Discussion:Do I throw my new client under the bus?
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Discussion Forum Index --> Advanced Tax Questions --> Do I throw my new client under the bus?
Discussion Forum Index --> Tax Questions --> Do I throw my new client under the bus?
Yankee Fan (talk|edits) said: | 3 September 2008 |
| A client I last did work for in 1996 came to my office last week with demand notices from 1997 forward to file 1040 returns. He is a self employed contractor who has been in and out of marriages and rehab several times but did do work amounting to 15 to 20K of 1099-misc reported from 1997 to 2005. In the early years (1997 thru 2005) he had a minimal amount of people working for him from time to time but did not issue W-2's or 1099's to any of them. He would make them fill out timesheets (which he still has) and go to bank and pay them in cash. In 2006 and 2007 his rehab has apparently kicked in and now he has approx $180,000 of undocumented pay to employees for each of those years with 1099 income of over 250K each year. I have met with the Revenue Officer who obviously wants the returns filed as soon as possible before he begins attaching liens on what little property client has. I have told client he has significant income tax liabilities (approx $60,000) which he can probably remortgage properties to handle but because of the w-2 issues he stands to perhaps lose the deduction or prob be assessed payroll taxes, penalties and interest. My question: Can/should I do the 1040 showing subcontract work (I believe he did pay the cash) even tho the proper payroll filing did not occur? | |
| 3 September 2008 | |
| Wow, Yankee Fan. What a mess - I assume he has funds to pay you in advance!
I don't think it's a slam dunk for the IRS to classify the workers as employees, rather than subcontractors. Perhaps you should prepare forms 1099-misc now for 2006 and 2007. Of course if he didn't get social security numbers for all of the subcontractors, he could get hit for federal backup withholding anyway. | |
| 3 September 2008 | |
CYA!
If you were his accountant back then, why didn't you do W-2 and 1099s for him? The IRS can say these people were employees and the the taxpayer didn't pay the FICA/ med tax. Where are the tax returns that you did prepare for him? Why didn't he file them? | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| mebbe I didn't make myself clear enough on first post....I did his 1996 return in 1997 and have not seen him again until last week...I do realize the ramifications of employee versus subcontractor and the failure to file either w-2 or 1099-misc forms...but my issue is who will prepare the returns (especially 2006 and 2007) with such a large dollar amount of labor costs with only timesheets for documentation. I do realize that these forms should have been filed but given the timesheets filled out over these periods with names, addresses and some SSAN's is it pushing the envelope too far to file the Sch C showing sub labor to reduce income and FICA tax and deal with the issue of non filed forms if question is raised by IRS at a later date... | |
| September 3, 2008 | |
| You were quite clear for all who read the post. Waiting for someone with audit experience to log in on this. To me, there's not much risk in doing the returns, but I don't know how an agent at this point might consider the subcontract costs. They might just want returns filed and that's that. | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| Revenue agent made it very clear to me that his interest is ONLY getting the returns filed...not to review for audit or examination...if I don't do the returns client certainly doesn't want the IRS to calculate the returns...does anyone think that I might be at risk by not disclosing on return regarding the non filing of w-2 and or 1099-misc...thanks for your input | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| p.s.
I think we all have clients who come to us with some payments that could be sub workers or w-2 employees but forms are not filed properly...If the amounts are fairly small I usually give them the lecture regarding the RULES and make them comply in the future... | |
| 3 September 2008 | |
| If this is indeed a Revenue Officer, I do not think it is likely he will care much about the employee/IC issue. He just wants the returns and probably does not want to run up the tab anymore than it will be anyway. I doubt a referral to Exam will be made either. It is an issue that should be addressed prospectively. | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| thanks irsfixer...it is indeed a Revenue Officer. I notice your profile shows experience with issues like this..would you think that I could perhaps get some relief on penalties due to his frequent trips to rehab clinics over this 8 year period due to diminished capacity? Just a thought | |
| 3 September 2008 | |
| If an IC earns more than $600.00 a 1099 must be filed. Have W-9s sent to them for exact name and ssn. If anyone was a corp, a 1099 is not required.
What proof do you have that these people were indeed IC and not an employee. I'd certainly issue 1099s to them, even if it's late. The IRS can disallow the expense and say it's all your client's income. | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| Thanks Birg...I think I'm up to speed on the rules for I/C versus employee and if I file the forms for 60+ workers at this late date the penalties would be huge..not sure if I wanna open that can right now..my conclusion is that the workers were employees and NOT subcontract workers...probably cheaper to pay the penalties and taxes on payroll issues than lose the tax deduction for labor..my main issue remains...do I do the return? | |
| September 3, 2008 | |
| Listen to IRSfixer, he's been there. Do the returns, don't worry about the subs/employees. | |
| 3 September 2008 | |
| Maybe, but I doubt it. I would have to know a lot more about the underlying personal facts and circumstances to give you an answer. | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| will do...thanks...but would still like input on possible reduction of penalties thru offer in compromise and or diminished capacity due to frequent rehab visits...mebbe I can send him to Irs fixer to fix it if client still has any money left...lol | |
| September 3, 2008 | |
| File first, then negotiate later. And get help on that if you need it. There seem to be folks around here who do a lot of it, and most of us don't. They know what to do and how to do it. | |
| 3 September 2008 | |
| Wait until after all the returns are filed and posted before deciding on a strategy. You could give him a 433-A to begin working on now. | |
| 3 September 2008 | |
| BTW, I would not go back earlier than 2001. Most RO's will not ask for more. | |
Yankee Fan (talk|edits) said: | 3 September 2008 |
| thanks Mike...RO most certainly wants all of em...soooo, I guess he get's em. Your site looks interesting and I will talk to my client about his options after filing all returns..Do you work with the State of Illinois on same subject by chance? | |
| 3 September 2008 | |
| I will work in any state. Some I have a lot of experience with, some not so much, but the procedures are always similar. I would ask the RO why he is asking for more returns than IRS policy suggests. If it is the difference between the guy owing $300,000 versus $500,000 then it makes little difference if he can't afford to pay anything. So why make him pay for the prep. so the IRS can get a bigger A/R that they will never collect? | |
| 4 September 2008 | |
| If RO is asking for all unfiled returns then they need to be filed. If client tells you it was sub contract workers, expense it that way. The IRS frequently goes back 10 years on unfiled returns. If the IRS figures the tax they don't base it on facts or expenses, they base it on income they have records for.
I agree that you should not concern yourself with the OIC, etc issues until the returns are filed and posted by the IRS. If you look at the prior postings on explanations for non-filing you will find that his issue might well qualify for getting the IRS to waive some penalties and interest. taxea | |
| 4 September 2008 | |
| With all due respect, the IRS does not frequently go back 10 years for unfiled returns. I base that on the fact that I have been doing this 25 years and it has never happened one time. | |
Yankee Fan (talk|edits) said: | 5 September 2008 |
| RO has given me IRMF printouts showing 1099-misc income for all years back to and including 1997 and wants the returns filed...not really sure how I can say no to that request...client does in fact have tax liability for those years and would think that the service would have the right to finally receive them...thoughts??? | |
| 5 September 2008 | |
| If he is insistent, you may not have a choice. But I would point out to him the IRS policy and suggest he do a preassessment evaluation of collection potential before requiring all those returns. I would not make such a big issue of it as to sour your relationship with the RO because I doubt it will make a difference in the final analysis. But I would certainly make my case. | |
| 5 September 2008 | |
| As a matter of policy stated in Policy Statement P-5-133, IRS will ordinarily only solicit six years worth of delinquent returns. I would prepare those, quote the policy statement and state that the client was in a drug and alcohol induced coma in the earlier years. If he treated workers as contract labor, put that down and deal with an audit if it happens. There is another policy that IRS won't ordinarily audit an empty pocket so if your guy is now broke, there is no point spitting into the wind. | |
Yankee Fan (talk|edits) said: | 23 September 2008 |
| sorry to bring this back but I have now completed all of the back tax returns and will finish 2007 today. RO came to my office this morning and I discussed possible OIC due to client's past alcohol (rehab) and marital problems over several years. RO indicated that he would be very willing to discuss "heavily discounting" the penalties and if the amounts abated were acceptable client may save significant legal/accounting fees (not mine) to resolve the matter. Does anyone see any downside to this? Thanks for any input. | |
| 23 September 2008 | |
| I agree that IRS does not usually go back 10 years, however, I have had this happen when they are aware that there is income and returns have not been filed. Based on my experience IRS will not, in this type of situation, engage in OIC until all returns are filed. The downside is if the client is not willing to agree to what the RO is requesting, he could be facing criminal charges. taxea | |
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