How do I prepare this return?

[joanmcq]

Old friend (this is the explanation of why I even try to do this return) who is also a client works multiple odd jobs to keep afloat. This is the description of his income: "ave. $1700-1800/month and how it's paid "roofing labor...paid in cash...music...paid in cash....waiting tables...2.13/hour...plus cash tips(no w2's since last time I filed)"

Even though he claims no W-2s, usually I find a few on eservices.

So do I just put down the income on a Sch C as musician/odd jobs with no expenses at approx. $1750/month after deducting out any W-2 wages I find or.....

Yes, he is being rigorously honest. Most people in this situation wouldn't report anything. Since he's single w/out kids, EIC isn't an issue.

[Guest Taxed]

How much is the W2? Does that require filing? Is his cash income steady? What happens if he declares cash this year and next year he does not have that cash income? Is that going to raise more questions?

I bet half my clients on min. wage have some cash income from odd jobs to put food on the table??

[joelgilb]

This question seems to be coming up on several tax boards and I will post my answer from the other boards here in response to your question:

There is nothing illegal about a taxpayer (not you) estimating the expenses on the old years. Only problem here is that should IRS decide to audit the information you have little support. Even then the IRS must be reasonable.

See the landmark decision in the George M Cohan case at:

http://pegasus.cc.ucf.edu/~bandy/cohan.htm

Basics of the Cohan Rule

Cohan was a vaudeville star who became even more famous for penning hits like "Give My Regards to Broadway" and "I'm a Yankee Doodle Dandy." Back in the 1920s, he claimed deductions for business travel and entertainment (T&E) expenses, but said he was "too busy" with his show business activities to take the time to document the expenses. Naturally, the IRS disallowed the deductions. First, Cohan appealed to the Board of Tax Appeals, the forerunner of today's Tax Court. But the board sided with the IRS, so he then appealed to the Second Circuit Court.

The judge presiding over the case, Judge Learned Hand, is as famous in legal circles as Cohan is in his milieu. The judge refused to kick the case up to the U.S. Supreme Court. Instead, he issued a stinging rebuke to the IRS by allowing Cohan to deduct expenses because there was credible evidence that Cohan had incurred deductible expenses. The oft-quoted paragraph that follows summarizes Hand's position:

"In the production of his plays Cohan was obliged to be free-handed in entertaining actors, employees, and, as he naively adds dramatic critics. He had also to travel much, at times with his attorney. These expenses amounted to substantial sums, but he kept no account and probably could not have done so. At the trial before the Board, he estimated that he had spent eleven thousand dollars in this fashion during the first six months of 1921, twenty-two thousand dollars, between July first, 1921 and June thirtieth, 1922, and as much for his following fiscal year, fifty-five thousand dollars in all. The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; 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. But to allow nothing at all appears to us inconsistent with saying that something was spent. True, we do not know how many trips Cohan made, nor how large his entertainments were; yet there was obviously some basis for computation, if necessary by drawing upon the Board's personal estimates of the minimum of such expenses. The amount may be trivial and unsatisfactory, but there was basis for some allowance, and it was wrong to refuse any, even though it were the travelling expenses of a single trip. It is not fatal that the result will inevitably be speculative; many important decisions must be such. We think that the Board was in error as to this and must reconsider the evidence."

Thus, the Cohan rule was born. Ironically, due to subsequent tax law changes, the Cohan rule cannot be used to justify T&E deductions, but it can still salvage deductions for other business expenses."

"Also, Section 274(d) of the tax code requires substantiation for travel, entertainment and gift expenditures only, thus, by inference allowing the estimation of other categories of business expense ..."

Also see this recent case [in light of IRC Sec 274(D)] which rules that even some estimates of travel, meals and entertainment are allowed... So long as they are CREDIBLE

http://www.accountingtoday.com/news/...y-67020-1.html

And finally, if you are going to let your client estimate the expenses, make sure they put it in some form of writing to YOU, so you can show that they are estimating the expenses and not you as the preparer. In other words CYA!

btw, for those of you who do not know who George M Cohan was:

http://www.pappastax.com/index.php/2...ible-expenses/

George M. Cohan was a 1920′s vaudevillian who is probably most known to modern audiences as the man who wrote the song “I’m a Yankee Doodle Dandy.” But to us tax attorneys, Mr. Cohan is better known for being the plaintiff in one of the most famous and enduring tax cases in American history.


I’m a Yankee Doodle Dandy
A Yankee Doodle, do or die
A real live nephew of my Uncle Sam
Born on the Fourth of July

I’ve got a Yankee Doodle sweetheart
She’s my Yankee Doodle joy
Yankee Doodle came to London
Just to ride the ponies
I am the Yankee Doodle Boy


and a youtube sung by Jimmy Cagney

http://www.youtube.com/watch?v=StDpLge_ITM

__________________

[joelgilb]

How much is the W2? Does that require filing? Is his cash income steady? What happens if he declares cash this year and next year he does not have that cash income? Is that going to raise more questions?

I bet half my clients on min. wage have some cash income from odd jobs to put food on the table??

Taxed,

Not sure where you are going with this answer, but you seem to be suggesting to ignore the cash income. Not only is this illegal (the words Tax Fraud immediatly come to mind), it is certainly not something that we as preparers should be suggesting or helping a client with. Thinking that you would then be party to the tax fraud and maybe even a conspiracy charge!.

Joan cannot tell him that and I am sure she is not even inferring that in her question. In fact she added that her client is "...being rigorously HONEST" (emphasis added)!

[joanmcq]

I know about the Cohan rule, but it can't be used for mileage, although maybe I'll see if he has expenses for guitar strings or whatnot.

I literally have to get a wage & income transcript to see what he might have as far as W2s goes. Thank god he lives in TX, so I don't have to try to dig up state withholding! Let me rephrase that; I hope he lived in TX all year; for a few years he bounced between TX & CA. But CA has withholding available online, so that at least would be ok.

[Guest Taxed]

Taxed,

Not sure where you are going with this answer, but you seem to be suggesting to ignore the cash income. Not only is this illegal (the words Tax Fraud immediatly come to mind), it is certainly not something that we as preparers should be suggesting or helping a client with. Thinking that you would then be party to the tax fraud and maybe even a conspiracy charge!.

Joan cannot tell him that and I am sure she is not even inferring that in her question. In fact she added that her client is "...being rigorously HONEST" (emphasis added)!

Absolutely not. I am not suggesting that she advise her client to hide cash income. Those are questions to explore and tell the client what the rules are. It is up to the taxpayer to declare their cash income.

[mcb39]

My experience, under audit, has been that the IRS does not want you lumping unrelated "businesses" together. For instance, they didn't want snow plowing combined with construction. Your client must have some method as to how he arrived at the total income for each endeavor. The burden of proof is on him. We all take in cash payments. Reporting them is on our honor. I would put the roofing and the music on separate Sch Cs. The waiting tables should produce a W2 or I would think that his employer is being remiss. Have him dig, dig, for deductions for the roofing and the music. He should be able to construct miles for both jobs if he kept any kind of records as to where he was and when. Not surprisingly, there are many clients these days who are trying to get by in this manner. I have an artist who also plays in a band and works parttime at a Hardware store., etc.

Other than the construction worker with the snow plow, I have never had any issues with any of these. Have him be as honest as he can. My audit issue kept terrible records, but by the time we got through with the second IRS meeting, his memory came alive and he produced a pile of receipts and a decent mileage log. This one also involved children and EIC. Therefore, I would do the best I could with your friend and not worry about it too much.

[Guest Taxed]

The IRS examiner knows that if they play hardball records that were missing will be produced by the taxpayer to substantiate their deduction.

One of my clients, a outside salesperson kept terrible mileage records. When challenged she produced every sales appointment sheet with date and time and location etc. Took her a week to put it in a spreadsheet and IRS accepted it without any change.

She was being lazy. Instead of clocking her odometer each day, she was estimating it at the end of the week or month.

[joelgilb]

Taxed,

Once she knows about the income she can't advise her client to do anything but to disclose it. It is never our duty to advise a client on how they can hide cash or that IRS would never know. This is something we should not do, period! Even more so today, when IRS is taking out preparers left and right.

Further, if we feel that the client is lying about their income or deductions, it is our ethical duty to dissassotiate ourselves from the engagement.,

The better approach, especially with the aggressive posture of the IRS today, is to explain to the client why they should try to be as forethcoming as possible and do the best job to prepare a complete and as accurate a return as possible.

[joelgilb]

Finaly as for mileage records, I am pretty sure it is not illegal to create the mileage records today (I did not take the time to research the case law here though). The only issue here is that the records are made with bad memory and should IRS know they are being made currently they would likely discount the records and adjust should the return be examined.

I have personally gone to audits where the client created the mileage records (one very recently) just before the audit and the worst thing that happened was the auditor discounted some of the mileage. This of course is the clients problem, as had they kept better records they would have better deductions.Still, in each case, the client was happy that they didn't lose everything and understood that it was their own fault.

Well except this case I posted above:

Also see this recent case [in light of IRC Sec 274(D)] which rules that even some estimates of travel, meals and entertainment are allowed... So long as they are CREDIBLE

http://www.accountin....y-67020-1.html

[Guest Taxed]

Thanks Joel.

[joanmcq]

This client is as scattered as they come. I'm sure the income is computated as: what do I have in my pocket, what amount do I need to pay the few bills I have, so that's about what I'm getting per month. I'll try to have him give estimates as to what was musician vs. construction work, vs tips.

I can't wait until he gets his nursing license back & he has a steady paycheck!