[JasonCPA]

I am a CPA representing a HVAC contractor with an IRS audit.

My client does not have receipts for some equipment purchases for about half of the year under audit. Thus, as far as the IRS is currently concerned he only has income for half of the year and NO expenses. We cannot obtain receipts from his supply house that he uses because he made most of his purchases with cash and the supply house does not track cash purchases by client.

Obliviously a HVAC contractor has expenses related to repairs or installations. While not a strong argument we can establish a normal percentage amount of expenses related to income over the long-term - say a year. For example, if we could say that for every dollar he earns he has about $.30 in related equipment costs. This will work for the IRS if we can establish this amount.

I need to some type of "industry standard" for equipment to revenue percentages from a reliable source such a industry manual or other that I can "document" for the IRS auditor. In other words, I just can't tell the auditor that the normal industry standard for equipment costs related to income is 30% - I need to present evidence that this is true.

I am only requesting help for the equipment charges related to income not overall expenses for items including such items such as automobile expenses. However, anything is useful if I cannot find the aforementioned percentage in question.

My client does home warranty work for about 80% of his business and installations about the other 20%.

Any help would be greatly appreciated!

Kind Regards,
Jason

 

[toocoolforschool]

costs are more like 80 cents on the dollar. always best to keep ALL receipts but water under bridge. life is a batch even more so when surprises put up. tell your client never too late to pray, while everyone else preys.

 

[JasonCPA]

Thank you for your response!

Any chance you could provide some type of documentation on the 80% or point me somewhere that I could find this documentation so that I could provide something to the IRS agent? There has to be something out there that walks someone through this process at least for forecasting purposes....

 

[Answer-Man]

Something does not seem right here.

I feel for the guy, brings back bad memories, I underwent a 5 year State and Federal audit at the same time back about 10 years. Just recently a state 4 year review. (Funny they called it a review but it was really an audit) Came out owing Zero $$$$

Have you asked your client how he calculates the bill. That should help in figuring a part vs labor cost split. I have bought many things from the supply house on cash basis, meaning I have used cash, credit card or written a check. But they have always given me a sales receipt Are you saying he has kept none of these things? (Part of me says, Dumb, maybe this will teach him to get his act together. But I never wish the IRS on anyone)

Your client needs to come up with a list of jobs and make up a parts list for the work he did in the given time frame. If he did not do the needed record keeping work then, he will need to do it now or just pay up.

There are some flat rate manuals available that can be used to indentify cost for a specific job. I have never used an HVAC flat rate book but they are avialable. I have used many Insurance and Repair cost book for construction jobs. These break out cost of material, labor, overheads, and correct to your market area and assume an HVAC flat rate book would do the same. Have your client find a flat rate book and come up with a parts then labor list based on the jobs he did.

You do have a strong arguement the contractor must buy parts to make repairs. He did not just grow them and the IRS knows this. But now the burden of proof is on your client.

Just some final thoughts that may help. I know many that use the 50% Parts - 50% Labor Rule of Thumb. He evidently filled something out to calculate his income (filed estimated income, received 1099). The IRS will provide whatever documentation they have if he asks for it.

Your client needs to be careful here and not just make something up. Whatever information he provides now needs to be a close match to what has already provided to the IRS.

I can think of several other ways to come up with a parts cost but, above (Flat Rate manual) is probably the easiest. The IRS receives millions of itemized forms forms from HVAC guys every year. They know what the parts vs labor vs overhead splits are.

Good Luck

 

[lkapigian]

As a CPA why wouldn't you simply ask him to go to the vendor(s) for a copy or statement of his purchases ...I rarely save " receipts"

 

[beshvac]

Cause he's a "cash" contractor. 80% of business is home warranty-probably no significant income from that. Sounds like a sidejobber accounting method.

 

[toocoolforschool]

any supply house makes you open at least a cash account which records your every purchase of the guy got arounaround that then he's surly the hack of the yr. maybe he bought all his parts at garage sales.

 

[JasonCPA]

Thank You Answer-Man!

Yes, I have asked my client how he calculates his invoices with idea that we should be able to ascertain these percentages for installs. He uses an out of date fixed price manual that he obtained from his prior employer. It has one price with no breakout of labor and equipment. I guess we could do a couple of fixed prices amounts then subtract the current equipment amount and thus have his labor percentage. But, I am kind of in the same position as before of me providing a document that is my calculation and not something provided by the industry.

My client trusted his prior tax preparer to keep copies of his invoices but they did not and were shut down by the state last year. Thus, we do not have copies of invoices - just deposits in his bank account. Hard to tie everything out... We are in a pickle!

 

[lkapigian]

Somethings not right...the vendors have statements ...backing into the numbers is easy no matter the trade

 

[HVAC_Marc]

I would say your client is going to be boned deeply by the IRS. And really, he deserves it for keeping such shoddy records. Every sale, cash or not, always has a receipt. Even garage sales offer receipts. It's really all on him, and he's telling you, as the CPA, to try to bail him out of being a bad business owner. Good luck with that...

 

[Juan Madera]

Since most of his work was warranty, have the warranty company(ies) give you a print out of what they paid in labor and what they reimbursed for parts. That should cover the 80%

 

[coolperfect]

Funny , I was just talking to my accountant who said she just had gone to an an IRS audit. She said without a paid bill the IRS did not even want to hear an explanation. Said it was horrible .

 

[pecmsg]

No tickie

No Shirtie

 

[lkapigian]

IRS auditors are like ADA's ...a half decent CPA should not even worry...

 

[hvacker]

Based on what you've told us my guess your client was paid under the table and he didn't keep anything because he had no intention to pay taxes until he got caught. If true, he is cheating the IRS along with himself by not paying into FICA.
There are some of us that run legal and don't mind dropping the name of those that don't.
These guys always think they are way smart and getting away with something.
My guess from what you've told us someone ratted him out.

If true he's running illegal and as CPA you'll need to decide if to fire the client or not.
Teaching him how to cheat is not ethical.