"I am always curious about self-employed clients with high personal expenses who can carry 3+ years of self-employed losses"

Kinda makes you wonder what they live on, doesn't it?  I think you are kinda between a rock and a hard place right now.  You can't tell him to buzz off because of an investigation that you were informed of from other sources.  Personally, I would tell him that you are a little uncomfortable preparing the return as is if he keeps reporting losses and see what happens.