I'm arguing with a client over "overhead expenses".

A client gives me a P&L on a spreadsheet with with very few listed categories and a large number in "visa overhead expenses".

I have been trying to convey to the client that we cannot lump together several expense categories into "overhead expenses" and list is as one large expense on his Schedule C.

I also "feel" like these expenses don't pass the sniff test and require more clarification (travel, meals, utilities from home, etc).

So I'm insisting that he breaks down the "overhead expense" into generally accepted categories, and I've spent the time writing up a few examples and helpful explanations of what is needed.

The client is being difficult and of course I know how to handle that, but he's an old friend and I don't mind spending extra time and energy guiding him - so at this point I don't wish to disengage.

Though if I'm forced to, I certainly will, and that seems to be the way our email conversations are heading.

But before I do, do any of you think I'm being unreasonable? Ethically and legally speaking, I'm correct in sticking to my guns here, no?

Stick to your guns. Some people seem to think they can lump everything together. I had one guy who thought "American Express" was en expense category. I made him take his stuff home and redo it, which he did with significantly better results. Another guy had recorded the payments to certain people as a negative in the revenue account. I found it because of the 1099-K reports. He had even sent these folks 1099-Misc forms. Both of these were hospitality/entertainment types.

But before I do, do any of you think I'm being unreasonable?

Yes. You should go with his method, which, if we drill down on it, means we just report 1 number on Schedule C. Have him add up all income, then subtract off all expenses, and just report 1 number. If you think about it, that really is a logical extension of his theory. If he says, “That’s crazy! I’m only doing this aggregation stuff for certain overhead expenses,” then you can tell him his theory is inconsistent.

Just point him to Rev Proc 2019-9, or the annual equivalent.

It’s funny. We had a guy come to us one time. He bought and sold houses, re-hab’d some, rented some, had mortgages, investors, etc. Tons of properties. He brought us a single sheet of paper with his numbers on it, no closing statements, no 1098’s, no nothing. We told him his one-pager wouldn’t work. He wanted to argue with us. We didn’t want to waste any more time with this clown, so we showed him the door.

It might depend on your definition of a large amount. It always interested me that any expense total of less than $5,000 could be on a Schedule C-EZ.

But then again I have been told by IRS that they seldom question any of the expense amounts that are on the pre-printed lines of the C and that the biggest Schedule C audit flag by far is making any entry at all in Part V. They believe that all legitimate expenses fall within the definitions of lines 8 through 26.

How large is large in this case?

Have him add up all income, then subtract off all expenses, and just report 1 number.

Probably just best to report one line on Sch C page 2, other expenses: "Net Expense/(Income)".

Seriously though. If this guy is an "old friend", you have a little bit of play here you don't have with the average client. And...you probably aren't billing him as much as you should be.

I would be direct. That is..."I need this broken out OR you can DIY the return or find another preparer...take a stab at it...jot down any questions that pop up...then call me for happy hour."

The client is being difficult ...

Look Jack, if you want to cheat you have to be a lot more subtle about it. You have to divide up the miscellaneous overhead amount into a half dozen smaller amounts. Oh, you don't cheat? Then simply list on a sheet of paper the various expense amounts that added up to the big number.

You're the pro. Lead him to get it right.

I'd require more detail. I'd explain that different items go on different forms and some are taxed differently (meal, fixed assets, inventory, etc...) and there is no place to put "Visa Overhead Expenses". I find that new clients can be resistant because it's a big chore to break them out but as the years go one they keep better books, so it's not such a chore.

Of course, we also have many people on this site and that will take anything, especially if someone hands them a Schedule C from an unknown "practitioner" and expects us to take that as sufficient. Thank you to all of the people answering here.

An old friend asked me if I would help her with her tax return because she didn't want to pay $775. I told her bluntly that she has loads more free time than I have, that $775 is a steal, that if she were broke I would help her, and thankfully she is not. End of story.

In similar fashion, if an old friend asked me to move forward as you described, I would simply say no. That's not how it works. Break this down into detailed components or I cannot help you. End of story. No need to engage further. Old friend might be a little prickly for a while, but I bet he will get over it.

Good Lord I fired a client who used QBO and imported the checking account. Thing is 90% of the transactions were personal and QBO didn't know that the restaurant purchases were because they were too lazy to cook for a family of six, the payments to credit cards were all personal and half of the gas stations were for the wife's vehicle. Darn straight I want to see a detail of expenses. These fools take their tax advice from their drinking buddies.

I still think that the dollar amount involved is germane to the discussion. Is this a material amount?

Thanks for all replies.

I am maintaining my ground while being very helpful and professional - but darned if I wasn't right about the back and forth time costs and him getting snippy about it.

I'll eat both. I don't mind too much for a friend. He does pay nearly full pop.

$9000 is the amount - and it is about 70% of his total expenses. Net profit right around zero.

Thanks!

70% of his expenses .... well, so much for my maybe it isn't material theory

Thanks though.

And he acts like it's "me".

Is there a polite way to tell him that out of 800 clients, it's him and 4 others that require back and forth like this? And that I charge the other 4 for the extra time?

Is the problem that he's embellishing these expenses or he just doesn't want to churn out the numbers?

How about telling him that you are required to do your due diligence and that you need the additional information to prepare the return, that you can't prepare the return incorrectly as this is how you make a living and you can't jeopardize that. And then just leave it as that. I'd put the time on the invoice and let him complain later.

Sometimes I would tell clients that I had two goals. One was saving them money. The other was making sure that if they were ever audited the result would be that the return would be accepted as is without controversy.

The ideal end product should always be the least tax allowed by law presented in a way that the service would not question. Clients generally agreed with that strategy

anecdote- when I first started in public in late 80's, the firm had a large real estate operator - over 50 separate partnerships. All of their 8825s were these 5 lines and only these 5 lines:

rent income
interest expense
depreciation expense
operating expenses
g & a expenses


they also had a policy (way before repair regs) of capitalizing cost on original placed in service but nothing ever after that - so fixed asset schedule was land,building, personal property- all in year of acquisition/construction. Pretty simple.

Their projects had been through several IRS audits without issue and this was their filing policy.

This kind of clients described by the OP are the ones that I try my best to avoid, and disengage once I find out that’s the way they handle their tax filing. The fees to be charged can in no way be worth the risk that is involved to handle a case like that.