's why a consistent biz use on these types of assets isn't a flag to me. 100% biz use? I ask questions, like, do you have another computer for personal?

A vehicle is another story altogether. I lecture people on the proper way to keep vehicle records and have been known to slap clients upside the head with mileage logs before I hand them out.

[Kea]

I completely agree about how much a pain a true log is. Even though I am generally pretty frugal with my money, I'm also lazy. I have a separate computer and printer for business. Can I say I've never looked at personal e-mail on my business PC? No, but it is "de minimus" I usally have my personal computer close by, so there is seldom an occation to check personal e-mail on it. Most of my business clients now do the same and have a separate computer (so much easier these days now that computers are so much less expensive than they used to be) - or they just forgo the deduction. I only have a couple of clients that go to the trouble of tracking. At least they tell me they have a log!

[mcb39]

Lecturing on logging must be built-in criteria for some of us. In the past couple of days I have had more than one client call for an appointment and say, "You are going to be really made at me" or "You are going to yell at me". Gosh, I don't believe that I ever raise my voice so I must be good at frowning and other facial expressions. Also, I know that when I see a 1099R for an early distribution; I possibly have said "Oh No!" In any case, some of them at least appear to be listening to me.

[kcjenkins]

Well, I've never seen the IRS complain about 'excess income' except where it was reported to get EIC. So if they hear the bottom line and don't say anything, that is the most I think you have to do. Frankly, I find it hard to believe that they would tax that much in extra taxes just to look good on a mortgage app, but neither do I think it's within the scope of our responsibilities. They are not trying to defraud the IRS, and that is what we are required to look out for. As long as you are not writing a letter for the mortgage company, the fact that they leave off some expenses that they MIGHT have taken is not your business. On the alimony, though, you might mention to them that the mortgage company is going to ask for more than one year's tax returns, in most cases, and the alimony will show on last year's return, so they might as well take the deduction.

[Kea]

They ended up claiming more expenses & the alimony. Still a very big tax bill.

I would never have thought that IRS would care about getting extra money, either. But in my NATP update class the instructor pointed out that "wrong is wrong" whether it's too much income / expenses or not enough.

[MAMalody]

No trips to Tibet or anything like that. Just &quot;very consistent!&quot; No other reason to question. She's been a client from the very beginning and no problems. Just the &quot;very consistant&quot; now that she is self-employed.

Thanks.

The answer here is really easy. If this was just a curious question you came up with, don't worry about it. If this came up because of a red flag, then I think you are bound to follow it up. It looks to me like you don't believe the individual, therefore, you need to follow-up somehow. Maybe a simple reply like: I have received your information. Thanks. It is unusual for percentage of use figures to stay the same year after year. Do you have logs to support your percentage? In the event of an audit, the IRS will want to review those. Please advise.