Ohio CPA Dana Stahl brought up several good points in a recent email exchange we had and has graciously allowed me to post them here.

DS:

Mr Guru – as usual, I haven’t been receiving your daily email blog updates, so I spent my lunch hour going back over the past few weeks & reading your blog.  Some thoughts:
 

KMK:

That email feature with Bloglet became so unreliable that I took the sign-up form off of my blog a few months back. You may want to try out subscribing to it via the rss feed, such as with a service like Bloglines.  That’s how I keep up with hundreds of blogs.

 DS:

1.    On outsourcing, you really articulated points that Accountants/CPAs ought to consider when deciding whether to use this.  I had planned to use as a marketing campaign how my firm does NOT outsource, but instead keeps the work right here in the good ol’ USofA.  May I pull a Senator Biden and plagiarize some of your points in my letter to clients, current & potential?

KMK:

1. Stressing that your firm does all of its work in-house is an excellent marketing angle that I would encourage you and everyone else who is resisting the outsourcing trend to highlight in your marketing efforts.  In fact, whenever this fact is not mentioned in a tax prep office’s ads, I encourage potential clients to explicitly ask about it.

As always, you are welcome to excerpt from anything that I have posted on my web sites.

DS:

2.    On the 1040X/IRS audit issue, I’ll have a really good test case coming up.  I just completed a 1040X for 2002 & 2003 with a client who says we overstated his business revenues.  When we first updated his books, we took all deposits shown on the bank statements and classified it all as income.  We explained what we were doing all along, but he finally got the idea that perhaps some of his deposits could have been money he put into the business to cover bills.  He compiled his own billings directly for each year and said we should use those figures for each year.  So, we made the change accordingly.  He’ll have a combined overpayment of just under $16,000.  We advised him about the 1040X issue, in that he may be facing an audit since we are claiming a large amount of refund.  I hope we’ll be able to get this through with no hassle, but I’ll keep you posted on what happens.

KMK:

2.  Good luck with the 1040X.  I just finished up one of my audits last week.  This one actually went rather smoothly because everything was in QuickBooks and I just printed out a G/L for the auditor, who spot checked a few things and then allowed the full $15,000 refund claim.  The other audit is not going as well because the client’s records aren’t as organized, plus the auditors stumbled over a huge bad debt deduction that they are trying to disallow after failing to disqualify most of the actual changes we had made.  I may have to take that one to Appeals.

DS:

3.    As to the IRS “tax gap”, there was an article in Accountants’ World citing a $315B gap, according to an interview with IRS Comm Everson.  Nowhere in the article was there any challenge to this figure, but it appears to have been meekly accepted as the gospel truth by the author.  Since I deleted AW’s email, I can’t link you to it.  Just wanted to let you know that your comments on the tax gap were born out through this article.
 

KMK:

3.  It has always been SOP for the media and almost everyone else to blindly accept the IRS’s tax gap figures as gospel because they do toss those figures around so confidently.  A number of years back, I attempted to track down their actual calculations, even speaking with some high level IRS execs in DC, who admitted that they guessed at the numbers since unreported income is something that can never be quantified with any real precision.

DS:

4.    Forgive me if I’ve already mentioned this, but I’ve been looking at dailyhowler.com for comments on Social Security from the leftist point of view.  The blogger of that site, Bob Somerby, really takes conservatives in general and Bush in particular for wanted to revise the structure of SS.  You should really give it a look if you want information on the arguments put forth by various leftists.

KMK:

 4.  As you have hopefully already read today, I have been enlisted to help with the Club For Growth‘s efforts to counter balance the leftist propaganda related to the current Social Security reform efforts through their new blog at SocialSecurityChoice.com.  We are addressing the left’s bogus arguments head on, such as their idiotic claim that everything is hunky dory and that Bush is manufacturing this crisis.  You should monitor this new blog because there is a lot of excellent info being posted there.

DS:

5.    I still haven’t heard from Edward Jones regarding the former IRS Commish’s comments on how the 1997 anti-IRS testimony was false.  I’ll keep pursuing this, as I contacted EJ again and demanded some type of response on this matter.

KMK:

 5.  Just like with the tax gap figures, nobody really challenges people who make claims about IRS issues; so that person was unprepared to document his claim that the IRS abuse stories were bogus.  As we all know, he was full of crap when he made that claim.

DS:

6.    I’m considering joining Dan Pilla’s group Tax Freedom Institute.  He seems to have a lot of good insider knowledge on IRS procedures, etc.  However, he charges $995/year for membership.  I’m always looking for more contacts and resources in dealing with IRS, so what do you think?  Would it be worth it?

KMK:

 6.  Dan Pilla is very knowledgeable and current with his info; but I really have no idea what joining his group would entail.  I’m assuming that it would entitle you to be the first to learn of things he comes up with in order to help your clients deal with IRS.  While at first blush $995 seems like a lot of money, I’ve seen plenty of seminars and conferences costing many times that.  Since you are working on building up your practice, that seems like a pretty good investment for a year. As you know, it’s a lot less than the other practice building services that often charge in the range of $20,000 or more for their “secret formulas” for success. 

DS:

7.    Finally, have you considered setting up a bulletin board for tax practitioners who regularly visit your site or even possibly starting some type of organization like Dan Pilla has?  It would be good to have contact with others across the country on tax matters.  I spoke to the one fellow from CA who had passed along his experiences with the 1040X/IRS audit issue, and he thought it might be a worthwhile enterprise.  Any thoughts?
 
Thanks for all your contributions to the tax discussions and for your great blog.  Who knows, perhaps you can be the next Andrew Sullivan, or even better, Powerline.

KMK:

7.  I’m not sure I have the time required to monitor an official discussion board.  I’m already stretching myself pretty thin with the limited amount of web activity I am currently doing. However, I have long dreamed of at least having a network of like minded tax pros to whom we could refer clients who are in need of good assistance.  Since we are actually trimming back on our client base, it is frustrating for us when someone asks us to take them on and we don’t have anyone to whom we can refer them.

Speaking of discussion boards, I recently joined up with the Yahoo based one on LLCs.  They haven’t gotten into the SE tax issue yet, but they have covered some interesting points.  They are at: http://groups.yahoo.com/group/lnet-llc
You may want to join up and see if the other members have more experience with the SE tax issues that will help you with your clients.

I hope this helps.  Good luck with tax season.

Kerry

This famous singer-songwriter has had more experience dealing with the IRS than most people would ever want to have.

Study: Tax Changes Could Raise Billions

Q:

Mr. Kerstetter:

A tax preparer at H&R Block mentioned to me that the Schedule A deduction for state and local taxes for employees should only be for net taxes, taxes that are paid on the state tax return.  Thus for 2004 taxes, one should prepare their state income tax return first then place the tax paid on the 2004 state tax return onto the Schedule A for the 1040.

I have not heard that this is the “correct” way to report state taxes.

What I am familiar with is to deduct on Schedule A taxes withheld, then count as next year’s income when the W-2G comes.  Or, if taxpayer does not itemize, no income in reportable from the W-2G.

What is the correct method, if there is one?

A:

You are right.  State taxes are deductible on a purely cash basis.  Whatever was paid in during the year can be claimed on that year’s Federal Sch. A.  If the person does receive some of that previously deducted money back, it is considered income on the 1040 for the year in which the refund was actually received or applied to a future state tax year. 

Just because a person itemized on the previous year’s 1040 doesn’t automatically make subsequent refunds taxable.  Under the Tax Benefit Rule, if the state tax deduction didn’t actually result in any actual additional Federal tax savings, refunds of those taxes are not required to be reported as taxable income.  I see this situation a lot when the taxable income figure was negative on the return where the state tax payments were claimed. 

As much as I often poke fun at H&R Blockheads, I can only assume that the preparer with whom you were speaking was sleeping through the section of their training course that covers Schedule A, because that has been the proper procedure for at least the past 30 years I have been in this business.

There are times when the net state taxes are used in some situations.  I prepare a lot of multi-state income tax returns, where we often need to claim a credit against the clients home state taxes for the taxes paid to the other nonresident states.  In those cases, we can only use the actual tax as shown on the other state form.

I hope I’ve cleared this up for you.  I also hope you aren’t seriously considering allowing that Block employee actually prepare your income tax returns.  If this person is so wrong about a very basic simple tax matter, there’s no telling how many other areas s/he is ignorant about.

Good luck.

Kerry Kerstetter

Lawsuit alleges ‘online currency’ scam  – Here’s how a classic privately run Ponzi Scheme is run.  As always, I have a hard time coming up with sympathy for people stupid enough to believe that there is such a thing as a safe and legitimate investment producing guaranteed monthly returns of 30% to 40%.

Lawmakers Look to Tax Cosmetic Surgery – Rulers in some states are equating this idea as just another sin tax, no different from taxes on alcohol, tobacco, and gambling.

Can an S-Corp Help Avoid Certain Taxes? – While I agree that LLCs are often better than S corps for owning investment properties, I can’t stress enough how important  it is to get competent professional advice about the type of entity before setting one up.  Every day, I receive emails and see messages on the online discussion boards from people who set up a corp or LLC without the foggiest idea of what they were getting into. Doing things that way is no different than jumping off a bridge before checking the depth of the water ahead of time.    

Don’t Add More Pain to Taxes With a Bad Preparer – Good tips on warning signs to watch out for.

I have been receiving questions like this one from Ohio CPA Dana Stahl from other tax pros every year since the 1980s:

I’ve seen lots of advertising by TurboTax on TV lately. I wonder if this may cut into our tax prep business to some degree, as has been predicted many times by various commentators (who say user-friendly tax software will take away much of our market!). One story concerning me: I heard from a tax client who said she wasn’t coming back this year. She said she took my data from her 2003 1040 & inputted it into TurboTax, which resulted in an additional $7 refund. Therefore, I must have screwed up when I should have gotten her another $7. I told her to send me a copy of that 1040, and that this was probably due to rounding or something. Oh, well, another one bites the dust.

My reply:

Assuming that your client’s TurboTax actually came up with the exact same figure for taxable income as your program did, a slight difference in the tax is quite possible based on the method the programs use to calculate it. If they do an exact dollar percentage calculation, there will be one figure. If they use the IRS tables, which use $50 wide brackets, there will most likely be a slight difference.

I have seen the tons of TurboTax commercials on TV. My opinion on TurboTax and other consumer tax prep programs as a threat to our profession hasn’t changed one bit since they were first made available back in the 1980s. If there was ever a perfect illustration of the old GIGO (garbage in, garbage out) maxim, tax prep software is it. This covers all tax software, including the heavy duty and very expensive programs that we professionals use.

I have never discouraged my clients from using TurboTax. In fact, I used to have several clients submit their annual tax info to me on a TurboTax print-out instead of my normal organizer forms. I would then enter that data into my tax program and the bottom line numbers never came out the same because I was able to use my knowledge to better enter the info to reduce the clients’ taxes. I don’t have as many doing this any more, as we have mandated most of them to use QuickBooks and to just send me a copy of their QB data file.

As I’ve said since the 1980s, form filler tax services, which just enter numbers onto tax forms (manually or via computer) with no thought as to the various options that may be available, do have a lot to fear about losing business to software like TurboTax. This could very well be the case for the super simple 1040A and EZ clients, which are the bread and butter of the assembly line tax prep outfits. However, we all know that with each additional tax schedule and type of transaction to report, there are dozens of options for how they can be reported in order to minimize the tax hit. This takes much more brain power than the form fillers have and makes those of us who keep up on the tax rules worth the big bucks we charge. I know it sounds crass, but clients who are too dense to understand this aren’t who want to be working with.

Just as with the emphasis on doing your own work and not sending it to India, you may want to highlight something like the fact that you and your staff are entering more than numbers into your computers. You are entering your years of experience and vast knowledge, things that are not included in cheap do it yourself programs.

Anyway; those are my thoughts on that.

Kerry

Indiana GOP Governor Proposes Tax Hike – How does this quote differ from what we have long heard from DemonRats?

“I ask the most fortunate among us, those citizens earning over $100,000 per year, for one year, to pay an additional 1 percent on the income they receive.”

This is too much like Dick Gephardt’s classic description of people who do well as “winners of life’s lottery.”