I recently inherited a client when his accountant passed away in the middle of tax season. It turns out this guy was charging this client $500 a month for work he wasn't doing and I'm still scratching my head as to how he did their individual tax returns before the corporate returns (no dividend reported). Anyway, as I dug deeper, it turns out this last accountant was just making up numbers. The net income of the corporation was understated by up to 99% (not kidding) since 2011, which of course means that the tax liability was also significantly understated. This guy broke every code of conduct and ethics you can think of. I have informed the clients of the understatement and have advised them to amend their past tax returns. They were quite shocked as they had relied heavily on this accountant's advice. Refiling means that they are going to owe a lot more in corporate and personal taxes than they can afford to pay and screw up the FASFA for their four college bound children. As a result, they have chosen not to amend the previous year's taxes, but to move forward, making sure all future taxes are accurate. I'm torn. These people technically did nothing wrong, but now they know about the problem, so not amending is really tax evasion at this point. The question is, based on the code of Ethics, do I continue a relationship with them? Do I work with them on the future tax returns? Under any other circumstances, I would part ways, but I really feel bad for these people. I have never seen such a complete and total breach of trust. Discussion, please!!!
USA Understatement of Income & Tax Liability
- Thread starter AMWF11
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I feel bad for these guys too. But they have now deliberately decided to become criminals. By the way "screw up the FAFSA" is neither here nor there as a consideration, if they've been earning so much that they've decided to engage in "breaking bad" tax behavior then they have enough to foot the school bill without college grants. Moreover, for the tax bill to be understated 99% and your clients claim to NOT know this ... wins the "Big Pinocchio" award of the year.
Notice that YOU have lost your objectivity and the danger is you will guide the client and yourself into bad decisions if you continue the engagement.
Anyway, if you do not want to join them in the big house, I suggest you bail out ASAP. And I think you need an atty to help you compose a "disengagement" letter (sent certified) that says why AND tells your client to seek legal counsel. You need to CYA cause now you don't want them to point to you and say "he knew and he also did not tell us". These guys are bad news. There are Journal of Accountancy articles on this exact issue - start there for general info.
Notice that YOU have lost your objectivity and the danger is you will guide the client and yourself into bad decisions if you continue the engagement.
Anyway, if you do not want to join them in the big house, I suggest you bail out ASAP. And I think you need an atty to help you compose a "disengagement" letter (sent certified) that says why AND tells your client to seek legal counsel. You need to CYA cause now you don't want them to point to you and say "he knew and he also did not tell us". These guys are bad news. There are Journal of Accountancy articles on this exact issue - start there for general info.
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Wow, I am totally shocked that you find yourself in this situation. Is there anything the clients can get from the old accountant. Look like he is a fraudster and should be responsible for the all the tax and penalties that will happen to the clients.
And the accountant in question is dead. He did this to all of his clients. He charged them money, but not one transaction was actually entered into QuickBooks in either 2012 or 2013 and those transactions entered in 2011 don't make any sense. They have no consistency. Something could just as easily be coded to medical supplies versus utilities. The clients were so heartbroken when I told them what was going on because he had been their friend. I saw e-mails where he had told them not to worry about it because it was unlikely they would get audited, which is alarming. These people just want to do their job and leave the accounting up to someone else, which is not uncommon. I have walked away from many clients before for ethical reasons, but I honestly think these people were not trying to willfully evade taxes. They trusted their friend. However, I am not willing to put my reputation or my legal obligations on the line.