In the middle part of the last decade I found myself standing in line at the grocery store waiting to checkout. Before me were two women in their late 50s discussing work.
One woman said to her friend, “Last year I worked in a tax office and it was the hardest job I ever had!”
I had to turn away as I suppressed a smile.
Later, as I reflected on that conversation, the smile faded. Is working in a tax office so hard? Did I really choose the of the most difficult of professions as my career?
It would explain a lot. Hiring qualified tax professionals has become nearly impossible over the last decade. Robert Half recently reported the unemployment rate for accountants stood at 1.8% in Q1 of 2019. The news isn’t any better if you plan on hiring a tax professional.
Crisis in Review
The crisis in the accounting industry is self-feeding. The worse it gets the more workload is shoved onto the desks of the remaining souls. Stress is taking a toll.
Several support groups for tax professionals exist on social media platforms. Tax season reveals a serious level of stress for practicing tax professionals. Complaints of long hours and clients unwilling to pay higher fees to compensate for the added complexities of the new tax laws has more professionals looking to leave the industry.
And it isn’t the tax pros facing the worst pinch. The ultimate loser is the client. With fewer experienced tax professionals accepting clients it has put taxpayers at risk. The IRS knows taxpayers have limited choices when defending themselves in an audit which means the IRS’ advantage is larger than ever.
Tax preparers are becoming more selective, too. Clients with documentation a mess are being turned away. Even clients with their documents in order are finding it hard to secure an experienced tax professional who understands the Tax Code and is willing to take on additional work.
Experienced tax professionals are like rock stars in many environments. An accountant in my office recently joined her mother for a Bingo event. She made the mistake of telling the lady next to her she was a tax professional. From that point on the questions came rapid fire with several people around her asking for her card and if she was accepting new clients. The relaxing weekend with mom turned into another afternoon of stress.
When I attend conferences (or on vacation or in the park or . . . )I get the same reaction. It becomes nearly impossible to enjoy time off if the people around me know what I do. They all have a quick question. They don’t understand an afternoon of quick questions is not time off to recharge.
People don’t care; they want answers their accountant can’t or refuses to answer. Or worse, they do their own tax return and want top quality answers without paying for it (until the IRS letter arrives).
It has gotten so bad that when I’m on vacation with Mrs. Accountant I tell people I’m a farmer (because I grew up on a farm and currently live on a hobby farm) so my vacation isn’t ruined. People are intensely interested in powerful tax strategies, but for some reason don’t want to pay the tax professional $500 for saving them $10,000. And have no problem consuming an accountant’s entire vacation.
And we wonder why the profession is shrinking.
To put it in further perspective: My office turned away over 20 new clients on April 15th this year. They just walked in and wanted us to drop everything so their return got filed on time. We don’t advertise; they just show up. Experienced tax professionals — even inexperienced tax professionals — have no problem filling their book. All they have to do is let people know what they do and it’s all over.
Greasing the Squeak
There are three groups who are willing to pay tax and accounting professionals well: government, big business and the wealthy. I see this even in my small tax office. Wealthy people and large businesses (I have even consulted large hedge funds) approach me in a different manner than typical clients. While they are acutely aware of the pressure tax professionals face, they make it clear they will pay for my time and information. In many of these cases I’m paid a fee versus and hourly rate. The incentive is to get me to stop watching the clock and focus on the Holy Grail: lower taxes coupled with higher returns and increased net worth.
While government watches my work, they don’t necessarily engage me. I’ve made it clear I don’t work for government which is probably why I haven’t been invited to do so. Businesses and individuals need my services more even if they pay less.
It is easy to see who is on the path to financial freedom and those who will doubtfully ever make it. The questions and the approach scream failure or success almost from the first words. Wealthy people want to learn while those allergic to wealth want confirmation they are right.
As self-serving as it sounds (and is), you need a tax professional. Finding one is the chore. I understand. When it comes to legal issues the wealthy (and smart) hire an attorney; when sick they see the doctor. When it comes to taxes — the largest expense you will have in life — too many hire a commissioned salesperson for guidance. That is like hiring the pharmaceutical sales rep if you are diagnosed with cancer! Or they go it alone when they are dealing with the sum total of all their income and wealth. Boggles the mind.
It is easy to cry about the crisis in the accounting and tax industry. I’m a solutions guy so I prefer to look for answers instead. The outline above expressing the stress professionals in the industry face is only to set the stage so you understand what is going on behind the curtain. There are actionable solutions professionals need to know and the public needs to understand so they can gain the maximum advantage to the benefit of all.
Several goals are necessary to improve the performance of the industry: reduce stress on the accountant, adequate compensation to encourage more to enter and stay the profession and more responsiveness to the client.
While salaries might be the easy culprit, money isn’t the overriding problem. Money would salve many wounds within the industry, especially at the entry level, and would encourage more to pursue an accounting career, but it will not alleviate the stress from endless deadlines and demands from clients. Let’s look at a variety of solutions, starting with salaries and fees, then addressing stress followed by industry trends sure to improve performance and reduce stress.
Money motivates. . . to a point. Offering tax professionals and accountants a larger salary is always nice. But if the stress is never-ending and job satisfaction is low more money will only make it easier for more to retire early and leave the rat race.
While there is an acute shortage of qualified tax and accounting professionals, many in the industry tend to work up to and beyond what is typically considered retirement age. People attracted to the industry love the work and the challenges even when it is demanding. Helping people manage their business, taxes and life is a powerful draw. Working with clients as they reach for their goals is addicting.
Larger firms have the advantage to segregating pricing from the front line accountants. Fees are negotiated between the firm and client by the sales teams. The tax and accounting professionals doing the work only need to record their time spent working on the account and serving the client’s needs. I do oversimplify a bit. The important takeaway is that the larger the firm the more distant fees and their collection are from the accountant doing the work.
Small and mid-sized firms are another story. Frequently the accountant working with the client in smaller firms is instrumental in the fee determining process. The client always wants a lower fee. What clients need to understand is a lower fee means a pay cut to the accountant in many cases, especially if she is also a partner or the owner of the firm. Nothing demotivates faster than a pay cut while the workload increases.
Fees and salaries go hand-in-hand. Clients need to be educated that lower fees mean fewer qualified candidates will seek a career in accounting and fewer qualified professionals available to work on their account in a timely manner.
The tax end of the profession feels the pinch hardest. Finding people willing to work a seasonal job at a high level of knowledge and experience for a seasonal salary has always been difficult.
Tax offices can best meet demand with adequate fees to cover the salaries of their professional team with a reasonable profit for the partners/owners. Tax work comes in various sizes. Business returns are different from individual return. For a tax office to be most efficient they need to focus on the type of client they wish to serve. It is difficult mixing very simple returns with complex return without dedicated staff to handle each type of return separately. Very small office are best served when focusing on a niche. Highly experienced accountants working on simple returns is a poor use of resources and an under qualified preparer working on a complex return opens the firm to litigation risk.
The right compensation package allows you to attract and retain high quality employees. Robert Half provides an excellent salary guide for the industry and there are several resources for compensation of tax professionals. Where you are located also determines how far you deviate from the averages. One thing is clear: Tax and accounting professionals can earn very substantial salaries with excellent work-life balance when handled properly. You want to be one of these firms or work for one.
Accounting and tax firms can maximize their efficiency by dealing with the next area of concern: stress. Reduced stress should lead to higher salaries and profits while providing optimal work-life balance and provided the client with the best value.
Stress is a constant in many accounting offices with deadlines constantly bearing down. Tax offices are even worse during the filing season. There are several way to reduce stress and improve your team’s well-being.
It starts with the client. Some clients increase the stress in the accounting and tax office. Paperwork hastily tossed in a box and missing paperwork tops the list. Everyone in the industry can tell stories about clients from hell: bad records, difficult to work with, constant interruptions. These clients increase stress massively and can drain the lifeblood out of a firm, harming all clients. The faster you disengage these clients the better for your firm and remaining clients. If you are that client you want to reevaluate, as it will become increasingly more difficult to secure a place at a quality firm.
Once you have a clean book of clients that value your work you can now excel at serving your clients.
Certain activities are more valuable to the client than others. Data entry is a low value task that also tends to add to stress when conducted for too long. The high value tasks are the most valuable to the client. High value tasks include planning and consulting.
Clients enjoy constructive conversations (planning and consulting) with their accountant because they feel they are getting value. And they are! No tax professional or accountant has ever created any real value plugging numbers. Business and personal planning — consulting — is a high profit activity for the firm that clients are happy to pay since planning with an experienced professional can yield a return into the three and four digit range. Smart clients are happy to spend $1,000 to save $10,000 or more in taxes or increase their net worth by orders of magnitude.
Consulting is a productive activity that also reduces stress. Professionals want to do more highly productive activities and avoid low value activities as often as possible. Productive is fun and makes clients happy; unproductive work is drudgery.
The issues boil down to managing the rote work activities and workflow.
Stress-laden work (data entry and other mindless tasks) can be addressed with automation, outsourcing or a combination of both.
While I viewed XCM as an outsourcing possibility, I missed what XCM was really all about: workflow.
Workflow is part of the automation process. Efficient workflow reduces stress and errors. GruntWorx and similar services complete many of the basic entries on a tax return. As the technology improves less and less time will be required by the accountant for data entry. This frees time to provide value-added services to the client like deeper tax return discussions, financial statement review and planning/consulting services to increase client’s net worth and reduce taxes.
Drake Software has Secure File Pro (it integrates with their software) as a portal to transfer documents between client and accountant. (Accounts complain endlessly behind the scenes over how much they hate it when clients take a picture of a document and text it because these are so hard to read and save. Document managers solve most of this problem.) SafeSend is another option that works with many of the most popular commercial grade tax software.
Automation reduces stress by reducing the amount of time buried in paperwork only punching numbers. Even if there is no time savings it is worth the added expense just for the reduced stress.
As automation technology evolves into robotic automation, computers will be able to enter more and more of the data on a tax return. The tax professional’s job in five years will be to review returns and consult with the client; the computer will handle the original preparation of the return. This will free more people in the field for more enjoyable and productive tasks, partially resolving the labor shortage within the industry.
Virtually all large accounting firms outsource a portion of their workload. In the last two tax season I worked on applying outsourcing a portion of my office’s work with less than exciting results.
I’m not willing to give up on the idea yet as outsourcing coupled with automation will consume a larger and larger part of the industry in the near future. Even people self preparing will find in the small print some or all of their tax return outsourced (the online software is probably programmed overseas). Fighting the inevitable will leave you stressed with lower profits while your competitors have lower prices, higher profits, fewer errors, spend more time consulting with their clients and have a better work-life balance.
Outsourcing can be integrated with automation and probably should.
Outsourcing also comes in two flavors: domestic and international.
Domestic outsourcing most clients have no problem with. Tax returns are either e-filed or mailed. In either case the data is handed off to another human being outside the firm for delivery to the IRS. This is all domestic and most feel comfortable with the process.
Real domestic outsourcing, however, involves your tax firm getting help from another tax office within the U.S. It might be a branch of the same firm or an outside firm hired to do the work. Domestic outsourcing still has issues with staffing and costs tend to be prohibitive.
International outsourcing is a whole different animal. Before an individual return can be outsourced in this manner requires approval by the taxpayer. Stiff penalties are a strong deterrent for a tax office to play it fast and lose.
Wealthy people and corporations generally are more comfortable with international outsourcing because they frequently have operations and/or investments in international markets. When proper security precautions are in place (using a reputable firm only) there is no reason to fear international outsourcing. I will test this process deeper in the upcoming tax season with clients who give authorization and report back to you.
When I attended the XCM conference I met many smaller firms that are using international outsourcing and making it work. (My first two years were false starts that were also expensive. If you can avoid the problems, especially the expensive ones, you may wish to consider learning from my experience.)
Individual clients are the most apprehensive. My goal is to get 100 clients next tax season to authorize outsourcing. I never outsource any client work unless I disclose to the client first and get their approval. We’ll see how it goes.
With the tax/accounting industry set to grow by 10% over the next decade, more professionals will be needed to complete all the additional work. As fewer people pursue accounting and tax as a profession automation and outsourcing will play a key role in completing work and managing workflow. Without these efficiencies more highly talented people will leave the field for less stressful work and from burnout.
The demand for solid information has never been higher. The Tax Code is complex and getting more so every year. Without automation and outsourcing there will be no time for your accountant to spend quality time with you or they will need to raise fees massively to seduce more people to work for them. The trends are a gift that reduce stress and increase accountant productivity. This is really good for the client and the accountant alike.
If you demand your tax and accounting work be done the old-fashioned way, don’t call me; we are full-up. We use computers to prepare returns, e-filing to file tax returns, use automation where ever we can and would love to find an outsourcing solution so we can handle more of the clients we currently turn away. And less stress would be nice before burnout sets in.
And if you demand I punch all the numbers by hand or you do your own return, don’t ask me any tax questions if you see me at a conference or at the park. I’m just a farmer. I have no idea what you’re talking about.
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Running a business is similar to conducting a science experiment. Unsuccessful proprietors use trial and error hoping to find a winning strategy. Gamblers do something similar. Successful business owners do things a bit differently; examine where need exists and then search out a plausible solution.
Success is similar across all industries and business sizes. Whether you are managing a massive international corporation, a regional firm, a small local business or running a side gig to pay the bills while you enjoy all life has to offer, the rules of success are similar from top to bottom.
Today we will focus on the side hustle and small local businesses. The conversation will also focus on the tax preparation industry.
I own and run my own accounting practice which is centered on tax and have been doing so for over three decades. What worked in the 1980s and 1990s would bring you ridicule if you tried the same thing today. For example, I offered free electronic filing in my community before any other tax firm. Offer free electronic filing as you shtick today and you’d get a plethora or dead stares.
My tax office morphed into something different on a regular business since the beginning. Of interest to you, kind readers, is the current transformation.
There are a variety of tools underutilized by most tax offices that would increase productivity, reduce stress and increase profits.
Why these tools are so underutilized is a mystery to me. It shouldn’t be such a personal mystery since I had to be dragged into the room kicking and screaming. What forced the current transformation of my business was an unusual event a few years back.
A series of events led to this blog and a national footprint for my very small firm. All the technology I pooh-poohed in the past now was desperately needed. I was so unprepared the first year from the influx of work I almost lost my practice. It was a disaster.
I’m not the kind of guy who quits! It was time to open my mind and transform my practice once again. Now with several strategies implemented I want to share how I increased my business footprint, reduced headcount, reduced stress and sent profits higher than ever before.
Profit Power Plays
The old model of tax preparation required an army of tax professionals plugging numbers into the software. Since tax preparation is nothing more than glorified data entry (sorry peers) it was easy to automate virtually every aspect of the preparation process. (So a rabid mob of tax professionals don’t lynch me, the tax profession is more than data processing. Yes, tax preparation IS data entry. As long as you know where to plug the numbers you are golden. However, it is still rote, mind numbing work. Where a tax preparer turns professional is when she consults with clients helping them get different numbers before the fact to plug into said computer. Better?)
There are three things I implemented in the last year or two which made all the difference and a few things which didn’t work.
The three things which worked well are Gruntworx, outsourcing and cloud services. What didn’t work was outsourcing. Yes, some outsourcing worked like a charm and one attempt was a disaster. I’ll elaborate on each winning attempt and the one thing I wish I wouldn’t have wasted my time on.
Gruntworx was the best thing I added to my practice in the last decade. For a couple thousand dollars Gruntworx eliminated the need for several data entry staff. Most returns cost less than $10 to send to Gruntworx in my office.
The trick of turning Gruntworx into a profit engine requires some explanation. First, simple returns are virtually completed, requiring only your review. At first I resisted sending small returns with a few W-2s, interest income, dividends and mortgage interest. Then I realized Gruntwork practically finished the return for a buck seventy-five, or thereabouts. There is no way I can get the work done in-house for close to that cost. A quick review, adding any items Gruntworx doesn’t handle, and the return is ready to present to the client.
Larger returns still require an experienced tax professional. Gruntworx handles a variety of traditional tax reporting forms (W-2s, a variety of 1099s and other similar type forms), but can’t input most Schedule C, E and F expenses. Gruntworx will enter 1099-MISC income to Schedule C. But, since expenses are beyond the capabilities of Gruntworx my office quickly elected to handle those entries internally.
Brokerage statements are a snap with Gruntworx and probably the biggest time saver of all the forms except W-2s, and W-2s only take more time because there are so many of them on almost all returns.
There are a few caveats. Gruntworx is really fast, but is slower to get data entry back to you as the April due date approaches. My office had a response to most files sent within 24 hours, sometimes only a few hours. By mid-March to the finish line it became a few days.
Another caveat involves brokerage statements. Clients with massive trades will send the Gruntworx bill for that client quite high. One client had a thick stack of trades which would have wasted a day entering the data. Gruntworx charged $78.50. Still a deal, but my policy is to scan and attach pertinent pages of the brokerage statement and enter only the consolidated numbers in the software. This is fast AND cheap and you know how cheap this accountant is. (Some accountants disagree with my policy. I’m good with that. Just send it to Gruntworx and get the workload out of your office.)
One final caveat involving Gruntworx. Review is necessary! As every tax professional’s eyes will attest, tax documents can be hard to read at times. We found two errors this tax season from Gruntworx. The computer entered a smudged number wrong. There is still room for the tax professional in the Gruntworx world.
Gruntworx works with Drake Software, which I use in my office. It also works with some Intuit, Thomson and CCH software. If your tax software isn’t on the list still check with Gruntworx as it still might work. If not, similar products are available for all the larger commercial software packages.
You can estimate the cost of Gruntworx for your office here.
Gruntworx and Drake are used by my office, but are not affiliates. Regardless, I highly recommend both for large and small tax offices. These companies will supercharge your tax prep side gig run out of the home or store front firm. Gruntworx makes you look like a larger and more professional firm
Outsourcing is admitting you don’t have to do everything yourself. In the past we handled payroll, bookkeeping, tax, audit and consulting all under one roof. This is a lot for a small one-location firm.
There are different levels of outsourcing. The level which worked for me involved payroll. Payroll requires dedicated staff and I didn’t handle enough payrolls to keep payroll dedicated staff. Also, payroll is a commodity business with national firms sucking all the profit out of it for small and local firms.
Virtually all payrolls are now handled by someone else. You can read about it hear, including who I use. (Reminder: the payroll service I use is an affiliate.)
My firm earns more profit not preparing payroll than we did doing all the work. Outsourcing freed valuable resources for other important tasks.
Where payroll was a success story, tax preparation was not. I knew there were serious issues to manage if it was going to work, but in the end it was a complete failure.
I will keep business names out of it. My goal is not to defame, but to inform.
First, I asked several local clients if they’d be willing to allow me to outsource their tax return to a U.S. source. A small number agreed to help with my experiment.
A VPN was set up with security locked tight to protect data. To make a long story short, the outsourcing firm made so many mistakes it took more time to fix the returns they worked on than if we just did the whole thing ourselves. We did not run the outsourced returns through Gruntworx.
VPNs are slow and clunky which might have been a very small part of the problem. Unfortunately, the real problem was quality. The outsourcing company failed on many levels. Their preparers were very green. If we would have rolled out the program the cost per return would have been favorable, but not nearly as generous as Gruntworx.
Due to lower profitability, security issues, time constraints, quality of work and incessant errors, I do not recommend outsourcing tax returns at this time unless you consider cloud services, which we will cover next.
Cloud services come in a variety of flavors, just like outsourcing.
I’m a big fan of cloud computing. I can work anywhere I have an internet connection without logging into the office system with a VPN.
Cloud computing can get expensive, but compared to the cost of IT services and servers it is a steal.
My office is undergoing its largest cloud build-out ever. Drake Software allows us to host their software on the cloud. (Don’t quote me, but I think the cost is $600 per year for the first user and $300 for each additional user. I’ll update when I get to the office or discover a different price.)
There are several benefits to hosting Drake on their cloud. The biggest benefit is working from home is easier. No more driving to the office on weekends.
Another benefit with hosting the tax software in the cloud includes outsourcing again. Some outsourcing firms are outside the U.S and that opens a host of problems. My experience shows how U.S. based outsourcing firms can also fail big-time. But with the tax software hosted in the cloud I can hire qualified employees from anywhere and train and supervise them on my terms!
This blog brings in complex tax returns most tax offices only see periodically. Finding qualifies tax professionals has been my greatest challenge and it’s wearing me out. Cloud computing will open the frontier. I can hire awesome tax people from around the country. There is no reason to house the entire team under one roof!
I sound optimistic because I haven’t had my head slammed in the door yet with cloud. It is a work in progress with lots of opportunity. Best of all, no VPNs!
Finding team members who I can vet and train is a powerful advantage only cloud services allows me to do. Training my team is the only way to assure the best accountants serve my clients.
Business is always an on-going work in progress. What worked a decade ago doesn’t today. Successful business owners are constantly reinvesting their company.
The ideas I shared today are the ones I felt were the most important. I’ll publish more on this in the future as my firm evolves. If you are considering tax preparation as a seasonal side gig consider the information above. It makes a difference.
Tax services is a profitable industry, but has its risks. Current tax professionals can glean what they need from the proffered information. At minimum it can get you thinking about your business and the various ways you can increase the bottom line while keeping your sanity.
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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.
- 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 dog days of tax season are here. I’m dead tired and not as caught up as I was a week ago. Missing documents and research put me in a minor bind. Still looking good, but for the record, I took a short nap at my desk Friday. I was cooked. I’m off Saturday, but working Sunday to prepare for a phone meeting with Mr. Money Mustache. The quiet, empty office is conducive to massive productivity. You’d be surprised what no interruptions can do to a guy’s efficiency.
An AWOL winner from our last drawing made an appearance.
Rich S from Philly collected his $50 Amazon gift card and wanted me to remind everyone his Eagles are the Rockin’ Super Bowl Champs! Rich is on a roll I would say. Congratulations and thanks for visiting.
Talking about money being given away and drawings, we have yet another drawing this upcoming week. Check the details on the Where Am I page. Consider using your winning with the Amazon link from this blog to recycle cash back into the system. It all goes to a good cause: charities and you.
I forgot to mention some tradelines news. I talked with Darren a few weeks ago and promised to mention they are experiencing high demand. If you want put some serious coin in your pocket read the previous articles I published on the topic.
Or just contact Darren to start earning some ca-ching fast.
2534 State Street, Suite #433
San Diego, CA 92101
Mention The Wealthy Accountant to receive a bonus on your first tradeline sale.
There were some concerns when I first announced my suggestion to use Tradeline Supply to sell your tradelines. It seems my earlier work was well worth it as the concerns were unfounded and Darren and his team have grown into an industry leader. You can expect to earn anywhere from a few hundred dollars up to a thousand per hour invested in selling tradelines. This is one of the most powerful side gigs I know of. If you understand tradelines you can retire before you ever start it’s so lucrative. Check it out.
Back to taxes. Time is running out. S corporations and partnerships are due next week Thursday. File an extension if you need it. If you need help use the contact button to see if my office can fit you in or at least get an extension. We are getting more selective as our schedule tightens, but are still looking at all requests. If you do your own return, consider the link below. You will have access to the same commercial grade tax software used by nearly 50,000 tax offices, including mine.
Finally, I have a volunteer to help with Camp Accountant. I haven’t had a chance to confirm due to the weight of tax season bearing down on my shoulders. Karen K, I’ll be in touch soon.
Enough about business. It’s time for a break. Here is some entertainment I’m sure you’ll enjoy!
What I’m Reading
Yesterdays post forced me to bring out a blast from the past. Nick Murray’s book, Serious Money, was an integral part of the story. After all these years it was time to partake in some of the old pleasures. Serious Money is hard to find. Used copies are available on Amazon, but unless you are in securities sales it isn’t a necessary buy. It’s also pricey since so few copies remain in the world at large.
What I’m Watching
Last weekend I took both days off! Yeah, I’m just as shocked! I was so tired I spent much of last Saturday watching educational videos. I want to share a few interesting presentations here.
When I can’t sleep I watch old Looney Tunes cartoons. I was snoring within minutes with this selection. Consider it a subliminal education.
I thought this next piece by Milton Friedman, recipient of the Nobel Memorial Prize in Economic Sciences, was an excellent way to better understand inflation.
Abbot & Costello always make me laugh and after a hard week of toil I enjoyed this piece on loafing. Ah, those were the days when a guy could join the union and get paid serious money to be a real loafer.
Finally, for all you kind readers who lust for a project that puts a few extra cents in your pocket, an experiment to get free lighting from magnets taken from an old microwave.
What I’m Listening To
I got this darn song stuck in my head all week. Now you’re infected. Sorry.
My game plan for next week is pretty short: prepare tax returns. Repeat. I keep reminding myself this too shall pass. Five weeks left.
It happens more often than you think. The IRS issues erroneous refunds all the time and you suffer the consequences if you handle the issue incorrectly. Missing refunds and reduced refunds are even more common. There is a procedure to handle each situation. Following procedure will avoid penalties due to an IRS error.
We Start with a Missing or Reduced Refund
A surprise refund in the middle of summer from the IRS quickly raises suspicions “this might not be a good thing”. However, refunds for less than anticipated are more common. Missing refunds top the list.
Before you panic, refunds have a general time table. If your refund is AWOL you might need to practice patience first. If it’s been less than three weeks since you e-filed (six week for paper filed returns) you need to wait a bit longer. Calling the IRS will waste a good portion of your day only to hear the friendly IRS employee say you need to wait at least 21 days before they can do anything.
If the allotted time has elapsed you can check on your refund status online. (You can actually check your refund status few hours after e-filed and it should show up as received.) You will need your Social Security Number, filing status and exact amount of your expected refund. Sometimes the IRS tells you to wait a bit more as they continue processing your tax return. This happens a lot with returns containing credits, especially the Earned Income Credit.
If a problem exists with your return the IRS should let you know. If the IRS says your return has been processed and refund issued you will be given a chance to file a dispute in the IRS’ refund status page.
Amended tax returns use a different search tool on the IRS site. Amended returns are always paper filed for individuals and take around four month to process and a refund issued.
If your refund is less than requested on your filed return you should start with the refund status link above. The IRS should tell you why your refund was reduced.
If your refund is lost or you disagree with the offset portion of your refund you have several choices to resolve the problem. Only contact the IRS if the refund offset was for federal taxes. Other offsets issues should be directed to the agency that received the offset funds. Common refund offsets include: child support arrears, delinquent state taxes and unemployment compensation debt. If you really owe the money you’re probably not getting all the refund you expected.
Surprise IRS refunds are more common than you think. Non-clients stop in the office (or call) several times per year asking what they should do about a refund they didn’t expect. There are set procedures when this happens. If you don’t follow IRS protocol on an erroneous refund you could be on the hook for interest charges and even penalties. If the amount not yours is large enough it could become a criminal issue! And it was the IRS’ fault!
Usually refunds are not larger than expected. If you receive more refund than expected, review your return and the refund status link above for an explanation. Usually you are owed the larger refund. Verify before cashing the check.
When the IRS changes a refund an explanation is mailed to the address of record. A phone number is provided to dispute or verify the change.
The complete surprise refund from the IRS is rare, but happens often enough for a small office like mine to help worried taxpayers unsure what to do with their newfound largess.
IRS procedures cover erroneous refund checks before and after they are cashed and direct deposits.
If the refund check hasn’t been cashed, VOID the endorsement area on the back of the check. Return the Treasury check to the IRS office where the check came from within 21 days. This is found at the bottom of the check and before the words TAX REFUND. I have included addresses at the end of this post. Do NOT attach, staple, bend or tape the check in any way! Include a note stating “Return of erroneous refund check because (and give a brief explanation of the reason for returning the refund check).”
If you got excited and cashed the check, submit a personal check or money order within 21 days to the appropriate IRS office listed below. Since the check is cashed you may not recall which office the check came from. In that case you need to call the IRS at 800-829-1040 for individuals and 800-829-4933 for businesses. Let the operator know you need information to repay a cashed erroneous refund check. Yes, you will be on hold a while so it’s best not to cash a refund check unless you are really owed the money.
Also, write on the check or money order: Payment of Erroneous Refund, the tax period for which the refund was issued, and your taxpayer identification number (social security number, employer identification number, or individual taxpayer identification number). Include a brief explanation why you’re returning the refund. If you cash an erroneous refund check expect to pay interest to the IRS.
Direct deposits of erroneous refunds are problematic. You may not be aware of the erroneous refund until you get your monthly statement from the bank or check your account. Once again, interest probably will accrue for an erroneously direct deposited refund. If the money is promptly returned the IRS may waive the interest due to their error. If you wait more than 21 days the IRS generally assesses interest and expects you to pay.
Contact your bank and have them reverse the erroneous refund immediately. Call the IRS at 800-829-1040 for individuals or 800-829-4933 for businesses to explain why the direct deposit is being returned.
Deeper Refund Issues
Sometimes you end up scratching your head over a refund issue or did all the right things and the IRS persists in penalizing you for their mistake. In these instances it’s time to call out the Taxpayer Advocate.
The Taxpayer Advocate (TAS) works inside the IRS on your behalf. The guys at the 800 numbers are nice enough, but lack the experience, tax knowledge or authority to fix most serious problems. The Taxpayer Advocate office is staffed by knowledgeable tax people able to work directly with the IRS agent handling your file. TAS answers the phone faster and gets the job done sooner. They even call you back with progress reports! The most seasoned staff is reserved for tax professionals.
My office has used the TAS many times with great results. Use the link above and click the Contact Us button to find the closest TAS office to you.
IRS Addresses to Return Erroneous Refunds
ANDOVER – Internal Revenue Service, 310 Lowell Street, Andover MA 01810
ATLANTA – Internal Revenue Service, 4800 Buford Highway, Chamblee GA 30341
AUSTIN – Internal Revenue Service, 3651 South Interregional Highway 35, Austin TX 78741
BRKHAVN – Internal Revenue Service, 5000 Corporate Ct., Holtsville NY 11742
CNCNATI – Internal Revenue Service, 201 West Rivercenter Blvd., Covington KY 41011
FRESNO – Internal Revenue Service, 5045 East Butler Avenue, Fresno CA 93727
KANS CY – Internal Revenue Service, 333 W. Pershing Road, Kansas City MO 64108-4302
MEMPHIS – Internal Revenue Service, 5333 Getwell Road, Memphis TN 38118
OGDEN – Internal Revenue Service, 1973 Rulon White Blvd., Ogden UT 84201
PHILA – Internal Revenue Service, 2970 Market St., Philadelphia PA 19104
It was an exciting week in the Wealthy Accountant’s world. Facebook decided they didn’t want me to use the name Keith Taxguy. Now if I were a Russian meddling in the election I would’ve had no problems at all. It all ended well (so far).
New policies instituted in the office this year are paying off. For the first time since I showed up in the blogosphere people are surprised how fast I’m getting work done. After tax season I’ll spill the beans on my experience so other tax firms can experiment with the same tools. It should help other business owners and those with a side gig formulate ideas to increase their efficiency. This means less work and more profit. Isn’t the modern world awesome!
I found a gapping problem in the new tax law this week that will cause serious issues next tax season. I stumbled upon it by accident (asking clients questions). Monday I’ll have a full write-up. This issue is for more than accountants. Anyone who files a tax return is affected. I estimate 70% of taxpayers will need to adjust for the error or will have a nasty surprise when they file their return next year.
A few reminders before we head into the entertainment part of the weekend. Do-it-yourselfers should consider 1040.com through this blog. I like the program and use the commercial grade program in my office. Since this blog’s profits go to charity (increasingly supporting agencies helping abuse survivors) it’s for a good cause.
We have another nifty drawing to give money away again in the upcoming week. Don’t miss your chance.
Looking to manage your growing stash better? Personal Capital is a resource many are using to visualize all their investments in one spot. Best of all it’s free!
In the near future I will share my experience using PeerStreet. I think it is an excellent addition to many portfolios. Over the last year or so I’ve wound down my Prosper and Lending Club investments for a variety reasons I’ll outline in the future post. I’ve added PeerStreet to my investment mix and so far have been very happy. I also like the added protection of real estate backing the loans I’m investing in.
And now for some weekend entertainment.
What I’m Reading
Tax season limits my reading time. (Notice my sad face.) I’m working on a really good book I hope to report on next week. I also have been catching up on some neglected issues of National Geographic. The short articles fit the schedule easier this time of year for me.
What I’m Watching
Tax season quickly turns into a real life edition of Groundhog Day. Each day melts into the next, only to repeat again and again until we get it right. With this in mind, I’ve never seen the movie Groundhog Day. I know, I know. Everybody has seen the darn movie except me, until now.
This weekend I went to the library to checkout Groundhog Day. (I actually sent Mrs. Accountant.) Now we can officially declare every living human has seen Groundhog Day. So much for my reputation as an early adaptor.
For the record, I actually watched the movie; something I rarely do. Normally TV is background noise or a sleep inducer. Bill Murray earned his keep. I watched, yes watched, the entire movie. Of course they had me when the groundhog was driving.
Here is a YouTube video everyone MUST see. Elon Musk hits the nail square.
What I’m Listening To
I worked in silence most of the week as I was on a mission from God. The work was peeling off at a rapid clip. Here is one soundtrack I noticed in my YouTube queue from earlier in the week.
Be good, kind readers. One month of tax season is nearly in the books. See y’all Monday.
(Now I’m off to read a book. I am taking the whole weekend off! All of it.)
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.
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.
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!
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 season is here with concerns about tax law changes effective this year while we still use the old rules for preparing the 2017 return. Several new tools are available to help you determine how the tax code changes will affect you.
Drake Software, the program I use in my office, has developed a Tax Planner incorporating the changes in the TAX CUTS AND JOBS ACT. If we prepare your return you will get a copy of this diagnostic automatically at no additional cost showing what your taxes would have been if the changes applied to 2017. No more guessing.
I am also officially opening my doors for additional tax clients! This is important. This summer will be busy as serious planning is needed for all taxpayers with rental properties or business income. Past advice is out the window as new rules mean new advice! Some people will need to consider different entity structures to take advantage of the new rules. Regular clients will have first pick of consulting sessions. If slots are available after serving clients I will open the doors for non-clients. I’ll keep you informed.
If you prepare your own return you should consider Drake’s DIY program with the link below and in the right column. You will receive the same diagnostic tax professionals using Drake provide.
If your tax professional uses software without an effective planner or you prepare your own return outside this blog you might consider the Tax Proposal Calculator offered by the Tax Policy Center. I’ve played with the calculator and find it helpful.
[After I published, Jeff from Maximum Cents (a blog you should consider reading) left a comment with a link to an even better tax calculator than I provided above.
This is what I love about the blogging community. Our group intelligence blows away anything I can do on my own. Thanks for sharing, Jeff.]
The stock market has been on a tear. Now is the time to consider monitoring your wealth building with Personal Capital. The easy money has been made with the massive market run-up. Having a plan and clear visual of where you stand financially is a powerful resource. Clicking the image below takes you to Personal Capital. Remember, you can’t manage what you don’t know.
Concerns over the market also have people thinking about different places to invest their money. Lending Club and Prosper were a great alternative until issues arose a year or so ago. I’m currently withdrawing all my funds from Lending Club and Prosper due to the high level of risk compared to the declining returns. This is a slow process, but nearing the end.
A similar investing model backed by real estate is offered by Peer Street with comparable returns. Lending Club and Prosper are unsecured loans with a higher level of risk. Peer Street isn’t a perfect answer, but certainly a consideration for a limited percentage of your portfolio. Clicking the image below takes you to Peer Street. Kick the tires and let us know what you think in the comments.
Student loans came up in the comments this week. Debt is the number one enemy of wealth and student loans are structured with serious risks to the borrower. I’ve pasted a link below to SoFi. At the very minimum kick the tires. Before interest rates climb higher you want to get your loans under control.
Before we get to the fun stuff, remember next week is our drawing for $100! The drawing is open to all subscribers. Check the Where Am I page calendar for more drawing dates and details.
Now for the fun stuff to enjoy the rest of your weekend!
What I’m Reading
Richard Branson has made a name for himself doing business differently and having fun in the process. I bought several of his books a few weeks ago and cracked open The Virgin Way: If It’s Not Fun, It’s Not Worth Doing.
Richard’s style is different and it resonates with me. I fell in love with the FIRE community for their frugal ways. Early retirement always sounds nice, but retirement in its traditional form isn’t for me. Enter Sir Branson.
Branson convinced with his words and lifestyle you can have the best of both worlds: free time with family and doing the things you enjoy, plus keeping the business. He also provided me with ample evidence I need to listen more and better. I tend to talk too much. (If you’re reading this dad do not comment. We, ah, you can laugh about this at the card table.)
Branson has a refreshing style I enjoyed more than I originally thought. If you want a fun, entertaining and informative read, I recommend The Virgin Way.
What I’m Watching
Natural history and science are common threads in my viewing habits. My guess is you’ll enjoy as much as I did this YouTube video on how the Earth’s landmasses moved over millions of years. [240 million years ago to 250 million years in the future]
Professor Brian Cox is a favorite. In the video embedded below Cox explains The Biggest Threat to our Civilization.
All that serious talk requires balance with a humor piece. Jim Jefferies is a riot. His humor reminds me of George Carlin with an Australian accent. Here Jefferies explains the situation between North Korea and the U.S. Enjoy.
What I’m Listening to
Talking about Australia, here’s a song from Midnight Oil I listened to this week. [Beds are Burning]
Finally, I rarely listen to recent music releases. The following video of Somebody That I Used to Know played at the gym ad nauseam a while back and YouTube must have heard about it. Now I can’t get the darn tune outta my head. I’m passing the blessing on to you.
Enjoy your weekend, kind readers! Can’t wait to get back with you again Monday.