For all the relatively inexperienced tax pros on this board
who read this, and by that I mean those with less than 5
years experience mainly, and/or those who have never
represented a client before IRS: Print this out, save it,
and re read it before every tax season.

Gene has covered all the bases I think, and extremely well
at that. In my first year of practice I was confronted with
a "problem client" not unlike this one. Won't go into
details, except to say he used the cash system of
accounting; and reporting. You know what I mean. No messy
details like credit card statements, let alone a large bank
account, if any.

The real lesson here, I like to call the Chevrolet message.
GM had a commercial once which ended with:
"Don't you BUYYYYY no UG ... LY truck!"

I paraphrase it:
"Don't you TAAAAKE... no UG...ly clients!."

Now I'm reminded of another one time client who was a
gambler, too, with six pizza stores. nevermind.

Gene E. Utterback, EA wrote:
- quote -

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Jake123 <sanseban[at]hotmail.com> wrote:

- quote -

I'm concerned about that "habitual gambler" aspect. Did this
client report any gambling INCOME on his return? Keep in
mind that gambling winnings and gambling losses are NOT
netted. If the guy claims he lost around $75,000 along the
way, it would "tax credibility" to suggest that he didn't
have at least ~some~ gambling winnings.

Now, it ~is~ true that you can deduct gambling losses (to
the extent of winnings) as an itemized deduction. However,
there are tons of cases where the courts have disallowed
such claimed deductions for lack of adequate proof. If your
client lacks records to prove where the $75 big ones came
from, I'll bet (no pun intended) that he also lacks records
of his gambling losses.

So, if the agent is aware of the gambling situation and a
reasonable amount of gambling income has not been reported,
you might be between a rock and a hard place at this point.
But, obviously, I don't know the facts; I'm just thinking
out loud. <g
MTW

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"Gene E. Utterback, EA" <eagent[at]alliancetax.com> wrote:

- quote -

Extremely well said. And you described my only addict client
very well. At least with him I knew what I was getting into,
it was penny ante, he was nice to work with, and he always
paid me for the prior year before he brought in the current
year. Of course by that time the return was late and he had
lost most of his records, but he learned to get new copies of
SS statements and W-2's on his own.

Jo

"Jake123" <sanseban[at]hotmail.com> wrote:

- quote -

Let me make sure I understand you - 1) you have only been in
practice for 2 years; and 2) you have never faced an IRS
audit before? With all due respect, are you (were you)
qualified to represent this client? Honestly, if you have
never worked on an IRS audit and have limited experience you
may have done a serious disservice to this person by taking
on a case that is beyond your capabilities and experience
level. It may also be that by saying you have only been in
practice for 2 years that you worked for AA for 25 years and
went out on your on when they collapsed - ONLY YOU know the
answer to this question and I would suggest you not answer
it here. My recommendation on this point is to make sure
you are qualified to do the job before you put the client at
risk. That being said . . .

An experienced rep would have gone through the client's bank
statements BEFORE the IRS ever saw them and done a cash
reconciliation. That way you would have been aware of the
issue and could have started gathering supporting
information early on. You could also have started pulling
together secondary substantiation - for example, if your
client got a cash advance on a credit card he should also be
getting a credit card bill that shows the balance due. I
don't care what the credit card company says, if they expect
the client to repay what they say he owes they need to be
able to produce proof that he owes it. I'd be willing to
bet that if your client called the credit card company and
said something like "since you can't provide me with
information regarding the "ALLEGED" charges on me account, I
think are bogus and I'm not going to pay them anymore" that
the card company would FIND the original charges on their
document storage system.

Since your client is a habitual gambler, and since you seem
to be new and inexperienced, what proof do you have that
those deposits are not his winnings? Remember, as a
professional you do get to accept what the client tells you,
but you are allowed to temper that with professional
skepticism if it doesn't pass the smell test. People with
gambling problems almost always have credit problems and I
have never seen one that didn't have a cash flow problem.
Your client wants you to believe that he gambles but had no
problem borrowing $75K on credit cards and has no problem
making the payments on these cards? This doesn't pass the
smell test. If he can afford to make the payments or pay
off the cards he likely didn't need the advances on the
cards. I'd suspect the deposits are something else - what
I'm not sure, but I am having trouble with his explanation.

At any rate, once you advise the client that he needs to
provide proof of the advances it is up to him to provide
that proof - it is NOT your responsibility. You do have an
obligation to represent as zealously as the law allows and
you can certainly work with him to find secondary sources
that support his argument, but it is up to him to follow
through. If he can't find the credit card slips for the
advances can the credit card companies provide you with an
annual summary of his charges? Most companies offer this,
though it may not be free - remind your client that it may
be cheaper than paying tax on the $75K.

If these were advances how were they obtained? Most cash
advances happen either by writing a check issued by the card
company or by using the card at a bank (sometimes via an ATM
terminal) to get the cash. Either way, the processing bank
should have a record of the transaction. Specifically, your
client's bank should be able to tell you whether the deposit
shown on the bank statement was cash or a check. If it was
a check then it supports your client's argument. If it was
cash, where did your guy get the cash? Again, it had to be
processed somewhere somehow.

What about third party support of his position? Does he
have any friends, family, or colleagues that can testify
that they were with him for any of these advances? How
credible are they? How credible is your client? These
people can sign sworn affidavits that can be submitted to
the auditor supporting your client's position - BUT be very
careful here. Sworn statements carry a penalty of perjury
if the person lies.

Be very careful with your client's credibility. If your
client is a self-proclaimed gambling addict he won't have
much credibility to start with. Do NOT let him get caught
in a lie.

Be very careful about feeling too sorry for this type of
person. They prey on sorrow and pity and this just helps
them justify their actions. Addicts do what they do because
they can, if they are not held accountable their problems
continue. Be careful not to get caught up in this. It is
very easy to feel sorry for a client who seems to be in a
bad situation. But the reality is that in most cases like
this it is their own fault and no one else's. If your
client has a gambling problem don't let it become your
problem.

Have you been paid for what you've done? Addicts will
always have a reason for not having any money to pay for
anything that does not feed their addiction. I'd be willing
to bet that your client has cried to you repeatedly about
not having any money and how is going to change, but I'd
also be willing to bet that he is late in paying you - if he
has paid you at all. Unless you have bottomless pockets or
are in business to work for free, be careful about how much
pro bono work you do. We all do some, but I generally limit
mine to helping existing clients that have paid me for years
and now find themselves in trouble due to circumstances
beyond their control. I seldom extend free assistance to
new clients who have put themselves into troublesome
situations with little or no regard for the consequences and
who have demonstrated an unwillingness to be responsible
-like the client who owns three homes, a Jag, a Vette, 3
boats, and makes $300K per year but who doesn't have enough
money to pay my rate for representation when they get
audited.

I have dealt with addict clients - ones who had alcohol
problems, drug problems, gambling problems - so I am
speaking from experience here. Also, if you let a client
push you on an issue, be it a compliance or procedural or
financial one, they will continue to push you. Please,
PLEASE - be very careful. Addicts are some of the best
manipulators on the planet, that is how they survive.

Under the circumstances you describe, you may seriously want
to consider referring your client to an attorney where he
can gain the benefit of privileged communications.

Good luck,
Gene E. Utterback, EA

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Jake123 wrote:

- quote -

I don't have any experience, but I have a possible
suggestion.

First, if already reported pension income (he DID report
as taxable, not just on the penalty form, didn't he) is
reported as additional income, there should be a remedy.

After all, noone expects the taxpayer to MAKE photocopies
of deposit slips and deposited checks. THAT would be
unreasonable.

Another possibility, as banks ARE required to keep deposit
records for some number of years, is to ask the examiner
for a percentage allocation based on the those bank
records which are available -- CASH deposits counting
as unreported income.

It should also be pointed out to the examiner that it
is VERY difficult to get money OUT of India, even in the
form of checks.

--
This account is subject to a persistent MS Blaster and SWEN attack.
I think I've got the problem resolved, but, if you E-mail me
and it bounces, a second try might work.
However, please reply in newsgroup.

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Jo Firey wrote:

- quote -

Actually, the IRC says "...all income from whatever source
derived..." in Section 62(a). In this fact pattern, the
question would be whether it was income. The IRC itself
does not directly lead to the conclusion that if you receive
cash it is income--but we can get there if the IRS is able
to show it has a right to reconstruct income.

- quote -

The taxpayer's biggest problem, since it opens the door to
the bank deposit method of reconstructing income. Now, that
said, the IRS can't just blindly follow it, nor can they
necessarily totally ignore the taxpayer's testimony.

I would first focus on whether, in fact, the taxpayer is
able to show a pattern of drawing on credit cards to make
those types of deposits based upon the cards for which you
*can* get information. A pattern showing that the
borrowings preceded or followed documented gambling binges
by the client would also be helpful, if you could show
similar binges around the unexplained deposits.

As well, I would carefully document (using return receipt
requests and certified mail) those credit card issuers that
have not responded to your attempts to get information.

That is, if this got to court the key question is going to
be whether the client is a *credible* witness. Has the
agent uncovered any cases where the client appeared to be
"less than honest" in reporting his income? As well, do
other methods of reconstructing the taxpayer's income
indirectly suggest unreported income? Or do they tend to
"back up" the taxpayer's story? And has the IRS actually
been able to nail the taxpayer with actual unreported income
in this exam?

- quote -

Well, yes and no. They have presumption of correctness on
their side, but they will lose it if their assessment were
shown to be completely arbitrary. That is, if the IRS were
to randomly choose a taxpayer and assert that he had
$100,000 of unreported income, the court would not accept
that assessment on its face.

- quote -

Or any other action that is *consistent* with the client's
explanation of events. The key is raising significant
doubts about the presumption that is inherent in the bank
deposit method, which includes the presumption the client is
lying about the source of the deposits.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Jake123" <sanseban[at]hotmail.com> wrote:

- quote -

The tax code says everything you get is taxable unless it
says otherwise. And it says that you have to keep
reasonable records. Plus unlike criminal law, it is not up
to the tax people to prove you had the income. They have
reasonable basis to believe he did. It is up to him to
prove otherwise. If you can't show the loan or cash advance
from the credit card company, can you show where the loan or
advance was repaid?

Jo

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A client of mine is being audited by the IRS and the Agent
wants to add back several deposits in his personal bank
statements to his income. The Agent for some reason suspects
that he has income from foreign sources (client is asian
Indian). But in reality, the client, a habitual gambler, is
going difficult financial period and all those deposits were
monies he borrowed from credit cards companies at teaser
rates.

The client is a salaried employee and keeps no records
except bank statements. We requested the bank and dozens of
credit card companies to provide us with statements. But
some credit card companies have merged with other ones and
have failed to respond to us. Some said they are unable to
provide all the information. Even the bank also was unable
to give us all the activity details and copies of deposit
slips. The Agent wants to add around $75,000 to his income
and the client swears that he has no other income. The
client even took an early distribution from his pension fund
to pay off some of his debts. That early withdrawal was
reported in his 2002 return and penalties were paid. But
nothing will convince this Agent from not adding back these
deposits as income.

I've been in practice for 2 years but never faced an IRS
audit before. I feel sorry for this client. Is there
anything I can do to convince this Agent? Any citations,
regs, anything? Your help will greatly appreciated. Thanks.

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