I think I'm a little lost here, but maybe cause it sounds like your boss is trying not to show that money was ever received, but my brain has a hard time thinking that way case I'm sometimes too honest even for my own good. So maybe I'm not picking up on this right.
So he got the cash, right? And you're supposed to record the cash and then credit the receivable because they don't owe you anymore. But your boss wants you to record it as a credit memo? As in, it'll net against the income for being credited. And the receivable will be correct because this customer doesn't owe anymore.
So... legal? Well, it's reducing income by taking the "credit" off the revenues. No, that's not right. Not when it's knowingly done. (As opposed to accidental screw-up.) It'll result in less taxes. And certainly not correct by accounting rules. The IRS doesn't particularly like it when people knowingly don't report income -- it's called fraud.
If I'm interpreting this correctly, no this isn't right and your boss is a jerk. Does your boss realize he's cheating? You can try to politely explain -- some people don't take this stuff very seriously and just shrug it off like it's no big deal. If it's a small amount, really, it's probably not going to be a big deal, but I hate doing things incorrectly on the books, and don't want to be a party to it. (People like to make accountants responsible, you know. :)) If he gets nasty about it, I guess you have to make the choice of whether you want to work for someone dishonest like that, or whether you want your job. I don't like working for people like that, but I also understand that sometimes you just have to keep your job cause you have to put bread on the table, right?
As for the IRS, as the employee you aren't responsible. You're doing what you've been instructed to do. So don't worry about it from that point of view. Assuming they ever find out, your boss is responsible.
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