possible disengagement

I have a new client, a construction contractor. He had a transaction where a friend made a 3-month loan with no documentation such as a promissory note to my client, his check the contractor lender said in the memo line "shop", the money was paid back in 3 months with no interest, and the transaction was 135k. I questioned this notation, the spouse said she made a mistake, it was a loan. My client received an incoming wire from a Title Company for 118k, which comes into the corporation for about two weeks and then goes out of the corporation to buy a piece of property in Texas in this person's name, my client says the money is a gift from his father. So 135k comes in and it comes out, 118k comes in and it comes out. I am trying to get a handle on what is going on here; does not make any sense, do I have a right to know? I have asked for canceled checks and images, and I have asked for the settlement statement involved in the wire transfer; my client acts as though I have no right or business looking at the supporting documents for the incoming wire deposit to his account for 118k.

Any thoughts on what is happening here? Do I have an obligation as the tax preparer to review documentation in this case?

He sold his primary home, he did most of the work himself, and he wants to add the value of his work to the cost basis of the home; I told him this cannot be done, and only his actual costs will attribute to the basis of the property sold. I have asked for a review of his construction receipts, but he is not complying with that request.

I have asked for the personal bank statements, they the husband and wife say they will not provide the statements and that I should rely on their representations that there is no commingling of corporate revenues to their personal account.

I have a signed engagement letter. They are husband and wife and together they are the sole shareholders in their S corporation Construction business. I am interested in your thoughts.

Your engagement letter should contain a statement that the client agrees to cooperate with your requests for information and documents. Since the client is apparently not cooperating with you regarding your requests, in my opinion, you should either disengage or warn the client that failure to provide the information and documents will result in your termination of the engagement.

I have asked for canceled checks and images, and I have asked for the settlement statement involved in the wire transfer; my client acts as though I have no right or business looking at the supporting documents for the incoming wire deposit to his account for 118k.

You as preparer should be reasonably comfortable when you sign the return that the representations on the return are accurate. Everyone has a different threshold for what makes them comfortable. If you're not able to get comfortable because the client is actively hindering your attempts to substantiate positions on the tax returns, it would seem you and the client should part ways.

This level of unresponsiveness, requests for deductions that are not deductible, and weird transactions back and forth will not get better. I suggest getting out and away early before you sink more time and energy.

Perhaps send one simple and final request for needed items with a 1 week deadline, explaining that you need to make progress on the tax return or you will not be able to help them.

When the clients provide half-assed non-answers on the evening of the deadline you give them, respond with a disengagement.

In writing, I would not explain anything. Just tell them that, due to your firm's goal and objectives, that you will not be able to provide future services to them and that they should reach out to another professional right away to facilitate the filing of their tax returns by the applicable deadlines, etc.

Adios to them. It's not easy but it sounds to me like it is necessary.

Given that you have not already fired the clients, I'm thinking you want to keep them. So here's how I would justify it if I were in your shoes:

I would not be leery about the $135k loan.

As to the $118k, the deposit into the corporation was a mistake which was quickly corrected. And they don't have a right to see their father's documents, so I'd have no problem with their not complying with your request to see those documents. While it is unusual for a gift to flow through a title company, if your clients give you something to rely on other than their oral statement that is was a gift (e.g., an email), that would be good enough for me.

As to documentation for the improvements, I don't see that you have any contrary evidence, so you could use the clients' estimate if you consider it reasonable. But first I'd send them an email explaining that as the preparer you have a due diligence duty. Given that they operate a construction company, I'd tell them the issue on audit would probably be whether their improvement costs show up on the corporate books, so you need to know via an email whether that was the case before you prepare the corporate return. Even if I wanted desperately to keep the clients, I'd draw the line on that one and fire them if they did not comply with your request.

I would be OK with their not giving you their personal bank statements.

new developments:

my client refuses to provide the cost basis related to his primary home sold. Further, he did provide a spreadsheet that looks to be all estimates that reflect the cost of construction but does not name a contractor and the costs including land exceed all funding available by 300k. I disengaged from the personal return, however, they want me to continue with the s corporation return, as they are sole shareholders. I strongly believe that the corporation was the general contractor (he the husband is a contractor) ran the costs through the books and deducted them, at least in part. I have asked about this, and their response is "absolutely not", it just does not add up and there are no other reasonable explanations and they will not discuss where the money came from to do the job. The father apparently gifted a property to them, but they did not tell me about it, I discovered it and those funds as a result of a sale of the gifted property transferred to the corporation and then immediately transferred out to purchase some more investment property in the state of Texas. They have had many unexplained transactions and they won't cooperate. They have paid me for my work to date and they hold that over me to complete the S corporation return. I have thoroughly reviewed 2022, but for the transferred money in from the gift property sale for the likelihood that the corporation was used to deduct costs related to a primary home sold, and but for some other, but typical issues in small business tax returns, the business looks okay and I could file. The issue is ETHICAL in nature. I know and believe strongly and evidence is not provided to the contrary and the client is not cooperative that the corporation was used in the past 5 years to build their home. I believe that they are involved in suspicious activities involving the father. The father essentially bought the house and immediately gifted the house, the house was then immediately sold, and the money was transferred into the corporation and then transferred out to purchase property in another state. Over the last 2 years 4 properties are acquired, I don't know exactly the details but I wonder where the money came from to do it. I am concerned about preparing the corporate return without collaboration with the new CPA who will prepare their personal return. I want to make certain that all issues are disclosed and that my preparation of the corporate return cannot be used against me in some negative legalistic way and that would include essentially covering up for prior bad acts related to the basis of the home sold and we are talking about 1m.

If it were my client, due to already being paid, I would still try to straighten things out, file, and then disengage afterward.

Step 1: Find and stick to your very specific boundaries with what you are not comfortable with.

Step 2: Make a big project a bunch of small, easy projects, and try to clarify one of these boundary items at a time. Tell the client one thing that is clearly needed, and explain that you will not be able to proceed without it. Give the client a 2 week deadline to provide it.

Step 3: If you are satisfied with what he gave you, go back to step 2 move on to the next boundary item.

If the client does not provide what you need, however, explain and show the specific tax code that requires the item(s) and tell him that you can't move forward with the tax return because you are willing or able to move forward contrary to the tax code.

The tax code is the "bad cop". You have to follow it. And let it be known that you will not budge form it.

"Dear client, I will not be able proceed in a manner that does not provide an accurate and compliant income tax filing according to section 12B 135 (1)a(a)~137bbT (just an example). If you cannot provide this in a timely manner it might make sense for you to seek out another way to have your taxes prepared by the appropriate deadlines, because I am not able to continue forward with what you have provided."

You might be in a position of conflict to where he wants money back, etc, but oh well, that's life. Negotiate accordingly. To me, I usually just refund everything because I don't want him to "own" me at all! It's VERY MUCH worth the price to me as my uncollectable revenue/refunds is about 0.2% and I chock it up to the cost of doing business.

Try not to take the stress of the conflict home with you.