Starting to doubt a client

[Kea]

A friend of mine (from exercise class) started coming to me for tax prep about 7 or 8 years ago (I had already known her a couple of years by then). I will call her "G Grandma." She's a very nice lady with a good heart. A couple of years later, I started preparing her daughter's return. I will call her "Grandma." She seems nice, too, but I don't know her as well as her mother. Grandma lives with G Grandma in G grandma's house. 3 of G Grandma's great grandkids live with them (2 twin girls & a boy cousin). Grandma has legal custody of the twins. The 3rd was listed on her 2008 as foster child. (I need to re-verify the relationship - I think he was a child of an ex-in-law.) All 3 kids lived in the house all year.

They started off the appointment saying that the twins were Grandma's dependents and the boy was G Grandma's. I asked about who was providing their support and they said that was how they were supporting them. Since they are descendants' of either of them & didn't provide 1/2 their own support, it shouldn't matter.

G Grandma is retired. Grandma had been working, but for part of 2009 & all of 2010 has been going to school full time. In 2009, Grandma claimed all 3 kids. In 2010, Grandma had W2 for approx $1000. Did not work much while in school. We went over the support test worksheet and it appeared Grandma may have provided > 1/2 her own support. (All figures were estimates, because they were in my office at the time and were guessing all costs.) As we kept discussing it, Grandma said that really didn't seem right. After all, it's G Grandma's house, and she really does provide most of the support. So I filed Grandma without claiming herself. After printing, Grandma asked if small amounts of income from house cleaning had to be reported. It was small and she really didn't have any records. I told her basically all income, except gifts, were taxable. Not keeping track was not an excuse. She said the amount was probably only around $50. Since everything was pretty much done and the income wasn't going to change anything, I didn't reprint the return. (Yes, I know I was wrong.) Efiled & accepted. I filed G Grandma claiming all 3 kids and Grandma. Rejected. Twins were claimed by someone else.

I tell G Grandma that return was rejected and gave her the options (paper or e-file without twins). She's coming back tomorrow. Grandma then tells me that she was mistaken. Her cleaning income was high enough to claim herself. She got a notarized form showing how much she was paid for cleaning. She wants me to amend hers to claim herself and the twins.

I've never had any reason to not trust either of them before. Maybe it's just from reading too many stories about EIC fraud that is now making me suspicious.

I'm not sure how to handle tomorrow's appointment. I still don't have any issue with G Grandma's return. No EIC questions since no earned income.

Just because using a cash business is a way to fraud EIC doesn't mean that she really didn't earn the money. She's already admitted that she didn't track the income. I have no way of knowing how much she made. Having the person supply a notarized page of what she paid sounds interesting. (I have not yet seen the document so I may have mis-understood what she said / meant.) How can I determine if amount is "real" or scam?

Also, I still see G grandma regularly at class & I don't want to create an uncomfortable situation there, either. Therefore firing Grandma doesn't really seem like a good option. I really just want to prepare both returns accurately & legally.

I appreciate any advice. Thanks for letting me vent.

[Pacun]

Don't fire her. Who claimed the twins? Is there a third person involved, I mean, forth?

The notarized letter is a good record to keep and redo the interview asking her to include ALL her global income. You should amend this year and tell her that next year you need all her income from the very beginning. Ask her to keep records of her income from this very moment. Find out what she is doing now, how much money her business has generated for January, February and March. Keep that information handy for next year IF she comes back.

If someone comes and tells me, I clean houses and I make 1,200 a month. I ask, how did you come up with that amount? If they have a notarized letter stating that, you have to believe them. Nothing wrong with that and it happens all the time. I do feel lucky when they have a simple letter from the house owner stating that they paid. You start your interview document by stating: How many house do clean in a week, how much do they pay you, do they pay you cash or with checks, do you have any letters or written contracts, do you deposit all the money? Can you get me your bank statements, etc.

Now, I had a potential client this year. I asked my partner to request, how much money he made in 2010 and the copy of his tax return for the past year. We know the store he works for is not his, so he must be an employee. His 2009, showed that he made 17K and he was using a portion of his house to keep inventory. After deductions, his income was about 12K with 2 children. His income for 2010, he said it was 12,500. I told my partner to tell him that I didn't feel confortable doing his taxes and to go somewhere else. My partner asked him why he wasn't an employee, and he didn't provide a good answer. Why will I waste time on a new client if you don't trust them to begin with? Even if they are right, my standards are very high for new clients. If you feel confortable with the amount of clients you have, you should raise your standards for new clients and your prices too!

[jainen]

>>I really just want to prepare both returns<<

Why do you want that? You have an obvious conflict of interest since they both want to take the same exemptions. That is exasperated by the inability (putting it nicely) to provide accurate income information. I suggest you decline to amend the return, with the friendly excuse that it would be unethical for you to take exemptions away from your client G. In fact, confidentiality prevents you from even discussing it, so there will be no discussion.

[Pacun]

>>I really just want to prepare both returns<<

Why do you want that? You have an obvious conflict of interest since they both want to take the same exemptions. That is exasperated by the inability (putting it nicely) to provide accurate income information. I suggest you decline to amend the return, with the friendly excuse that it would be unethical for you to take exemptions away from your client G. In fact, confidentiality prevents you from even discussing it, so there will be no discussion.

In situations like this, I really like to have both incomes and both clients tell their story in order to correctly calculate dependency.

Last year I had a similar situation. Not married client (but both husband and wife paid expenses) came to me and we prepared the worksheet and based on the information she provided, she could claim her daughter and qualify for HH. She made about 17K. I asked her "how much does your boyfriend make"? She said "not a lot". I asked, do you think you made more than him? She said "yes, they pay me $8 per hour and he gets paid $7.50 per hour". I asked if it was possible to see his return before I sent mine... and both came next day with the return. He already claimed their daughter and filed as HH AND he made $25K. How would my return had looked like if I got only one side of the story?

[rfassett]

Cut through the proverbial crap and get back to the facts. Do the support calculations again. And do what's right. Even if Grandma does come up with additional income sufficient to claim the children, my guess is if she did not keep track of income she probably did not keep track of expenses either. So all of her income will be subject to SE tax and that will eat up a good chunck of her EIC. Anyway, I would start the next appointment as if it was new. Get ALL the facts and then determine the proper required filings and proceed from there. Good Luck!

[Kea]

Thanks for the advice. I will keep a copy of the notarized income and make sure I explain the importance of keeping good income records. I'll also do the digging to make sure the amount on the letter seems reasonable. (charge per cleaning * number of trips).

The conflicts aren't between G Grandma & Grandma. They come to the appointments together so everything is discussed in the open. They aren't trying to claim the same exemptions. (Yes, I have their permission to discuss with each other.)

The twins were most likely claimed by their mom. She lost custody of them several years ago due to legal issues. She has claimed the twins before causing Grandma's return to be rejected (2007 & 2008). Grandma has filed paper returns and has been successful in claiming the kids after sending all necessary documents to IRS.

All 3 kids meet the tests for qualifying children of either client. So I don't have an issue there. If grandma's income is more than $3650, G grandma can't claim her regardless of support.

The only reason I got concerned was the changing amounts on house cleaning income. And I know most people think it doesn't count and / or they didn't really track it. All under the mistaken belief it doesn't matter. That view is wrong, but not uncommon, and not intentionally fraud. (Negligence = yes)

It's just that the complex family situation and cash income sounded like what can go on in EIC fraud cases. But that doesn't mean this is. (But how to "prove" cash income.)

Thanks to all.

[jainen]

>>They come to the appointments together so everything is discussed in the open.<<

In my opinion, that is not good enough. Even though you have permission to disclose, you still don't have the right to suggest, for example, that the twins go on one return--that would damage your other client's interest by increasing her tax. Furthermore, "in the open" requires a leap of faith that in my experience is hard to make concerning family relationships.

So I repeat my advice. I would not act on the new story without documentation. You are not an auditor, but it is still required under Circular 230 when information is inconsistent. Let her go elsewhere to amend her return, and paper file the rejected one which is apparently what she expected all along.

[kcjenkins]

I do not see a problem when they come in together, and they both tell the same story. You are not 'giving' one of them the deduction to the disadvantage of the other, you are simply putting it where it should go, based on the total picture. I usually agree with Jainen, but not on this one. And a notorized letter from the person she cleans for will be fine for documenting the income. At least as good as a 1099. I see no reason not to do the amendment.

[Kea]

Thanks so much. I've never had reason to not trust these clients before. Just reading too many horror stories about EIC fraud put this doubt in my head!

They'll be here any minute now. I feel more confident!