Estimates on a Schedule C

Technical topics regarding tax preparation.
#1
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Hello, a tax attorney friend of mine, who gives me all of this income tax preparation work (he doesn't prepare the forms), asked me to prepare 3 years of returns for which he re-constructed a P&L for his "shade-tree" mechanic client.

The numbers all come from estimates based on the attorney's analysis of all of the client's bank statements and receipts. There are very little 1099s involved.

The numbers are estimates, none the less and look like:

$5000
$6000
$500
$1000

etc.

On a side note, I understand that as the preparer I am not allowed to make those look like actual numbers - but that's really beside the point.

But as the preparer, do I have to include a note with the e-file disclosing that we are using estimates?

Am I exposing myself to an increased risk of any sort to my EA credential by preparing these tax returns?
 

#2
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I know you're not a CPA, but this is what the AICPA's standards for tax services has to say on the matter...

"Unless prohibited by statute or by rule, a member may use the taxpayer’s estimates in the preparation of a tax return if it is not practical to obtain exact data and if the member determines that the estimates are reasonable based on the facts and circumstances known to the member. The taxpayer’s estimates should be presented in a manner that does not imply greater accuracy than exists."

Here's a great article on the topic: https://www.thetaxadviser.com/issues/20 ... nrule.html

For estimates as egregious as this, I might consider including Form 8275 to be explicit that estimates are being used. I've never included an 8275, but it might fit here.
~Captcook
 

#3
Nilodop  
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I did not see anything specific on the subject in Circular 230, but the AICPA's SSTS #4 has this:
7. Specific disclosure that an estimate is used for an item in the return is not generally required; however, such
disclosure should be made in unusual circumstances where nondisclosure might mislead the taxing authority
regarding the degree of accuracy of the return as a whole. Some examples of unusual circumstances include
the following:
a. A taxpayer has died or is ill at the time the return must be filed.
b. A taxpayer has not received a Schedule K-1 for a pass-through entity at the time the tax return is to be filed.
c. There is litigation pending (for example, a bankruptcy proceeding) that bears on the return.
d. Fire, computer failure, or natural disaster has destroyed the relevant records


In your facts, I'd disclose for sure, maybe in a simple attached statement or even on F 8275 (which is perhaps not designed for this purpose, but still ...).

And are you engaged by the lawyer or the taxpaer? I'd expect the lawyer to have some thoughts on your question, at least on brhalf of the taxpayer and maybe for you, too.
 

#4
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You probably will do this, but I wouldn't do this, even for a buddy attorney, without engagement letters that have been executed by the taxpayer which also authorize the attorney as his agent for providing financials.
 

#5
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The numbers all come from estimates based on the attorney's analysis of all of the client's bank statements and receipts.

Highly confusing comment. How can the final totals “come from” estimates if they come from (an analysis of) ALL bank statements and receipts?

If all bank statements and all receipts are used, the resulting totals wouldn’t “come from” estimates. They would come from actual source documents. But…Are you suggesting that, with respect to the bank statements we do have, there’s stuff on there like withdrawals…but we don’t know what some of them were for? So we had to take a guess? Are you saying the May bank statement was missing, so we estimated that month’s entire activity, hence you’re use of the word “analysis’? (But a missing bank statement would be contrary to your word “all”).

Sounds like you don’t even know what the attorney did. I don’t either. All I know is that we somehow end up with a bunch of real round numbers. I’d have reason to believe these numbers aren’t any good, until such time I got an explanation from the attorney as to how they were derived.

Real hard to say here if the attorney thumbed through stuff and slapped down some numbers or if he actually did an extensive accounting, but had to make some assumptions/fill in some gaps with respect to unclear/missing information.
 

#6
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Is the attorney signing as preparer? Why does he want his client to be audited?
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#7
CathysTaxes  
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I'd ask for the bank statements. Otherwise, I would not want to prepare a return. Is this attorney an accountant as well?
Cathy
CathysTaxes
 

#8
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Is it too early for a Kovel letter? If so, do you think that is where it might lead?
 

#9
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OK...


I'm out....




Is this OK?:



Dear [friend]

Even though I told you yesterday that I would help prepare a tax return with estimated items on schedule C, after doing some research, I changed my mind and now I will not do it.

What I really did wrong here was to tell you initially that I would do it, and then renege on that promise. For this I sincerely apologize.

Please trust that I am so quick to agree to what you request only because of our relationship and my appreciation for it.

My reasons are because I have no experience with putting numbers on a tax return that I know to be estimates, and I have since read articles that discuss potential preparer penalties and sanctions for doing so improperly.

Obviously, there is no sale that is worth jeopardizing my future livelihood and the years of work to build up a practice.

I'm very sorry and I hope you understand and are not upset with me.

Perhaps the client can take the P&L that you both worked on and walk into an H&R Block and have the tax return completed in an hour or so.

Thanks for your understanding,
 

#10
skassel  
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How is it that 'intelligent' professionals make something simple so fricking complicated?

Anyone stating that they wouldn't prepare these returns is insane.
Steve Kassel, EA
 

#11
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ItDepends wrote:I'm out....
Is this OK?:[/i]

I wouldn't use that letter. Why are you out?

Who's signing the return?

Have you explained the idiocy of putting numbers rounded off to the nearest thousand on the return? Since he did an analysis of the client's expenditures, have you asked for more accurate numbers?

What's your agreement with the lawyer?

If the lawyer is signing the return, does your agreement state that he's liable for the accuracy?

If you're signing the return, tell him you need more accurate estimates.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#12
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My expected roll in this is "paid tax preparer". I would be signing it. The attorney only helped with the P&L and he does not prepare tax returns.

Why are you out?


I wouldn't want to risk that my lack of experience with knowingly putting estimates on a tax return will cause me to do so improperly and possibly lead to sanctions or penalties form the IRS as the preparer.

Have you explained the idiocy of putting numbers rounded off to the nearest thousand on the return?


No, although it sounded a bit crazy to me at first also, I figured that he would know what he was doing and that it was best not to try to hide the fact that there are some estimates involved.

tell him you need more accurate estimates


According to our conversation, there are many gaps in the (personal) statements and so the attorney is filling in some blanks with reasonable estimates. There are no business statements and no way to be more accurate.

Also it might pay to mention that there are no real 1099s of significance, and the income is being estimated as well (from the deposits, and for all I know, what the mechanic took in cash). The taxpayer did not receive a letter and there have been no requests for his tax returns, he just came forward because he wants to be up to date on his taxes and not "off the grid". Also, apparently, in my friend's words, he is "not capable" of preparing his own books.

So in my opinion the same thing will happen in another 3 years and we are just enabling him. Or that the system has failed this level of less-sophisticated self employed individuals. I'm not sure which is correct, but that's besides the point.

The point is that I don't know what I'm doing when it comes to estimates on a schedule C and I don't want to risk my livelihood. I worked REALLY hard to get where I am now, as we all did.

I didnt send the letter though.
 

#13
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There has to be documents that can be made into accounting records. Didn't the mechanic prepare invoices for customers and keep a copy? Did he file sales tax returns? How did he pay his vendors...cash, check, credit card? If the mechanic didn't operate like a legitimate business, I'd disengage.

Why put your reputation on the line for someone like that?
 

#14
Andrew  
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Years ago, I prepared a Cash T analysis to reconstruct income for a new client who had no records. Client had not filed returns in years and received notices from the IRS asking for returns.You're allowed to reconstruct income: see link for info. If a business is cash intensive, bank statements aren't going to tell the whole story. Not sure if that's the case here. My client's returns were never audited.

https://www.irs.gov/pub/irs-utl/cashchapter4_210632.pdf
 

#15
skassel  
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Disengage because your client is a boob? Please. If I did that I wouldn't ever have a single client. ALL of my clients have major issues. If you let clients walk because their information is sketchy, please do not represent anyone in collection matters. There are simple and clear ways to handle all of these matters.
Steve Kassel, EA
 

#16
JR1  
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Love that, Steve.

If anyone thinks they've not prepared with returns with estimates, you've just yet prepared a return....lol.
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