Business hasn't filed in 5 years - Bad bank statements

Technical topics regarding tax preparation.
#1
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A new client came to me. They run a successful business but haven't filed since 2016. They've been receiving notices from the IRS and want to make getting caught up a priority.

They basically have no records. I requested all their bank statements from 2017 - Present. The majority of the deductions on the bank statement just say "Withdrawal Debit Card Business" or "WIthdrawal POS".

My client has no idea what the charges could be for.

So I'm unsure how I should handle this when filing the taxes as we have basically no idea what the charges are for.
 

#2
taxcpa  
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Run away.

Don't make their self inflicted problems your problem.
 

#3
JAD  
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Nightmare. The client might need to be working with an attorney so that there is attorney/client privilege. Deductions are a matter of legislative grace. "I don't know what they are for" = zero deductions. The activity must be reconstructed from other sources of documentation. I've only done a few projects where I got someone caught up, and I won't do it again. There is a reason why they are so late, and getting to the finish line is brutal. Plus you have to deal with old law and getting old software to work. If you take this on, get a big retainer, because people who file late also pay late, if at all.
 

#4
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You will not be able to bill enough to compensate you for the headache involved.

I would not take this work unless I was desperate. In that situation I'd quote a premium fee and require a big retainer. Once the retainer is drained, all work stops until it's refilled. The client would also need to understand that unsubstantiated withdraws will generally be treated as nondeductible distributions to the client. For deductions, you might be able to use reasonable estimates for similar business of similar size under the Cohan rule, however that does not apply to certain expenses like auto and travel.
 

#5
sjrcpa  
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TravisReynolds wrote:They run a successful business


What's the definition of successful?

Are they also behind on the Washington B&O tax?
What about payroll taxes, etc. ?

TravisReynolds wrote:My client has no idea what the charges could be for.

But your client made the withdrawals?

I'd pass on this.
 

#6
CathysTaxes  
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Run. I tried to help a client in a similar situation only they hadn't filed in ten years. It's not worth it.
Cathy
CathysTaxes
 

#7
juro  
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Been there a few times, it means the client does not care, & will never care.
Client may come to resent your efforts to make him care.
 

#8
CathysTaxes  
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juro wrote:Been there a few times, it means the client does not care, & will never care.
Client may come to resent your efforts to make him care.

Especially when he gets the tax bill and the bill for services renderd.
Cathy
CathysTaxes
 

#9
Nilodop  
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I have no experience in any like this, but I'm curious. If this taxpayer, with or without a lawyer or tax pro, voluntarily goes to IRS with his story and an apology and a desire to pay what he owes, what would IRS likely do? Hit him with all they can, or work out some sort of (IRS-favorable) result that lets him move on?
 

#10
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In 2021, I had several "successful business owners" contact me to prepare 7 to 10 years of past year tax returns. They could not get the
PPP loans since they had not filed. One was getting ready to retire and realized he had not been paying in to Social Security. I declined all as I had too much on my plate with regular clients. Funny how people don't want to take responsibility until there's something in it for them.

I did not make their problems my own.
 

#11
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I've done a lot of work with non-filers. It's an opportunity to help someone. Taking on clients' problems is what we do for a living. If you don't have the stomach for this type of work, then don't engage.

To begin with, you have to consider possible criminal exposure. In that regard it is important to note that IRS policy is not to send the case to CID if the returns are filed before CID knocks on the door. So I'd not worry about that and move on to preparing the returns in good faith based on the available information. The preparer has no exposure from doing so.

In the meantime planning should begin on how to deal with Collections.
Steve
 

#12
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What type of business is this? They must have some idea of what type of expenses they incur. Payroll? COS? Any regular vendors, suppliers…that could provide information?

You say “they” meaning partnership? H&W?

I have helped some taxpayers in this type of situation who become loyal clients, although they had better bank records and knowledge of their business
 

#13
sjrcpa  
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I've worked with nonfilers, too. Always get money upfront as others said.
But this sounds like too big a mess. If the "client" can't tell you what expenses they had or help in any way that's why I'd pass.
Last edited by sjrcpa on 22-Nov-2022 11:32am, edited 1 time in total.
 

#14
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It's not that the TP has not filed. It's that Collections is part of the fact pattern. If you don't get paid up front, you'll probably be dealing with "What have you done for me lately?"
Steve
 

#15
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sjrcpa wrote:I've worked with nonfilers, too. Always get money upfront as others said.
But this sounds like too big a mess. If the "client" tell you what expenses they had or help in any way that's why I'd pass.


But if they can come up with some reasonable estimates I would be okay with that.

As a starting point present them with the worse case scenario; reporting income with no expenses.

This could be ugly and the end of their business.
 

#16
CathysTaxes  
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My personal experience with these types of clients is that they use the business checking account for personal expenses and the personal expenses exceed the business. So if no receipt or the bank statement or cancelled check doesn't indicate business, I would be inclined not to take expenses.
Cathy
CathysTaxes
 

#17
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The returns should be a good faith effort, whatever that may be in these circumstances.

There is no need to be accurate or to make a big deal of the unfiled returns (i.e., spend a lot of money on professionals.) You can help by just staying in your lane and preparing the returns. Then if you're not competent to advise globally in this situation, make a referral to someone who is.
Steve
 

#18
Joanmcq  
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Yellowdog wrote:In 2021, I had several "successful business owners" contact me to prepare 7 to 10 years of past year tax returns. They could not get the
PPP loans since they had not filed. One was getting ready to retire and realized he had not been paying in to Social Security. I declined all as I had too much on my plate with regular clients. Funny how people don't want to take responsibility until there's something in it for them.

I did not make their problems my own.


Social security will only go back three years. So if he hadn’t filed, he’s SOL..
 

#19
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Yep. They always seem to be surprised to find that out.
 

#20
CathysTaxes  
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Yellowdog wrote:Yep. They always seem to be surprised to find that out.

Not to change the subject but client is now disabled but he's been a full time notary since 2015 and hadn't paid social security and is now complaining because SSA wants his last three years tax return and now he's worried about how much he'll collect. I did advise him to pay or put money in an IRA or SEP but he wouldn't listen.
Cathy
CathysTaxes
 

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