One time, someone (who is not a client) said to me: “I get paid as a 1099 consultant, but my CPA has it all run through my LLC so I don’t have to pay taxes on it.”
Another time I took over as the tax preparer for an S-corp — a one-owner, service-based business where the owner did all the work himself — where the corporation always turned profits in excess of $100,000 a year. But the owner paid himself $0 salary. In fact, payroll had never even been set up! The prior accounting firm said nothing about this, and the corporation operated this way for YEARS and never got audited.
My investment advisor clients get mad when I say “you can’t just nominee over to your S-corp all of the commissions paid in your name personally — your corporation has to be doing something to earn that income.” (By the way, that’s not “Jason’s opinion,” there was a freaking court case about it a couple of years ago!!!) The response is: “oh, we had a CPA come in and talk to a group of us advisors about this a few weeks ago and he said not to worry about it.” And lord knows there are tens of thousands of investment advisors, realtors and insurance agents doing this, and presumably “they never get caught.”
I sit at my desk and worry about every little thing I’ve ever done on a tax return. It still bothers me, the one time I put $717 as a cost of goods sold deduction on a client’s tax return when I later discovered the deduction amount should have been $711. In the rush of tax season, my bleary eyes couldn’t make out whether it was a “1” or a “7” on the info the client sent me.
I worry and I obsess, and I feel like I care more about my clients’ tax situations than THEY do.
And then I see the work product of other preparers. Balance sheets on S-corp tax returns … that don’t balance.
S-corp returns where distributions have NEVER been accounted for, causing retained earnings to be hundreds of thousands of dollars off from the “accumulated adjustments account.”
Tax returns where the depreciation deduction doesn’t match the depreciation schedule, which doesn’t match the balance sheet, which doesn’t match the client’s Quickbooks file.
And of course, none of these clients have ever been audited.
One time a new client’s prior preparer allowed the client to deduct tens of thousands of dollars of employee business expenses for travel to a permanent (more than 1 year) assignment. The client lived in Des Moines but worked at a job site 60 miles away. This was a permanent assignment, and the client chose to keep living in Des Moines and commute.
The prior preparer allowed deductions for mileage, a daily meal per diem, hotel costs when the client chose to stay in a hotel close to work, etc. This happened on every tax return the preparer prepared for this client over the course of 7 years. The deduction for unreimbursed employee expenses totaled upwards of $20,000 worth of travel expenses some years! And again, this client “never got caught.” And then I come along and am the bad guy saying “you can’t do that.” And the client’s response is “oh, my old guy never said anything about that.”
Sometimes I wonder what I’m missing that these other preparers aren’t.
How do you sleep at night if you, for example, casually dismiss a major court case which essentially blew up the whole “I’ll just nominee my commissions over to my S-corp” thing that so many commissioned professionals (investment advisors, insurance agents, realtors) do?
It can still be done, but you have to think about the setup and make sure the corporation is doing something to earn that income, rather than just serving as a tax shelter. This is serious stuff with serious implications if the IRS ever comes calling — and I don’t get how any reputable professional could casually say “don’t worry about it.”
I worry about my S-corp clients and if they’re paying themselves a high enough salary. I worry about the times I have had to “plug” the distribution amount on an S-corp return with an extra $100 to make the balance sheet balance (it was a $109 plug number, to be exact).
And then I see and hear the things I see and hear from other preparers who obviously couldn’t care less about these sorts of things.
How do they sleep at night? And what am I missing when it comes to my attitude versus their attitude?