Maybe I am too new at running an accounting firm. A new client I signed this year seems to want to do whatever he can to avoid paying tax. He asked me questions that are “grey”. I suspect that the numbers/info he gave me for filing his business tax could be fraudulent. I know it’s the taxpayers’ responsibility to provide accurate information. But I am concerned there could be implications on me. Should I withdraw? How do you draw the bottom line?
I always have “prepared without audit” messages on tax forms. It’s your call. If you don’t feel comfortable preparing his return and financial statements then tell him and withdraw. Ultimately if you file what he has and he is audited, it will be on him to prove his income and expenses. You can only process what he is given you whether it is bogus or not. Your responsibility is to prepare to the best you can with what the client has given you. Remember, garbage in, garbage out.
I agree with David. If you smell a rat it likely is a rat. Red flags are raised especially if the expenses do not seem reasonable. I am not afraid to question something that seems out of whack but if you feel any way uncomfortable I would drop the client. Sometimes in cases like this I tell the client that I feel we are not a good fit and leave it at that. It is your business and your reputation that is at stake.
Thank you David and Allen! Really appreciate your guidance. I am sure that this issue will come up in the future and not all clients are 100% honest. I guess I would need to somehow draw a line in the sand.
Although rare in my experience, there is always the risk of Civil Penalties imposed when associated with misrepresentations.
Lie down with dogs, get up with fleas!
I’d echo responses above. Do your due diligence - which does NOT mean auditing their info. It DOES mean being reasonable and, where something appears questionable, taking it in context and evaluating it.
Is it material and significant? If yes, consider as below:
- Is it actually a “grey area” (given that there are just a few in the ITA…)?
- Has the client made up a story to fit reality?
- Is there genuine confusion or a simple failure to communicate clearly?
- Is there any external documentation available, or can it be produced?
If not material, I’m not generally too worried…as David rightly points out, it’s up to the t/p to support his/her reporting. (ie a moving expense receipt that is not available is their prob, not mine; an unavailable RRSP receipt is a different story)
If material, and dubious to me, I tell the client I’m not comfortable with that kind of a claim, and if they’re able to prove it fine, but if not, they’ll need to proceed with someone different.
Good Morning KillerBeeDee:
I have been in this business for over 30 years and I was burned a couple of times early on, but I eventually learned to trust my instincts about people. The vast majority of people are honest and a pleasure to have as clients. But over the years I realized that every time I accepted a client that I “Knew” I shouldn’t, it inevitably turned out to be a disaster. Your instincts are developing early and that is a good thing.
A few things to consider:
Firstly, your client has a few tricks he can through at you. He can bad mouth you around, he can possibly write a bad review somewhere, and he can register a complaint with your professional society. Such a complaint isn’t anything to worry about because you are within your rights to withdraw, but it is something that would require a response from you.
If you decide to continue with this client there are a few things you can do to protect yourself. Firstly, ensure that you have a signed engagement letter. The Tax Cycle letter is pretty good, but you can edit it if you feel you have to. This establishes clearly that you are not auditing his records and therefore you cannot be relied upon to detect any errors or omissions in those records. Most importantly, it indicates that “He” is solely responsible for the information that you use for his tax return.
Secondly, get any verbal statements he makes about income and expenses in writing. Insist that he either writes and signs a letter to you with this information, or sends you an e-mail with it. This can sometimes be difficult when information gets added after the fact or with subsequent phone calls. In such cases, you can send him an e-mail stating your understanding of the new information, and requesting his response if it is incorrect. I would include a statement that you are proceeding with this understanding unless you hear back from him.
Thirdly, scan as much of the information as is practical. I wouldn’t necessarily bother with parking or restaurant receipts, but I would scan anything about revenues and the larger expenses. Anything legal or anything he has written or prepared in Excel or represents his statements about expenses or revenues. Or anything else that strikes your fancy.
Fourthly, present him with a transmittal letter. This letter should indicate that it is his responsibility to review the financial statements and or tax returns for accuracy and completeness, and to report to you any errors or omissions. Put a time limit for this review that you feel is reasonable but not too long. I generally use 7-10 days. While not legally binding, it is harder to complain about something after six months that you were supposed to have already reviewed.
All of this is time consuming and will eliminate much of your profit on the engagement, but it will also give you peace of mind. Knowing that if he is foolish enough to make unfounded allegations, that you have what you need to protect yourself is worth the loss of profit.
And finally, put a note in you file not to accept him back the following year.
I hope this helps.
“I suspect that the numbers/info he gave me for filing his business tax could be fraudulent.”
Ask that he provide you with the proper business records that he has been keeping pursuant to Section 230 of the Income Tax Act, and the financial statements that his business’s CPA prepared.
If he does not want to comply or plays dumb, tell him (in writing) that you require a proper copy of those books and records per S230 before you can even think about preparing tax returns based on them. You are required to examine them.
Give him a copy of S230(1):
" 230 (1) Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined."
If he still resists, tell him you will be happy to assist him later when he is forthcoming will all the detailed required books and records as required by law by S230.
Inform him that because of Section 238, you unfortunately cannot help him until he does comply with section 230.
Give him a copy of Section 238:
"238 (1) Every person who has failed to file or make a return as and when required by or under this Act or a regulation or who has failed to comply with subsection 116(3), 127(3.1) or (3.2), 147.1(7) or 153(1), any of sections 230 to 232, 244.7 and 267 or a regulation made under subsection 147.1(18) or with an order made under subsection (2) is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(a) a fine of not less than $1,000 and not more than $25,000; or
(b) both the fine described in paragraph 238(1)(a) and imprisonment for a term not exceeding 12 months."
I had a client referred to me from another client this year. His prior “accountant” had died. His 2018 return included expenses that clearly had no basis. Obviously, the tax preparer had just created expenses to bring his income down. When I did his 2019 return this year he was confused about why his net business income was so much higher. I reviewed it with him and politely told him that his prior accountant, in my opinion, had included expenses that didn’t exist and that I don’t work that way. I invited him to go see someone else and that I wouldn’t even charge him for the work I had done. In the back of his mind, he knew what had gone on in prior years and may have been involved in it.
By taking a stance of being professional, your business will thrive in time. You don’t need clients like that and you don’t need those clients referring more like-minded clients to you. It won’t matter what fee you charge. It won’t be worth the aggravation. My new client knows that I won’t just make stuff up for him and will come back next year with that in mind.
This is a tremendous help Stephen! I was really lost, but what you suggested makes great sense, and I will for sure do everything you have mentioned. Thank you for sharing your experience and the tips!
This is a great reference, Joe. Thank you very much for your help!
Awesome, Kevin. Thanks for your reply! Yes, I guess one of the concerns of me dropping him is that it could hurt my reputation. It is great to hear this from a fellow professional accountant.
Over my many years of doing tax returns I have fired many clients for wanting me to do things that go against my professional integrity. I pride myself in keeping in line with CRA and the many more clients that I have compiled over the years because of this shows. Clients come to you as they feel you know what you are doing, yes there will be the ones that want to do things that are not in agreement with you but their loss will be your gain in the long run as you get know for being honest.
I had a similar situation. Operating in rural area where everyone knows everyone, I was concerned about how the client could be a detriment to my business.
My mentor at the time said, “If the client exhibits these qualities to you, he must exhibit them to others. Your reputation will be how people perceive you, just as his reputation is how people will perceive him. How much weight do you think others will give to his opinion of you?”
I have let my reputation of being ethical speak for itself and have great clients who refer great clients.
Trust your instincts.
He might drop a few bombs and try and spread lies but ultimately being professional will win out. Most cases you can respond to whatever is written and when clients are happy with your service, word of mouth can spread like wildfire.
MGBTAX - myself included. I don’t do anything not in line with CRA guidelines. Honesty, integrity and trust are key
Thanks everyone for your replies and guidance! I read every reply, and I feel a lot more comfortable and confident making my decision now.
I use the the “my way or the highway” if you do not have that warm fuzzy feeling I would drop them. You do not need headache. Even if it is their issue to deal with an audit, it still comes back on you.
Just one thing to add to the advice (which is all good!):
DOCUMENT, DOCUMENT, DOCUMENT!
Document when you talk to them about the issues. Date and time, what was discussed and the agreed (or not) outcome.
Document every contact you have with the client. If you didn’t do that in the past, go back now and make notes about what you remember, be clear that you aren’t back dating documentation, but that these are your memories as of today’s date.
If you are terminating the business relationship do it in a clear and professional manner. There are lots of articles out there about how to do that but one of the clearest is by the AICPA (the American Institute) https://www.journalofaccountancy.com/issues/2017/feb/end-client-relationships.html
I had a very negative experience with a client and ended up having to produce dozens and dozens of pages of proof that my firm had acted professionally, and that we had discussed all the issues with him, and that it was only when he refused to clarify his position in relation to my concerns that I terminated the business relationship, and that I withdrew in compliance with the terms in our engagement letter.
In the end it was deemed that I had gone above my professional duty by ensuring he had the information he needed to protect his interests. And in these situations that is the best you can hope for. He’s out there and may or may not be bad mouthing me, I have no idea. But I know that I did my best!