2nd Opinion Please

[Tax Prep by Deb]

OK, I need some reassuring although I believe 100% that I am right.

I had  a new client (she just came and picked up her stuff)  who has 2 schedule C businesses of which both are showing a loss.  The client presents me with a summary of the information of which first of all I notice is almost a carbon copy of last year (red flag #1).  Told her I would need the receipts for donated goods (exceeded 3500.00).  Looked over the previous years return and noticed the previous guy included in one of the businesses as income the amount that my client borrowed and has since repaid from a family relative, thus boosting the income (which I believe is to manipulate the EIC).

Looked at the year before that and saw on the same schedule C under other income an amount of $21,000 of which he did specify on one of his worksheets as money that the client personally put into the business, again boosting the income and manipulating the EIC.

Correct me if I'm wrong, but loans, or money personally invested in a business is not considered income to the business, correct?  They are stating that they contacted a couple of CPA's and were told that it was income, (I seriously doubt this) and that they contacted IRS and they also stated it had to be included as income. (I seriously doubt this as well because I haven't even been able to contact IRS in behalf of one of my clients).

I honestly feel that because I did the return right by not adding the other things in as income, it brought their AGI down to 5,000 and thus very little EIC compared to the previous guy who's return netted them exactly the peak amount of EIC.

What do you guys and gals feel about this?  Am I wrong?

The one and only audit I was involved with was with one of my business clients and the thing the auditor started with was adding up all of the deposits from every bank account they owned, then subtracted out any that was simply moved from one account to the other, considering any draws from the business account as personal draw and any money redeposited into the business account from the personal account as personal investment.  When all was said and done there was a discrepancy of about 3,000 for which he stated if we could explain it then he would be happy to close the audit and for which we were able to satisfy him.

So I'm sure I'm right, but then again what if I'm wrong?  Any opinions would be greatly appreciated!

[MDEA]

I agree with you 100% It is a return you do not want to do.

[michaelmars]

loans or capital infusions are not income.  I think your assessment seems correct, that they boosted income to get the eic, or to get a loan.  this is not a return I would have done either.

[Gail in Virginia]

I don't think any of us like for someone to go away mad at us and feeling like we don't know how to do taxes.  BUT I don't look good in an orange jumpsuit. 

You have to decide if you want a reputation as someone who can always get the most refund. or as someone who knows what they are doing but will only do it honestly.  I think you made your choice, and it seems to me to be the one that will let you sleep well at night. 

There are firms in my area that I could refer that client to who would probably continue doing things the same way, or even worse.  But I don't want to be one of the firms other people dump their crooks on.

[Catherine]

You were (and are!) 100% correct. 

Loans to a business are balance sheet items, they are NOT income.  Unless in the very rare circumstance the loan is from a non-related party and has been forgiven; then you have income.  And a Cancellation of Debt form to go with it and back it up.

[Tax Prep by Deb]

I agree.  It just really makes me mad when they try to make me think I don't know what I am talking about, when I no for sure that had it been the other way and they owed taxes, that they would have a hissing fit that I included personal money invested in the business as income.  I had a funny feeling about this as soon as she sat down, and today just confirmed my suspicion.  I would have had a very difficult time answering truthfully the questions we have to this year for due diligence and would have even a greater time trying to document the additional questions I asked and the answers I was given.

I didn't bother telling you that the same preparer did another schedule c and included income and donations as income which was suppose to have been done for a non-profit and shouldn't have even been on this guys personal tax return, so I am really glad that they are gone, and now I can move on.!

[FDNY]

That last year's preparer must have a sign on his desk..."If you're willing to risk a little jail time, I could save you a lot of money."

[Ringers]

I agree with you completely.  Loans to the business are not income just as the payback of a loan is not an expense.  The numbers to maximize EIC are just too "convenient" to make the inclusion just an oversight on the former preparer's part.

[JohnH]

You came to the right conclusion.  You don't want to be anywhere near this return.  Even if 2016 is prepared correctly, the prior years are a time bomb waiting to explode.  If it happens, they will try to blame you for preparing the "correct" return and thereby alerting IRS to the prior-year problems.  They will just throw stuff against the wall and see what sticks, plus they will try to throw any and all people associated with any of their returns under the bus. There will probably be no end of aggravation waiting for whomever is holding the bag if/when this blows up. 

(I'm nowhere near being out of figures of speech, but I'll stop here anyhow).

 

[Tax Prep by Deb]

Couldn't agree more, in fact in our initial discussion it was agreed (so I thought) to amend and correct the error's but when they saw the significant difference in refund, well, you all get the picture.  This particular client is the reason we are being slapped with this due diligence paperwork that is doing nothing but slowing us down and putting the fear of god into us that even if we are doing it right IRS will somehow say we are not.

[Yardley CPA]

Deb...you definitely did the right thing.  I wouldn't give it a second thought.  Her intentions were very clear.  Good for you for sticking to professional and ethical morals.  

[Tax Prep by Deb]

I like to sleep at night, and I love what I do!

[Catherine]

Yes, the other piece is most definitely that they would have thrown YOU under the bus - instantly and without a qualm - when (not if) the IRS questioned the prior-years when compared to the new year.  

None of us need that level of headache.

[Richcpaman]

Deb:

Good job.  They can't even lie right... "Called several CPA's and the IRS!"  Yeah, RIGHT.

Tax Pro Today newsletter lists preparer's every week doing exactly what the other preparer did here.

You brought the voice of reason and what is right.  They left,  Good.

And those Schedule C's were garbage anyway.  Always a Loss?  But they have money to "loan" the biz?  Right.

Sheesh.

Rich 

[JohnH]

The past few posts remind me of something else.  The potential client is clearly lying.  If a couple of CPA's and the IRS said it's OK, why didn't one of those CPA's take on the project?  

I guess they want you to believe the conversation went something like this - "Yes, what you're doing is perfectly fine. I see absolutely no problem with it.   And the IRS agrees with me.  But I don't want to do the work for you. Glad to give you this free advice. Have a nice day.  "  

[Lion EA]

Deb is right.  And, so are the rest of us here.  We good guys/gals will stick together.  Don't try to bamboozle us, or we might need a Donate button to buy Rita more acreage.

[Catherine]

11 hours ago, Lion EA said:

a Donate button to buy Rita more acreage.

I just *love* this idea!!

Anyone know how to start up a Go Fund Me?  Rita, is there additional acreage available?

[Lion EA]

And, she may need a new backhoe before this season ends if we all send our PITAs to her....