While I have never in the least felt my business to be threatened by do it yourself tax software, that hasn’t been the case for many other tax professionals, such as in this email from Ohio CPA Dana Stahl.

Mr Guru – saw your blog this am.  You really do know tax pros who “are desperately looking for clients?”  I know I’ve had a hell of a time trying to build the accounting end of my practice, what with some of the marketing programs I’ve tried.  The tax end has grown, however.  But I do worry about the future, particularly with the tax software available for people to do their own plus the IRS making tax prep available online.  I know we’ve discussed that before, but I do need to pay attention to the trends affecting our profession.  That’s why your comment about desperation jumped out at me.

 

Talk to you soon,

DS, CPA, ABA, ATA, ATP

Dana:

As you well know, there is a growing mini-industry that focuses on helping accountants get new clients; so there is obviously a big market for that. I also frequently see messages on the discussion boards asking for help on how to generate new clientele. 

As I’ve always said, tax preparers who are nothing more than form fillers do need to worry about competition from do it yourself software.  Those of us who use our knowledge and experience to massage the info have nothing to fear from those programs.

Kerry

Ohio CPA Dana Stahl has been watching the discussions on the tax gap issue.

Mr Guru – I finally got around to looking at the Roth & Co post on the “tax gap“.  He, as you know, took you to task for “selection bias”, citing restaurant owners & others who keep revenue off the books & those who come up with bogus deductions (of course, you would NEVER know about those matters, right?  You’ve only been preparing taxes for how many years now?

Guess that means you’ve got no clue to how the real world really works).

Anyway, he does raise an issue here.  Wondered what your counterpoint would be.  Something for your blog in the future?

DS, CPA, ABA, ATA, ATP
Sandusky, OH

My Response:

In regard to the tax gap debate, I have never said that nobody cheats on their taxes.  In fact, I make a point of posting plenty of articles on tax cheaters.  Maybe it’s just the difference in my outlook on humanity.  Most other people, including some other bloggers, seem to always see the worst and start from the premise that everyone is dishonest and will cheat on their taxes.  Based on my 30+ years of working with people from pretty much all cross sections of our society, I know that assumption is not true and is an unfair characterization.  I stand by my opinion that it is wrong to treat everyone as a criminal and punish us all with more Gestapo like powers for IRS just because of a small number of people who refuse to obey the laws.

I’m nearing the end of an email exchange with someone who is a classic example of how people intentionally overpay their taxes that I hope to post in the next few days.

Kerry

 

Update: I have posted the above-mentioned email exchange.

Q:

Subject: help

Kerry:

 

I have a client who owns a home with his wife which otherwise would qualify for the Section 121 exclusion.  They want to “sell” their home for a promissory note to a controlled entity (LLC or S corp) and then have it developed into condos to be sold.  The entity/purchaser will be 99% owned by the seller and 1% by another.  Assume the sale is “respected” by the IRS.

 

Results:  no ability to use installment sale treatment (453(g)); ordinary income on the sale (707/1239).

 

Even given the potentially “bad” tax results above, this is no problem because 121 still excludes the gain even if it is ordinary income under 707/1239.  Do you agree??

A:

I’m not aware of any restriction on the Sec. 121 exclusion for full unrestricted sales to a related party.

The only mention of any such restriction in Pub. 523 is the following for when only a remainder interest is sold to a related party.

“Exception for sales to related persons.   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.”

Kerry Kerstetter

Follow-Up:

agreed.  Thanks!!

 

 

Q:

Subject: Tax Question

Dear Kerry,

I have friends that want to sale their residence valued at $1.5 million.  They also want to make a contribution to a charity of approximately $500,000.  They are wondering if they can donate 1/3 of the residence to charity before it is sold.  Then after the home is sold and they get $1 million for their 2/3 share of the residence, still deduct the $500,000 exclusion for sale of a partial interest of a residence.  Your thoughts are appreciated.

A:

Such a plan could be possible, with proper documentation, including an IRS approved appraisal of the value of the partial interest.

However, such a plan might not work out to give your friends the lowest tax.  It could very well work out that having them sell the home as 100% owners and then donate $500,000 cash would have a smaller bottom line than the scenario you are proposing.  Long term capital gains are taxed at a much lower rate than is ordinary income. 

Their personal tax professional should run the numbers under both scenarios.  It could end up showing that a $500,000 cash donation saves them more ordinary income tax than the extra capital gains tax on $500,000 additional taxable profit from their residence sale. 

Of course, with numbers that large, all kinds of other factors will kick in, including the insane AMT and phase-outs of deductions and exemptions.  The only way to get a decent handle on the figures is with a good tax software program, which their personal tax professional should have.

Kerry Kerstetter

 

Q:

Subject: Any advice?

 

I have just found our website after months of IRS torture. We are being audited for the year 2003 and it’s been going on since August. My husband is a small business owner (LLC construction company) and I worked as a physician assistant in 2003. I am now in medical school. Anyway, we are being given hell over my unreimbursed employee business expenses. The majority of these expenses are for 2 medical conferences and for a Palm Personal Digital Assistant. I have receipts, credit cards statements, and my own records as kept using the It’s Deductible program. However, the IRS auditor insists that I must produce documents from the employer explaining the reimbursement policy of Tulane and documents showing my requests were denied. The problem is that I had been told prior to even requesting reimbursement that there was no more money in the department for reimbursement. Why would I ask my employer for money I had already been told would not be reimbursed? Also, concerning the Palm, they say that it is only deductible if it was “required” by my employer. Our CPA has really gone to bat for us and has argued tirelessly with no success. Today, my husband and our CPA had a conference call with the auditor and her supervisor who is in Houston . (We live in Pineville, LA—4 hours from Houston.) He backed the auditor on everything. My former supervisor and chief of the department had written me a letter explaining that these expenses were not reimbursed and that a Palm PDA was ordinary and necessary. However, the IRS agents dismissed that saying that my former supervisor was a “personal friend” and couldn’t offer information. They said I had to get something from Tulane’s Financial Office. (I was employed by Tulane University School of Medicine in New Orleans. I’m sure you can see the problem with that.) However, I have studied all the IRS documents thoroughly and I disagree with their position. I don’t see anything that says I must keep records of my previous employers reimbursement policies. All I can see is that I must keep accurate, complete receipts which I have done. The agent has already been through all our bank statements thoroughly so she knows good and well I was not reimbursed. Well, I don’t mean to go on and on but we are very worn out over this. She told our CPA today that she now intends to dig into 2004 even though she told him at their last meeting that she wasn’t going to. We feel like they are just fishing and angry because we are fighting them. Please offer any insight you can.

 Thanks,

A:

With IRS audits, there is an element of luck in regard to whether you get an auditor with some smarts or an imbecile.  It sounds as if you got the latter.

From the way you described it, you have provided much more substantiation for the legitimacy of the unreimbursed employee expenses than it normally takes.  The auditor is being an unreasonable jerk.

I have had plenty of experiences just like yours.  I long ago realized that asking the audit supervisor or manager for help is a big waste of time.  While a case in underway, they always rubber stamp their auditors’ opinions.  I have actually had a number of times where I was speaking with an IRS audit manager about a new case and they admitted that their auditors on previous cases were out of line.  It was obviously too late to have any effect.

In cases like yours, the best thing is to try to close it out at the auditor level ASAP and then take it to Appeals, where the people have more brain power and are required to consider the hazards of litigation.  This means that an Appeals Officer would know that the IRS would be laughed out of Tax Court by insisting that the documentation you proved wasn’t good enough.

Your CPA will have to decide exactly how to end the audit.  One technique I have used in situations like that was to just tell the auditor and his/her manager that we will not be providing any more information to them and they should just go ahead and issue their report.  When the report is issued, your CPA should then submit a formal request to have the case transferred to Appeals. 

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your advice. I have forwarded it to my CPA. I think you are right. I want this out of her hands.

H&R Block Sues Intuit – Not happy with TurboTax ad campaign.

Q-1:

Subject: Unfiled Taxes

Hi. I was wondering what I can do about two years of un filed federal taxes.

I’m 22 years old. Own a small business. In the year of 2003 I filed an extension for my personal federal taxes. Payed est. tax I thought I would owe. Worked hard at my business (which I started in my teens). Incorporated and started switching it over to the LLC. When it came time for the extension to be over, I found out had to have major surgery, went through a deep depression.

The business flourished without me strangely. I did the minimum to keep the business running. Deposited the checks. Paid its bills etc.I spent most of those two years holed up in my apartment, buying groceries, surviving on the minimum, and staying out of public life. Surgery time came, everything went well and I was healthy again. Decided I had no reason be depressed.

Now I owe two years of un filed personal taxes and one year of un filed taxes on the LLC. I believe I have the money to pay it as I did nothing with the profit from the business, just let it setting in the account. I’m in a bit of a mess as I have no CPA for myself or the business.I want to get it all sorted out, pay the taxes to the IRS I owe, and hope to avoid jail time.

Could you lead me in the right direction?

Thanks,

A-1:

You aren’t that far behind on your tax returns that you need to be worrying about prison.  I know plenty of people much further behind than you are.

You absolutely must engage the services of a qualified tax pro who can help you get the past year tax returns prepared as accurately as possible.  Trying to do this on your own is asking for serious trouble.

If there are taxes due, your personal problems will be important in getting the IRS and State tax agencies to reduce or waive the late penalties for reasonable cause. 

Good luck.

Kerry Kerstetter

Q-2:

Kerry. Thanks a lot for the response. I value your opinion greatly because of your site and your writings.

There are  many CPAs in my area, most who either seem to have clients who are either employed clients, or large business. I cannot seem to find any who do small business specifically.

Do you have any suggestions for finding a qualified CPA?

Thank you,

A-2:

I know that there are tons of tax pros desperately looking for clients.  You may want to widen your search area.  Choosing one based on close proximity to you is the wrong way to go about it.

Unfortunately, we don’t have anyone else to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you. 

Good luck.

Kerry Kerstetter

Follow-Up:

I will carefully read the advice on the page.

Thanks again!

 

 

While QuickBooks is the best way to keep track of money paid out to charities, it doesn’t have the ability to easily track and properly document noncash items donated, such as old clothes and furniture.  There are various ways to assign value of used items donated to charities.

You can use WAGs (wild ass guesses), the most common technique.

You can use one of the various guides, such as this one from the Salvation Army.

A computer program to do this that’s been around for several years is It’s Deductible.  Intuit purchased the company that produces it a number of years ago and now includes it in TurboTax.  A few years back, Intuit said they were going to add It’s Deductible compatibility to Lacerte, another company they bought (and the tax prep program we have been using since 1985); but so far that hasn’t been more than an empty promise.

H&R Block has its own version of the It’s Deductible program, called Deduction Pro, that also includes info on other Schedule A deductions. The website lists the price as $19.99.  For the past year or so, I have been subscribing to the free RSS feed from TechBargains and have learned about several money saving opportunities.  This morning’s feeds included one linking to a free copy of DeductionPro.  I downloaded it and checked out some of the values for noncash items and was impressed with how many it includes. When you install it, you have the option of setting it up for the year 2004 or 2005.

I pass this along for informational purposes.  As always, I must warn that no software, including the extremely expensive Lacerte programs that we use in our offices, can take the place of a knowledgeable and experienced professional tax preparer. Programs like those mentioned here should only be used to help you better organize your information for your personal tax pro.