My new client's 2021 return is missing 4562 and schedule C

I'll preface with this; I've been a solo-proprietor for a year this month. It's overwhelming at times when I run into a new issue and am reminded on how much I still don't know/haven't run into . Public accounting certainly did not prepare me for this! Anyhow, thanks in advance for any input.

I have a new client that came to me last week to file his 2022 and 2023 taxes. He usually used some shady backroom shadow dweller old lady, who charges a small fee and uses turbotax to illegally file people's tax returns. Upon review of his 2020 and 2021 returns I noticed in the 2020 turbotax prepared return the shady-lady got the man a whole lot of bonus depreciation on a personal vehicle [2020 Tesla 3 $38,700] used for a side-gig (main job W2 wages); the depreciation method noted on 4562 was DB-HY but had $0 since the max was taken for the vehicle through bonus depreciation [2020 limit: $18,100 @ 73.91% business use rate = $13,778 depreciation taken]. In the 2021 return is where it got hairy, the return didn't have the form attached that said turbotax, nor had any other identifiable brand of software and of course the "paid preparer use only" box was left blank, not even "self-prepared." The most troubling part was that there was other income from the client's side-gig on schedule 1, however, there was no sch C or 4562 attached to the return. What adjusted basis do I use since I don't know what depreciation was taken in 2021? or the percentage that was used for business purposes? So, I don't know how to proceed with the treatment of the vehicle depreciation in the 2022 return and so forth.

~Boring bloke

I noticed in the 2020 turbotax prepared return the shady-lady got the man a whole lot of bonus depreciation on a personal vehicle [2020 Tesla 3 $38,700] used for a side-gig (main job W2 wages); the depreciation method noted on 4562 was DB-HY but had $0 since the max was taken for the vehicle through bonus depreciation [2020 limit: $18,100 @ 73.91% business use rate = $13,778 depreciation taken].

Does he have two vehicles? If not, how is the business use rate 74% for a side gig? Does he not have mostly commuting and personal mileage? Or does he walk/bike/take public transit to the main W-2?

The most troubling part was that there was other income from the client's side-gig on schedule 1, however, there was no sch C or 4562 attached to the return. What adjusted basis do I use since I don't know what depreciation was taken in 2021? or the percentage that was used for business purposes? So, I don't know how to proceed with the treatment of the vehicle depreciation in the 2022 return and so forth.

I think you need to consider the possibility that amended 2020 and 2021 are strongly advisable before 2022 return prep. And for that, you need to consider and investigate the facts that actually transpired, not just what's listed on the prior year returns.

If amended returns are advisable, I would walk unless he genuinely seems like he wants to do things the right way, and he agrees to the amended returns and a retainer.

And I certainly wouldn't worry about this work right now unless you're done with 10/15, due to the fact that this prospect approached you last week.

In addition to ManVsTax’s observations and sensible advice, I have two thoughts:

1. Does a business actually exist?

2. Did the collection of numskulls that prepared the 2021 return subject the Schedule 1 income to SE Tax?

I had posted, then deleted earlier. I was wondering if there is indeed a “shady lady.”

If you are willing to take on such a client, and that is a huge if:

Get a solid engagement letter.
Get a large retainer.
Get supporting docs for that vehicle. Logs etc.
Client must agree to amend 2021 if necessary.
Client must agree this will not get filed by 10-15.

If they balk at any of the above, hand them their material and wish them good luck. If an engagement letter has been signed, disengage.

If indeed the "shady lady" really exists, my guess is that this potential client is used to just making stuff up. That should not fly with a professional. We can accept client representations, but must inquire if things don't seem right.

First off, bravo everybody. Great responses!

ManVsTax

Does he have two vehicles? If not, how is the business use rate 74% for a side gig? Does he not have mostly commuting and personal mileage? Or does he walk/bike/take public transit to the main W-2?

According to the 2020 return, he does have two vehicles.

I think you need to consider the possibility that amended 2020 and 2021 are strongly advisable before 2022 return prep. And for that, you need to consider and investigate the facts that actually transpired, not just what's listed on the prior year returns. If amended returns are advisable, I would walk unless he genuinely seems like he wants to do things the right way, and he agrees to the amended returns and a retainer. And I certainly wouldn't worry about this work right now unless you're done with 10/15, due to the fact that this prospect approached you last week.

100% agree, I briefly mentioned this to him when getting more information thursday evening regarding the $4k side income. As far as genuinely wanting to get it done right, I'm not necessarily getting that vibe. But to his credit, I don't think he fully grasps the severity of the situation, as I did brief him on what I saw and my initial thoughts trying to not sound the alarm just yet. There's not a snowballs chance in hell he's getting any of this done before and/or by 10/15! He's lucky if by 1Nov!


SumwunLost

In addition to ManVsTax’s observations and sensible advice, I have two thoughts:

1. Does a business actually exist?

2. Did the collection of numskulls that prepared the 2021 return subject the Schedule 1 income to SE Tax?

1. It did, it was more of fitness related "speaking engagements" from what I'm gathered. It lasted 2-3yrs before turning/evolving into a full-scale LLC that provides actual fitness related services and is bringing in real $$.

2. Both 2020&2021 had almost ($30k) business losses each . Without the sch C for 2021 I can't see what the expenses were, although I have a very good idea based on the 2020, as I also constructed a few depreciation scenarios to try and come up with the most logical depreciation expense that would have been used in 2021.


Yellowdog

I had posted, then deleted earlier. I was wondering if there is indeed a “shady lady.”

Although hard to believe, this person was dumb enough to put their phone number and personal email on the 2021 return in the section where the taxpayer/spouse sign I googled the phone number and sure enough it belongs to a mid 60's young lady.


taxcpa

If you are willing to take on such a client, and that is a huge if:

Get a solid engagement letter.
Get a large retainer.
Get supporting docs for that vehicle. Logs etc.
Client must agree to amend 2021 if necessary.
Client must agree this will not get filed by 10-15.

If they balk at any of the above, hand them their material and wish them good luck. If an engagement letter has been signed, disengage.

If indeed the "shady lady" really exists, my guess is that this potential client is used to just making stuff up. That should not fly with a professional. We can accept client representations, but must inquire if things don't seem right.

At this point, I'm ok with showing the client the door. I don't necessarily want to but totally fine in doing so without the EL, retainer (first time in these waters so not sure what constitutes a large/fair retainer), agree to amend whatever I feel is necessary and he better crap some very convincing logs (mileage) out! From what I was told the old lady is good for getting the most refund for her clients

Much appreciated everyone.


Note: My gut is telling me to only proceed with this engagement if the client agrees to amend 20/21 and remove the vehicle completely.

Note: My gut is telling me to only proceed with this engagement if the client agrees to amend 20/21 and remove the vehicle completely.

That bizarre. You need to have a conversation with the client to determine the facts. You seem to be saying: "This fails the sniff test, therefore it's most likely wrong." If it fails the sniff test, it's time to grill the client, not make assumptions. If the business use if actually bona fide, the client would be correct to surmise that you're inexperienced, and don't know what you're doing, and stop responding to you.

ManVsTax

Does he have two vehicles? If not, how is the business use rate 74% for a side gig? Does he not have mostly commuting and personal mileage? Or does he walk/bike/take public transit to the main W-2?



According to the 2020 return, he does have two vehicles.

Great, open and shut case then I guess. Have you asked the client the question?

I don't necessarily want to but totally fine in doing so without the EL, retainer (first time in these waters so not sure what constitutes a large/fair retainer), agree to amend whatever I feel is necessary and he better crap some very convincing logs (mileage) out! From what I was told the old lady is good for getting the most refund for her clients

You can do what you like, but doing this work without an engagement letter and retainer is a huge mistake. You're going to regret it if you get 20 hours deep and the "client" suddenly ghosts you and goes MIA.

"the old lady is good for getting the most refund for her clients"

Huge red flag in my book. Reminds me of a preparer who has been active for many years in my area. Saw a return they had prepared claiming unreimbursed employee business expense (back when that was allowable). Ignored the monthly allowance not on W2, claimed mileage for all miles driven, and added in repair costs. Not much wrong there. Told the client they needed to amend and pick up about $6K in income. That went over about as well as you can expect.

Two questions I would ask: Why are you coming to me? Why now and not earlier?

I don't necessarily want to but totally fine in doing so without the EL, retainer (first time in these waters so not sure what constitutes a large/fair retainer), agree to amend whatever I feel is necessary and he better crap some very convincing logs (mileage) out! From what I was told the old lady is good for getting the most refund for her clients

You can do what you like, but doing this work without an engagement letter and retainer is a huge mistake. You're going to regret it if you get 20 hours deep and the "client" suddenly ghosts you and goes MIA.[/quote]

That was a miss-type, I meant I'm fine in cutting ties if I do not get a solid EL and retainer.

Speaking engagements and a $30,000 loss in two years? I am not the greatest at getting retainers, but this screams out for one.

This fails the sniff test, therefore it's most likely wrong." If it fails the sniff test, it's time to grill the client, not make assumptions. If the business use if actually bona fide, the client would be correct to surmise that you're inexperienced, and don't know what you're doing, and stop responding to you.

Yes, you are correct. This failed the sniff test from the moment I opened the return for review. Questions and research come from making assumptions, part of my research is asking perceived professionals that may have real life experience dealing with a similar case for thoughts. So, I'm not sure where you're trying to go with this.

Speaking engagements and a $30,000 loss in two years? I am not the greatest at getting retainers, but this screams out for one.

That's what stood out first in 2020 with healthy W2 wages alongside the $4k misc income and 30k loss, and the same thing in 2021 with roughly 5k income and 28k loss. I have a scheduled call with the client tomorrow, so I'll get more info then.

Two questions I would ask: Why are you coming to me? Why now and not earlier?

I would second getting these answers.
I had a prospect last year who had worked with one of these preparers previously. They came to me "confessing their sins" and "wanting to do things right."
After further discussions with them, I got the strong vibe that they knew exactly what was going on in prior years and enjoyed saying they were ignorant and receiving the benefits of claiming ignorance more than was actually the case.
Once I told them what it would take to fix it, their resolve weakened substantially.
I let them walk and had no hesitation doing so.

So, I'm not sure where you're trying to go with this.

Unless I missed something, you reviewed the tax returns, caught something that didn't look right, and instead of asking the prospect any questions, you're going to tell the prospect something along the lines of: I'm only going to proceed with this engagement if you agree to amend 20/21 and remove the vehicle completely.

If the client is savvy/sophisticated and the auto use is bona fide, they're going to ghost you. And that response would be understandable.

It's okay to send a follow up email with clarifying questions. If they don't respond and ghost you, that's okay, you probably dodged a bullet. But they may have answers and explanations that put your worries to rest.

I find that most people are willing to do things right. So don't speculate, ask...and work together to get it right, whatever it takes.

Unless I missed something, you reviewed the tax returns, caught something that didn't look right, and instead of asking the prospect any questions, you're going to tell the prospect something along the lines of: I'm only going to proceed with this engagement if you agree to amend 20/21 and remove the vehicle completely.

100% agree, I briefly mentioned this to him when getting more information thursday evening regarding the $4k side income. As far as genuinely wanting to get it done right, I'm not necessarily getting that vibe. But to his credit, I don't think he fully grasps the severity of the situation, as I did brief him on what I saw and my initial thoughts trying to not sound the alarm just yet. There's not a snowballs chance in hell he's getting any of this done before and/or by 10/15! He's lucky if by 1Nov!

Apologies, I wasn't as detailed as I thought I was in a prior post, but I indeed did talk to him probing and asking him about the large amount of depreciation/miles vs the low amount of side income. I was strategic when talking to him in a way to not come off as accusatory, and more so just gaining a genuine interest to piece together the missing forms from the 2021 return. This is where I mentioned to him the possibility of amending the return if he cannot find the mileage logs. He was adamant that the vehicle was used in business.

He still has not emailed me the mileage logs, and we're scheduled to meet tomorrow. My thought process is if I don't have those mileage logs by tomorrow then at that point the only way to move forward is to amend/remove the vehicle.

I will add one last piece of info I found out Thursday, the car was hit by hail and totaled by ins in 2023.

No, I wouldn't remove the vehicle. I'd prepare a draft return that shows the tax effect of not getting mileage expenses. See how quickly the mileage record appears.

I have had success pointing clients to MileIQ for auto expenses. It works especially well with those who claim they are technologically illiterate but who realize I am serious about keeping mileage logs.

No, I wouldn't remove the vehicle. I'd prepare a draft return that shows the tax effect of not getting mileage expenses. See how quickly the mileage record appears.

I have had success pointing clients to MileIQ for auto expenses. It works especially well with those who claim they are technologically illiterate but who realize I am serious about keeping mileage logs.

Right on. That was/is one of the items on my list to present to him if this partnership moves forward, a mileage tracking app and getting in the habit of uploading receipts to quickbooks. A couple of my current clients that track mileage for business use, are older gentleman and they like to do it the old-fashioned way with pen/pencil and journal. Me personally I do not drive much nor track mileage, so I don't recall ever hearing about mileIQ, but I will def check it out and pass it forward. Thanx!!!

I'll preface with this; I've been a solo-proprietor for a year this month. It's overwhelming at times when I run into a new issue and am reminded on how much I still don't know/haven't run into . Public accounting certainly did not prepare me for this! Anyhow, thanks in advance for any input.

I have a new client that came to me last week to file his 2022 and 2023 taxes. He usually used some shady backroom shadow dweller old lady, who charges a small fee and uses turbotax to illegally file people's tax returns. Upon review of his 2020 and 2021 returns I noticed in the 2020 turbotax prepared return the shady-lady got the man a whole lot of bonus depreciation on a personal vehicle [2020 Tesla 3 $38,700] used for a side-gig (main job W2 wages); the depreciation method noted on 4562 was DB-HY but had $0 since the max was taken for the vehicle through bonus depreciation [2020 limit: $18,100 @ 73.91% business use rate = $13,778 depreciation taken]. In the 2021 return is where it got hairy, the return didn't have the form attached that said turbotax, nor had any other identifiable brand of software and of course the "paid preparer use only" box was left blank, not even "self-prepared." The most troubling part was that there was other income from the client's side-gig on schedule 1, however, there was no sch C or 4562 attached to the return. What adjusted basis do I use since I don't know what depreciation was taken in 2021? or the percentage that was used for business purposes? So, I don't know how to proceed with the treatment of the vehicle depreciation in the 2022 return and so forth.

~Boring bloke

UPDATE:

I was able to finally get the transcripts for the 2021 return with the missing Sch C and 4562, and there was no depreciation taken, instead the $18k balance of what should have been depreciated was EXPENSED. Also, upon looking at the transcripts it shows a CODE 420 (sent for examination in April 2023), and a CODE 421 (examination closed in May 2024). The taxpayer was never contacted, and it took them over a year to decide that an examination (no audit) was sufficient, and nothing was wrong with return. I'm baffled as my first inclination is to amend 2021 and reverse the $18k vehicle expense and proceed with the 2nd year depreciation. It's like the IRS is ok with the vehicle being improperly expensed, and do not care about any resolve? They seem like enablers at this point. Thoughts?