Proof may be in the pudding, but it sure isn’t in the shoeboxes and scribbles that clients cart into a lot of tax preparers’ offices. What’s the best way to point out that clear and complete records are indispensable when it comes to staying out of tax trouble – and how do you handle clients who refuse to provide it?

“As subtly as possible, we ask for substantiation,” said Enrolled Agent Twila Midwood of Advanced Tax Centre, Inc., Rockledge, Fla. “We advise them that if we’re asking the questions, then IRS certainly will ask the same questions on audit. Our engagement letter clearly states that [clients] have the final responsibility and must have and keep all records to substantiate any item on the tax return.”  

Doubting a client’s records runs a gamut of problems and issues, said EA Sherry Whah, of Anchorage, Alaska: “Lack of records,” she said, “records that are unclear or estimated, claiming dependents that do not appear to be appropriate. When these issues arise, I inform the taxpayer that I’m concerned. I further note that it’s much easier to report it correctly now, rather than risking an audit and a potential penalty.”

“We’re frank with the client, maybe even passive-aggressive,” said preparer Jim Loperfido at JGL Management Consulting, in Auburn, N.Y. “It works: Some get it, some don’t, but all understand that we want to help them.”


Riling ‘the dishonest ones’

Preparer Jeffery Sauer in Minnetonka, Minn., sees the biggest problem in car logs or logs of business miles. “There’s probably a lot of people not keeping the detail but still submitting. I rarely allow a client to submit more than 90 percent business use of a vehicle – I’d doubt those situations.”

Donations are also a records minefield. Midwood said that it’s “surprising the number of clients who still feel that IRS ‘allows a certain amount’ without proof” regarding Schedule A donations. “Educating clients in this area has been a challenge,” she added. “Our questionnaire addresses this in that we state that they must have proof from the organization. We do require that taxpayers sign and date the questionnaires.”

Added Becky Neilson of Neilson Bookkeeping in Sheridan, Calif.: “Clients who don’t have donation tags with the nonprofit they were donated to and the date, I won’t accept,” she said. “Another trouble area is small business. I expect to see a printed P&L, not just numbers they pull out the air.”

“Asking for printed P&Ls or detailed statements will rile up the dishonest ones pretty fast,” added EA Bob Smith of Albert Lea Tax Service LLC in Albert Lea, Minn. “We do a little test by questioning a couple numbers they provide, and it doesn’t take too long to figure out if they just don’t have good records or they are intentionally misrepresenting the information.”

Loperfido had a new client “come in upset that she was audited last year and wanting someone else to check this year’s work. We first did a cash flow analysis that showed she spent $12,000 more than she earned. She was flabbergasted and actually a little upset with me and asked that we check our work. Our work was fine, and a deeper look at her records showed that she writes checks (some to family) for work that are not always cashed. A lot of these checks are written in December. A further look also revealed that she carries uncashed checks for years.”


What to ask for

Whah requests proof of income from bank statements, 1099s and cash receipts and proof of dependency, especially for the EITC. When a taxpayer simply lacks certain income documents, said Whah, “I’ll extend them and with a [power of attorney] go online in mid-July and request the income information from the IRS,” she added.

Yolanda Johnson, an EA at Tax Accountants Inc., in Orland Park, Ill., also relies on additional documentation, additional questions – and, again, mention of what the IRS thinks of sketchy records. “This usually is enough to cause taxpayers to remove information that is questionable or doubtful,” she said.


‘Squidgy figures’

“I ask to see accounting records,” said Janie Biddix, an EA at Advanced Tax Specialists Inc., in Dalton, Ga. “If these are in question, I ask the client if the records are correct per their knowledge of their business. For example, one client was involved in insurance sales. Being familiar with the assets of a franchise insurance agency, I questioned the assets listed on the accounting records for depreciation. They didn’t like my questions and were afraid of consequences, so I released them from my services.”

J. Alan Fagan, an EA at The Mattox Group, in Marina, Calif., said that strict due diligence when onboarding a new client often heads off eventual questions and problems. “We establish from the very beginning that our firm does not tolerate squidgy figures. From time to time issues do arise, most notably with mileage logs and schedule C expenditures. We provide every client with a complimentary electronic mileage tracker for smartphones. For those clients not as tech-savvy, we designed a spreadsheet they can print and complete manually.” His firm also meets quarterly (“no less than semi-annually”) to review the activities of clients with Schedule C businesses.

“I ask to see more information concerning the records. Sometimes I then look the information up on Google or other areas on the Web,” said EA Susan Floyd of Egner’s Tax Service in Paducah, Ky.

“Depending on their answer or the severity of the issue, I will dismiss them as a client,” said EA David Spaulding, a principal at Janover LLC in Garden City, N.Y. “Over the last few years, I had two potential clients come in with returns that were wrong to the point of fraudulent. I dismissed one and the other I told that the only way I’d prepare a subsequent return was to amend the prior one and adjust the information into the current year.”

“Our clients are mostly old-timers we’ve known for 30-plus years, so no need for doubt,” said R. Dale Dixon, an EA at The Tax Surgeon LLC, in Smyrna, Ga. “If a new person comes in, we make them provide detailed backup documents, at least until we get to know them.”

“I keep pushing and questioning until I either get real answers or send them home to find them,” added EA Jaimee Hammer in Cherry Hill, N.J.


Remember your risk

“We politely ask, on average, two to three a year to leave,” said Smith. “They go willingly, which tells me they were doing something wrong. Sometimes one will feel offended, and we offer to reconsider if they bring the documentation. We will do the return if they do document the area of concern.”

Preparer Paul Knapp at Exact Income Tax Service, in Santa Fe, Texas, provides problem clients with “examples from our experience of what IRS has accepted and refused to accept. In one sense, we doubt every client’s records and provide info that lets them revise as needed. Most don’t, because they’re confident in their own records,” he added.

EA Michael Harvey Baum of Naples, Fla.-based Baum Accounting, Tax & Computer Help sends a written request – usually an e-mail – to a client when he doubts a record. “I ask the client to verify in a written response the information or provide additional details,” said Baum. “I then keep the e-mail as part of my work papers and I also provide a PDF copy of the same work papers to the client.”

“I request [a record] in writing and have clients sign that the records are accurate as written,” said Neilson. “I also put this in my formal engagement letter. In addition, I explain that they need hard copies of all of their records in case of an audit and that if they don’t have the records the expenses will more than likely be disallowed.”

“If they don’t have a bookkeeping system in place,” she added, “I offer that service for an additional hourly fee.”

Toward many such clients, there’s ultimately one response. “I fire clients all the time, including friends and family,” said blogger and EA John Dundon II of Taxpayer Advocacy Services Inc., in Englewood, Colo. “People efficiently substantiate their claims or go away.”

“Ask a number of additional questions and let the client talk and talk. Most people can’t keep a lie straight,” said EA Mele Perrego, of Clayton, N.C. “If the explanation seems to confirm my suspicion, I ask if they have ever read the perjury statement on the tax return that they sign, and generally I’ll read it to them. Then I ask if they know the penalty for perjury. They may be willing to risk jail or penalty for a few bucks. I am not.”

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