Client onboarding and review

[Strongsilence-CPA]

Was referred to a client by a person I trust.  He needs business tax returns (2017-2019) filed for a laboratory that never made sales. I know that a different CPA reviewed a draft tax return that the client prepared but preferred to hand it off as he doesn't do businesses.  He admitted that he has filed a lawsuit against his equipment supplier.  His CPA and accounting manager for the lab both died a few years ago and he doesn't have good financial records. So those facts give me pause to determine what due diligence is needed.  Other than a discussion with the potential client, a review of the accuracy and completeness of the accounting records, what sort of investigation can I do?  

[IRonMaN]

What sort of investigation do you do for other clients?  Personally, I would meet with him and see if he passes the smell test.  If he smells like someone that is a decent person but a little scatter brained when it comes to bookkeeping and taxes, I would help him out.  If he instead gives off a toxic smell -------- run.

[abctax55]

I agree with what Jeff said; I'd add that you should get a 'large' retainer up front.  And bill against that until depleted then get more as necessary.

[Strongsilence-CPA]

Usually, no investigations are done. (AICPA recommends setting a process and following it.) If a client or friend recommends someone that is nearly always sufficient for me.  But this engagement is telling my gut to walk slowly.  

Thanks for the advice Ironman

An interesting tidbit to share:

1. Cannabis lab, likely sprung up here in CA in 2017 when state regulatory environment was lacking and many new entrants came in - some with low ethical and business standards.

2.  A small shareholder "unlawfully" dissolved the corporation with the Secretary of State. He wants to reinstate it. I'll learn more later.

[Strongsilence-CPA]

Thanks mr. abc.

This seems like it could be an ongoing engagement - with tax notices, client questions, etc. so a large retainer is on my list.

[IRonMaN]

There was once a boy named Sue, but I never heard of a boy named Anna 🤔

[PATAX]

I would not get involved with it. I think you have enough work. As the old saying goes: If the waters are calm, why have a fat lady jump in?

[abctax55]

(even my avatar is a 'girl' dog 😉

[Strongsilence-CPA]

@PATAX 

I met him and he is a straight arrow.  He is a scientist by training, ran a food quality laboratory for years, then the cannabis industry began, and he wanted to use his training to improve the quality and medicinal attributes of cannabis.  The wrong crowd started to get involved in his business, a vendor supplied him with inferior equipment, and he initiated a lawsuit, and his partners turned against.

I'm not the best judge of character but I believe him.

[PATAX]

@Strongsilence-CPA 👍 good points there. If he is a Straight Arrow and your gut tells you it is okay, then I would accept him as a client. Sometimes people that are real straight are a little naive and others take advantage of them, I'm not saying this is what happened, I'm just saying in general. Heidi is real naive, and that Pitbull gang tried pulling one on her, but she wasn't having any of it.🐕☝

[Strongsilence-CPA]

I met him and I described my judgement below

The 2018 and 2019 corporate tax returns were never filed.  He told me that the company was terminated in 2019 - illegally by one of the partners.  He told me that his six partners have not communicated with him or inquired about the status of the tax returns.  There are big losses that each of them possibly can deduct. I was surprised.  He said he knows that one partner has deducted his investment on his individual tax return.  He doesn't want to talk with them (as they have opposed him on certain business matters) and he thinks the ugliness of their separation and a lawsuit could arise  should they get K-1s from him.

I know this isn't right, but what would be the pros and cons of not listing those six as shareholders on the S Corporation tax return?  One thought would be to proportionately reduce the P&L so that my client doesn't receive more loss than he has a right to take.  

I don't think a taxpayer would know about a K-1 with a loss if they were not told or didn't review their transcripts. The IRS would not advise taxpayers, would they?

I'm going to file with all the partners, but I am finding that is an odd and interesting situation because. It something I have not ever dealt with.

@IRonMaN 

[Strongsilence-CPA]

@PATAX 

I'm a numbers guy and people, even though I have met many in my life, are still mysterious to me.

Who is Heidi?  🙄

[sjrcpa]

PATAX's dog.

[BobKamman]

Doesn't really matter what he tells you.  The California SoS website has the information you need for names of incorporators, directors, officers, shareholders (maybe not all of that, but it's a good start).  Date of incorporation and date of dissolution.  How do you even know your client is a corporation?  ("Just because he told me.")  And how do you know there was even an S election?  ("Just because . . .")

And when dealing with cannabis, it's usually an all-cash business.  I don't think that would change for a "lab."  I seem to recall this nomenclature was a way that dealers got around some of the regulations in the early days.  You're going to trust books kept for cash receipts and disbursements?  I wonder how many sets of books there are.  Maybe six -- one for each partner.