Will You Get Additional Deductions By Working with a Tax Pro?

Two weeks ago I was poking around on Twitter and saw a discussion among tax pros about how, most of the time, the answer to the question posed in the title is: no! In fact, many times the bottom line on your tax return will be WORSE working with a tax pro.

I know I shouldn’t say that, because it seems like bad marketing. But anyone who has read anything I have ever written knows: I don’t BS or sugar-coat things. I call a spade a spade, and the fact is, you probably WON’T “get additional deductions” by working with me.

The tax pros in that Twitter discussion said the same things I say: I almost never find additional deductions, but I sure as heck find things that were done wrong on the tax return in prior years. Here are examples (these are just ones I thought of off the top of my head as I was writing this post; there are many more!):

  • A new client was deducting their pre-tax 401k contributions as IRA contributions on their self-prepared return. Pre-tax 401k contributions already reduce taxable income on a person’s W-2, so this person was double-deducting. They had been doing this for years and the IRS never audited them. And then I come along and say “no you can’t do that.”
  • A client was paying into IPERS (the Iowa pension plan for public employees) and their preparer was claiming the retirement savers credit for those IPERS contributions. You can’t do that. Even though IPERS contributions are basically the same as 401k contributions THEY ARE IN FACT NOT THE SAME. IPERS contributions are considered EMPLOYER contributions, not employee contributions. I wrote about this here. So this client was getting this credit, and then I come along and say “no you can’t do that.”
  • A new client was commuting to a job. This was their full-time job and they had been at this job for 10 years. Their preparer deducted transportation costs of over $20,000 per year as an employee business expense (back when you could take these deductions). They had been doing this for the entire time the person had this job. And then I come along and say “no you can’t do that.”
  •  A new client was a college professor. Their prior preparer claimed a home-office deduction via the Schedule C (self-employment) line on the professor’s Form 1040 even though the professor was a W-2 employee. This had been going on for years and the IRS never questioned it. And then I come along and say “no you can’t do that.”
  • A prospective new client owned a rental property with his wife. The property was in an LLC owned by the two spouses. Their prior preparer put the rental on their personal return, when in fact they should have been filing a partnership return because an LLC was involved. (NOTE: you can possibly get out of penalties by arguing for Rev. Proc. 84-35 relief here, but with partnership failure-to-file penalties being so draconian, not filing a partnership return and then hoping for penalty relief is a bad strategy.) This person ended up not going with me.
  • A prospective new client owned a rental property in another state. They stopped paying the mortgage and the bank foreclosed on the property. The client received a Form 1099-C for cancelation of debt. They had been using H&R Block, and let’s just say the reporting on all of this — the rental through the years and the 1099-C — was “problematic.” “Wrong” is actually the more-accurate term! Multiple years of amendments were in store. This person ended up not going with me.
  • A new client had been doing their own taxes in TurboTax but decided to use me because they were sure they were “missing out on deductions.” Oh my. This client’s income spiked during the year — like doubled — and they ended up owing. This wasn’t my fault, but the client came to me specifically to “get more deductions,” and instead I ended up telling them that they owed several-thousand dollars, when they had been getting refunds of several-thousand dollars in the past. This client used me that year and then I never heard from them again.
  • A new client was a partner in a partnership. The partner had legitimate unreimbursed partnership business expenses. These expenses are supposed to on page 2 of the Schedule E as a subtraction from K-1 income. Instead, their prior preparer put these expenses on a Schedule C. The net result on the tax return was correct but the reporting was all wrong. And I’m the one who had to point this out. At least in this situation, I didn’t have to tell the client “no you can’t deduct that.” Instead it was just “we need to report it in a different place.”
  • Another spousal LLC situation: the client hadn’t really gone into business yet, but made some equipment purchases in the LLC. The prior preparer deducted tens of thousands of dollars of equipment expenses on a Schedule C that showed $0 income. For a partnership. When the partnership wasn’t operating yet anyway. And then I come along and say “wait just a minute here.”
  • A new client does backdoor Roth conversions every year by making non-deductible contributions to a traditional IRA and then converting to a Roth. Because the traditional IRA contributions are non-deductible, the client has basis in the IRA, which means all or most of their Roth conversion is not taxable. The prior preparer failed to account for the fact that the traditional IRA contributions were non-deductible. Instead, they were counting the entire IRA distribution as taxable. On this entire long list, this is the ONE AND ONLY item on this list where I found something that actually saved the client money.

Reasons to Work with a Tax Pro

So the moral is: I probably WON’T “get you extra deductions” or save you money year-to-year on your 1040. That’s just a fact. So why work with a tax pro? A few reasons:

  1. You want your return done right so you can sleep at night. While I do make mistakes — and I write about my mistakes right here on this blog! — I do take my job seriously, as do most reputable tax pros. Many of the examples on my list above involve the foibles of tax pros, but I maintain that most of us in this field really do try to get things right.
  2. Your situation is complex and you need a pro to do it. This is related to #1 and is true of any situation from a personal tax return to a corporate return.
  3. You don’t have the time or inclination to prepare the return yourself and so you want a tax pro to do it.