I Don't Want to Hear About It

Many people want to tell their accountant things they shouldn't. It is true accountants have limited privilege with clients. Certain matters you tell an enrolled agent or CPA remains confidential and your tax professional cannot be used against you in an audit or in court in certain instances. The key word though is "limited." Now is a good time to review what is and is not covered by privilege with an enrolled agent or CPA.

Accountant-client privilege only extends to noncriminal tax matters before the IRS. In state court, accountant-client privilege cannot be asserted. If you are engaged in tax fraud, your accountant can be compelled to testify against you. What is always confidential is any tax inquiry you make. If you want to explore ways to reduce your taxes, the discussion is covered by privilege.

Your accountant is subject to fines and prison is he knows you cheated on your taxes and signed the tax return anyway. So let me say this as clear as possible: I don't want to hear about it.

By the way, you will sleep better at night if you follow the rules, anyway.

Free Tax Audit Protection

Did you know that if you have a professional tax preparer prepare your tax return that you get automatic audit protection? If you get an IRS audit the preparer must defend you at no cost all the way to the Supreme Court. Since it costs you nothing you may as well go the distance. If you do owe additional tax from an audit the preparer must pay the tax. In fact, you should withhold information from your accountant and let him pay the tax if you get caught. You should also encourage your tax pro to take an aggressive stance since you have no risk. All this for a couple hundred dollars in prep fees.

The above paragraph is not true, but many people think it is. I pick up several clients each year from other accounting firms because the client expected free audit protection. The real kicker is when they expect the accountant to pay their taxes for them. So it goes.

I am lucky. My clients get audited at a lower rate than average. But audits still pop up from time to time. And every couple of years I get a client that thinks I should pay their audit costs and taxes. Today is the day.

When you win 99% of the audit, have zero penalties and only $40 in interest you should be happy. Unfortunately, this is not the case. It is even worse. The client wants me to pay him for his time. It does not work that way, folks. Not in this fantasy world.

This post is about how I handle the client that thinks a tax preparation fee includes audit protection and payment of their taxes. In a simple phrase: I fire them. Sound mean? Not really. I do not want to serve a client that expects me to pay their taxes. No one is really so dumb as to think anyone will pay their tax bill for them.

Let me make this clear. Tax preparation fess pay for tax preparation services. Audits cost extra. Your taxes are your responsibility under all circumstances.

I am writing this early Monday morning but will post this Wednesday. Thursday I will fire a client for wasting my time, expecting me to pay taxes he never owed, including costs of the audit. Too bad, really. I liked the guy. But if trust is lost why waste time. He will be served better elsewhere.

And just so you know, you can purchase audit insurance where some or all of these costs are covered.

IRS Hangs Up 70% of the Time

The IRS expects you to prepare an accurate tax return and file it on time. To help you accomplish this goal, the IRS answers their phone about 70% of the time. If you get lucky and get through, you will wait an average of 12 minutes before a live person speaks with you.

The IRS admits they have problems and blame the issues on new temporary tax law changes over the last few years. The news is not all bad, according to the IRS, as 93% of callers that got through received accurate information in 2009.

The IRS should consider the following adage: There is never enough time to give accurate information, but plenty of time to audit.

Auditing is an inefficient way to collect monies owed the government. The bulk of the calls reveived by the IRS are from the 20% of the people that do their own taxes, an area the IRS is auditing heavy due to taxpayer mistakes.

There are other resources available. The IRS website has information on nearly every topic, including forms and publications. Some tax organizations will answer your question for a fee of $50 or so. Considering all the time and expense needed to prepare an accurate return that reflects all the credits and deductions you qualify for, it may be time for a tax professional. It sounds self-serving, but a good tax pro can save you many times the fee he charges.

Every year we field numerous calls from people that want us to answer tax questions on their self-prepared return. We decline in every case. I don't need the added liability when I get no revenue for my time. If you have tax questions, it indicates you are in need of a professional. But it is your life, do what you want. Audits are always a nice source of revenue during the summer.

Forms

A non-client business owner stopped in today for forms. I sent him to the local IRS office.

He was surprised we don't carry forms. Well, we don't; haven't for years. Everything we file is on the computer and filed electronically.

Regular clients allow me to plug the data into my computer and print clean copy. I don't have time to waste printing forms for non-clients.

Do not consider me rude. Time is money and I get about 200 requests per year. The IRS will provide forms online or at a local office for free. The government has the resources to hand out free forms, I don't.

The businessman went on to inform me he is currently working through an audit on his own and the IRS just opened several more years of returns. I told him he really needs a tax pro. He thought differently. I was a nice guy, however. As he explained the audit, I told him he will need to file an appeal to get the assessed tax reduced.

He smiled. I know he has no clue on how to file an appeal. The IRS will help reduce the tax burden for the rest of us on his dime. Too bad. He seemed like a nice guy. The IRS is taking him for a ride. I forgot to ask which auditor he has. I have a pretty good idea, anyway. Twenty-six years on the job and I have a pretty good feel for the way each auditor works.

The moral of the story: Spending a few bucks with your friendly accountant can save serious coin with the IRS. Oh, and you can order free forms from the IRS here, employers here, and state forms here.

Tell the Truth

It goes without telling (so I'll tell it here), you should be honest with your accountant, lawyer, and doctor. Why do I bring this up? Because I inherited a new client with an IRS audit issue and she lied through her teeth to me.

My job is too help you. What you tell me is confidential. If you lie to me I can't help you. You are also wasting my time and your money. For your sake, and my sanity, be forthright with me. I don't blab to the IRS. I help you formulate a plan to manage your tax situation/audit.

The lie didn't cause additional problems, however, I will no longer work with this client. When I make a client's life easier, I am tickled to death; when jerked around, I pare down the client list by one. You paid for a professional to serve your needs, treat me like said professional.

Ok, the rant is over.

Mortgage Interest Crackdown

As reported in The Kiplinger Tax Letter this week, the IRS is using additional tools to catch tax cheats. Revenue is going nationwide using Form 1098 (mortgage interest) to find nonfilers. Large interest payments without a filed return will likely cause an audit. Also, having a mortgage interest expense higher than your reported income may bring the taxman to your door.

As a reminder: There is a $100,000 cap on home equity loans. The IRS wants banks to separate this out on Form 1098 for easier enforcement. Home equity loans used for investment or business may be deductible separately.


Kiplinger is a great resource and investment.

Audit Myths

Several tax blogs I've recently reviewed, including advice in the comments section, exercise the fear factor. This is concerning because fear of an audit is a poor guide for tax planning.

The best way to increase your chance of an audit is to have an income over $100,000. Refusing to reduce your taxes legally is stupid. I am not too harsh in this statement. If you qualify for a deduction, take it; if the income is excludable, don't claim it. Keep documentation to prove your position.

Any tax professional that encourages you to overpay your taxes as a strategy to prevent an audit is incompetent. Overpaying your taxes will not prevent an audit; it may let the IRS know you're a patsy willing to overpay even more. Follow the tax code to the letter and document your position.

There are more myths than tax code. The following is a list of audit FACTS:

• An audit is NOT an accusation. An audit is a request to verify your documentation.
• A third of audits end with little change or a refund.
• The IRS doesn't care if you are aggressive; they care if you cheat. By aggressive, I mean, you use the tax code to your advantage. By cheat, I mean, you write-off expenses that never happened or fail to claim all income.
• IRS auditors don't bite, not often at least. (You should laugh right about here.)
• It is natural to be nervous about an audit. Your tax professional can help you every step of the way. The auditor will need to speak with you at least once. Tell the truth. Review said truth with tax pro in advance. The remainder of the audit should be handled by the tax pro. If you have a business, the auditor will want to see the business. The remainder of the audit should happen at your accountant's office.
• You are not screwed if you lost a receipt. Depending on the amount and how many are missing, the IRS will probably use a reasonable number. My reasonable number is different than theirs, which leads us to,
• If the auditor disallows something you have the right to appeal. In 98% of appeals in my office, the amount owed the IRS is reduced, sometimes to $0.

When a tax pro says they had two or three audits in the last year and they were hell, look for a tax pro with more audit experience. I handle over 50 audits per year personally; all but one or two come in off the street.

Auditors put on their pants one leg at a time, same as you and me. Their job is to add up numbers and produce a report. The auditor's supervisor is the first level of appeals. A formal appeal is required if a satisfactory outcome isn't reached.

Audits and appeals take time. Find an experienced and trusted tax pro to guide you through the rough waters of a tax audit. Then, it just might be smooth sailing.