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.

Fixing the Deficit is Automatic

All the talk this week will center around the deficit committee entrusted to come up with a plan to shave $1.2 trillion or more of red ink over the next 10 years. That will not happen and if it does, Congress will not pass the measures.

The good news is that debt reduction is on automatic. Without action, automatic spending cuts are already law and will kick in in 2013. This will make the Reepublicans happy. Numerous tax cuts will expire at the end of 2012. This will raise even more revenue than the automatic tax cuts will save. This will make Democrats happy.

The automatic spending cuts and revenue raisers will start after the election. Under the automatic measures, spending and taxes will look more like the late 1990's when the economy boomed.

What do you think the chances are Congress will not mess with the automatic budget adjustments and tax laws? Me too.

Substantiate or Lose the Deduction

CPA trainer extraordinaire, Jack Surgent of Surgent-McCoy CPE, LLC, is fond of saying, “In taxes, form trumps substance.” What Jack means is that you need documentation if you intend to take a deduction. If you don’t, the IRS will levy penalties against the taxpayer AND tax preparer. The penalties can be steep.

Most deductions require a receipt only to prove the deduction. However, when deducting auto expenses and meals and/or entertainment, you need more. The IRS will disallow a deduction based solely on a receipt.

When you keep records of vehicle miles for business, you also need to state where you went, whom you saw, and the purpose of the trip. For meals and entertainment, you need to include on the receipt, who you were with and the purpose of the business meal or entertainment event.

The rules can get tricky when deducting vehicle expenses, travel, meals, and entertainment. It is a wise investment to consult your friendly accountant to avoid nasty surprises in an audit. Also, don’t give your friendly accountant the evil eye when he requests you keep documents in the fashion listed above. He is working to protect you and keep his own career. The IRS has no problem penalizing and barring tax preparers that flaunt the rules.