California is a disaster | AccountingWEB

California is a disaster

Eva Rosenberg, MBA, EA - No, that’s not an attempt at humor. Or sarcasm.

Science Daily just reported that there is a 99% chance of another ‘big one’ hitting Southern California. Soon.

We have earthquakes, fires, floods, landslides, AIDs, and the Rodney King riot.

Yup, I’ve lived through all of those, and held clients' hands and reconstructed records through every kind of disaster.

The interesting thing is, once the disaster is over, people forget. Especially government tax people. We remember. So do our clients, who experienced the disaster.

Let me tell about a man who came to us, with his own disaster – an IRS audit, and an unenrolled preparer who couldn’t explain the information on the tax return.

George came to me with an IRS assessment and lien of about $300,000 as a result of that audit. IRS decided there was a lot of unreported income. True, an assessment like that may be a disaster. But what does that have to do with disasters? The problem originated with the Rodney King riots. But we didn’t really know it, when we got started. You see, we'd forgotten the riots, too.

When a client comes to you with such intense terror, it’s no different than dealing with any physical disaster. You do the same thing. Help them relax. Help them calm down enough to remember the year or time-frame in question.

The human mind holds a great deal of information – when you don’t push someone to retrieve it. Sometimes, just a light, relaxed conversation about insignificant things, small talk, gossip, silly things, helps the person just start to speak and open up. Bits of memories will start to surface. And pretty soon, there’s a flood of information that you practically need a tape recorder to capture, because you don’t want him to slow down and arrest that train of thought.

Using that technique (or just plain niceness) – and an in-depth Proof of Cash spreadsheet, we located identified most of the ‘unreported income’. It was mostly transfers from other accounts and loans. But, we couldn’t find the last $300,000 to prove there was no unreported income.

At one point, George said the $300,000 was from his CDs. But, we had a 1099-INT for the interest on the CDs. The reported interest matched the deposit x the interest rate for the year. So, we were certain he hadn’t cashed in those CDs.

This went on for a couple of months, with an IRS Revenue Officer who believed George’s contention that his tax return had been truthful. But that last $300,000! We looked and we looked and we just couldn’t prove it wasn’t income.

Oh, did I mention that we were missing many of the bank statements on his accounts for several months that year? Yup. And we couldn’t get them. Why? Because his Bank of America branch had been attacked during the Rodney King riots – and the records were destroyed. So, we had a lot of missing records – without any objective way to reconstruct them.

And here’s George mumbling about the $300,000 and his CDs. With us mumbling - they weren’t cashed.

And this went on some more.

The Revenue Officer, sympathetic as she was, couldn’t keep the case open any longer. She arrange for an audit reconsideration to clear off the assessments we were able to prove. She was going to leave it up to the auditor to decide whether or not to waive the last $300,000 unproved non-income on pure trust.

A few days before the audit, George called and we were talking about loans and refinancing his buildings to get some cash out….and I suddenly realized where the $300,000 worth of unidentified deposits came from!

He was in the habit of borrowing against his CDs! He did it all the time and just took it for granted, without even thinking about it. Just call his banker – and she’d collateralize his loans against the CDs, and voila – he has instant cash.

No proof though. Those bank records are gone with the bank.

What do you do?

Simple, you call the bank manager and ask for a third party letter, confirming this long-standing business practice, and that there probably had been loans of about $300,000 or more in that year. (If need be, we could provide proof of similar loans in later years – to establish the pattern of behavior.)

Yes. The audit reconsideration was a success. All the ‘unreported income’ assessments were reversed. Well, almost all. There was still the interest on the CDs that the original tax preparer had left off. Though, by now, with the levies on his accounts had more than paid those taxes.

The point?

  • 1) In a disaster, you won’t get any information from anyone under stress. Provide a calm, comforting environment.
  • 2) Listen. Listen. Listen. Yes, they’re going to ramble and say irrelevant things. But…if you listen closely, you’ll glean important seeds of ideas and information to help rebuild records, and to substantiate them.
  • 3) Know you’re going to be working with the client for a couple of years before all the disaster records and tax issues are resolved.
  • 4) Be prepared to amend returns as new data comes to light.
  • 5) Keep copies all of backup information related to the disaster. Don’t return the useful records without making copies. You never what will be important 2 years from now. Kind of like a CSI investigator.

For you earthquake buffs, here’s some history of major earthquakes as they have impacted my life and that of my clients. We get big ones every 10-20 years, like clockwork. Of course there’s another 6.5 and above + quake due in the next 5 years or so. The last really big one in Southern California was in Northridge in 1994. (The powerful 7.1 or 7.3 Landers quake in 1992 didn’t do as much damage due to low population densities in the Yucca Valley.) The previous big one in a populated area was the Whittier Narrows quake in 1987, and the one before that was the Sylmar Quake in 1971.
There are lots of smaller quakes practically every day. That money would have been well spent IF the study could tell them in what area to expect the next big one – and narrow the date down to less than a generation. (Note: there are also powerful earthquakes in Northern California.)

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Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

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