My wife and partner scoffs at me when I say this, but I think many clients are either lying or withholding critical information.
Sometimes it is intentional, while other times, the client is just ignorant that the information they have is important.
If you do representation, you see this in action all the time, especially with tax resolution clients. However, it happens with normal, everyday tax clients as well. It requires us as accountants to put together a puzzle and be detectives.
There used to be a time when all you needed to do was cover yourself after a client gave you information, such as a list of income and expenses. However, a few years ago, Circular 230 was changed, and we have to do further due diligence when something doesn’t look right.
For example, I had a client during tax season who sent me their stuff so I could do a return. This individual had been with me for a long time. They had a child in 2017 and presented me with only $13,000 in income. The client was married, and this was the first time, in my experience, where his income was so low.
Now, instead of calling this client, I sent an email asking him simply what he lived on. The reason for the email is so I had a record of sending it. He replied that $13,000 was indeed all the income he had for the year. I saved the email in his file. I knew something was wrong, but it’s not my job to interrogate him.
About three months later, the client called me because he was trying to buy a house. Of course, his income was too low to qualify for a mortgage.
All of a sudden, his wife earned money from an installment sale she had. When asked why he didn’t tell me this before, he stated that I should have known because I had a copy of her old returns.
Well, I have a lot of clients, and I can’t remember every detail of each one at the drop of a hat. Point blank, I asked him what he lived on. Long story short, I had to amend the return.
Every client who is getting a mortgage has to sign a consent form. Then, I answer all the mortgage broker’s questions and send the returns. When I offered this service to this person, he immediately declined. Not because I charge for that service, because I don’t. My theory is he had more things to hide.
The most notorious collection agency in the world, outside of the mafia, is the IRS. Most clients have an innate fear of them. However, when it comes to tax resolution, they have no fear.
Outside of getting your money up front, be leery you might be lied to. Usually, a resolution consultation starts with reasons and excuses why a tax wasn’t paid or returns filed. Then, they explain they have no money, and they give you limited information.
The first thing I do with them is get a retainer and a signed Form 8821. I then pull transcripts and see what the story is.
For example, someone with a lien will tell you that they have nothing. Lo and behold, you pull a transcript, and their income is so high they owe a bunch of money in taxes. I present them with my findings. I then get more money and have the client fill out a Form 433-A, as means to see which resolution action to take.
For example, I have a client and acquaintance who had an accountant. The accountant never told this client about Self-Employment Tax, and he owed a nice chunk of change to the IRS.
After filling out the 433-A, it wasn’t that he didn’t have the money to pay the tax. It was that he spent his money as fast as he made it. He had four mortgages. He, his wife and his kids all drove expensive luxury cars, and he was leveraged to the hilt. After expenses, his company made $100,000. That was on top of the pension he got and other side jobs.
He wasn’t destitute. He just needed someone to be honest with him.
About three months ago, I had a client who referred his brother-in-law to me. This person owed the IRS $100,000, was on an installment agreement or had an offer in compromise (he didn’t know which) and complained that his other accountant screwed him over because he told him his back taxes were paid when they weren’t.
After going through his information, it turns out that he was on an installment arrangement with the IRS. The taxes he paid went to the State of New Jersey.
However, the installment agreement with the IRS was canceled because he hadn’t filed a tax return for three years. Somehow, he ended up on Currently Not Collectible status.
When I pulled his wage and income transcripts, there were no information returns on file for him. However, he presented me with 1099s for three years for his single-member LLC, which was a disregarded entity. When I asked for the expenses to go against the income, he gave me a sheet of paper listing expenses.
Remember, there were three years of returns. When I asked about the expenses for the rest of the years, he said they were the same from year to year. The income was different, but I digress.
In my 25 years of being in practice, I have several more examples of these types of things occurring over and over again. When I complain about many clients being liars, my wife says I’m just jaded. Perhaps, but I can’t be the only one this happens to.
Editor's Note: Has this happened to you as well? Do you agree with Craig’s theory or have different experiences? Your reactions and thoughts are welcome in the comments section below.