I have taken on a new client to prepare their tax returns, both C-Corp and personal. Client is going through a divorce and former preparer has chosen to represent the spouse. In reviewing the books for the corp found several mistakes made by past preparer that affect the current returns. Also discovered that the corp has not filed or paid employment taxes for several years, neither federal or NYS. Bookkeeper does not have signature authority on accounts only the taxpayer and the bookkeeper has quit because of not being paid. I have accepted a sizable retainer to take on the client for preparation only. Corp can not be dissolved because of unpaid and unfiled taxes. Large carryover NOl for corp which I expect would be challenged and the IRS would likely prevail on many points. Client owns building and rented to the corp for no money, corp paid and deducted the property taxes, repairs, utilities, etc with no 1099 to taxpayer and no written rental agreement, while taxpayer took depreciation and claimed loss on personal return each year. Client cleaned out his retirement accounts last year and has a W-2 showing withholding from the corp along with his other employees, but the funds have not been remitted. Question: Do I refer him to an attorney before continuing with the engagement?
I might contact an attorney but a Kovel letter may not be an option. A Kovel only covers you against disclosure if you discovered this information while working as an attorney’s agent. You should probably be careful to not dig any deeper.
As Eric would say, you should contact the best criminal lawyer in town and tell the client to go to the next best criminal lawyer. I say that in jest. I doubt you are in trouble but you want to be careful you don’t end up being a witness against your client.