C Corp audit

[lsowers]

I have a field examiner coming in for an audit on a C Corp client. The client is incarcerated and all I have to go on is the records his wife found for me. The auditor is asking for proof of sub contract labor, rent, and gross receipts. The client always gave me a hand-written P&L and balance sheet to use for tax prep. Now that I have the box, there is no formal record-keeping system, just bank stmts, canceled checks, and receipts. After going through the checks to verify the labor numbers, it looks to me like the tax return figure is overstated (in a bad way) by a material amount. I cannot find backup for 1/2 of the rent amount also.

My question to those that have been involved in an audit before is - do I let the auditor discover this on his own or should I be upfront about what I have found so far. I cannot reach the client, obviously, to ask questions. His wife can only see him once a week for a limited time and only phone him once a week for 15 minutes. She had nothing to do with the corp and knows nothing about the records.

Could someone please advise me as to how to proceed given the situation?

Thanks

[michaelmars]

let the auditor know that neither you nor the wife were involved in the record keeping and returns were prepared based on submitted info only.

also don't sweat it, unless the c corp has assets that the wife hopes to eventually get, the irs can make any assessment they want and they won't collect a dime.

c corp taxes don't pass through to the shareholder except for some payroll and sales issues.

does the wife file married filing separate? that would be a big plus too incase they do assess payroll tax deficiencies, on the "contractors"

[kcjenkins]

Also, you might be able to verify the rent by contacting the person or business that the checks were written too, in case he paid some of them by cash or some other means.

And just don't take on more responsibility than you need to,. It is his audit, not yours. You took his data, in good faith, and HOPEFULLY you kept his handwritten P&L, which is YOUR defense.

[jainen]

>>I cannot reach the client, obviously, to ask questions.<<

To answer your main question, no, you never rat out a client (even if he IS a rat). But what CAN you do? You apparently have no way to get instructions for this dangerous audit, and are pretty much totally unprepared. In my opinion, it would be unethical to proceed. You should request an extension for the purpose of securing alternative representation.

Obviously the client is very vulnerable. It's an easy guess that he couldn't explain the lack of records even if he were present. A realistic goal for the audit might be no more than heading off criminal charges. For that, he needs an attorney. The wife is also at great risk even though you say "She had nothing to do with the corp." Yet you can't even alert her to the progress of the examination, because she is not the client.

Even more important, YOU could have huge liabilities if you find it's over your head. I mean, the guy's in PRISON already.

[TAXBILLY]

You are in dangerous waters. Time to get additional help.

taxbilly

[OldJack]

Well... If properly authorized with a power of attorney form, signed by the taxpayer, I would have an initial meeting with the IRS auditor to make contact and see what he has to say when you tell him that the taxpayer is in jail and cannot represent himself. Get the auditor to do all the talking and have him tell you what he wants to do about the situation. If the auditor does not fold up and go home, then I would notify him that you would have to contact the taxpayer for advice on how to proceed and his decision as to who would further represent him. This would be a good audit to pass the buck to some lawyer if it has to go forward.

[ed_accountant]

I agree with the above opinions.

I would request an extension and withdraw from representing this client for this audit representation. I would also suggest to the client to obtain attorney representation.

In your opinion, what were the red flags on the return that caused this Audit? Large shareholder loans? Did the client take payroll for himself?

[BulldogTom]

While I generally agree with the above answers, I think the first question is - WHO IS GOING TO PAY YOU FOR YOUR WORK?

I am not totally convinced that you cannot be of assistance to this taxpayer. You may be able to mitigate the damage from the audit and reduce the taxes and penalties. I do like the idea of making the auditor tell you how to proceed with the taxpayer incarcerated.

Doctors need sick patients too. We are not lucky enough to have only clients that pay us for the convenience of not having to prepare their own returns. Sometimes we have to take on those clients that are in a world of hurt as well.

But, if there is no way you are going to get paid, withdraw.

Just my 2 cents.