Why I Don’t Talk to Salespeople About Tax
The emails always start the same: I’ve read your article in whatever publication. They say that I think differently and want to talk to me. Like an idiot, I talk to them and five minutes into the conversation, I am wondering why I took this call.
I have been in practice for 24 years. I have seen a lot in that time. I have a certificate from UCLA in taxation. What I hate is when some salesperson quotes a Code Section to me. The call I got the other day was probably my favorite. This guy wanted to sell my clients on non-qualified (non deductible) Defined Benefit Plan. He offers that most Fortune 1000 companies do this. They then invest this money into life insurance.
My clients are business owners. How do I explain to them to put $600,000 away and get no tax deduction. Then the money goes into life insurance. The estate exemption is $5.49 million. Let’s say over a period of time the life insurance exceeds that amount. You have just created a taxable estate.
They mention some code section, that I don’t even bothering listening to, where they say they skirt the estate tax. They only way life insurance is protected from the estate tax is an Irrevocable Life Insurance Trust (ILIT). This strategy may work for an employee, but not a business owner. I could never sell that to my clients. But that wasn’t the worst.
I get a call from a person whose question is, is money from a sexual harassment lawsuit taxable? I explain that unless the money was for unpaid wages it is tax free. The guy starts arguing with me. Saying he did a Google search and I was wrong. I explain to him that he can search Google and find out how to untax himself, and how the 16th Amendment was passed illegally. Then he goes into the fact that he hasn’t filed returns for three years. He adds that he was self-employed and only got a 1099 for $1,500, and his wife didn’t make much money. So I ask the obvious question, what did he and his wife live on? No response. I explain that I have to pull transcripts, and charge a $2,000 retainer. The guy says that he has to speak with his wife, which is code for he doesn’t have the nerve to tell me no, he puts the onus on his wife.
Then, this one I can’t explain. I get an email about the good ole cost segregation studies. I thought the IRS shut these down, but apparently not. If you don’t know, a cost segregation study involves depreciating, and 179ing certain equipment. The good news for us, is we have to file Form 3115, which is always a good day.
Why do salespeople think they know more than a pro? No one can know the entire Internal Revenue Code, but I certainly know how to look code sections up. I don’t take anyone’s word for anything. I look it up.
Now we talk about Captive Insurance. There is nothing wrong with traditional captive insurance. The problem are micro-captives. The micro‐captive insurance structure, in a nutshell, is when a small‐business (the insured) pays and deducts insurance premiums paid on a policy to a “captive” insurance company (the insurer) that is also owned by the insured. The insurance company makes an election under IRC §831(b) to exclude the net premiums from income so that the company only pays tax on its investment income.
This type of structure is easy to sell to a small‐business owner with consistently high profits that become the victim of a Federal tax rate of 39.6%. The world’s worst salesman could successfully convince a money-making-business owner to consider a captive arrangement. This is where we hope our clients call us. the pitch goes something like this: You are making a lot of money this year so you have a choice; (a) Pay $500,000 to an insurance company that you own 100% of so you get to keep the money; or, (b) Pay $198,000 of income tax to the US Treasury and keep $302,000 of the $500,000. Sounds like a no-brainer.
Here is why I don’t do things for money. My clients trust me. I know micro-captives are on the IRS’s Dirty Dozen List. Yes I could charge a ton of money to set this up, but what happens when the audit comes?
If someone is really making that much money, let’s start a defined benefit plan (DBP), and put away $215,000. Then start a 401k putting away $18,500, plus a 3% match. Start a Health Reimbursement Account (HRA) and put as much money in it as we can.
I don’t mean to sound pompous, but I have a philosophy that I have had since I went on my own six years ago. If it costs the client more for my services than what they are saving in taxes, I tell them to stop doing it, knowing perfectly well that I am cutting my throat. But you would be shocked the response that I get to that. I am thanked over and over again, and when that person needed help again, they called me.
Don’t get me wrong, I charge a lot for what I do. I do that because of all my years doing this, and I know what I’m doing. That being said, growling up poor, I do a lot of pro-bono work.
Don’t question yourself when some salesperson tells you tax law. Look it up.
Craig W. Smalley, EA is the CEO and Founder of CWSEAPA®, PLLC, located in Orlando, Florida, with clients all over the country in every industry. He has been admitted to practice before the IRS as an Enrolled Agent, and has a Master's Certificate in Taxation from UCLA. He has been in practice since 1994, specializing in individual, partnership...