Hi, I’m Gary Bode, a Wilmington CPA who’s been preparing taxes for over a decade. Many of the tax preparation postings on this website advocate self preparation of personal taxes when appropriate. Why?
- It seems wrong that taxes are so complex, Americans need tax preparers.
- The IRS sponsors free online software. And, TurboTax is great if your return isn’t too complex. But you have to know when to punt.
A Case Study to Help you Decide
All Wilmington CPAs look over a lot of self prepared tax returns. Usually as part of the new client setup process. For example, I like to see what’s been done in the past. Are their missed deductions? Can I keep using the client’s tax categories to remain consistent for the IRS?
Here’s what I found on one of the first reviews in 2012.
Some background first. The taxpayer runs what the IRS calls a hobby income business. And the IRS specifically states these company’s returns receive more scrutiny than other business returns. Many folks turn their hobby or passion into a business when they make that first sale, or get paid for a service. Since they must report the income, they have the right to deduct legitimate expenses. Hobby income companies generally lose money in the first few years. Examples include arts and craft businesses. But the IRS has found that many of these companies essentially turn personal expense into business expense, which generates that tax loss. And some hobby income companies never turn a profit. Sometimes inadvertently, sometimes intentionally. So, on an IRS audit, they might only allow deductions up to the amount of income. So, zero profit and no loss. And they assess back taxes on losses already claimed. Why don’t they catch this earlier? I don’t know, but it can take years.
Well, this taxpayer seemed unaware that the IRS automatically looks at his/her particular type of service. And the taxpayer has a regular job; the service is a sideline. Bang, another red flag. Hobby businesses can turn around the automatic IRS suspicion by conducting themselves in certain ways. For example, an artist with a college art degree has a better defense against the IRS than an artist who doesn’t. Proving you have an intention to make a profit is another defense. And this particular taxpayer has stumbled onto many of these defenses. But the business is seasonal and requires expensive equipment. As a sideline, it can’t expect to turn a profit. Plus the equipment has the potential for personal use. But, no personal use shows in the tax return. Another red flag. This taxpayer is very savvy and runs a good set of books. But the complex nature of tax depreciation, for the expensive equipment, allowed him/her to make a glaring error on Schedule C. Depreciation is at least $4000 high, probably more than double what the IRS considers normal. Thousands higher than the prior return shows. And way out of proportion to the reported income.
This taxpayer will be audited, in my opinion. Now it may well be an automated IRS audit, just asking for documentation, along with an unpleasant recalculation of the tax due. Which would be fine, if the tax audit could be contained to a single year. But there’s a chance the IRS will retroactively disallow prior losses once the company is under the microscope.
I’m a Wilmington CPA who prepares taxes. While I advocate self preparation when appropriate, remember what President Obama said, and I’m paraphrasing, that the amount of tax you pay shouldn’t depend on the skill of your CPA. But of course, it often does. For a free phone consult call (910) 399-2705.