A really funny thing happened to me today in a tax audit.
I’m a CPA who does much of his work solving IRS problems most any day of the week. Our firm represents taxpayers with tax problems before the IRS whether its correcting tax returns, settling back tax problems or representing taxpayers in an IRS audit.
Today, I was representing a taxpayer who got the IRS notice and is being audited by the IRS. This particular taxpayer was being audited for two years tax returns. My client, lets call him Joe, received an IRS letter and tax audit report explaining what were the changes and taxes owed the IRS was proposing after receiving his tax return. It was not a pretty picture to say the least.
Joe had his taxes prepared by a local tax preparer – the same tax preparer he has been using for the past 4 years. Like every year, Joe went to their office, brought all his tax paperwork and was looking to pay the least amount of taxes possible. After all, who wants to pay more.
In most cases, I’m pretty successful in helping taxpayers to avoid the dangers normally associated with IRS audits and getting them to pay no additional taxes at all or just a small amount more. But in this case, I knew going into the audit, the taxpayer was going to have to pay. In fact, the taxpayer was going to have to pay alot.
Like most tax preparers, the tax preparer was just trying to get the biggest refund possible for his client. The tax preparer attended tax preparation classes, studied how to use free income tax software and read about many of the tax loopholes he could use to help his clients. Furthermore, the inexperienced tax preparer thought that the more he could save his client, the more he could charge them and the more business he would get once word got around. Wrong!
Before I got to the IRS audit, I reviewed the tax returns prepared, I researched the tax law on the issues before the IRS, I corrected the tax returns so I would know the real tax exposure and looked intently on finding other tax deductions that could help the taxpayer save money. I was well prepared. Joe already know he what he was going to have to pay, and I already knew how I could help bring this amount down to something Joe could afford.
When I got to the IRS audit, everything was going as expected. I knew what tax deductions would be allowed and what tax deductions would not. I knew where the tax preparer made errors and what the corrections were. I knew what the potential exposures were and what to expect if these came up. I even knew what penalties were going to be assessed. I was well prepared.
Then a funny thing happened. The IRS agent turned his attention away from Joe and to Joe’s tax preparer. The IRS agent was much more interested in Joe’s tax preparer than Joe. The IRS agent pulled out a checklist and started asking me questions like “How did your client find this tax preparer?”, “Did your client exercise reasonable care is choosing this tax preparer?”, “Did your client ask him if he was a CPA?”, “Did he represent that he was a CPA?” and more. In fact, the IRS agent knew exactly how long Joe had been going to this tax preparer, how many tax returns this tax preparer prepared every year, the names, addresses and social security numbers of other taxpayers that have gone to this tax preparer and just how to find them.
Lucky for me, Joe got off easy. Yes, Joe had to pay more taxes. He would have had to pay more taxes anyway if he filed his returns correctly the first time. But I did two key things that helped Joe tremendously. Most importantly, I got Joe out of almost $10,000 in tax penalties he was going to be charged for just plain relying on dumb mistakes made by his overzealous tax preparer and second, I got his taxes reduced for other deductions he should have taken that weren’t put on the return that were just plain obvious to me.
Joe paid me around $3,000 to help him get out of this mess. The original assessment by the IRS was over $300,000. Joe still will have to pay around $30,000 in taxes he couldn’t get out of, but he would have had to pay that anyway if the tax returns were right in the first place. Yes, I saved him over $10,000 in penalties and other tax deductions he should have taken, but if he went to me in the first place he wouldn’t have to have paid me around $3,000 more.
The moral of this story is that if you’re researching tax preparation fees or tax preparation rates on the internet and looking for the best deal out there, you’re simply asking for trouble you just don’t want. The cost of tax preparation is directly related to your how difficult your returns are to prepare and the time it takes to do it correctly. The guy who gets you the largest tax refund is not your best choice. CPAs who spend 365 days a year doing accounting and tax work are far more qualified than the guy in the mall who does taxes in the mall every year for 2 or 3 months.
Free tax preparation software is just that – free. You get what you pay for. Even if you opt for TurboTax or some other tax software, you may still need professional help from a licensed, CPA. The online tax software products are excellent, but only if you know what you’re doing. Answer a question incorrectly and it will be wrong. Want to save money? Then prepare the return yourself with your online tax software, print it out, and bring it to a CPA with your tax documents. The CPA will charge you less because you made his life much easier.
Don’t think because you never got audited before it just won’t happen. Sooner or later it will. The IRS is taking very strong measures to look at tax preparers and weed out tax preparers who do not meet minimum standards. If your new tax preparer is overzealous, or gets you large refunds where you never got them before, you need to understand why. Tax preparers who ask you how much you spend on personal expenses like gas, clothing, shoes, etc. are a dead give away for looking for deductions you really can’t take. Steer clear of tax preparers who give you phantom income from self-employment just to get you back more money in tax credits (a common technique currently being targeted by the IRS). Pay a little more and get your taxes done by a CPA who practices all year long, not just a few months from January to April 15th. And above all, ask what are your tax preparers credentials, ask to see their license and ask what their experience is – not just how much is this going to cost me?