[Anonymous]

Hi everyone, it’s been a while since I have posted here but would love some help.

My dad made improvements to his basement last year to turn it into an apartment. He quickly found a tenant and because Denver’s rents are insane high, he is somehow getting $950 per month. I believe the rental period began March 1st so he has $9,500 in rental income.

I have been doing his taxes for a few years now. In asking me to do his taxes for 2015, he asked me to tell him what his refund would look like if he didn’t claim the rental income. I let him know quickly that I would not be part of him committing tax fraud. I also let him now that because he can depreciate the cost of improvements as well as take deductions for portions of property tax, etc. he would get some relief there.

I now found out that he didn’t pull permits for the improvements. I looked at zoning for his house and his rental improvements are not allowed. So now I am at a catch-22. We can’t depreciate the improvements because they’re not permitted. However, he is also taking in rental income that he needs to report.

I am going to lay all of this out for him but ultimately I know that he’ll want to refrain from claiming the rental income. How do I tell my dad that I refuse to be part of this?

[alboreland]

Lay it all out for him then refuse and he will probably do it on his own.

[Andyred04]

I think its a very simple “dad, I'll lose my license”. Maybe easier said than done though.

FAR 80
REG 87
BEC 87
AUD 96

Primarily Gleim, supplemented with Ninja Notes & Ninja MCQs

Missouri CPA as of January, 2017

FAR: 80 (Gleim, Ninja Notes, Ninja MCQs)
REG: 87 (Gleim, Ninja Notes, Ninja MCQs)
BEC: 87 (Gleim, Ninja Notes, Ninja MCQs)
AUD: 8/27/16

PA Candidate

[Missy]

I'd wash my hands of his taxes entirely, and yes I've had to tell family I can't for very similar reasons. Sounds like a huge can of worms, not the least of which is that it may not even be a legal rental unit. Tell him to use a tax prep service, then he can choose what to share or not with them and its on him.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

Thanks for the input. You're right, just keep it simple. He's self serving so he won't appreciate the position he's putting me in nor understand why I just won't do it but this is on him.

[PublicGuy]

You got it. Tell him to drop 75 bucks on turbo tax and he can tell it whatever he wants. As a professional, you can't be directly tied to a return you know is wrong/illegal.

[Missy]

And if the conversation is awkward (I get that) I play dumb and say I don't know enough about rental income to get the best return. Lol half my family thinks I'm completely clueless and it's best for everyone that way.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[the LAST Coffee]

You don't have to prepare the return nor report anything to anyone if there are mistakes being intentionally made. However, if you have a good relationship with the father, like I do, I would probably try and help with pay the taxes due or something similar. Even at 25% bracket, the extra tax is roughly $2100. No small change but little compare to ruining the dad-child relationship.

FAR 84 (AUG '15)
BEC 83 (AUG '15)
AUD 79 (OCT '15)
REG 71, 78! (NOV '15, FEB '16)

[FIFOisbetterthanLIFO]

@the LAST Coffee, wait you are recommending that he help his dad pay his tax bill in order to preserve the relationship? Because, that would be insane lol.

You should really tell your dad to man-up. Don't take part in that type of thing…its a slippery slope and you never know what might come back to bite you in the butt. Your dad should have enough respect for your CPA license to not even THINK of asking such a thing.

FAR - Passed (82)
BEC - Passed (76)
AUD - Passed (89)
REG - Passed! (81)
AICPA Ethics

Licensed CPA

[ohiostategirlcpa]

This is the first time I heard that renovations without city permits are not IRS depreciable. What is your source for this?

He might get in trouble with the city, but I don't see why the IRS would disallow it. Even if it were an illegal activity, the IRS does allow (and require) a complete accounting.

F91 A95 R90 B94
CMA since 2015
(Gleim books/PDFs, MCQs, SIMS)

[Missy]

There are times when it is appropriate for a child to help their parent out. There's nothing in this thread that indicates the assistance is necessary. But I will say this, if a parent child relationship hinges on the child's willingness to settle the.parent's debt, it's not a relationship worth continuing.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Son]

I second ohiostategirlcpa, illegal expenses should be deductible – for as long as they are “ordinary and necessary expenses” incurred in the course of running your dad's business.

AUD - passed
REG - passed
BEC - passed
FAR - passed

[Anonymous]

Make sure you inform him of his risks he is taking, and then let him know he's on his own. No way can you risk your license.
Also want to add, why do you care if he has the right construction permits? That doesn't affect income tax and expense reporting.

[Anonymous]

@ohiostategirlcpa im with you on this.

IRS couldnt care less-the unpermitted renovations/not a legal rental unit has NOTHING to do with this. we're accountants, not real estate lawyers. just claim the income/depreciation deduction and it's as simple as that.

and if he does do this right dont forget to tell him that the depr. will reduce his basis in the property and make that portion taxable/not subject to the homeowners exclusion come selling time. the depr will help him today, but bite him in the ass tomorrow (or 10 years from now when he sells) plus he can take a portion of his insurance, utilities, snowremoval, tax prep fees, etc etc on Schedule E that were prev. non-deductible for personal homeownership. tell your pops to do it right, and lower that rental income via legitimate deductions, theres no way it's gonna be the whole $9K. im guessing more like $2-$5K. also, i heard CPA after CPA tell me never to do my family's taxes. looks like you're another posterchild for this.

[y_u_no_pass]

I was about to say the same thing. You can still deduct the expenses even if they were not done legally. But I still think there is something for not preparing family member's returns. Just tell them you are too close to the situation to prepare it.

Florida CPA!
Took final exam 2/25/15.
Sent in Application 3/12/15.
Issued License 3/20/15.
Used CPA Excel solely for all exams.

[ohiostategirlcpa]

There's no problem with doing your family's books and taxes, but you have to do them your way, because you're the CPA, not your dad.

If he were to go to another accountant he'd have to pay the taxes that accountant says, not what your dad wants. Where does he get the idea that he can declare only the income he wants on his taxes, and that any CPA/EA/tax preparer would allow it?

Does he not realize he is subject to IRS audit and penalties, etc? If not you have to make it clear to him, like you would to any client. If you cannot treat your dad like you would any other client, then don't take him on as a client.

F91 A95 R90 B94
CMA since 2015
(Gleim books/PDFs, MCQs, SIMS)

[Author]

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