Keep client? Or Dump Him?

New client seems reasonable enough and provided a decent-looking P&L with no questionable expenses (low travel, meals, auto, etc). I was pleased to have him as a new client.

The foreign account questions come up on my organizer and he leaves the question blank. After my questioning, it turns out that his family may have put some large-ish accounts in his name and/or gave him signature authority over them.

I explain in detail, in writing, what a can of worms this is and that he needs a lawyer ( I insist).

He shops around a bit and then comes back a couple of weeks later and says, "I was mistaken - there are no non-US accounts in my name, please proceed."

My spider sense tells me that he's not being honest - though I'm not totally sure. I told him I will need it in writing and he says OK, but he wont email it to me - he'll write it and hand it to me.

I already know that a common response will be "what else is he willing to lie about" - and I would agree.

Trying to figure out if I should end the relationship. If I do, it leaves him in a bind and breaks our agreement.

his family may have put some large-ish accounts in his name and/or gave him signature authority over them.

comes back a couple of weeks later and says, "I was mistaken - there are no non-US accounts in my name

Sounds like he wasn't sure, looked into the matter, and confirmed that there are none. This would be good enough for me but certainly not for many others. Pick your comfort level.

I'm with Nightsnorkeler. I would take him at his word.

I disagree with the first few responses. If everything is so clear cut and dry, why is this client unwilling to provide that information in a simple email which would provide some semblance of an audit trail (just a few sentences would do)? Once this individual receives the notice with the $10,000 FBAR penalty, how will that play out?

AlexCPA -- If he writes it, then signs & dates it - why wouldn't that actually be BETTER than an email?

ItDepends -- Keep a copy in several places so it doesn't get lost (original & scanned). If you have a notary in your office, you could even have him write/sign/date and then have the notary witness it, if you are really nervous. Or YOU could even sign/date that you witnessed it. If he brings it to you already done, would you recognize his handwriting/signature? Lots of ways to document in your file that this is information given to you directly from him.

Return the Organizer to him and have him complete the question regarding foreign accounts and initial it .Also before starting the return show him the tax return where you have to check the box regarding the foreign accounts .If he balks at this disengage .

Agree with Joan TB's response but if it were me, I'd add a second layer to this.

First off - you should have very clear language in your individual tax engagement letter that you have signed EVERY year. Next is what the AICPA suggests:

"

U.S. filing obligations related to foreign investments
As part of your filing obligations, you may be required to make certain information disclosures related to your foreign investments. You are responsible for informing us of all foreign assets owned directly or indirectly, including but not limited to financial accounts with foreign institutions, other foreign non-account investments, and ownership of any foreign entities, regardless of amount.

Based on the information you provide, you may have additional filing obligations including but not limited to:
• Ownership of or an officer relationship with respect to certain foreign corporations (Form 5471);
• Foreign-owned U.S. corporation or domestic disregarded entity (Form 5472);
• Foreign corporation engaged in a U.S. trade or business (Form 5472);
• U.S. transferor of property to a foreign corporation (Form 926);
• U.S. person with an interest in a foreign trust (Forms 3520 and 3520-A);
• U.S. person with interests in a foreign partnership (Form 8865); or
• U.S. person with interests in a foreign disregarded entity (Form 8858).

If we believe you have additional filing requirements, we will discuss them with you prior to completing your tax return.
In addition, as part of your filing obligations, you are required to report the maximum value of specified foreign financial assets, which include financial accounts with foreign institutions and certain other foreign non-account investment assets that exceed certain thresholds.

Based upon the information you provide, we will use this data to inform you of any additional filing requirements, which may include Form 8938, Statement of Specified Foreign Assets, and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). The FBAR is not a tax return and its preparation is not within the scope of this engagement. If you ask us to prepare the FBAR, we will confirm this representation in a separate engagement letter.

Failure to timely file the required forms may result in substantial civil and/or criminal penalties. By your signature below, you agree to provide us with complete and accurate information regarding any foreign investments that you have a direct or indirect interest in, or over which you have signature authority, during the above referenced tax year.
The foreign reporting requirements are very complex. If you have any questions regarding the application of the reporting requirements for your foreign interests or activities, please ask us. We assume no liability for penalties associated with the failure to file or untimely filing of any of these forms.

Foreign filing obligations
You are responsible for complying with the tax filing requirements of any other country. You acknowledge and agree that we have no responsibility to raise these issues with you and that foreign filing obligations are not within the scope of this engagement."

With your current concerns, I might also include something to the effect in your custom tax cover letter " By your signing this 2019 tax year e-file authorization form, you are confirming that you do not have a 2019 FBAR filing requirement and the questions answered on Schedule B have been answered correctly."

None of the above is legal advise - I am not an attorney.

IMHO, you don't know that he's lying. People makes mistakes. I wouldn't excise him based on a hunch.

One of my clients is an expat couple. They live abroad, and claim to have no foreign accounts. Income comes from US rental real estate. It is eyebrow raising for me, but they're more than aware of the obligation and the risks. And it's in writing as a C.Y.A. for me.

My engagement letters specifically state that clients must inform me of all foreign accounts which they have an interest or signature authority (AICPA templates Michael quoted). Sure, people like to argue nobody reads those, but I don't care. Failing to read a contract before executing it isn't a valid defense for failing to abide by the terms of said contract.

Then, my organizers have two questions dealing with foreign assets. 1040 organizers are now required for each engagement. Coincidentally, one of the major reasons for that decision was that I wanted a source document each year in which the client attests to foreign asset ownership/signature authority.

Explain the obligation in writing. Explain the risks in writing...which have been high in recent years as the IRS has ramped up enforcement activities. It's low hanging fruit for them as the penalties are large for even non-negligent non-compliance. Get them to certify, in writing, they have neither interest, nor signature authority in any foreign accounts/assets, and that they will update you if this changes. File it away as a carryforward file. Re-confirm in writing annually. Sleep easy.

Just my little opinion...next time don't layer on the drama before the client can confirm if he has foreign accounts or not. I explain in detail, in writing, what a can of worms this is and that he needs a lawyer That might incentivize a dishonest person to behave dishonestly. Keep it calm and the information only about what he needs to figure out if he has an interest or signature authority, and then figure out what to do once you have the answer.

Agree with ManVsTax's take on this as well. The tax software I use is Lacerte and it has the two questions ManVsTax mentioned in the tax organizer.

Because I wanted the two questions highlighted due to their importance in my opinion - I have made them bold type and underlined them - see below.

Did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?

Did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust or did you have an interest in any foreign assets or accounts?

While this is not part of this post, I added a question to the tax organizer this year because the question was not there and I felt it needed to be. It is also in bold type and underlined.

Did you receive, sell, send, exhange or otherwise acquire any financial interest in virtual currency?

I start off assuming everyone is lying-its just a matter of degree. I mean, do they really maintain contemporaneous mileage logs? Did they really discuss business at that dinner meeting? Is the nonash value of the junk dropped off at Goodwill fair? That's why my engagement letter is 3 pages long. (Did you really read the engagement letter or even review the return before you signed both?) Pardon my skepicism

If it's in writing, I wouldn't fire the client unless other things seemed off.

I ask the foreign accounts questions to clients, every year trying to get the perfect wording. The number of people who get confused in this area is staggering. Each year about 10% of my clients say "Yes" to the foreign accounts question when their situation is that there's an international index fund in their 401(k).

Solved:

Told him politely that, given the extreme nature of the potential penalties, to put it in writing (was also "planning" to show him the schedule B questions that he would be certifying).

Client fired me.

Client fired me.

Client did you a favor.

"Some of the best statements I ever made were the words I never spoke."

Client wants copy of the tax return I prepared.

He paid for it.

He says his friend is going to help him file.

Should I just watermark it as "incomplete, do not file"?

If he complains, then I'll tell him to finish filling out the organizer?

Or...

Is he trying to burn me into being responsible for penalties if he gets caught? I have nothing in writing and the question on my organizer for foreign accounts was left blank.

Do I make him complete the organizer?

I'd ask my E&O if they have a boilerplate response.

It's obvious the (former) client wants the draft return so that he and his buddy can recreate everything in TurboTax et al.

It's therefore obvious what you should do. (not give it to him if it's not so obvious)

As far as I'm concerned, there is only one deliverable in a compliance engagement, and that's the final, as-filed client copies of the tax returns. As the engagement was terminated by (former) client before you could efile or process paper returns, there are no deliverables of which he may request. But...my engagement letters spell all of this out, more or less, your's may not...

Do I make him complete the organizer?

Why would you do that?

Client wants copy of the tax return I prepared.

He paid for it.

He says his friend is going to help him file.

Should I just watermark it as "incomplete, do not file"?

If he complains, then I'll tell him to finish filling out the organizer?

Or...

Is he trying to burn me into being responsible for penalties if he gets caught? I have nothing in writing and the question on my organizer for foreign accounts was left blank.

Do I make him complete the organizer?

Copy of incomplete return? Nope, don't do it. I did it once, never again.

Client wants copy of the tax return I prepared.

He paid for it.

No, he didn't pay for it. He paid you for the work that you did. He did not pay for the return. The return is a product derived from when you complete all of the work. You did not complete all of the work.

Thanks for the help(!)

The short version of the end result is that I refused to deliver the return unless:

1) It was completed (would require a completed organizer with all of the questions answered)

and

2) The client agreed that I would e-file the tax return and would not use it as a reference for another preparer.

The client said "OK, never mind, I'll have my friend do it".

So the client has disengaged, is not demanding anything, and has paid. I'm hoping that this happy ending proves to be final.

Glad everything turned out fine. I wanted to comment on this:

Trying to figure out if I should end the relationship. If I do, it leaves him in a bind and breaks our agreement.

I dumped a fairly complicated set of trusts with 45 days left to the extended filing deadline. Client was a jerk, became verbally abusive, and would not give me the financial information that I needed because he thought I would charge less if I didn't have the information about the detailed transactions.

After I dumped him, I sent a detailed email to my liability insurance agent. There was a conference call with several players. The attorney said that I had done the right thing - always ditch the trouble-maker. They were not concerned that the deadline was only 45 days away. They decided that there was nothing to report to the insurance company - no potential liability event had happened.

^^ Interesting. Perhaps they don't think that late penalties are recoverable? Or substantial enough to worry about as compared to what "could" result from a bad-acting client?