Posts Tagged ‘tax stories’

Dealing with Clients Who Want to Take Illegal Deductions

Tax professionals all have stories of clients who wanted to cheat on their taxes. It might be tempting to nudge the line a bit to the left to keep a client happy and collect a fee. But you need to think long and hard before you make your decision.

If you prepare your own return you can avoid all the pesky demands of tax professionals to file an accurate tax return. Just as a tax professionals face serious penalties, so does the taxpayer. If you talk a tax professional into an unreasonable position on your tax return you will be penalized a lot faster than the tax professional. Tax preparers are really just entering data. She may not be aware of the malfeasance. That leaves you blowing in the wind. And a cold wind it is.

Then we have those instances where the issues are not clear. You can take a questionable deduction, within reason. If you disclose the position you’re taking you should be secure from penalties from an overzealous IRS agent.




The Client Not Worth Having

Bring up the subject of the unreasonable client or client from hell with tax professionals and they all go into cataleptic shock.  A tax season isn’t complete without at least a dozen or three requests to do something industrial strength stupid.

A few years back my office had a client who included a receipt to deduct IMODIUM® and underwear. I pointed out the receipt and informed the client he hadn’t seen my bill yet so the deduction is not “regular and ordinary” and therefore not deductible. He is the good kind of client. He withdrew the deduction without complaint.

This tax season wasn’t as polite. As hard as I try to winnow down the client list somebody always comes up with a position that will not stand IRS scrutiny and has preparer penalty written all over it.

The client in question this year has been with my firm a few years. He always pushed the envelope too far and should have been shown the door a long time ago, but a certain accountant was a nice guy and listened to the BS.

In the past the client had us do his bookkeeping. That was too expensive so this year he threw everything in a box. I have employees who work exclusively bringing order to chaos. These employees are generally not tax professionals, but we do train them to sift the wheat from the chaff. Items in questions are reviewed by an accountant and added to the numbers if the deduction is allowed.

My friendly client likes to eat out. A lot! As in every meal. He threw every receipt into the box. Working on the road he filled the van with fuel often. Included on the receipt was always a bottle of water, gum or some other snack. The other items are NOT DEDUCTBLE!

If a few small items slip by I don’t lose sleep over it. I’m not auditing the return; I’m preparing it. Sorting wads of paper in a box isn’t bookkeeping. If you don’t care enough about your business to manage it correctly don’t expect me to work for free during the busiest time of the year bringing order to the mess. We separate receipts into piles based on our interpretation of type of expense (or if it is even a business expense) and run a z-tape on each pile.

Back to our client. All those meals and extra items on gas receipts were disallowed by my office. Dawn, a preparer in my office, separated out the questionable items and told the client she would not put those expenses on the return. The client was pissed. The only answer? Gotta talk to da boss.

The boss was having none of it. If you have a meal expense it is your responsibility to record the business purpose. You can NOT deduct everything you eat while on the road and dinner on the way home because that was related to work. NO IT’S NOT!

Smart tax preparers explain why the deduction is not allowed to the client. This is actually required by Treasury Circular 230, the publication regulating tax professionals practicing before the IRS. Section 10.21 clearly states a tax professional must inform the client of an unreasonable position. Nowhere in Circular 230 does it say you must fire the client, but Section 6694 of the Code is very clear: an unreasonable position by a preparer, even if disclosed, can result in penalty and even censure. Preparer penalties start at $1,000 for an unreasonable position and $5,000 for disregard of the rules.




The Most Important Number Every Tax Professional Must Know

For many years my office attended professional education classes taught by Jack Surgent. Jack is one of the smartest tax guys I’ve ever met.

During one of these training sessions we focused on ethics. When the topic of clients wanting to take illegal deductions came up Jack never stopped for comment. All he said was, “800. . . 799. Get it?”

The whole room better have. What Jack meant was if you have 800 clients and lose one you still have 799. Barely more than a tenth of one percent. No one client is worth it.

What Jack didn’t say, and I will, is, if you keep these clients it will hurt the profitability of your practice. Clients always pushing the envelope don’t want to pay for quality consulting. They want to cheat and if the boom is lowered will throw you under the bus before you open your mouth.

800.

  1. Get it?




For the Folks Back Home Preparing Their Own Return

Nothing is more annoying than a highly trained and competent tax professional disallowing bogus deductions or not allowing unreported income. I see bloggers publishing some of the things they think are allowed. I quietly smile as I read knowing I’m not the one who will have to defend them in audit.

Treasury Circular 230 regulates most tax professionals. That doesn’t leave DIYers off the hook. The penalties can get large real fast for playing it fast and loose. Just failing to file a tax return by the due date (without a valid extension) subjects you to a 5% penalty per month up to five months (25%). If there is no balance due you at least avoid this one.

Section 6662 provides for a 20% accuracy penalty if you disregard the rules by failing to make a reasonable effort to comply with the tax code. The IRS automatically assumes you didn’t make a reasonable effort if they assess additional tax because if you did you wouldn’t owe the extra tax. You can fight this in appeals and might even win if you can substantiate you did make a reasonable effort.

Considering my ex-client above, he went to another preparer to get his return done. The other preparer has serious risk if she allows the deductions. The client is still on the hook for a Section 6662 penalty or even a $5,000 penalty for filing a frivolous return. If the numbers get big enough—I don’t think they were in this case, but then again I could be wrong—Section 7201 comes in to play. Section 7201 is the willful attempt to evade or defeat tax which is a felony, subject to a fine up to $100,000, up to a year in prison or both.




Don’t Be Scared

Now that I put the fear of god in you it’s time to take a deep breath and gain perspective. Honest mistakes are generally minor and the IRS rarely assesses a penalty or removes them relatively easily.

The discussion above isn’t about minor or honest mistakes. Small changes in an audit are usually disregarded by the IRS and treated as a “no change” audit. Most IRS auditors are pretty darn nice people. I’ve worked with them for several decades and one was an employee before she bed down with the enemy, ah, the IRS. Yes, there are a few knucklebusters out there, but even they don’t cause problems unless you invite them to.

Fear of an audit or penalties is unfounded unless you played fast and loose on your tax return.

If you do your own return you MUST take the time to educate yourself on the issues affecting your tax situation. Consulting with a tax professional doesn’t mean they must also prepare the return. I personally consult with many people who prepare their own taxes. I even consult other tax professionals. (It happens when you become the old guy on the block with three decades in the trenches.)

The takeaway from this post is thus: If you are a tax professional, do NOT relax your ethics for a fee. Educate your client, if they allow. If the client refuses to follow the rules remember Jack Surgent: 800; 799. No one client is worth your career, a fee or the headache. Move on. Life is better that way.

If you do your own tax return or hire a tax professional, insist on accuracy. Educate yourself on the issues affecting your taxes. There are so many ways to legally lower your taxes it is nothing short of insane to cheat on your taxes.

The only excuse is laziness and then you deserve what you get.



The Power to Do Evil: The Ethical Dilemma

Over 2,000 years ago Plato, Socrates, Aristotle and the Stoics were debating ethics. Fast forward to our modern day and we find our moral compass challenged daily and on a much deeper level.

Less than two months ago I faced the second largest ethical dilemma of my career. About eight years ago I faced my biggest ethical challenge. I will share both stories here today and the outcome. My struggles should prove fertile ground for contemplation of your own moral judgment.

As a society we think of certain people as more prone to ethical lapses. This might be the result of the professions involved. Police officers make repeated ethical decisions every day. Judges, prosecutors and even jury members must deal with their personal ethics and that of others. But law enforcement or military personnel aren’t the only ones thrust into serious choices. Attorneys and doctors are forced into making decisions that might not seem ethical at first, but they are often forced to make a choice and fast. No choice is an ethical choice all too often with serious consequences.

Your favorite accountant also faces ethical issues. I’m enrolled to practice before the IRS (EA) and that means I have an ethical code of conduct forced upon me (Treasury Circular 230). But it isn’t enough! Every decision I make in my office has some level of ethical consideration involved. The bare-bones guidelines governing EAs is only a framework. Many decisions must be made quickly in the gaps.

Non-professionals also deal with ethics. The demand to choose the most ethical route might be less rapid-fire, but everyone still faces tough choices from time to time. By revealing my two most difficult decisions of my career I hope to get you thinking about choices you make in life and the moral and ethical issues involved. There is no doubt the comment section will be lively with this one as opinions vary widely when ethical choices are discussed.




I Did it Right and Paid Hush Money

This one happened less than two months ago and is still a festering thorn in my tail.

In Wisconsin we have a personal property tax for businesses only. In January a form comes in the mail to list all the business assets outside the building. Computers are exempt from the tax, but desks, phone systems, copiers and faxes do count. The value of the property is decreased each year for depreciation in estimated value. The value is then taxed at the rate real property rate.

My client received his personal property tax forms in January two years ago. The report is due March 1st. This is a serious issue. Most business clients don’t have their financials in to me by the time I need to file the personal property tax report. When most clients are quizzed on new purchases they generally draw a blank until they need a deduction on their income tax return. By then it’s too late for the personal property report.

As preparer I’m required to sign the return attesting the report is true and accurate to the best of my knowledge under threat of perjury. Even though the return might be wrong, I don’t know this until after the fact and usually after the due date.

The client in question purchased a large piece of equipment two years ago. It was missed on the first return for the reason listed above. Then, last January, we added the new equipment to his disclosure. This added close to $100,000 to his business’s personal property. His bill from the municipality would jump from a few hundred dollars to $2,000.

Last December the bill came in and he flipped. We did everything right, but he was mad we didn’t cheat on his personal property tax report. After several rounds of debate he demanded I pay him half the tax owed.

Here is where the ethical dilemma turns ugly. His business and personal return alone isn’t enough for me to even consider such an outrageous demand. But he’s connected to one of my five largest clients. Losing all that business will be noticeable. I paid the $1,000.

You can grill my tail in the comments. You are 100% right. I was wrong to pay half his tax bill in the name of saving a client.

Of course, you know what happened next, right? Well, in December he got his personal property tax bill and in January he got the forms to report this year’s information. My office manager filled it out last year and filled it out the way the client wanted this year and put my name on it to sign. I refused. I made it abundantly clear this office will neither prepare nor sign another personal property tax report for this client ever again! If he wants to cheat I will have no part of it.

My office manager hand delivered the personal property tax forms back to the client with my response. She pointed out the offending machine and he made it clear he will not report it.

Things have been frosty since. I did the right thing except for writing a check. In the end it is almost a certainty I will lose one of my biggest clients and all work connected to them. It probably would have been better if I cut ties immediately.




Ethical Discussion

The ethical dilemma above is clear to see in hindsight. I did a lot right and also committed what I consider a grievance error.

Every option available creates an ethical problem. If I comply I’m an accomplice to fraud. If I do what I did I only pushed the unethical act back on the client. And if I fire the client I push the ethical issues to the next tax professional. As you can see, even no choice, standing like a deer in the headlights, is still a clear choice with ethical implications.

What would you have done? Do you think I was wrong? Would you have written a check to keep a client? Paying a client’s tax isn’t illegal. I committed no crime. I was only asked to prepare a false return and refused. Morally the ground I stand on is higher. But we are talking ethics, kind readers. The decision isn’t always so clear cut in such cases.

My Greatest Ethical Challenge Ever

I have a reputation for handling very difficult cases against the IRS. I have a tax attorney in D.C. on speed dial. Her rate starts at $1,000 per hour. For the dirtiest cases we call her in.

The case in discussion here didn’t involve outside help. I did this one all on my own.

Sometimes when an accounting or tax firm gets into tax trouble I’m called in. It makes for a unique situation, for sure. The IRS usually laughs when they see me defending the competition. When I was done with Revenue on this case the laughing had stopped.

The tax firm involved had about $800,000 of profits annually. They are a slightly larger firm than mine. An audit revealed some irregularities and the IRS assessed them with $1.2 million in back taxes, penalties and interest. It was rightfully owed.

The auditor made a few errors in assessing tax. When I pushed back I was threatened with preparer penalties. I was called into the IRS office. I brought the only paperwork I would need. The agent made it clear I was in serious trouble. This is when I pulled out the federal court paperwork already filled out. You see if you want to attack a tax professional you don’t do so in Tax Court where you need to prove your innocence. You go to federal court where you are presumed innocent until proven guilty. I finished my argument with, “You file any penalties against me and I file this in federal court. I want to see the prosecutor dumb enough to get his butt chewed by a federal judge over preparer penalties against an individual who DIDN’T PREPARE THE RETURN!”

The auditor swallowed her tongue. I remember her words clearly, “I’m glad you told me this.” I’m sure she did. Of course she could have looked at her paperwork before she levied the threat to back me off a case. As I left I turned back and very quietly said, “You’re going to regret doing this.” I was pissed.

Six months later the IRS couldn’t collect a penny and the auditor was gone.

Through a series of procedural maneuvers I backed the IRS into a corner. Eventually they sent a guy from the appeals office in Dallas. That’s a long trip for little ol’ me.

The meeting with the appeals officer, client and me happened in my conference room. My client was grilled for assets. He kept professing he had few assets. Most of the client’s income was off the table. (That story would be a long post in and of itself.) At one point the agent asked the client if he had any expensive jewelry. My client said no.

But that was a lie! He just bought his wife a $25,000 ring. I saw the receipt. That was one nice rock!

When the inquisition was finished I filed the coup de grace and had my client deemed uncollectable. Not bad for a guy who owed over a million and pulled in close to a million annually.

One of my CPAs at the time asked me if what I did was ethical. I defended myself by saying it would have been unethical of me NOT to defend the client to the nth degree. After all these years I’m no longer certain.

As happens all too often, the client dodged a bullet and went right back to the well. This time he brought a bigger shovel. I took a pass. He was no longer a client. But there is no doubt in my mind I enabled his behavior.




Ethical Discussion

I take a big chance sharing these stories. I kept the details vague for a reason. All information that would lead to identifying the client has been removed.

Tax professionals are a large part of this blog’s readership. IRS agents and state revenue departments also drop in unannounced. By sharing my ethical standards I expose myself to risk of sanction or retaliation. However, these issues are too important to ignore. Hiding from the truth doesn’t make my profession better. Only by sharing my experiences and choices can the demographic grow.

When over a million dollars are on the line we are starting to talk serious money. The ethical implications are huge.

I never said a word when the agent asked my client about jewelry. If I were asked I would have told the truth. But I wasn’t asked and the IRS agent had no reason to believe I had additional information.

What are the ethical implications? If I spoke up I would have betrayed the client I was representing. Can you imagine an attorney throwing his client under the bus? I felt it was the same thing. Now I’m not so certain.

Enrolled agents have virtually no privilege with clients. People need to understand licensed tax professionals (CPAs and EAs) have to comply with most IRS requests for information or face penalties and/or sanction. Only attorneys have privilege with clients.

This final story bothers me on two levels. First, the size of the amount due was large. This wasn’t a minor issue. Once you cross into seven figures the gloves come off. The second problem for me was my actions enabled the client. He went back to digging a new hole.

The worst part of this ethical dilemma was why I did it. An IRS agent pissed me off by her low level of professionalism. I used my 30 years of experience to gut her just because I could. It sounds like smart talk, but because I won the game I actually walked the talk. And when the dust settled I had to contemplate my CPA employee’s comment: Was what I did ethical?

The real questions should be: Why don’t I fight at that level all the time? For one I don’t have the energy. And second, most cases don’t have the facts to accomplish what I did.




Time for a Debate

This is where you can tell me how wrong I am.  The second ethical issue above is a large number while the first issue above is highly questionable.

What would you have done? If you hire a tax pro would you expect that kind of defense? When it comes to taxes is it anything goes? I hope not. I think my moral compass is better aligned than that.

In each instance every action I took was an ethical choice. “No decision” was also an ethical choice! Firing the client only kicks the can to the next tax professional.

Treasury Circular 230 is clear on the matter. Section 10.21 states tax professionals governed by the rules of Treasury Circular 230 must inform the client of errors and the consequences. In other words I have to tell you if you are cheating when you probably already know you are cheating! I also have to tell you the potential penalties. There is nothing in there saying I have to fire the client! However, I think it’s clear I’m not allowed to sign a return attesting its accurate when I know it isn’t. But I can still keep representing the client. Talk about a conflict of interest (which is covered in the circular, too).

I hope we can get a lively debate in the comment section. The personal property report issue is what triggered this post. I’m very interested in how you would handle the situations I had.

My goal is to get you to think about the ethical implications of your decisions. Many times life gives us all bad options and not much time to make said choice. Doctors make life and death decisions in a heartbeat. The police, prosecutors and judge can destroy an innocent life with one bad decision.

And tax professionals can make or break the personal finance issues of clients. Retirement, early or not, is affected by tax choices. The answers are rarely crystal clear.

This isn’t about right or wrong. It’s about making a choice when all the answers are wrong. About making the most ethic choice of those available.



How to Write Engaging Blog Posts

Grab the reader’s attention early. A rubber snake might do the trick. Then again, maybe not.

Every writing conference I’ve ever been to has a breakout session titled: PANTSER OR PLOTTER?

Beginning writers flock to these things because they think it’s an important part of the writing process when the question is really a matter of personal work habits.

Many successful writers plant their tail in front of the keyboard and start pounding out copy while others need a detailed plan before the muse flickers to life. Plotters take the risk they’ll plan until infinity before rolling up their sleeves and working; writing from the seat of your pants can lead to rambling pros in need of heavy editing.

The longer the work the more need for at least a few details before you start. Novels need a plan (which usually changes several times before reaching the conclusion) while a short story can start as a vague concept and move to the page rather quickly.

Blogger’s Dilemma

Bloggers are desperate to get something published. Once upon a time you had to write until your fingers bled to improve your voice and acuity on the page. The only true way to master the writing craft is to write. A lot!

Traditional publishers want polished work. Polish comes from experience. Experience comes from practice. It takes heart to write endlessly perfecting your craft without much reinforcement.

The publishing world has changed tremendously over the last several decades. Self-published books were universally bad in the past. Today many of the best books on the market either are self-published or started as a self-pub.

Bloggers are like any other writer. They want to see their stuff out there as soon as possible. Rushed work looks, well, rushed.

I’ve received several requests to discuss my writing habits. Most people realize publishing a half million words a year on a personal finance blog is a lot of work. They want to know where I get my ideas, do I plot or write by the seat of my pants, when do I write and how fast do I write.

I imagine the Plutus Award for Best New Personal Finance Blog of the Year has something to do with it. Another part is my story telling. People expect boring facts when they see “Accountant” in the title. Surprising the reader with engaging storytelling mixed with useful information grabs them early and keeps them.

Some questions are hard to answer. One reader asked how I come up with such awesome post titles. I didn’t have an answer.

Writers have a difficult time explaining what makes a good piece of writing a good piece of writing. At first glance it appears I just sit down and peck out a story, hit publish and people get Ooooo lips.

Rather than give you stale, dry description on how to write an engaging blog post people will want to read and will keep coming back for more, I will show you how I do it. My way isn’t right for everyone, but it does give you an idea on how my creative process works.




How I Write

Ideas hit me all the time. Reading a book, watching a movie, talking with friends, thing jump out at me and demand recording. The working title of this post was the title of this section. Of course, if I want anyone outside my regular readers to become “engaged” in this post I had better come up with a better title.

When ideas hit I take notes. At home, at the office, on the road, I keep paper and pencil handy. Yes, even beside the bed is paper and pencil. I sleep on the couch about half the time and in bed the other half. On the couch I’m surrounded by books and papers. When my creativity is highest I wrap myself in the literature and recording utensils.

Rarely do I sit and write spontaneously. After a long day, writing a quality post requires some advance planning. If I had no previous ideas to mull you wouldn’t see a new post the next day.

There are 64 unwritten posts in my WordPress queue. You need a title to save the idea, but every title is accompanied with a few sentences outlining a theme I wish to address. Sometimes the notes are detailed and run several hundred words and links to resources. Most descriptions are short. This post has two sentences as the material for pumping my creative energy.

Most ideas die in my little notebooks. After thinking about them for a few days it becomes clear the idea doesn’t work or the project would be 20,000 words. (As an example: I had planned a post on climate change and why it doesn’t matter, plus how it affects personal finances. The material I gathered kept growing until I realized it would be a veeeeery long post. It would also cause people to throw things at me since it’s such a politicized topic. I had planned a second post on mass extinctions and why we are not in the sixth great extinction. The natural world is becoming more diverse even as people think humans are killing everything off. The work on both these posts would have ended up short books in their briefest form so I shelved the projects. I did get to read several really good books on the subject so all wasn’t lost.)

(Good blog posts also try to avoid long paragraphs.)

Three times a week I publish on a topic of interest in the personal finance community (I hope). On Saturday I give readers a glimpse inside my personal life.

Every day I am thinking about writing! When I take a break or eat I’m thinking about what I’ll write in an upcoming post. The thoughts are never more than a few inches away.

By the time I punch the first words onto the digital screen I’ve played the idea through my mind countless times. I start the story and then toss it when it goes down a dead end road. As I work around the farm or workout at the gym I’m playing with possible scenarios.




The Fun Part

Most days I have a good idea which posts I’ll be writing for at least a week out, including the “Stalking the Accountant” post on Saturday.

This gives me time to work the idea out in my head. Plotting is something I rarely do even when writing a long novel. (Eight years ago I wrote a 180,000 word science fiction novel from a three sentence note. I knew where I wanted to go and started building the story. It ended up someplace different and a better story that is now the first book of a trilogy.)

Pantser writing has a huge risk. Plotting is drudge work. I like to write. After plenty of time thinking the idea through (sometimes with and sometimes without notes) I set to work. Writing from the seat of my pants means there are times I write a post and get the dry heaves when reviewing. Yes, I have to start all over. The idea I regurgitated is dead and gone once that happens. Those are tough days when I have self-imposed deadlines.

Most of the deleting these days happens in the editing process. Maybe a dozen or so posts get completely rejected per year. Most can be salvaged with work. On good days (when the whisky is flowing freely) the necessary editing is light. Those days are rare.

What comes next is the part people seem most interested in. They want to know “how” I write.

Most posts, including this one, are written the night before they are published. The clock reads 10:05 as I type these words.

On a good night I can stamp 1,000 words of rough draft to the laptop’s memory banks per hour. On a bad night I start to wonder if I’ll get any sleep before sunrise.

Normally, rough draft takes two hour or so for posts on this blog. If more research is needed or if I want to add more links for readers to dig deeper into certain points I don’t have space to adequately cover in the post the time commitment increases.

It seems easy at this point. Some crazy guy from Nowhere, Wisconsin types for a couple hours and calls it a day. If only it were so easy.

Dozens of hours of thought entered the scene before the first word was typed. Sometimes I read entire books or pull information from several books to build a quality post. I don’t show books just to get an Amazon sale! These books really add to the learning process of the reader!

Writing rough draft appeals to beginning writers. I don’t know why. From the outside it must seem like that is all a writer does.

The hard work reignites the next morning. Editing also takes several hours as I rework the words until they communicate what I demand them to. Time constraints can be an issue.

I read every post out loud to Mrs. Accountant. Reading aloud is the most powerful editing tool I know of. If Mrs. Accountant will not sit still to listen to you read your work to her you can still read aloud to yourself. Trust me, it works.

Important note: Stephen King in his book On Writing tells a story of an editor who once sent him a note along with rejection letter stating: Final draft is rough draft minus 10%.

I don’t delete as much as I used to. As you build your writing skills you will delete less, yet still edit plenty. Sometimes you even add during the editing process. Remember the 180,000 word novel I mentioned above? In the editing process I highlighted 30 pages that needed to go and hit delete. I loved the story deleted, but it had no place in the novel. If you want engaging writing you have to do it.

Publishing a blog is more than words. I was never a picture taker. Now I’m always looking for possible images to add to posts. At least phones have cameras today and Google automatically downloads the things to “Photos” on my laptop. Don’t ask me how.

Formatting the post takes about an hour.

As soon as I finish I hit publish. Sometimes I finish a day or so early. In those instances I schedule the post. Most scheduled posts are written the day before versus the night before. This means Mrs. Accountant listens to the story at night. Before I hit the hay I format and schedule the post.




Personal Touch

The information to this point is mechanical information. It tells you what you’ll see if you follow me around and read my mind. You see me mentally taking notes and planning. You see me writing and editing. My personal writing schedule will not produce engaging posts!

Engaging writing has a piece of you in it. Stories are vital! Most posts on The Wealthy Accountant have some element of story. A good writer knows which parts of the story to leave out. The same story can be told multiple times from different perspectives!

Your life is rich and full of stories. Your childhood, work, marriage, health and family are a cornucopia of stories to share.

Our wedding candle as we approach our 30th wedding anniversary. The personal touch is the key ingredient of engaging writing. Always have a piece of you in there.

No matter the subject, stories are important. Without a personal story the information is just rote formality. For crying out loud, kind readers, I write on taxes and personal finance! Story is the only thing I have to offer unless you think plagiarizing the stock quotes page of The Wall Street Journal is engaging material.

Stories from history or the news are interesting, but often told. Your story, told right, is one only you can tell and readers will find it near impossible to put down or stay away.

Stories are unique in communicating information. Story allows a message above the communicated information. Think of the power of Christ’s parables. They stood the test of time and are so memorable for a reason regardless your faith.

When you own the story the reader gets a chance to step into your world. That’s why a started publishing the “Stalking” posts every Saturday. Engaged readers want to know more about the person they are growing fond of!

Share a piece of you and readers will be engaged. Readers feel like they know you and in a way they do. Writing allows the author to share at a deeper, more intimate level than mere verbal communication.

Practice, kind readers. If you are looking to write an engaging blog you MUST practice. Practice is the only way to get good. Write every day. Never believe you must publish every word you smear across the parchment. The words aren’t that precious until you can string them together in a way that makes your readers swallow hard. They just can’t seem to get the lump in their throat to go down.

The clock now read 10:37. This post is coming to an end. I’ll read a bit before retiring for the night.

Tomorrow morning the hard work starts. If I do it right (or is it write) you’ll be thinking about these words for a lifetime.



Preliminary Report on Estimated Tax Savings with the New Tax Law

Tax season is still early in the tooth but patterns are starting to emerge.

My software allows me to use current year data to estimate results based on the Tax Cuts and Jobs Act changes. With a couple hundred returns under the belt already the impact of the changes are mostly expected with a few surprises thrown in.

Since planning will be so important this year I wanted to share my findings. Please understand these are estimated results. Several factors are hard to nail down in these estimates as the accounting industry is still deciding how to handle certain issues and the IRS still has to write regulations interpreting the changes.

One of the biggest issues not accounted for is the business income deduction as it is adjusted for guaranteed payments to partners and reasonable compensation to S corporation owners. If you aren’t familiar with these terms you can still benefit from my early findings.




Expected Results

Some results were expected. High income taxpayers are doing rather well with the new rules. My original thought was the biggest benefits would go to those well up the tax bracket ladder.

That has been the case, but significant tax reductions are being felt by those down to $100,000 of income and even lower!

My reading of the tax bill led me to believe lower income taxpayers wouldn’t benefit much. Eliminating personal exemptions while increasing the standard deduction was mostly a wash on the surface as the amounts generally offset.

The child tax credit enhancements are helping families with children. In the end, families in the upper middle class are doing well based on estimates.




Unexpected Results

The reason for this post is the unexpected results. Common knowledge on how the tax changes will affect taxpayers has been written about ad nauseam. There are plenty of surprises I do want to share.

As the first tax returns came in it started to look like the majority of clients would see nickels and dimes to their tax savings or additional tax next year. These early clients also tend to have very simple returns with lower income (at least for my client list).

My team and I review the expected changes with every client. We quickly discovered the tax savings frequently crawled lower down the income ladder. I personally find this a pleasant surprise. If a tax cut is going to work you need to give the break to those who will spend it. People like me only add it to the investment heap without helping the nation’s economy much.

Eliminating personal exemptions and replacing it with a higher standard deduction didn’t hurt as much as feared, especially if children are involved. Households without children are seeing minor changes unless their income is higher where they benefit from the lower tax brackets and longer time spent in lower brackets.

Retired clients were expected to see modest adjustments. However, because many retired persons can control their income stream somewhat due to timing of withdrawals from retirement accounts, they can react to the changes and plan for an overall lower tax liability.

The most unexpected result was the percentage of clients who will see a tax reduction. My client base is not a typical cross-section of the country. Low income taxpayers generally seek a different type of tax professional.

Of those facing a higher tax liability the numbers can be large. Most tax increases are nominal, but a few are significant. The worst part is I can’t tell you what to look out for. It always involves something unusual that affects the return negatively. All I can do is encourage a consultation with a tax professional after tax season. My guess is most taxpayers will find more value in a consulting session than they have for many years.

Two expected changes that turned unexpected are having a serious effect. Miscellaneous deductions on Schedule A, subject to 2% no longer apply in 2018 and after. These deductions had no affect for most taxpayers since the deductions in this category had to exceed 2% of adjusted gross income before it counted.

As a good accountant I studiously entered the information from clients even if I knew it wouldn’t count so they could see I didn’t miss it.

The things in the “subject to 2%” area of Schedule A include tax preparation fees, safe deposit box, union dues and specialty work clothes (uniform, safety glasses, steel tipped boots, et cetera). Most of these items are small enough not to change the amount itemized.

Certain education expenses fall into this category, too, along with certain legal fees from protecting or increasing taxable income.

But the biggest losers involve unreimbursed employee business expenses. Sales people top the list. I also have a rock band where equipment and travel not reimbursed by the band are no longer deductible.

Miles add up fast for traveling sales people. When I say traveling it usually involves local clients. Distant travel is more likely to be reimbursed by an employer.

There are a few planning tips. First, it’s best if the employer reimburses expenses. They’re not reported by the taxpayer receiving the reimbursement and deductible by the employer.

For the rock band and a few other clients I might recommend changing from an S corporation to a partnership. Before making this change it is vital to have your tax situation reviewed by a competent tax professional.

The reason for my recommendation to change to a partnership is that unreimbursed partnership expenses are fully deductible on page two of Schedule E and listed as UPE. The downside is the possibility of higher self-employment taxes.

The final Schedule A issue relates to the limitation on the so-called SALT (state and local taxes) deduction. In 2018 and after the SALT deductions are limited to $10,000. Most people assumed this only affected high income taxpayers from high tax states. Think again.

I have several clients from low tax states facing the cap. One Texas client saw a reduced estimated deduction because real estate and sales taxes pushed him above $10,000. And Texas doesn’t have an income tax!




Cautions

The more returns my office prepares the more I’m convinced clients will need to sit with me this summer and plan. You, kind readers, need to do the same.

I’m setting some appointments already. Due to the demands tax professionals will face this summer I recommend setting an appointment early. My office will accept consulting sessions from the beginning of May until the end of December. (The two weeks after the due date are for “me” time.)

One more thing before you prepare for the weekend.

There is a lot of confusion about the ACA (Obamacare) penalty for not having health insurance. The penalty applies for the current 2017 tax return being filed AND the 2018 return. The healthcare coverage penalty disappears in 2019!

My advice is plan. Of all years, this will be the one that gives you more bang for the buck than you’ve enjoyed for a long time.

Now go and have some fun. See y’all tomorrow for Stalking the Accountant.



Tax Cuts Don’t Create Value, This Does

The latest tax cuts have sent the eight year old stock market rally on a steeper trajectory after 300% gains to date. Tax cuts and interest rate reductions have a habit of sparking market rallies, but only one has anything to do with value.

To understand why the market is rallying so hard you have to understand what people expect the corporate tax cuts to do. You also need to understand if these gains are based on real increases in value or only a mirage.

Tax Heaven

The corporate tax rate for regular corporations dropped from a top rate of 35% to a flat rate of 21%. For most corporations this means a 40% reduction in federal income taxes.

With all this extra money sticking around the corporate coffers there is ample reason to think this is really something to behold. The extra money can be used to retire debt, buy back stock, pay out dividends or invest for future growth.

But are these companies really worth more? Is there more value just because one expense will decrease for one year?

If a company is earning :

  • $10.00 per share

before the tax reduction and if everything remains exactly the same will see a:

  • $2.00 per share

increase in profits due to lower taxes, what value has been created?*

The company has $2 more per share in cash lying around and that does have value in a manner of speaking, but it’s not repeatable.

The corporation earns $10 per share in year one, $12 per share in year two and again $12 in year three even if the company is bloated and slow. Worse, incompetent management could spend the money on stupid stuff!

Our corporate illustration shows a company with 20% growth over a three year period, but only treaded water in reality. The tax cut makes it easier to hide problems for longer before it becomes apparent to shareholders they are getting screwed.

The Value of a Dollar

Shareholders might not care one iota as long as the money keeps rolling their way. The extra money the corporation enjoys from the tax cut can prop up the stock price if they buy back shares. Additional dividends also put a mischievous grin on the faces of shareholders.

Now think about this for a moment. How much is that $2 per share extra from tax savings worth?

TWO DOLLARS!

The value of the cash is $2. Period. How much will you pay for the $2 of cash? No more than $2, I hope.

By looking at the stock market it appears as if investors are paying more than $2 for the $2 per share tax benefit!

The tax cut isn’t repeatable either! People wrongly think the tax cuts help the next year. It doesn’t! Earnings are now stuck at $12 per share instead of $10 unless there is real growth. There is no growth in our example. How much would you pay for $12 per share if there is no growth with the risk management screws it up and ruins a bad game to start with?

The value of those earnings is based on interest rates. If the risk-free interest rate (U.S. Treasuries) is 3%, then the value of the $12 of stagnant earnings is no more than $396 per share ($396 x 3% = ~$12). If the risk-free rate rises then the value of the future earnings declines.

So why is the market rallying so hard? Because the extra $2 times the risk-free rate translates into $60 or so!




The Bad News

Unfortunately interest rates are not static. They are currently rising at a slow rate. It can only be guessed what inflation (the ultimate factor driving interest rates) and interest rates will do in the foreseeable future.

With an economy near full employment and stimulated with massive tax cuts, my guess is rates will go higher. This means those earning are worth less. And that assumes the extra $2 goes to the owners (investors)!

In the early 1980s the top brass in corporate America earned about 30 times the wage of an average worker. That number now stands well into the 200s. With more cash than ever, corporate America might be seduced into skimming a bit for themselves. I’m not suggesting anything, only making an observation.

Dividends are real cash you can count in your paw. Stock buy-backs are a bit more elusive. Stock buy-backs can mask stock grants and options to insiders.

It is safe to say only a portion of the extra $2 per share in profits due to the tax cuts will actually find its way into shareholders’ pockets. Depending on how you look at it, that could be a blessing.




Creating Real Value

If tax cuts don’t create real value, what does?

As stated before, the quality of future earnings is based on the risk-free interest rate. If you can’t earn more than that, why bother. Just drop your money into the risk-free asset and enjoy a few Mai Ties on the beach.

We discussed in April 2016 how companies create true value. Now is a good time to revisit the issue before your money gets a value lesson of its own.

Tax cuts provide the opportunity to create value; they don’t in and of themselves create anything! If tax cuts are not fully spent and the government lowers spending to offset the lost revenue, the economy will actually decline. If the government keeps spending while reducing taxes they do so with borrowed money. Knowing this, tax cuts have the same stimulus as the government just spending extra money themselves.

And tax cuts have historically not been 100% spent by those receiving the cut. Some people reduce debt or invest some of the newfound wealth. And since tax cuts are only good for one cycle their benefits are fleeting unless you keep cutting taxes every year.

This doesn’t mean we shouldn’t have tax cuts. Heck, no! I love keeping more of my money!

What I’m getting at is this: your income hasn’t increased solely because your tax bracket declined! And once you digest the reduced taxes into your budget you’re going to look for a pay increase to keep feeling warm and fuzzy inside.

So how do you get a raise? Well, inflation can mask any “real” wage increase if it doesn’t exceed the inflation rate. Or, you can increase your productivity so the company has more profits for your labor from which to pay you. (Now you need the corporation to part with a percentage of those additional gains you generated. That hasn’t happened much over the last 30 years.)

If tax cuts don’t create real value, what does?

Simple. Your return on invested capital (ROIC) in excess of the cost of capital (COC) is the textbook definition of value creation.

If the stock market rally is going to have real legs corporations will need to invest the tax savings in a productive way!

Corporate America has experienced record levels of profitability for some time now so the question begs to be asked: If they didn’t invest the extraordinary profits before, why will they be encouraged to do so now?

Good question. Wish I had an answer.

Personally, I don’t think corporations will increase investing anywhere near the levels of the tax break. We see headlines listing a token few major corporations granting a small 2% or so bonus to the rank and file for one year while announcing layoffs a few days later. (Kimberly-Clark announced 5,000 layoffs in their diaper division as I write. Tax cuts will not increase demand for things people don’t want. But automation, which the new tax bill encourages, will make human capital less necessary.)

Only businesses that invest the tax savings wisely will create real lasting value. By investing in increased production which yields more than the cost of capital, value is only realized.

The ROIC must exceed the COC or value is destroyed. Automation and technology make it easier than ever to do more with fewer people. This increases quality of life. But if the process is too quick it becomes a painful transition.

Now that most assets can be deducted currently versus being depreciating over a number of years or the life of the asset, businesses are incentivized more than ever to increase their use of technology and automation.

If these investments return more than the cost of capital, even capital derived from tax savings, real and lasting value is created.

And that will keep the stock market riding high, providing us with the warm and fuzzy feeling inside.

 

* I took liberty with the math for easier reading. A company at the top tax bracket of 35% under the old tax law would pay about $3.50 per share on $10 of profits before tax.  Cutting their tax by 40% would not be $2 per share. (40% of $3.50 is $1.40.) In reality it would take ~ $16.67 of profits to pay ~ $6.67 in tax to arrive at $10 of reportable gains to shareholders. Rather than get bogged down in the math I kept it clean, as a family-oriented blog should be.



When Claiming Fake Deductions is Legal

Google has a neat feature called Alerts. This feature allows you to get a daily update on any topic you desire. The setup process is so simple even an accountant like me can do it without a problem. Once set up Google scans the internet, news and social media for mentions of your selected topic/s.

I follow a few topics which rarely get an update. I also have an alert of my tax practice: Tax Prep & Accounting Services, Inc.

The name of my practice is generic for a reason. I wanted something simple like General Mills or General Electric or General Motors. While most accounting firms want to spray paint their names across the logo, I wanted a name a buyer would feel comfortable purchasing without changing the name. You see, I was thinking about my exit before I even opened the doors.

Thirty years later I’m still holding on without a sell date in sight. I also get a daily Google Alert on a dozen or so items Google thinks fits my criteria of interest relating to my business name.

Accounting Today is an industry newspaper with a Tax Fraud Blotter. It usually tops the list provided by Google when an alert is issued.

On an alert received Saturday was the clickbait title: Look Ma—Phony Deductions!

The title bothered me because phony deductions, or more to the point, unsubstantiated deductions, are not always illegal!

I clicked to the Tax Fraud Blotter and discovered, as I knew I would, there was more to the story than the headline. The phony deductions were illegal. But the topic of legally claiming unsubstantiated deductions is real.




A Story from the Underground

If you were a tax professional, what would you do in a case like this? A regular client starts a business and has questionable recordkeeping from Day 1. Then he expands his business and has almost no records at all.

There are only a few things you can do. First, you can fire the client.

Remember, as a tax professional you sign the tax return under oath that the return is “true and accurate to the best of your knowledge” under penalty of perjury. If you sign a tax return as the paid preparer and the return doesn’t pass the sniff test you can face some serious fines, some as high as $25,000 a swing!

Second, you can throw up your hands and tell your client, “You can’t file an inaccurate return so I guess you don’t have to file at all.”

This is another really bad idea.

Third, you can prepare the return with the information at hand and hope for the best.

Each of these choices has issues. Firing a client because they’re stupid they didn’t keep accurate records doesn’t solve the problem.

It’s illegal NOT TO FILE your tax return by the due date, plus extensions. You are required to file even if you can’t pay. Lack of funds is not illegal; non-filing is!

If you refuse to touch the return somebody else will have to or the client is out in the cold. So if you don’t do it, somebody will or your client is heading for the hoosegow.

Telling a client they don’t have to file their tax return if they didn’t keep pertinent documents is also a bad idea.  I don’t know the IRS penalty off the top of my head, but it includes a baseball bat and something about “behind the woodshed.”

And last, hoping for the best is not sound tax advice.




Super Accountant to the Rescue

If you’re a taxpayer reading this you might want to put your fingers in your ears for a few sentences.

There is an easy way to file the above mentioned tax return for a disordered client and you get to charge extra for the service. A lot extra!

Last summer I wrote about the Cohan Rule. Now with tax season racing straight for us at warp speed, it’s a good time to review an extreme case which will allow you to file an accurate return “to the best of your knowledge” and avoid preparer penalties.

The example client we used above for our thought experiment is a real client. He runs a liquor store. His records are a mess to be polite. When we ask for more documentation we get an annoyed, “We gave you everything. It’s in there.”

No it’s not!

Last tax season it was so bad I had to junk the entire return except for three things: the bank statements showing deposits and checks written, supplier printouts for cost of goods sold and property taxes paid by going to the county to get proof of what was paid and when. From these few items I had to reconstruct a tax return, avoid preparer penalties and stay out of jail.

What would you do in a case like this? The client is a good guy, just a bit light when it comes to recording business income and expenses. Dumping him on the street would almost certainly end in the return never getting filed for years until the IRS lowered the boom. Then it would hurt him really bad and certainly end his business, putting him and his employees on the unemployment line.

You already have a good idea what I’m going to do. I’m going to make up numbers. But how?

You can read the Cohan Rule post I wrote back in August. The Reader’s Digest version states you can deduct reasonable expenses ordinary and necessary to a business (Section 162(a)) with the exception of meals, entertainment, recreation, amusement, gifts and certain listed property (Section 274(d)) for unsubstantiated expenses.

In the case of our friendly client, we also had to reconstruct income!




Building an Elegant Tax Return

I will show you how I built this client’s tax return without triggering an audit. The odds of the client getting audited are slim as I told the IRS exactly what I did. Past experience leads me to this conclusion because I’ve never had a client audited when I disclosed what I am about to show you.

Our victim, ahem, client had a box of stuff to go through. I added the whole thing up once his retainer cleared the bank.

The numbers were well outside the expected norm. (Remember, a tax professional can’t just file a return based on client provided information. If the numbers are unusual the tax professional MUST quiz the client further to ascertain if the data is correct. Unusual items remaining on a tax return should be disclosed with the original return. The disclosure should include the item in question and how the number claimed was arrived at.)

I pay special attention to local clients. If they have a business I make a note when driving past their establishment if I’m in the area. Clients miss a lot of serious tax benefits I find from a simple drive-by.

Our client in question had a small shop. I expected that since it was a liquor store. The footprint of such establishments is generally small compared to sales.

I also had his prior year return to build from. The numbers were substantially different.

I plugged the numbers I had as a starting point. My software compares the current year to the prior year. It was a crazy mess.

To construct a return I’d be willing to sign off on I started with known variables. The client was slow to get me bank statements so I had him sign a power of attorney allowing me to pull his bank records.

With the whole year of bank transactions in hand I added all the deposits for the year to arrive at Gross Revenue. I asked the client if he had ever deposited personal cash or checks to fund company expenses. He said, “No, well, maybe once. Okay, but, yes. No! Now that I think of it, maybe.”

There is a price for bad records. It’s called double taxation. If you can’t prove any of those deposits aren’t business income you have to report it as income! My disclosure to the IRS will list my position as such for good reason. The IRS uses the same formula!

I also asked if any income wasn’t deposited. I got an answer identical to the last question. Facepalm.

The revenue looked reasonable compared to the growth in his company.

Next I used the power of attorney to get a printout of the cost of goods sold from his main supplier. This was another number I could hang my hat on with reasonable comfort.

The COGS allowed me to back out an expected revenue number. It was close so we will stick to what we originally calculated by adding all deposits.

Property tax records are easy to find online so that was one expense I was also comfortable with.

Now came the hard part. I had three months of rent receipts and the landlord wasn’t kicking him out so I multiplied one payment by twelve.

I asked the client if he ever took money from the business account for something other than a business expense. By the way his mouth was catching flies I took it as a “no”. I couldn’t add all the checks cleared and allocate between expenses. (Since some items are not allowed under the Cohan Rule I don’t use the bank statement for a total of deductible expenses when I have no substantiation unless I have no choice. That and I know how small business owners like to take cash here and there for personal expenses even if they say they don’t.)




Deep Science

Now we are going to get extremely scientific; we’re going to guess.

Advertising, utilities, office supplies, and other expenses still are allowed under the Cohan Rule.

For our client today I took his information from prior returns and compared the expenses as a percentage of revenue and COGS. Example: If in the past three years he has advertizing expenses of 12% of revenue and 27% of COGS, I will use the percentage that gives the lower number as a deduction.

I want two reference points whenever possible. I use the lower deduction because it’s not my job to put my neck on the line if you don’t care enough to keep good records.

I move to each deduction normal for the type of business involved.

As I work through the return I keep detailed records of how I arrived at the numbers I report and attach it to the tax return and keep a copy in our permanent file.

I’ve used the same process for clients who get audited but lose their documents between filing and the audit. A home or business fire or theft is an understandable reason for a client to lose their documentation, hence the need for the Cohan Rule.

We scan a lot of stuff in when preparing a return, but time is limited so we don’t copy every receipt for our records. That is the client’s obligation.

However, if we see documentation we note this fact in our records. Our contemporaneous record acknowledging we saw the paperwork and actual receipts are frequently enough for the taxing authorities to accept the numbers we report. Must be my honest face.




The Flower Girl

Virtually every number on the above client’s tax return is a guess. The IRS would have to use the same methodology to come to an estimated return. We just beat the IRS to the punch and documented each step we took.

And that is how claiming fake deductions is legal.

Now before you say a word, I can hear you thinking.

For any client willing to pay me a bit extra to see if my guess is a better result than the actual numbers, NO!

My guess will always be conservative and probably overstates your tax liability. The Tax Court has clarified what they allow and don’t when invoking the Cohan Rule. And they always lean in favor of the government. So do I in such instances.

But good try. I like the way you think.



Side Gig: Tax Preparation

A common request the last few months involves starting a tax preparation side gig. A seasonal tax prep business can be rewarding if you follow a few simple rules. And if it spirals out of control you might find yourself working a full-fledged business 30 years later like a certain tax professional we will not name.

To run a real tax prep side gig you will need some background tax knowledge, an e-filing account with the IRS, commercial grade tax software, workflow management and clients. We will touch on each issue.

Education/Experience: Experience comes with time; there is no shortcut. I started on day one like everyone else. In the beginning it’s best to stick with simpler returns to avoid getting in over your head.

Continuing professional education is widely available in the tax industry due to the requirements for CPAs and enrolled agents. This makes it easy to learn while you gain experience.

The IRS’ Registered Tax Return Preparer program ended in 2013, but you can still be a part of the Volunteer Annual Filing Season Program (AFSP). Without involvement in the AFSP it’s hard to work with the IRS on a client’s account. CPAs, enrolled agents and attorneys have unlimited representation rights before the IRS. A participant of the AFSP has limited representation rights. As you begin your side gig journey this is a great place to start.

It’s relatively easy to be an AFSP. You need 18 hours of continuing education from IRS-Approved CE Providers: 10 hours of federal tax law topics, 2 hours of ethics and a 6 hour Annual Federal Tax Refresher (AFTR) every year. (Note: The links are to  products used in my office with newer preparers.)

I have never been a minimum education type of guy. Generally CPAs need 40 Continuing Professional Education (CPE) credit hours per year; enrolled agents an average of 24. In a typical year I approach 100 hours of qualified CPE! If I’m going to do something I may as well do it at a high level of competence. I recommend you complete at least 40 CPE credits per year. The cost is a business deduction.




As you grow your practice you will want to add some letters after your name. I suggest the enrolled agent designation. EAs are a tax authority and have full representation rights before the IRS. EAs can also represent clients of returns someone else prepared, unlike AFSPs.

The EA exam is tough, but worth the effort. Here is the study guide I recommend. Take your time when working for your EA. Use the study guide and study and study and study. About a third pass the first time through. Success is in direct proportion to dedication of studies.

Here are some IRS-approved continuing education programs I approve:

Surgent CPE: It’s been a few years since I attended a Jack Surgent program, but they were always packed with solid information. Highly recommended.

Tax Insight: I attend Tax Insight’s Annual Tax Course every year. They are located in Wisconsin, but they also have a few classes in Mississippi, plus they are starting an online version this month.

National Association of Tax Professionals (NATP): I was a member of NATP for years, but they were a bit pricey for what they provided. Recommended if no other options available in your area. NATP also has EA exam preparation classes and an AFTR refresher. NATP members also have a tax research help line.

Gleim and WebCE: If you need something fast, cheap and easy you can use these two options. They are not recommended because the courses are very basic. Remember, we want more than minimum effort.

Once you start your side gig the educational programs will find you. Each state has its own list of providers. Feel free to experiment. The only way to find good programs is to try them out.

Become an Authorized IRS e-file Provider: Rather than list the details I will send you to the IRS page to complete the process. It takes about a month and a half to complete the process so start ASAP. Back in my day it took four months so things have improved a bit.

Commercial Tax Software:  My office uses Drake Software and has since 1988. Drake has always been as easy to use program with commercial grade power. I’ve been with Drake so long my account number with them is 197!

I’ve found new preparers find Drake easier to navigate than other commercial tax software. I’ve played with other software over the years, but never was tempted to leave Drake. Their support is second to none. They answer fast with a dedicated team ready to help preparers get the job done right.

Drake is a powerful tax software package at a reasonable price. You can license the full package or pay by the return. Review Drake’s pricing to determine which package fits your side gig needs.

Workflow: I started my tax practice out of my home and prepared around 2,000 returns annually (with the help of employees) for five or six years before moving to my retail storefront. When I ran my practice as a side gig it was always out of the home. From 1982 to 1989 I treated tax preparation as a side gig. I ran a full-time seasonal tax practice from 1990 to 1995 out of my home. Then I lost my mind, bought an office building and watched my practice explode. I tried, and mostly succeeded, in cutting back ten years ago. Then this blog and a push from Mr. Money Mustache happened.




Workflow issues are a constant challenge in a tax office. Even as a side gig you want to utilize technology to improve performance, reduce errors and remain profitable. I can’t tell you everything my office does because it’s always in flux. I do want to share one thing we do to keep the paper moving.

Tax preparation is largely data processing. The real value for the client is the conversation with the accountant. A simple, short dialog can save the client serious money! The problem is the workload of paper to process.

Plugging every number starts to affect the carpal tunnel. It’s also mind numbing. My office uses a tax organization program called GruntWorx. GruntWorx is integrated into six commercial tax software programs: All Tax Software, Lacerte, Go SystemTax RS, CCH ProSytem Fx, UltraTax CS, and of course, Drake Software.

A compact research book.

You want a paperless office so you’ll be scanning everything in for your record. From inside Drake Software you attach a file with scanned documents GruntWorx handles and send securely. The next day GruntWorx returns a file you import into your Drake software. Several items will need attention, but a large part of the grunt work is processed, saving you time and money. Review GruntWorx pricing to see how much it helps your side gig workflow.

Technology is your friend even with a seasonal side gig tax practice. You want a good computer, Drake Software, laser printer, scanner and security. Contact an IT professional to secure your data!

Tax preparers are a prime target of identity thieves! When Equifax was hacked most of the data stolen was already on the dark net! It came from small tax offices. You read that right, small tax offices. My office IT contract is north of $50,000 per cycle. As a side gig you will have few if any employees so your IT needs will be smaller. My guess is security will cost under $1,000 for most side gig firms.

Technology reduces stress and errors. The computer can read small type on W-2s better than you after hours in a chair. Note, even when using GruntWorx or other productivity enhancements, you must still review each return in its entirety!

Clients: I’ve talked about acquiring clients plenty in the past. Here is a short review.

As a side gig you want basic returns to start until you get your sea legs and gain experience. Decide which type of returns you want to prepare.




Once you’ve decided the focus of your tax side gig you need to study. Maybe a few study courses listed earlier are a good starting point. Take classes on your area of interest.

Clients outside your area of expertise will come knocking. It’s hard, but necessary, to turn some clients away rather than get in over your head.

In your area of practice you need to find where these people congregate. If you want to help elderly people I recommend speaking at churches on Sunday. You might even offer to prepare returns right at the church service. Portable printers and a laptop (with adequate security in place) make it easy to travel. One day a week at a church might satisfy your side gig lusts.

The Chamber of Commerce is a great place to meet business owners; one speaking engagement at the local apartment association will keep you busier than you want. There are so many places where you can grow your client list.

Get some business cards from Vistaprint and carry them with you. You never know when a future client crosses your path on August 4th.

Final Thoughts: Tax preparation is an enjoyable side gig with plenty of profit potential. If you start with smaller returns you can do a lot in an hour. Three hundred simple returns at $100 each is a nice side gig. After expenses you should net over $20,000 in this scenario. Not bad for two and a half months during winter.

Most of the questions I receive are repeats. Please leave questions in the comments below so everyone can benefit from the answers. I’ll answer as many as I can.



2017 Tax Bill Review, Part 1

I have some good news and some bad news. The good news is a certain unnamed accountant will do rather well over the next several years with the new tax code. The bad news is you will not.

The current tax bill on the verge of becoming law will make an experienced tax professional more important than ever. Worse, you’ll have no choice. You’ll either pay an increasingly overworked experienced tax professional or overpay your taxes. Either way you pay.

As for me, I was busy enough. I didn’t need more busy work. The tax bill is 500 pages with handwritten notes in the margins because it is being pushed so quickly toward passage. You know what they say? Fast is better than good.

The ink hasn’t dried and new ink is still being added as I write, but the tax bill is almost certain to become law now. There are plenty of surprises to discuss. A few issues are still up in the air; I’ll cover those in a future post.

For now I want to provide a guide as we head into the last month of the year. Some issues in this tax bill are effective (if passed and signed by the President) on varying dates in 2017. Since planning is not possible I will skip those items for now.




The Craziest Tax Bill Ever

Over three decades of experience and I had to live long enough to see this. We can debate the merits of the economic benefits of this bill, but the truth is brutally painful.

Pass-through businesses (partnerships and S-corporations) will see tax relief. More than ever small business owners will need to organize as a pass-through. Even taxpayers will smaller amounts of side gig income will need to have a serious conversation with their tax professional to determine if an entity is right for them.

I’ve seen (and heard) a few different versions of the pass-though deduction. Since the hand written notes were not available to me before publishing I refrain from giving exact numbers. Last week Tuesday and Wednesday I was in training and plenty of time was used to discuss the potential tax changes. As crazy as it sounds, one short week later and part of my training (and two days of my life) are obsolete.

The wealthy will benefit the most from this bill. Tax brackets are coming down for individuals at the upper end of the scale while the lowest tax bracket goes up from 10% to 12%.

The standard deduction is going up and exemptions are going away. When you’re done playing the end result is nil. Families with children will see a higher Child Tax Credit. I ran several illustrations on the Senate proposals late last week and many typical situations will result in a tax increase!




Bad for Business and Bad for the Economy

Small business owners might be jumping for joy at their tax reduction. However, it might be wise to delay the celebration.

Yes, pass-through entities will see a tax reduction, but if customers pay higher taxes who will drive sales? That is the catch-22 of this tax bill. High income/net worth individuals will keep more of their income while the middle class and poor are gutted.

The argument goes back to the old “trickle-down” theory of thirty years ago. It didn’t work then and it’s doubtful it’ll work now.

Wealthy people don’t spend more just because they get a tax cut! They’re rich. They wouldn’t be rich if they spent every penny they made.

The middle class and poor spend a larger percentage of their income just to meet necessities. A tax increase for the middle class and poor means an immediate decline in spending!

Your favorite accountant will enjoy more income and lower taxes from this bill. However, I will NOT pay higher wages based on my tax rate! (Sorry to any employee reading this.) I pay higher wages for higher profits! Wages are deductible so profits, not tax rates, drive wages! Congress is wrong, lower tax rates will not increase wages. It’ll just add to the deficit and probably cause higher interest rates.

Most small businesses will have it worse since they are not in the tax services business. In fact, I predict the only two groups of small businesses who will win with this tax bill are tax professionals and businesses who cater to the very wealthy. How can it be any other way?

Don’t be fooled by the news reports. The economy might have a minor upward blip, but it will be short-lived as spending from a serious percentage of the population is pressured by higher taxes. As for me, don’t expect me to spend more based on a tax cut. I don’t spend all I earn already and encourage you to undertake the same habit.

More than ever, a frugal mindset will be needed to navigate the course of the next many years.

Stock Market

The last I saw the corporate tax rate will be reduced to 20%. I also heard there could be an upward adjustment to this.

Investors will benefit from a lower tax rate for corporations in some industries. Tech will not do as well as first thought. My largest investment, Altria, will probably do very well. Pharma will also have mixed results.

The reason the lower corporate tax rate will not lift all large corporate boats equally is because of the lie the American people have been sold for years. We have been told time and again that the U.S. has the highest corporate tax rate in the world.

There is a kernel of truth to the statement. What the lie involves is the “real” tax rate after all deductions and credits. Then the U.S. is decidedly in the middle to slightly below the centerline.

The lower tax rate and bonus depreciation brings back the Alternative Minimum Tax for corporations last I saw, but it looks like an accidental effect and could be resolved in committee before the law is passed.

Some companies, like cigarette company, Altria, will do well under the new tax scheme. Altria pays at the top 35% tax bracket under the old law. If the 20% top corporate bracket holds Altria and other major corporations paying a larger portion of their profits in taxes will see benefits. However, many large corporations already pay a lower rate.

Note: I do NOT buy a stock based on tax rates! This is not a recommendation to buy stocks of companies paying near the highest tax rate under the old law. Any tax benefit will be short-lived. Once the reduced tax cost is digested profits from continuing operations and cash flow will determine a corporation’s value.

The bill also requires first in, first out accounting on sales of stocks and mutual funds. This will make tax-loss harvesting more difficult.




Republicans Hate Jesus!

Never mind the provision allowing 529 plan funds up to $10,000 for private and religious schools. Tapping into a 529 sooner means there is less tax-free gain to accumulate! Since 529 plans are only deductible on state tax returns in a limited way, the only real benefit on a federal return is the tax-free growth. Unfortunately, if you allow withdrawals earlier for primary and secondary education, there is less benefit. It might not even be worth the effort. And the money earmarked for higher education will be diminished.

What surprises me the most in all the proposed bills is the damage non-profit organizations will face. When the standard deduction is increased to offset the elimination of exemptions there will be consequences. Limits will be (likely) placed on the amount of mortgage interest deductible. The same for state and local taxes.

This means Schedule A will be used a lot less in the future and contributions to charity are claimed on Schedule A. Though charitable giving shouldn’t be predicated on tax implications, it frequently is.

Small businesses can promote their favorite charity through sponsorships, but individuals will see less, or no, benefit from their charitable contributions. I expect churches will feel the squeeze as more people discover their tithing translates into a tax increase!

Donor advised funds may allow for a larger charitable gift deduction in a particular year, but the higher standard deduction will always diminish its true value. The same applies to charitable remainder trusts (CRT). There could still be estate tax reasons to use CRTs. But, the estate tax is virtually eliminated.

It will be interesting to see how this plays out when politicians meet angry parishioners at church on Sunday. I don’t think many people have a clue how non-profits will be affected by the tax law changes.




More Good and Bad News

The Child Tax Credit is expanded to age 17. Buuuut. . . it expires in 2024. That is a recurrent theme in this bill. Corporate tax cuts are permanent while individual cuts are temporary.

Kind employers (like me) can’t even be nice to our employees anymore. Employers in the past could have incentive rewards. Small gift card rewards were tax-free. Not after the end of 2017. Corporations with billions in profits see their taxes decline nearly half while employees can’t avoid tax on a $25 or $50 gift card! If you had a warm and fuzzy feeling I bet by now it’s gone.

A Family Leave Credit was added at the last minute. Buuuut, it only counts for certain states. Talk about insane! It seems the family leave provision is only allowed on the federal return if the state doesn’t have a similar provision. My guess is states will adjust so the federal credit applies in their state, too.

This brings up another interesting topic. It seems the Republicans have built a tax code to punish blue states. California, New York, New Jersey and Massachusetts will suffer greatly under the new tax proposals. The problem is these states contain the largest percent of our national economy! California is ~13.7% of the U.S economy alone.

And these states have the highest populations. The tax bill is designed to hurt a large portion of the national economy. What could go wrong? I predict the next recession starts and spreads from these economic growth centers.

SMH

I wish I could offer better news. This tax bill is the biggest mess I’ve seen in my career.

There are plenty of solutions. I’ll wait until the ink dries from the President’s pen before giving advice so I know it’ll stick.

I’m an optimist. I think this tax bill is so riddled with holes I’ll be able to drive a Mack truck through it. My guess is the law will not last long as the deficit balloons out of control and the economy stutters. In the mean time I’ll do everything in my power to help you maximize your results.

Stay tuned.

When you’re born you get a ticket to the freak show; when you’re born in America you get a front row seat. —George Carlin