Has your boss ever asked you to cross a line that shouldn't

It's not something I have ever been asked to do.

But cash does not equal income. If the customer has been invoiced, that is the income, not the cash receipt. Unless he is asking you to delay invoicing. I come from a manufacturing background. Am I missing something? Are you a cash based business?

As someone who is a small business owner and has to pay taxes, but has never done anything like this (and honestly it wouldn't occur to me)... I googled your description within the IRS to see if it was a legal issue, ethical issue, or both.

Here is how what you described is defined:

Constructive income. Income also means anything you have the right to put your hands on but don't for some reason. The legal doctrine of "constructive receipt" says that as soon as money or property is available to you, or is credited to your account, it becomes income -- whether you grab it or not. For instance, you can't get a check for services in November 2000 and hold it for deposit until 2001 without being taxed on it in 2000, the year received.

So, regardless of when he deposits the income should be taxable for this year.

Kristin

What about the fact that some checks are void after 30/60/90 days? I would be worried about the September check...

It's my understanding that in order to def income to next year, the income has to be paid for now (deposited) but earned in the subsequent year and you have still have record it as Def Inc on the balance sheet. 

OP - I would not feel comfortable with holding the deposits for the July - October work.   That seems too much of a stretch for me.

One thing you can do to protect yourself in case this ever comes up in an audit is to ask your employer give you something in writing (via email maybe) stating that he is requiring you to hold all deposits from now until January 1st. 

 


Save

Keep a list of when checks were received vs when they were deposited and give that to the tax preparer so that he/she can properly report the money since even if you don't deposit them until next year, they should be considered income:


www.irs.gov/publications/p334/ch02.html

Cash Method
Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. For more information, see Inventories , later.

Income
Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. If you receive property or services, you must include their fair market value in income.

Example.

On December 30, 2014, Mrs. Sycamore sent you a check for interior decorating services you provided to her. You received the check on January 2, 2015. You must include the amount of the check in income for 2015.

Constructive receipt. You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it.
Example.

Interest is credited to your bank account in December 2015. You do not withdraw it or enter it into your passbook until 2016. You must include it in your gross income for 2015.

Delaying receipt of income. You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.
Example.

Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2015. She was told in December that her payment was available. At her request, she was not paid until January 2016. She must include this payment in her 2015 income because it was constructively received in 2015.

Checks. Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year.
Example.

Dr. Redd received a check for $500 on December 31, 2015, from a patient. She could not deposit the check in her business account until January 2, 2016. She must include this fee in her income for 2015.

Yes, darn it, my boss regularly asks me to notarize things he signed when I wasn't there. How do I know he really signed them? Oh, sure, I recognize his signature. Still!!! I took an oath!

He also wants me to jaywalk. I absolutely refuse. Some lines cannot be crossed.

(OK, I know my issues are not as potentially serious as yours, OP. Still.)

[People jaywalk in Knoxville All.The.Time. Just because everyone else does it doesn't mean I will.]

That is not deferred income. Deferred income is not received until later. Once he has control over it (ie it is in his mailbox) it is taxable to him at that point in time. He is smarter to accelerate expenses than to avoid declaring taxable income. He will be receiving 1099's from these companies that include the amounts he is holding onto. If his 1099's exceed the amount of gross revenue he claims, that is a big red flag to the IRS.

Working in accounting, I have been aware of situations that are not on the up and up. I never sign tax returns (state or federal, income or payroll) if I have not done the actual transactions myself or if I know of something shady going on. (For instance giving free rent in lieu of wages). The person who signs the returns is the one with their neck on the line. The external CPA is covered because they are removed from the actual transactions and prepare the returns from documents provided by the client. An inhouse accountant would not have that protection. Having knowledge of the shadiness could come back to bite you if you sign returns.


That said, I would do as instructed. However, I sure as heck would not sign any returns. Prepare them, yes. Sign them, no.

Yes, especially to the part that is bolded.

If he earned the money in July, IRS is not going to agree that he can wait to be taxed on the income until next year if he's ever audited. He will then owe penalties on the money for the time it was due to have taxes paid on it to the time it is paid.

I bet he's underpaid his quarterly taxes as well. Maybe that's part of why he's trying to do this now.

Holding deposits is not an uncommon tax planning strategy. However, holding for that long is pushing it, IMO. A bookkeeper in that position will not face any issues for going along with it, only the folks signing the return would.

You could be a tax whistleblower if you want, but I don't know how much the IRS would pursue it.

I have gone toe to toe with a partner at work for wanting the firm to do something questionable. Facts didn't matter at that point, but I did have to get another owner involved.

Whether you are accounting using the cash method or the accrual method, the income is earned in this fiscal period.

In Canada, corporations report on an accrual basis - no choice. As an auditor, a large deposit right at the beginning of a fiscal period is a huge red flag for me.

unless I was doing his taxes for him, I would just do as I was told, but I would request it in an email in case someone tried to accuse me of holding onto the payment intentionally.

if he chooses to handle his taxes incorrectly, that's on him, not on me (again, assuming I am not doing his taxes for him)

Oh. Hell. No! Good for you! There's no way I could know something that was reportable and then hope that the principal took care of it. No way, no how. Nuh-uh.