CPAs or those with tax knowledge please read this thread

[Mill]

Hypothetical situation:

Person A owns his own business. Person A deposits checks from Person B and C into his account, and then transfers the money to other parties for the benefit for person B and C. Person A received no tangible or monetary benefit -- it was simply a "favor."

I am not clear if Person A deposited the checks into a business or personal account. Person A was told by their accountant that he must pay taxes on the "income" from Person B and C. I think the accountant is dumber than a pile of rocks, because it is clearly not income, and wire transfer receipts -- as well as the names on the original checks -- would show that Person A was simply acting as an agent of Person B and C.

Where might I find the appropriate IRS/banking regulation concerning such a transfer? I need to know what steps are necessary to assure that Person A does not have tax liability in this situation. I've looked on the IRS site and googled a ton, but I haven't found something covering specifically what I'm talking about. I just need to know what steps need to be taken to prove Person A was an agent, received no income, and thus has no tax liability for being the agent that transferred the money.

Finally, the situation does NOT involve me or any actions I have undertaken. I am asking this question for a friend of a friend.

 

[Vette73]

If the checks were put in the business account and they were made out to the business then it will look like income. How did he give the money back? In a check, cash, etc...

And why did he put their check in his account in the first place? Was it income for them they are trying to hide or is he trying to laundry money? Sounds like his accountant is trying to save him a major audit and/or federal rear-end pounding jail time.

Also how much money are we talking about?

 

[GuitarDaddy]

Money laundering is bad, mkay!

You example is way to vague to give any meanful advise. How much money are we talking? Who are "other parties" and what benefit did B and C recieve?

 

[IHAVEAQUESTION]

Did person A provide service to earn the check? If so, person A is subject to tax liability. The fact that he gives the money back to B and C matters less. Although I think that there would be some kind of deduction he can take to mitigate the liability.

 

[Rastus]

Also, when money changes hands and it isn't for services or products, gift tax can apply also.

 

[Mill]

Checks were made out to individuals. They simply signed them over to Person A because they did not have a bank account. They needed a bank account to cash checks that they received for work. All witholding and SSI taxes have been paid on the checks. The people they worked for simply combined their earnings into one check post taxation. They needed to cash the checks, so they deposited their checks in a friend's bank account. The friend owns his own business, and his accountant told him he would be taxed "1500 dollars" on each check. I think that is a bunch of BS, and the friend is trying to scam person A and B.

There was no service. Nada. He simply deposited the checks and then gave them the cash so they could wire the money back to their home country. They are here legally on an exchange visa for work. He was acting as their unpaid agent.

I hope that clarifies, but if there are any other questions please ask.

 

[BrunoPuntzJones]

How did he handle it on his books?

He should have just hit a liability and cash and then when he took the money back out reversed it.

Not a big deal. He'll just have to prove it if audited and it's questioned.

 

[GuitarDaddy]

If all person A was doing was cashing the checks, then there is no tax liability.

There are a couple of ways to handle.

1. like a previous poster suggested, the checks and cash transactions could be posted to the same account on Person A's business accounts, netting to 0.

2. The deposited checks could be included in income, and the cash outlays could be included in expeneses, which would have a net 0 effect on income and taxes. Although this method would overstate gross income, which could be a problem if the business pays bonuses/commisions/royalties based on a percentage of gross income.

 

[Mill]

Thank you both for the help. Apparently either this guy is trying to scam them or his accountant is uber conservative. The accountant was claiming that person B and C needed to pay person A 1500 dollars per check. Each check was for around 8000. I knew from the start that that idea was BS, but I was trying to make sure I wasn't crazy.

Witholding and all that jazz had already been paid, and they aren't subject to more income taxes because they are foreign nationals. So, either the bookkeeper is a loon or the guy is taking advantage of them.