I have been hired by several clients in what appears to be a recurring theme related to “proving” in some type of civil court proceeding that the client’s income is or is not above/below a certain number. Clients that have engaged me for such services have come from Cincinnati, Miami, Dallas, and several other large cities in the U.S.
Generally, the typical situation is as follows: the taxpayer had not filed taxes for a given number of years. Then, a former business partner, large vendor/customer, former spouse, or other third party takes my client to court for damages or other assessments. The client is concerned with showing that his income is below a certain level and therefore unable to pay the damages being brought.
This is typically the case with self-employed individuals, as a standard W2 employee has income that is clearly discernible through reading their W2 or income transcript provided by the IRS through form 4506-T. The question for these self-employed individuals then is: how much income was earned after expenses?
The schedule that will show this computation is schedule C of form 1040 (as well as a possible depreciation form, if they also own capital assets that are being depreciated to arrive at schedule C income after depreciation/amortization).
Below is an example of a simulated schedule C form showing income and expenses to arrive at net income earned from business. The example also shows the depreciation deduction on line 13 of Par II:
The best-practice way to corroborate the argument made by the client (if the circumstances seem suspect) is to obtain bank account statements from the client and use the information within to create an income statement or tax return using the data directly from the bank. Chase, for example, has a feature where you can invite your accountant to download data.
I have been engaged to not only provide the requested year(s) of tax returns, but also write letters on CPA letterhead explaining what procedures I took to arrive at the numbers on the return. These statements have at times been notarized per request of the client’s attorney.
The following article here brings up confidentiality concerns when tax returns are brought into a court case as evidence. However, they seem to be many parties’ idea of a substantive way to corroborate income earned, and therefore, necessary when making a decision to assess damages.