The IRS has Turned your Accountant into their Policeman
Every business owner thinks he pays too much in taxes, and in reality, most actually do. These days your accountant has to "play it safe". This is not reducing your tax bill.
Many times a tax preparer's work on a typical return is subject to '+interpretations+' of the tax code. New legislation may force preparers who hope to lower a client's tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties.
Furthermore, if a tax preparer's client insists on an aggressive deduction, the preparer may include a form explaining the circumstances. This could eliminate the potential preparer penalty, but it is a certain red flag for the IRS.
This should anger taxpayers who feel strongly about particular deductions. What's more, these penalties do not apply to taxpayers preparing their own returns. This could prompt a taxpayer to tell a preparer: "who needs you; I'll do it myself". The remainder of this article explains why your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions.
The new law alters the standard from a "realistic possibility" that a preparer's position will be sustained to a "more likely than not" standard, or more than 50% likelihood.
Instead of paying just $250 if an interpretation is disallowed, the preparer will now be penalized the greater of $1000 or half the income derived by the preparer. Thus, if a preparer charges $500 to do a routine 1040, he or she faces losing the income on two such returns, and if "willful or reckless conduct" is found, the penalty jumps from $1000 to the greater of $5000 or half the income derived by the tax preparer. But if the taxpayer prepares his or her own return, these "crimes" may bring absolutely no penalty.
Another new wrinkle not sitting well with preparers expands these penalties beyond income tax returns to other tax work: estate & gift tax returns, excise tax returns, exempt organization returns, and employment tax returns.
If an accountant allows a taxpayer to deduct what the accountant may think is a listed transaction, the accountant has to file a form with the IRS to alleviate a potential $200,000 penalty to the accountant. This form is likely to get the business owner audited. So what does the business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant that is not afraid to fight with the IRS.
Unfortunately, all of these options are difficult or worse. The tax code is complex and very few accountants understand most of it. And the IRS has recently made the accountant a policeman. Most accountants are honest, knowledgeable and cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient.
In light of this, you may want to test tour accountant's knowledge. You may want to ask him the following questions:
1) Why haven't I been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2) Why haven't I been using a VEBA to reduce my health insurance costs?
3) Am I a good candidate for a double K to reduce my taxes and provide security for my retirement?
4) What strategies do you have whereby I can legally deduct the cost of my life insurance?
5) Why haven't you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my industry: both with respect to who will be audited and what will be looked at in an audit, and this will provide me with a lot of other useful information?
6) Am I currently using any strategies that the IRS considers abusive?
I would be willing to bet that your accountant has little or no knowledge of the above (6) items.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.