Unusual Request

[mcb39]

Have a client's spouse who is unhappy with the preparation of their return as she thinks the self-employed husband should not claim his deductions in order to show more income. The bank is looking at their return for a refinance. The bank isn't liking the numbers. I told them years ago that as they have several rentals which they have been busy paying off, thus creating a rental income gain; that they should be paying off some of their personal debt and let the rentals stand on their own. As it turns out the bank is not even going to consider the value or income from the rentals.

Wife is living apart from her husband and is quite upset with him (for not making enough money) and me (for not giving him a larger profit.) Just what are the ethical and responsibility concerns here for me as a preparer? Is it common for a taxpayer to ask to show more income and more tax owed?

I don't feel right about it and will step aside if she insists on taking a stand. She even asked the banker if they should amend and he told her that would just make it look worse.

This couple is almost certainly headed for a divorce. He is very happy with the returns that I have prepared for them for many years. I want to know, though, what my moral stance should be here. We all know that the IRS doesn't allow deductions to be over-declared. How do they feel about under-declared? I feel that I would be preparing a false return with the intent of duping a financial institution. I won't do that. :scratch_head:

[MAMalody]

My take is, tell it like it is and let the chips fall where they may. That is also the IRS take on it. I suspect your engagement letter also indicates that you will give them every benefit they are entitled to and it will be an accurate reflection of their tax picture. I have had a couple of clients over the years that tried to steer the tax return. I essentially tell them only one person can drive; I have a license to drive, but, if they want to, fine, see you later.

[JohnH]

Assume a worst-case scenario, which would be that you amend the prior-year returns, the bank is swayed by the numbers, and they make the loan. Fast forward a few years and the client defaults on the loan (maybe due to the financial strains of a divorce, for example). The bank is looking for someone to blame, and the only choices are the client, his wife, and you. Wonder how quickly the client and/or his wife will come to your defense, or will they throw you under the bus?

If they want the return amended, or if they want to commit mortgage fraud in some other way, I'd let them find someone else to aid & abet their lies. You'll sleep better.

[mcb39]

Thank you, Gentlemen. You agree totally with my take. When she said "amended", I shivered internally. I would not have done it for her in any case. This was always a nice return, three businesses, seven rentals, two kids in college, etc. Now the marriage is going South and I would just as soon be out of it. I will print your replies so that when she confronts me again, I can show her more explicit facts and circumstances. She is being advised by her sister who is a "financial planner", and, supposedly, a man-hater. The sister keeps telling her that her husband's business is just an expensive hobby. NOT the case. He is a taxidermist and naturally things are slow as they are in most luxury oriented businesses. I am having no issues with the husband, but cannot split allegience unless they divorce this year. Lots of assets involved here as well as lots of debt.

Thanks again.

[JohnH]

Oh, I didn't think about the fact that you might show our responses to the client.

If so, then be sure to show them this:

If it becomes apparent that somebody might go to jail, your first responsibility is be sure it's the client.

[mcb39]

If it becomes apparent that somebody might go to jail, your first responsibility is be sure it's the client.

[Catherine]

I'll toss my two cents in here as well, Marilyn.

Lack of prior-year listening and following your good advice on THEIR part is THEIR problem. You did not create it. You are not their "mommy" to MAKE them do what is fiscally responsible.

The wording by signature line on the 1040 reads "on penalty of perjury" that the return is COMPLETE and correct (to the extent possible with the information available). If the husband's business is a business, then he must report all the income AND all the expenses. One cannot decide to "leave them off" to make a bank happy. You wouldn't leave off income on a Schedule C so that the client qualified for the EITC - this is the other side of that coin.

Tell the wife that if she wants to commit tax fraud (and YES, use terms that strong; at the least she can't come back later b!+ching that you didn't warn her), that she needs to find a crook to prepare the returns to her liking, as you will NOT participate in fraud.

Sounds like good riddance to me; this is not the kind of client to keep. If they do stay with you for this year, make sure you've got a good engagement letter from them, signed and dated by BOTH.

Catherine

[Bees Knees]

We all know that the IRS doesn't allow deductions to be over-declared. How do they feel about under-declared? I feel that I would be preparing a false return with the intent of duping a financial institution. I won't do that.

It is illegal to under claim deductions.

From TheTaxBook, page 5-23:

Claim all deductions. The Self-Employment Contributions Act

of 1954 requires every taxpayer to claim all allowable deductions,

including depreciation, in computing net earnings from self-employment

for SE tax purposes. Penalties apply for making a false

statement or representation in connection with any matter arising

under the act. (Rev. Rul. 56-407)

The reason it is illegal to under claim deductions is you are committing Social Security fraud. Social Security benefits are based on the average 35 years of Social Security earnings. The higher the earnings, the higher the benefit. By understating your deductions, you are overstating Social Security earnings, which is fraud. You as the preparer would also be subject to penalties if you went along with the fraud.

[rfassett]

I agree with the others, but I would suggest that this is not all that ucommmon of a request. I tell my clients that broach this subject a couple of different things. Most of the time they are very happy with the tax result. (And this response usually involves returns with wiggle room with Section 179, etc). And then a couple of months later go to the bank and get a negative response. I simply tell them, contrary to popular belief, they can not have their cake and eat it too. They can not have it both ways. Of course, the banker worth his salt will add back the 179, but that has not been the experience recently.

The other request, similiar to the present one, where the client wants to "play" with revenue and/or deductions, I tell them this is not an MTO practice. If they want their return correct, I will prepare it. If they want a Made-To-Order tax return, they need to go elsewhere.

And the other thing that may be playing here with the bank, the plain fact-of-the-matter - banks just are not as loose with loans as they were previously. I am still wondering where all that bale out money went - but that is a subject for a different post.

[Pacun]

Last time, I had a client who qualified for EIC and was getting a refund. Let's say of about 5K. He wanted to qualify for a $200K house and the loan officer told him that he needed to make about 65K. He wanted me to add about 40K in self employment income. I told him that that was illegal and that I would not do it. I went on and explained that the net result of another 40K on his income was about $20K in taxes. Instead of lying in his taxes and paying $20K to the IRS, I suggested to take those $20K to the loan officer as down payment. I ended up the conversation abruptly and asked him if he wanted to do the taxes correctly, I was willing and able to.

[Pacun]

It is illegal to under claim deductions.

From TheTaxBook, page 5-23:

The reason it is illegal to under claim deductions is you are committing Social Security fraud. Social Security benefits are based on the average 35 years of Social Security earnings. The higher the earnings, the higher the benefit. By understating your deductions, you are overstating Social Security earnings, which is fraud. You as the preparer would also be subject to penalties if you went along with the fraud.

Why are you basing your reasoning on Social Security Fraud? So, it will be OK for someone with ITIN to do it since a person with ITIN will never collect social security benefits.

[Bees Knees]

Why are you basing your reasoning on Social Security Fraud? So, it will be OK for someone with ITIN to do it since a person with ITIN will never collect social security benefits.

Where in my post did I say it is OK for someone with an ITIN to understate their deductions?

[ILLMAS]

Probably no here one here has heard blame the "Tax Preparer" or the "Accountant" right? Well why is it the tax preparer fault if the banks, mortgage brokers, loan officers and even real estate agents are coaching the clients on what the bank wants to see to get approved for the loan (at least in the past). Either 60 minutes or 20/20 had a bit on Countrywide Home Loan right after it went under and a top executive even said they had to sell loans no matter what, and basically they were instructing brokers to have clients tax return be prepared a certain way. Before going independent, we used to get random people showing up, "I made X amount of money and I have no expenses", later on as the mortgage crisis came to light it turned out that most banks were not verifying tax returns or even a CPA letter would simply due to get approved. I am glad you told your client you could not make the change, unfortunetly, the next tax preparer they approach will get a different story from them.

[JohnH]

I'll always remember the broker who called me up and asked if I could send them a letter stating that the client was self-employed. After getting the client's OK to talk with the broker, I called him back to say I couldn't write that type of letter. All I could say was that I had prepared tax returns based on the figures the client was providing me. He said that wasn't good enough, so I offered to get copies of the actual Schedule C's to him. He quickly replied, "Oh no, we don't want to see any actual numbers. We just need the assurances we're asking you for". He didn't get anything from me, and that conversation was a dead giveaway that something fishy was taking place.

[Pacun]

Where in my post did I say it is OK for someone with an ITIN to understate their deductions?

It is my understanding that it is illegal to understate expenses in order to qualify for a bigger EIC. It is illegal to understate expenses if you are going to get another TAX benefit or a benefit from the social security administration. It is also illegal to understate expenses (contractor) in order to have your insurance premium lower.

Can anyone else think of anything thing else where understating expense is not permitted or (as Jainen would say) give me quotes from the code when understating expenses is illegal?

Remember that a lot of times, people say... I paid $700 cash to this contractor but I didn't issue him a 1099-misc, what do you do? Do you add that expense without substantiation or just leave it out since there is no 1099, receipt or cancelled check? In a sense that will constitute understating expenses, correct? On the other hand, entering expenses without substatiation is another violation of the code, correct?

[Lion EA]

You can educate your client to choose from among several choices for depreciation. And, a client can disqualify potential deductions by personal use, lack of record-keeping, etc. Think about the TV in a home office or family use of a computer. Did he keep a mileage log? As you say, Forms 1099 put you in a Catch-22 situation when your client paid cash.

[mcb39]

You can educate your client to choose from among several choices for depreciation. And, a client can disqualify potential deductions by personal use, lack of record-keeping, etc. Think about the TV in a home office or family use of a computer. Did he keep a mileage log? As you say, Forms 1099 put you in a Catch-22 situation when your client paid cash.

I HAD to work with what she brought me and she brought all of the deductions in her reports from her computer. She did not bring a mileage log and I did not take mileage. As far as depreciation goes; the rentals are governed by residential rental rules. Business property is already in my depreciation log and they had nothing new to depreciate. I called him yesterday and told him that I would not be able to prepare their taxes this year if she insisted on driving the bus that she tried to throw me under. He is in agreement with me, or so he says. Things are pretty likely to get nasty and unless they are divorced before the end of the year, I am going to be out of it.

[Lion EA]

SHE gave you the deductions. And, now, she's asking you to ignore them. You can NOT.

Watch today's Tax Talk Today (it'll be archived); it was about ethics. When they talked about conflict of interest, they talked a lot about married couples as well as partners/partnerships, etc.

You'll drop these clients when they're divorced, so maybe you should drop them now. Document EVERYTHING. Keep/copy/scan EVERYTHING.

[JohnH]

Marilyn: Sounds like you're headed for a divorce regardless of what they decide to do.

[Cathy]

I HAD to work with what she brought me and she brought all of the deductions in her reports from her computer. She did not bring a mileage log and I did not take mileage. As far as depreciation goes; the rentals are governed by residential rental rules. Business property is already in my depreciation log and they had nothing new to depreciate. I called him yesterday and told him that I would not be able to prepare their taxes this year if she insisted on driving the bus that she tried to throw me under. He is in agreement with me, or so he says. Things are pretty likely to get nasty and unless they are divorced before the end of the year, I am going to be out of it.

Don't have time to read all responses, but the first thing that popped in my mind after reading this couple is heading for a divorce is more income equals more child or spousal support....then property settlement.