Recurring Legal Cases Involving Income Proof
I have worked with several clients facing similar issues in civil court. They need to prove whether their income is above or below a specific threshold. Clients from cities like Cincinnati, Miami, Dallas, and other major U.S. locations have sought my help for these matters.
Typical Situation
In these cases, the taxpayer has not filed taxes for several years. Then, a former business partner, vendor, customer, spouse, or another third party sues my client for damages or other claims. The client needs to show that their income is below a certain level to argue they cannot pay the damages.
Self-Employed vs. W2 Employees
Self-employed individuals often face this issue. Their income isn’t easily seen on a W2 or an IRS income transcript (Form 4506-T) like it is for W2 employees. The question is: how much income did they earn after expenses?
Using Schedule C for Proof
Schedule C of Form 1040 shows the income earned after expenses. If the client owns depreciable assets, they must also use a depreciation form to determine net income after depreciation and amortization.
Example of Schedule C
Here’s an example of a Schedule C form that shows income and expenses to arrive at net income from a business. The example includes the depreciation deduction on line 13 of Part II:
Corroborating Income
To support the client’s case, I recommend obtaining bank account statements. These can be used to create an income statement or tax return based on actual bank data. For instance, Chase offers a feature that allows accountants to download data directly.
Providing Documentation
My role often involves not just supplying the requested tax returns but also writing explanatory letters on CPA letterhead. These letters detail the procedures I followed to arrive at the numbers on the return. Sometimes, these statements are notarized at the client’s attorney’s request.
Confidentiality Concerns
An article on confidentiality in court cases highlights concerns about using tax returns as evidence. Despite these issues, many believe that tax returns are essential for verifying income and assessing damages.
