Underreporting boo-boo

[ILLMAS]

TP reported gross income was lower then the 1099-K received by the IRS, now the IRS has made a adjustment for the difference, the amount is significant and I wanted to see if amending the tax return would open a can of worms if we don't agree with the proposed change?  Also, when the gross sales were reported on the tax return, sales tax collected was not reported in gross income nor was it expensed, however the 1099-K amount does reflect the sales tax collected, if we are going to amend the tax return, would it make sense to report the sales tax collected as part of gross sales, and just expense it?

Thanks

MAS

[RitaB]

37 minutes ago, ILLMAS said:

TP reported gross income was lower then the 1099-K received by the IRS, now the IRS has made a adjustment for the difference, the amount is significant and I wanted to see if amending the tax return would open a can of worms if we don't agree with the proposed change?  Also, when the gross sales were reported on the tax return, sales tax collected was not reported in gross income nor was it expensed, however the 1099-K amount does reflect the sales tax collected, if we are going to amend the tax return, would it make sense to report the sales tax collected as part of gross sales, and just expense it?

Thanks

MAS

Regarding the can of worms.  All you're interested in is completing a correct return.  Forgive my candor, but I'd be sure and instruct my client, who under-reported income, that he better not NOW be over-reporting expenses.  If a client is not honest, I really don't care if worms come up, but that's just me.

Regarding the sales tax being included in the 1099-K,  if that's correct, yes, report the gross amount on the 1099-K and expense the sales tax. 

I don't understand how there was no other income besides the 1099-K amount, however.

[Jack from Ohio]

Ask him why he did not give you the total amount of his income, thereby causing the income to be understated. 

Then fire him.

[Catherine]

2 minutes ago, Jack from Ohio said:

Then fire him.

Preferably after being certain all payments to *you* are up to date.  But better to fire them without payment than to have a known-dishonest client.

However, it's also possible that the guy is just utterly clueless and/or inept.  In which case you may decide to keep him, asking lots more questions in future, and for a much higher price because he's going to cost you effort to keep.  

[MDEA]

I would want to see bank records for the tax year to check deposits against income reported. Had a friend(not a client) who is involved with criminal over a problem that started the same way.I would demand proof of income and expenses or fire client.

[RitaB]

46 minutes ago, RitaB said:

I don't understand how there was no other income besides the 1099-K amount, however.

/s

[BHoffman]

Restaurant 1099-K forms include sales tax AND tips that were charged on a credit card.  The 1099-K income is always overstated, sometimes by a significant amount. The sales tax and tips have to be reported as income and then they are expensed out on the tax return.  Regular bookkeeping wouldn't do this, but since the 1099K is an important puzzle piece, we have to make the accounting fit the reporting.  

I'm curious why the client didn't give you the form 1099K?  And, it would help if we knew the what kind of business.

RitaB is totally correct that unless the income was received only via credit card payments, it is very fishy that the underreported income would be such a large amount.  I could see something like happening if the client sold via the internet only and charged sales tax and netted shipping charged against shipping expense.  Another thing is that the credit card payments probably don't match with client's records since December 2014 sales might not be deposited to the bank until January, although there is a reversing effect since Dec 2015 might not show up until Jan 2016.  

I hope the guy is just dumb and not a crook.  Crooks are so disheartening...  

[ILLMAS]

"I'm curious why the client didn't give you the form 1099K?  And, it would help if we knew the what kind of business. "  Good question, this client has been a cash only restaurant for 30+ yrs, until recently they starting accepting CC.  TP does their own accounting and I will be asking how this information was missed.  In order to show a profit, the floundering gourmet seafood restaurant was allowed to cook its books since there is no accounting for taste.

 

[RitaB]

4 hours ago, ILLMAS said:

TP reported gross income was lower then the 1099-K received by the IRS, now the IRS has made a adjustment for the difference, the amount is significant...

 

47 minutes ago, ILLMAS said:

...Good question, this client has been a cash only restaurant for 30+ yrs, until recently they starting accepting CC. 

The gross income they reported was a fraction of the credit card receipts is what I got from your first post.  And they reported zero cash is what I'm surmising from your second post.  Do I have that right?  A restaurant that reported no cash receipts?  If that is true, I would be running, not walking, away from this client.  (If I ran.)

[ILLMAS]

12 minutes ago, RitaB said:

 

The gross income they reported was a fraction of the credit card receipts is what I got from your first post.  And they reported zero cash is what I'm surmising from your second post.  Do I have that right?  A restaurant that reported no cash receipts?  If that is true, I would be running, not walking, away from this client.  (If I ran.)

Yes, that is the impression I get too when comparing the 1099K & reported gross receipts.  I am going to question the client first and if there is good reason I will continue working with them, if not, I am going to refer them to get tax attorney.

 

[Catherine]

51 minutes ago, RitaB said:

(If I ran.)

Driving at high speed...

[RitaB]

11 minutes ago, ILLMAS said:

Yes, that is the impression I get too when comparing the 1099K & reported gross receipts.  I am going to question the client first and if there is good reason I will continue working with them, if not, I am going to refer them to get tax attorney.

 

Well, I may be too quick to judge.  If they could convince me this was really boo boo (as in somebody left off a digit on gross receipts) and not a thirty year chain saw massacre...

[SaraEA]

Another way the 1099K messes up reporting is for places that offer cash back.  I'm sure your restaurant client doesn't, but bars/strip joints often do (the guys need crisp bills to tip the..."performers").  Seems like that chef of yours got used to reporting one-eighth of his income every year and didn't realize that by accepting plastic he now has a "paper trail" to prove him wrong.  I know a lot of wait staff who were pretty upset once plastic became the preferred form of paying tips.