Let me tell you about a hypothetical couple - Mr. & Mrs. Pinocchio Every so often I will have a potential new client or two who arrive in my office and they instantly sound the “seems a little shady to me” alarm. You know they are the type of person who you are almost sure is lying to you because their mouth is moving and their nose is growing.
Let’s talk about this hypothetical couple Mr. & Mrs. Pinocchio. They arrive at the eleventh hour with very little documentation but they indicate to you that they have a business. They are the proud owners of Shady Car Repair on Shady Lane in Shady City, USA. Now even though they have this business in which they incurred huge business expenses throughout the year, they had a very low amount of sales to claim. When asked how their sales could be so low but their expenses were so high they said that since they were a new business in their inexperienced ignorance they had under-estimated all the jobs and gave the customers estimates that were just too low while purchasing a large inventory of repair parts. Then they had to follow through with the low-balled figures for the sales. Could this be true? As the meeting progressed and the business expenses became the topic of conversation it seemed that the expenses were somewhat inflated. I thought that perhaps the stated rent figures included not only the auto repair garage rent, but probably the rent for the Pinocchios' home, and maybe even a vacation home as well. So what was I to do about the Pinnochios and their apparently incorrect tax data?
As an ethical preparer there would be no way that I could put their information as presented on a tax return. It appeared to be complete fiction or at the very least it was completely undocumented information. I also wanted to be careful not to insult someone in my place of business. So I would probably suggest that it appeared that they were missing some of the documentation needed to file a complete and accurate return and that the Pinocchios should probably file for an extension of time to be sure that they were not overlooking important sales or deductions that they would want to have included on their returns.
So, you ask, what is the moral of this little hypothetical story?
Neither a professional tax preparer nor the IRS will find seemingly unbelievable facts and figures believable unless there is adequate documentation to support them. So, if somehow their numbers were based in reality and they were just horrible business owners with bad bookkeeping or in fact a start-up company in early years with limited sales but high operating costs due to over purchasing etc., they should bring complete documentation to their meeting with their tax preparer so that correct facts and figures can be compiled and a correct return can be prepared. Appearances are not everything. Sometimes what you perceive to be fiction is really fact and vice versa, but when in doubt the proof is in the pudding as they say or the truth is in the documentation. When it comes to business bookkeeping good documentation is worth its weight in gold and when it comes to the sounding of the “seems a little shady to me alarm” in your business dealings it’s probably better to be safe than sorry and to proceed with caution and courtesy.
If this little story leaves you want to revisit Pinocchio click here for the soundtrack or to locate the story:
I hope you're enjoying Just the Basics on the Taxing Subject of Taxes!
Any U.S. tax advice contained in this electronic communication was not intended or written to be used, nor can be used, by any recipient of this communication for the purpose of avoiding penalties that might be imposed pursuant to the Internal Revenue Code or U.S. Treasury Regulations, or any other state or local law or regulation.
Content of this site is not intended to replace professional consultation.