Theft by employee

[cpabsd]

During 2008, my client was reviewing his books and discovered that a former employee had taken approximatley $15,000 out of his account. The client is a sole proprietorship and most of the expenses were recorded as Draws. The police report has been filed. Does this amount get claimed by amending the 2007 return or claiming the theft on the 2008 return when it was discovered? Also, is there any break from SE tax as the client is really paying tax on money they never personally benefited from? Thanks for any guidance.

[ILLMAS]

During 2008, my client was reviewing his books and discovered that a former employee had taken approximatley $15,000 out of his account. The client is a sole proprietorship and most of the expenses were recorded as Draws. The police report has been filed. Does this amount get claimed by amending the 2007 return or claiming the theft on the 2008 return when it was discovered? Also, is there any break from SE tax as the client is really paying tax on money they never personally benefited from? Thanks for any guidance.

Your client can sue the former employee for the theft or issue a 1099 for the 15K to reduce his income. I do work a CPA and he has a client that owns various currency exchange so he has a high employee theft, the currency exchange is going through an IRS audit now and the agent is looking very closely at the "Bad Debt", he wants to see insurance claims and police reports. We consulted with a retired IRS agent, he said next time if the employee doesn't repay the stolen money or the insurance claim is denied, to give the employee a 1099 as additional compensation, and don't worry about the employee coming back and saying "I didn't earn that money, oh wait a minute is that the money I stole..."