jainen

>>This subpoena is not from a judge<< Well, whatever the format, it carries the power of the bench. You must comply without a signed release from your client, unless the opposing attorney challenges it. (Or YOU can challenge it, but that is probably too complicated and expensive unless you are worried about some liability exposure for the work you have performed.)

>>someone will have to reimburse me for all of the copies<< You have the right to request a reasonable copy fee, perhaps 25 or 40 cents per page. If the records are not readily available to you then you can ask for reasonable research fees as well. I would start by calling your former clients (I assume they are still your friends). Ask them if they object to you sending the documents. They certainly might, especially if the litigants are simply fishing for new material. But don't you fight it--either comply with the court order or let the attorneys argue about it. On the other hand, don't submit anything not specifically ordered. For example, if they are requesting tax returns that would not include depreciation schedules or other workpapers not actually filed. The fact that you were not paid is probably irrelevant, unfortunately, but if a return was never picked up you wouldn't have to send it now. Furthermore, you could mark them all "draft" since you do not have any direct knowledge of what was actually filed. If the subpoena gets broadened to include work papers, follow your insurance company's advice. If the subpoena is unclear to you, send a note to the judge explaining what you understand.

In TC Memo 2008-209, the taxpayer only gave her preparer a hand-written memo of employee expenses three years in a row. When the IRS asked for substantiation, she explained that she had shredded all the receipts after entering them in Quicken, but -- darn! -- her computer got stolen. She also said she couldn't get canceled checks because the bank would charge her $2. The court was not sympathetic, even though the taxpayer insisted that she had done it this way for many years "and had not had a problem with her tax reporting before." (I think the judge was prejudiced because he said that the expenses were "so large as to be improbable" in relation to her income, which sounds very subjective to me.)

>>admit to sharing the housework<< Alas, it is the price one pays for the company of a liberated woman (which is all one can find here in Santa Cruz). At least it's better than getting a real job MYSELF! And anyway, there are certain places in the house I would just as soon my better half wasn't snooping around, if you know what I mean.

>>Wife needs to install CleanHouse3.1<< I can't recommend this program. It requires a fortune in add-on products and it doesn't have an ESC function so it will lock up your whole system in an endless loop. It will especially cause conflicts with career development applications and your favorite role-playing games like DOGZ and all the kid stuff. Some people have short term success with undocumented Alienware, but the best solutions are simple shareware.

>>the client is an ex CFO & CEO of a bank<< Not all that impressive in these days--we are seeing that the banking industry has been dominated by soft if not actually slushy records, and even less attention to risk factors. My principal recommendation is that he fire his attorney and find someone else, one who is more in tune with your client's attitudes about business management. Why should he pay for advice he won't follow anyway?

>>my fickle client would now rather bypass the S corp<< That's fine with me from a tax perspective, but I doubt his attorney was thinking about taxation when he "suggested" it.

>>if I rolled over all his gains through a 1031 exchange<< It is not up to you. He has already done whatever he has done. If it met the requirements, 1031 treatment is mandatory. He can't elect out of it like an installment sale.

>>separate the asset from the management<< We always caution landlords not to provide personal services such as laundry machines or child care because it may turn the entire activity into SE income. It is less certain in the case of janitorial and repairs, but where that is a large factor (such as apartment buildings) it is normal to engage a separate property management company. I wouldn't recommend that management be a related party, but it should work if the entities are kept totally separate. The risk is that LLC's tend to get sloppy about acting as a separate entity. In my opinion, the issue of SE tax is dwarfed by the question of liability if someone gets injured and decides to challenge your corporate shield. Hire a real bookkeeper to be rigorous about corporate accounting, hold formal stockholder meetings, and follow your state's rules for a corporation exactly. Bill each LLC for specific services provided under enforceable contracts, and pay the bills from separate bank accounts. Report rental income and expense on separate 1065s, not on the corporation's 1120-S. And don't put "Double Dudes Investment, LLC" on the side of the utility truck!

>>A QI is only required if is a deferred exchange.<< For many practical reasons a qualified intermediary is generally preferred. But nothing in the tax code REQUIRES it. Deferred exchanges were successfully done for decades before such a safe harbor was even mentioned in the tax code. It is still only one of several safe harbors, and traditional ways of structuring a multi-leg exchange continue to be used (especially with commercial properties, unsaleable lots, and other difficult situations).

>>In year 2 when property B was sold<< If Property B was sold such a short time after acquisition, it may not be eligible for 1031 treatment in Year 1 because it was not "held" as rental or investment property. It doesn't matter whether he used an intermediary or otherwise made it look like an exchange. He can't defer gains when he is flipping properties. Form 8824 is the main form for reporting Section 1031, but Form 4797 or others may also be required depending on how the transaction was structured. It's not an easy form if you have never done it, and even after you figure it out it is hard to code into software. You should do some research or get some help with it.

>>the only worksheet I have is in the 2007 publication<< Do you mean Table 1-2 in Pub 544, Worksheet for Foreclosures and Repossessions? That should be the same for 2002. But you'll have to figure out exactly what the 1099-A and 1099-C are saying. Although it would seem the value of the property covered the amount owing, the lender was not supposed to count sales proceeds in the canceled debt. You can't make assumptions about a non-filer with a large tax bill already in collections. This engagement will likely involve more work than simply filing a tax return, so be sure to price it accordingly.

>>the judiciary bodies were supposed to be the most helpless and harmless members of the government<< A fine case of buyer's remorse. It's not true, of course. An independent judiciary was one of the most important elements of the new form of government. Far from "helpless," the courts were designed to be an equal but separate branch of government. Neither "individual suitors" nor "the public at large" could remove a judge just because political opinions changed.

>>preparation of a tax return includes the inputting of tax data into a computer<< Most data entry clerks do NOT have to register, because they are supervised by an attorney, CPA, or EA who will sign the returns. The only employees who must take the classes are those who do not have an attorney, CPA, or EA signing, such as employees of unlicensed preparers (i.e., registered with CTEC). But why would you not want your employees to know what they are doing? Sandy, it was money well-spent.

>>every board I go on where he responds<< I post on three tax boards. One is a public forum where I give general answers citing IRS Pubs and instructions. One is a tax reference board, where I give researched citations of regs and case law. And one is this ATX Community where I discuss professional issues such as client relations, citing various sources and labeling my posts as opinion. Catherine, I apologize for the pronoun "you" when I meant an impersonal "someone." Circular 230 says whatever it says; anybody can read it and decide if I quoted accurately. The same document (closely based on the Internal Revenue Code) establishes the authority for penalties because of the possibility that a practitioner would violate the sections I quoted. The authority specifically identifies those sections by number, which is how I got the opinion ("I suppose") that one lead to the other. I try to be clear in explaining how I reach my opinions as well as in the opinions themselves. Others may express other opinions, with or without explanation.

>>a very easy solution and easy answer<< I daresay it is somewhat easier to make an unfounded guess about someone's credentials, as you have done, than to quote legal authority for a tax position, as I have done. >>WE CAN'T CONTROL OUR CLIENTS' actions<< Yeah, man, I heard you. Did you hear ME when I said this is NOT about the client's actions? It's about how the PREPARER fills out the tax return, which hopefully he or she does have a little control over. Sure the IRS is shifting more responsibility to professionals--isn't that a GOOD thing? Aren't we glad that they are no longer sending letters about how they lost a return or typed it wrong (which clients used to blame us for anyway)? Aren't we proud that our industry has ethical standards we can point to in serving our clients? Well, at least I am.

>>Our job is to tell our clients what the rules are, and to prepare an accurate return based on what they have chosen to do<< In my opinion, our job is to comply with the law which clearly imposes a duty of "due diligence" and avoiding a return "that demonstrates an intentional disregard of a rule or regulation" unless it also contains a disclosure of "a good faith challenge." (Quotes from Circular 230). You may hold a different opinion, which I suppose is why Congress had to establish preparer penalties in the first place. I agree we can't force the client to change practices, and have stated that agreement at least twice already in this thread. The company can do whatever it wants with its money. The issue is solely how to fill out the tax return, not how to run the business. If they come to me for tax preparation, I must use my best professional judgment in reporting the payments the way that the tax code defines them. There may be some room for the client's preference for a conservative or aggressive stance, but that is limited and certainly doesn't extend so far as reporting distributions without ANY salary. If a client does not care for my professional judgment, why in the world would he ask me to do the return?

>>an abuse of power<< IRS doesn't actually have that kind of power and efficiency. They can't say what's reasonable compensation any better than we can. In spite of their new bluster they must continue to accept anything that's more than a token amount, especially if the business profits come from sales or employees other than the owner's personal efforts. So can we, with fairly routine inquiry along the lines I said in my first post. ------ >>preparing a return that states the truth, that they did not pay themselves a salary<< The only truth is that the corporation transferred money to the owner. The preparer must determine how to treat that payment for tax purposes, and that may not necessarily be the same way it is treated on the company's books or for other purposes. ------ >>writing to their representatives<< As for contacting your Congressman, you'll need something more compelling than, "It's not FAIR to hold us responsible for how we report expenses on the returns we sign."

>>it is not reasonable to require them to do something that they are not in a legal position to do<< While I often take a contrary position on this forum, in this thread I actually do not understand your argument. What are we not in a legal position to do? Determine whether a wage is reasonable? Nobody is asking for that. Correctly categorize an expense? We do that all the time; it is the essence of our job description. Keep in mind that although we can generally rely on the client's unverified statements, we must consider the implications of everything we do know. If an S-corp has distributions with nothing designated as wages for an officer (i.e., employee), we must explore the possibility that the distributions are properly treated as salary. If the client can't satisfy us on that point, then let the return sit on the back shelf until the extension runs out.

>>People who are on SS are another story entirely<< There is only one story, and I don't find it to be particularly full of "qualifiers and disqualifiers." Since your tax liability was eliminated by deductions and exemptions, a minimum rebate amount was based on qualifying income which could be wages or SE as well as Social Security and VA. Assuming earnings were at least $3000, your joint return would have generated the same rebate amount even without Social Security.

>>Bring an open mind, wallet, and a good sense of humor! << First of all, I'm just about the most opinionated curmudgeon on this board. Secondly, Chase Bank has pretty much eliminated both the need and the opportunity for me to carry a wallet. Finally, the weather forecast for Elk Grove is mid-nineties and less-than-clear air, which this coastal cruzer doesn't find the least bit humorous.

>>Do you think this is a good idea?<< I think you have several good ideas. An EIN is easy to get and use. A year-end summary is likewise easy and appropriate. Sending it with the W-9 will emphasize that you expect things to be reported accurately. Plus you won't have to answer all those phone calls from parents asking for your info!

>>they cannot penalize me for preparing the return with true and accurate figures<< When people learn I prepare taxes, they say, "Oh, you must be good with numbers." I say, no, the numbers are the smallest part of my job because the computer basically handles that. The substance of my work is understanding what number goes where. Compare this to a client telling me that building model airplanes is not a hobby--I have to tell him that how the tax code characterizes the "true and accurate figures" may be very different from what anyone thinks the law ought to be. In the same way, the corporation is free to do whatever it wants with its money. But you still have to get the tax return right, which often means a different treatment for any given item of income or expense. In fact, in MOST cases corporate accounting, which typically uses Generally Accepted Accounting Principles (GAAP) or Quickbooks, is different from tax accounting, which doesn't use either. Often state law will require a THIRD set of books (for example, corporations are not allowed to use MACRS depreciation on a California return). So we add another sentence or two to our engagement letter and the interview takes a few minutes longer. Our fee goes up but we give real value to the client because we know how to handle what is important to the IRS. You can't force your client to issue a W-2, but don't you think they are counting on you to warn them about such serious tax consequences? If the facts and circumstances (as stated by your client) indicate that the distributions function as wages, don't you deserve a penalty if you fail to report them as such?

>>I was doing something wrong ethically by discussing her situation<< Although your intentions were good, you certainly violated your client's right to confidential treatment. You must get your client's permission to work with the family member. It doesn't require anything more than a telephone call (and a note thereof in your file). If you don't take that easy step, some day the OTHER daughter is going to cause you a lot of trouble.

>>I have not been able to find anything stating that it does not qualify as 'qualifying income' if it is not subject to SE tax for the above reason.<< Although it takes a few steps, it is not really difficult if you look at the law itself. Start with the Heroes Earnings Assistance and Relief Tax Act of 2008 which establishes the stimulus rebate. It says "earned income" is defined in Section 32 (c )(2) of the tax code, which says it means "net earnings from self employment" as defined in Section 1402, which says earnings from a "trade or business." But Section 1402(c )(6) excludes from the term “trade or business” any work performed while an exemption under Section 1402(g) is in effect. That is the exemption your Amish clients have obtained. In other words, "net earnings from self employment" means EXACTLY the same thing for the stimulus rebate as it means for self employment tax. If it isn't on Line 3 of Schedule SE, it isn't qualifying income.