How to Get in Trouble When You Have Principles

Craig W. Smalley, EA
Founder/CEO
CWSEAPA PLLC
Columnist
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So, I have principles. For example, when I meet with a new company, I usually form a limited liability company (LLC) for them. I usually don’t see these clients again until tax time. When I see them, I review their income and expenses.

If their net income is less than $15,000, I file the return as a disregarded entity. Self-employment tax on $15,000 is $2,295. It would cost less to file an S Corporation return. Under Rev Proc 2013-45, then it would to pay the self-employment tax.

Then I have clients that are LLCs and told me years ago, when they started, that they would make all kinds of money. So I set them up as an S Corporation. Five years go by and these people have not made any money, and after talking with them, they don’t plan on making any. I then talk to them about revoking their S election and explain that they can’t be an S Corporation for five years. I also tell them that I am taking food off my table because they are paying me more than what they are saving in taxes. The clients appreciate the honesty and tell me if they need an accountant again they will call me.

I offer a free one-hour consultation. I give the client advice, examine their returns, financials, and write up an analysis, tax plan and proposal. Some clients will try to put my plan into motion without my help, and they begin sending emails. The email is returned with an engagement letter asking for a retainer, and a credit card authorization. The reason for that is that I have answered free email after free email for years, and I decided to put a stop to it.

My wife, Belsis, who is also my business partner, talked to a potential new client (PNC), the other day. The PNC wanted me to examine 2014-2016 returns and some IRS letters. The PNC lives in Canada. Her 2014 return shows wages and a loss from a rental. However, her 2015 and 2016 returns are on Form 1040. After talking with the PNC, I ask her if she was in the U.S. for 180 days or more in 2015 and 2016. She says she wasn’t. I then tell her to go back to the original preparer. Since it was the preparer’s mistake, I suggested that the fix on the returns should be free. After that, the PNC mentions that she has IRS letters from 2011 that she wants me to review. And I’m stuck.

For the first time in many years, I am getting emails and calls asking what I charge for a return. The person on the other line doesn’t realize that they are asking an ambiguous question. I charge for a tax return by the schedule. I even got an email from a PNC looking for the best tax person to consult with them through an initial coin offering (ICO). They then added that the fee should be cheap. I replied and stated, you are looking for the best, but don’t want to pay for it?

Then, I picked up a new client this year. They upload their information to the portal, with their tax stuff, and it’s a Form 1065 that they prepared themselves. The 1065 is for a side business that the husband and wife operate. They do it in their spare time and spend less than 500 hours a year working in that company. However, they do the 1065, and, with the income that they make, they are subject to self-employment tax. It is passive income. Further, the husband and wife are 50/50 partners. They don’t even have to file a 1065. They can simply put it on a Schedule C.

I decided today, after that call with the lady in Canada, that I can have principles, like not charging a fee that is more than a client is saving in taxes. However, this lady from Canada, I have to bill. I don’t have a choice.

I charge $275 an hour. Especially during this time of year, I can’t be doing a bunch of free stuff for someone who will never become a client. When asked what I charge, I tell the client that they are asking the wrong question.

I have another new client that was referred by the financial planner I work with. In reviewing his returns, in 2015, he owed $65,000. The tax preparer didn’t fix the problem — she simply gave the client estimated tax payments totaling $78,000. In 2016, the client gets a refund of $49,000. I know that what we do for a living, we are desensitized to numbers. However, that is $49,000. I can think of a thousand things I could do with that kind of money. The tax preparer APPLIES the refund to 2017. I mean, the guy could have put the money in the stock market, gone to Las Vegas, invest in something. Instead, he gives the U.S. government an interest-free loan.

I take this client on in January. I charge a monthly fee for write-up and a retainer for tax planning. It was a lot to come up with at once. Then, I bill him for his corporate return a month later, and he begins complaining to the financial planner, who then tells me about it. With his corporate return, I give him a tax plan that I will be modifying every quarter. He tells the financial planner that I say I can save him $50,000 but he’s NEVER paid income taxes before.

I make an appointment with him to review his tax return. I start by reenforcing that he did in fact owe large sums of money. He paid his accountant $2,000 to do the returns. However, I tell him that his preparer did nothing to fix the problem. In fact, he had a separate bookkeeper, and I had to fix his QuickBooks to be able to do the return. With all the tax changes, I get his profit down to $60,000. I then tell him that he will get back most of the $49,000 that his last preparer applied to 2017.

He is happy for the moment but decides to read the engagement letter that he already signed. I mention that I am being engaged to do the return. Letters from the IRS or state agency will cost extra, and if the return is audited, it will cost extra as well.

In short, I can’t get a break.

About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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