Dealing with clients who don’t report all their income
When times get tight, people moonlight. When people moonlight, they often get paid in cash. When people get paid in cash, they don’t always tell their tax preparer right away – if at all.
“Usually I find out about it by accident,” said Susan Floyd , an Enrolled Agent with Paducah, Ky.-based Egner’s Tax Service. “Even though I ask every year if they have any other income, they usually say no. Once I was talking about my roof and one client said, ‘Oh, I do roofs as a supplemental income.’ He had done that for years without ever turning it in to me. I prepared his return correctly and advised him that he should amend his past returns to reflect the income and expenses. After paying me for the return, taking it with him and not returning the signature forms, I assume he took the return somewhere else.”
Sherry Whah of Sherry Whah EA & Associates in Anchorage, Alaska, works with many small-business clients, from handymen, snow plowers and lawn maintenance workers to craft sellers and others. “Clearly this is income to supplement the household income. The folks who do outside sales for cosmetics, household items and investment sales always believe they have [personal] deductions that they want to take as business deductions. They generally always have losses and are convinced they can take a very aggressive stance. Other clients talk about cash-under-the-table income and how if it is somehow below $600 per customer they don’t have to report it or they are simply hiding cash. Others are so disorganized and don’t pay attention to the business they don’t claim all their income. Intentionally? Maybe.”
Whah uses a publication and brochure to help clients understand taxable income and business deductions – and as a last resort will do what often happens to a bad client. “If the clients insist on taking deductions or not reporting the income,” she said, “I end the engagement and return their documents.