I reviewed a return for a prospective client this past week (as part of our FREE! CPA Tax Review program).  First of all, his cover letter was touching.  He’d had a very hard year, like many of you have.  He’d lost his house in a short sell, but barely managed to hang on to his business.  Then this past month (October), he discovered that he owed over $10,000 in federal taxes.  He kept asking his tax preparer how this could be when he was completely broke and the preparer never gave him a good answer.

So he sent in his tax return for 2007, plus his returns for two years prior.  That’s when I got puzzled.  In the prior year, he filed a Form 1120(S) (S Corporation Income Tax Return) for his business.  But in 2007, the business was filed as a Sole Proprietorship.  In fact, his itemized deductions wiped out the profit from the business so there was no income tax.  The over $10,000 was due to self-employment tax from his Sole Proprietorship.

Now here’s the part that puzzles me.  He didn’t have a Sole Proprietorship!  He had an S Corporation.  He said he kept asking his preparer if he was sure he really owed the money, but he didn’t know exactly what was wrong so he finally went along with it.

The preparer was the same as the prior year.  My guess is that he got busy, or tired, or sloppy and my prospective client paid the price - a very big one to the tune of over $10,000.