Client looking to "game" SS credits

One one hand, this client has been a top dollar, easy to work with, long time customer, and just a nice guy and so I wish to avoid disengagement for the coming year if possible.

On the other hand, the client in the past has once suggested manipulating the factual reporting of his and his wife's self employment income "just right" so he could get a loan for a real estate deal, which I was not comfortable with and I would not allow.

Now the client, looking at her history on the SS website, emails me asking why she didn't get full credits for 2021, asking me if the department is correct, and:



"If they are then I'd like you to explain why, with a view to insuring that her reported income in 2022 doesn't fall below the $6,040 threshold for receiving the 4 point maximum."



I'm looking for a firm but polite and professional (non-snarky/non-smart-alec) reply - please tell me what you think of what I wrote.

EDITED: REV 3


Dear client,

The self-employment tax forms on your 2021 tax returns reflect SPOUSE'S Schedule C income, but then the forms apply a formula reducing those amounts to 92.35% of the amount according to the algorithms of the form. This is because SPOUSE can deduct half of the tax as an adjustment elsewhere on the tax return.

Since I only prepare taxes for filing with the IRS, providing advice on how this might impact social security benefits or the way in which they interpret income for calculating benefits is beyond the scope of tax preparation, but I have a feeling that this is what they might have done to arrive at that number.

I understand that your goal is to ensure certain social security credits for SPOUSE. This goal should be obtained only by actually earning legitimate wages or income from self employment.

I will not provide advice, prepare tax returns, or make suggestions that include the alteration of income, expenses, or other facts in order to meet a goal other than an accurate filing according to the tax code. This could lead to additional taxes, penalties and/or enforcement actions against all of us (and possibly other unintended negative consequences).

If you wish to proceed with me as your tax preparer for your 2022 taxes, please be sure to provide financial reports solely based on the actual facts of her activity to include all income and expenses (and not altered to meet other goals) so we can correctly report it to the IRS.

ItDepends

First paragraph: Do you have access to The Tax Book Web Library? There is a volume there that tells you all you need to know about social security eligibility. That will allow you to write with more authority, rather than linking to another accounting firm, to whom he may take his business in future.

Second paragraph: Was there any s179 or bonus taken? If this was discussed and client decided they wanted full income tax benefits, I'd be inclined to point this out and observe that, for the future, elections are available to arrive at a more desirous result.

If you are able to to have that discussion, I imagine you'd want to soften the third and fourth paragraphs. You might want to soften them anyway, but it is time for lunch here on the east coast. My wife's home-made pasta is calling, like a siren, from the kitchen.

Home-made pasta?! Epic!

I can fix p1 to briefly explain the .9235, that's easy. I agree.

But is it wrong in some way that I do not wish to provide advice on how to maximize her social security credits? I feel like it is beyond "scope" and that it undermines accurate reporting - especially with this client.

"I prepare tax returns for filing with the IRS", and all that.

I'm not being paid for that nor do I wish to assume liability for any lack of benefits as a result of my advice.

Well, if your engagement letter states you are engaged solely for tax preparation, he has no leg to stand on. He might not be happy, but it is what it is. As I recall, Grant Thornton (are they still called that) got sued for not providing advice that client wished they had. I believe Grant Thornton won.

Thoughts on second paragraph: change "experience" to "engagement," if that is the truth. Following on from that, do you want to keep the client? If you do, a spiel about planning might be worthwhile, eg, 179 or bonus. You're right, though. You cannot produce a desired profit out of thin air.

If spouse is making a small profit, it might mean she does not devote much time to it. So perhaps she can obtain employment to get SS credits. If she is devoting a lot of time to it, can you initiate a discussion about the value of working for so little? I daresay you'd need another engagement letter for that. You deserve to be paid for your time.

You may also be able to use the Non-Farm optional methed to calculate SE tax if she meets requirements to do so. This can provide minimum qualification for SS coverage even if net income is less than $6,040. If she qualifies, maybe you and your client can both meet stated goals. See Part II of Schedule SE, Form 1040