USA Client Rental Property Situation

[McWord]

I’m taking over a client whose 2019 tax return has been started but not completed. The client has several rental properties and it appears that one of them was placed in a trust. At least, according to the county real estate records for Snohomish County (State of Washington), the property was moved from the mother (the grantor) to XXXX Trust (the grantee). The trust consists of the mother and her three children.

In 2016, the parent contacted Anderson Law Group and the rental property in question was formed as a partnership. To my knowledge, the IRS was never contacted to obtain an EIN for the partnership. Since that time, the rental property data has been reported on the mother’s individual income tax returns.

This situation, of course, raises several questions. First, the matter of the partnership tax returns. None has been filed to date. As mentioned, all rental property data has been reported on her personal tax return. The IRS has not contacted her regarding the missing partnership returns.

The client has been unable or unwilling to obtain an EIN from the IRS and is insisting that the 2019 return be filed as the previous three tax returns were. I’m concerned that the three partnership returns are missing and the 2019 return would be the fourth. I have explained the ramifications of not obtaining an EIN and not filing those returns, but she is insisting that the current return be filed as the previous have.

As an Enrolled Agent, I’m quite aware of my duties representing this client, and I am concerned that filing in this manner will open the client (and me) to sanctions, which we can ill-afford.

Thanks for your assistance with this matter! Any comments would be most appreciated.

Regards,



McWord, EA

 

[kirby]

Conspiring to commit tax fraud is punishable by maximum 5 years prison and $250K fine. That law was recently applied to a tax preparer.


So, what is the smartest thing for you to do?

 

[McWord]

Great question! I don't know why it is listed as a Trust on the county website. I also don't know why the IRS has not responded to the client with an EIN (assuming she applied for one). I'm in the office now and discovered that her 2018 tax return does not have this property listed. Also, there is no 1065 nor 1041 for this client (in this office) for 2018 or 2019. I don't know if there was an entity return filed in another office (I can't see that from here without an EIN).

To make matters more intense, when I interviewed her yesterday, she put the pressure on to file as she is refinancing one or more of her properties. This property was not listed on her 2018 return (and I don't know if it's also missing in older returns) and her rushing to file makes me want to just back away from it. It's not worth the effort and the damage to my professional standing to continue.

I'll be speaking with HRB management about this matter before contacting the client.

Thanks for the feedback!! It is most helpful to talk it out. That's a lot better than making a huge error!!!

Regards,

 

[MoralesTax]

Grantor Revocable Trusts usually do not have EINs, as the IRS considers the trust and individual to be the same taxpayer for income tax purposes. The keyword there being "Revocable". I'd suggest obtaining a copy of the trust document(s) to verify this.

I'm not sure how the Anderson Law Group is a part of this problem, nor why they are claiming a partnership exists, if the property is showing as titled to the trust by the county. I would try to establish evidence of this partnership. Check the state's Department of Corporation for a business filing registration and/or ask the law firm to provide a copy of the Operating Agreement. A client signature on any of these two sources of third-party documents would help establish that you have a partnership to contend with.

However, if you can establish that no partnership actually exists (and seeing how most of the tax filings have been done personally), then that's no longer an issue. Assuming no partnership exists, and you're dealing with a Grantor Revocable Trust, then it sounds fairly straight forward of a problem.

Figure out why the rental property wasn't filed for 2018 (maybe it had no activity?). It will likely need to be amended anyways, seeing as how if it was available for rent, then the rental property should have at least claimed depreciation expense. Then you can file for 2019 and beyond on the first foot and help the client.