Protecting yourself from the non-filing and non-taxpaying client

Many of my clients prefer not to file their tax returns and many also prefer not to pay their tax obligations. I, too, and I suspect you, as well, would prefer not to file your tax return and would prefer not to pay the accompanying tax bill. The major difference is that you and I ultimately do file our returns and ultimately do pay our tax obligations. Many of the people whom I represent, however, haven't filed their returns or haven't paid their taxes for 10, 15, or even for as many as 25 years.

This "tip" I present appropriately comes to you after the filing season for 1040s and well after filings were due for 1120s. This tip is primarily for the benefit of the return preparers but it does have applicability to those who wish to practice defensively regardless of what they do.

You ignore a non-filer and a non-taxpayer at your peril because while this "client" has ignored you, the IRS, various state and local taxing authorities, most probably his wife, and others about his duty to file and pay his taxes, he has not been forgotten by the aforelisted parties. Even more to the point, I can't remember when I have ever represented a non-filer or non-taxpayer who has not blamed the tax preparer for his failure to file or pay. (I use the masculine gender intentionally here because the vast majority of my nonfilers and non-payers are, interestingly enough, men.) The non-taxfiler or non-taxpayer comes to my office usually only after he has been contacted by the Service. These individuals feel trapped and, of course, the nonfiler or non-payer informs me the preparer is to blame. After the interview has been concluded, my first call is to the preparer to ask what has been done regarding the preparation of the tax return(s). Usually I'm told my client has not supplied the preparer with previously requested information thus delaying the preparation of the return, if indeed enough information was ever presented allowing a proper return to be prepared at all.

If I am representing a non-filer or non-taxpayer in a criminal proceeding, I am looking for any reason to "explain away" my client's actions or inaction's as the case may be. Representing a non-filer or a nontaxpayer in a civil matter, I'm looking for mitigation. I'm trying to point the spotlight away from my client. Rarely does a non-filer or non-taxpayer do well with the spotlight pointed directly at him. I ask the preparer questions along this line:

Did you explain to Mr. X the consequences of his non-filing or non-taxpaying?

Did you do this in writing?

What was Mr. X's response?

Did you follow up with Mr. X by phone or in writing to see if he later acquired the missing materials?

If so, please mail or fax me a copy of the letter.

If not, why not?

How involved are you in Mr. X's business or with the preparation of his business or individual tax returns?

How long have you prepared tax returns for Mr. X and/or his business?

I'm always amazed at the responses I receive from return preparers. It is as if they want to unburden themselves to me by describing all they have done on behalf of this ungrateful client. Indeed, I find it difficult to make these preparers cease their diatribes against their "clients."

Needless to say, this is all very regrettable because not only does it display a profound lack of professionalism on the preparer's part, it opens the preparer up for a whole host of problems.

First, why is the preparer even talking with me without the written consent of the client? Second, why didn't the preparer protect himself by sending the client a letter explaining the dangers associated with nonfiling or non-paying when the client obviously missed the tax filing or paying deadline? A one-page simple form letter informing the client of the appropriate deadlines along with a general disclaimer of responsibility should these dates be missed would suffice. I realize some individuals may have found a different preparer to do their work, but it only costs 33 cents to mail a letter for a preparer to protect himself.

Third, why would the preparer give me evidence which I could use against him in a deposition or at trial by answering my questions? If not an absolute defense, the preparer's own words might be useful as possible mitigation for my client's conduct. It may be the only defense we have.

I can only conclude that many of the preparers who run well-oiled tax preparation services aren't readily able to accommodate the occasional monkey wrench thrown at them by clients who do not file or pay their taxes on time. These "clients" are often forgotten or ignored because there is money to make elsewhere. While this sentiment is certainly understandable, it is dangerous because it allows the client to now use you as his defense. And this defense is made better by the preparer's inaction and/or by his or her own lack of self-preservation actions. Please don't give the nonfiler or non-taxpayer even the slightest of chances to hurt you in the future. He has taken enough of your valuable time by being "difficult." Don't let him take more time by becoming dangerous.

My tips are really very simple, very basic, and can save you many sleepless nights. Please protect yourself by sending termination letters. Include in these letters language indicating the ultimate responsibility for filing returns and paying one's taxes rests with the client. Leave a blank space in your form letters for you to write specific failings of the client if you choose. The form of the letter is not as important as its contents. Only your future former client and officers of the court will see this letter. Write simply and avoid legal jargon so the client can't claim that he failed to understand the letter's contents. It's not a bad idea to include "client responsibility" language in an engagement letter as well. Incidentally, engagement letters should always be used even for the most basic of returns. It shows who is responsible for what.

Send out "protection letters" with some proof of mailing. (I don't use certified mail because it frequently comes back "undeliverable"-and for good reason. Those who aren't filing returns or aren't paying their tax obligations usually have other problems as well. They believe they avoid these problems by not responding to mail. I don't want to waste time trying to "serve" a letter on an individual who is causing me trouble anyway. A proof of mailing certificate form from the post office should be enough to document that you've tried to make contact. Interestingly, the recipient of the letter which you mail with the proof of mailing certificate is not notified that you are mailing the letter in this fashion. I'm always surprised, and somewhat saddened by the number of "clients" who claim that they never received my letter. They are left with trying to prove to a court that the U.S. mail is to blame.)

Finally, be very careful about getting too close to the non-filing or non-taxpaying client socially. They are often looking for "friends" who understand their failings and who accept them nonetheless. While certainly admirable to a degree, too much "closeness" can lead to a conspiracy charge being levied against the return preparer. Even the threat of such a charge can ruin one's afternoon. The preparer is paid to prepare a return for the client but is not obligated to endorse or tolerate the client's illegal actions. Nor is the preparer obligated to be used as a "crutch" to ease a client's troubled conscience.

By following these and other common sense precautionary measures, your chances of being harmed by the non-filing and non-taxpaying client should be dramatically reduced.

Mark R. McBride

Toledo, Ohio

Copyright American Association of Attorney-Certified Public Accountants 1999
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