I like many of my fellow tax preparers have often complained about taking yet "another ethics class". I think you will agree with me, this, if anything, certainly brings a new understanding to the Internal Revenue Service's concern about "ETHICS" of the tax professional. What really gets to me is not only was this person a CPA, but a former Internal Revenue Agent.
Read the article excerpts below and share your opinion on .
The title to this piece is not a literal quote…but it’s effectively what today’s petitioner told both the IRS and the Tax Court. Needless to say, that’s not a good strategy.
The Petitioner worked for the IRS for a few years and is now a certified public accountant (CPA). Now, many CPAs know the Tax Code and rules quite well; however, many CPAs don’t practice in tax. The Petitioners S-Corporation “prepar[ed] tax returns and provid[ed] consulting services.” He also sold insurance through a sole proprietorship.
The petitioner’s S-Corporation return was audited, and the IRS made many adjustments including disallowing travel expenses, depreciation, cost of goods sold, and rental payments. This led to a deficiency of $306,336 and an accuracy penalty of $41,365. The Petitioner challenged this in Tax Court.
Mr. Fox goes on to point out several of the areas the Tax Court took issue with the Petitioner... again, to read the entire article or the court case, click on the links provided.
There were several items in dispute. First was travel expenses. While you can take deductions for ordinary and necessary business expenses you have, you must keep records.
The petitioner is a CPA, worked for the IRS, and he prepares tax returns; surely he had backup for his deductions.
"The Petitioner did not substantiate that he met the requirements under section 1.274-5T(b)(2). Petitioner therefore is not entitled to deduct any of the claimed travel expenses for 2006."
I personally don't understand how someone who worked for the IRS and is a CPA wouldn't think they needed to maintain receipts to back up their deductions.
Petitioner’s claim for depreciation expense didn’t fair better.
"Here, petitioner failed to prove the adjusted basis of the portion of his home with respect to which he claimed the depreciation expense."
Well, he must have had some proof of his cost of goods sold from his insurance business. After all, those expenses should be obvious. There’s a problem, though: What is he selling? He’s selling his services, and there isn’t a cost of goods sold with a service business.
"We have held that a business must involve the sale of a material product to which direct cost may be allocated to reduce gross receipts by the costs of goods sold in computing gross income."
This next part I found extremely disturbing... Mr. Fox's article goes on with the rental Payments..
Then there were the rental payments. The petitioner supposedly rented a portion of his house for his business to his S-Corporation and received just under $33,000; the IRS thought that was compensation. No matter how those payments were characterized, they were income on the petitioner’s return. The difference is that if they were compensation, employment taxes would be owed. So the petitioner undoubtedly provided his rental agreement or other documentation or–well, I’m writing this so I think you know where this is headed:
"Petitioner did not produce a rental agreement between himself and the Company for 2006. Petitioner did not provide any checks or documentation demonstrating that the Company paid him rent for use of his home. More generally, there is no documentation in the record reflecting that the Company rented a portion of petitioner’s home."
The article continues with his correct conclusion that as "TAX PREPARERS" we are held to a much higher standard and goes on to say...
Then there was the accuracy-related penalty. Let me state what should be obvious: If I am ever in front of the Tax Court, I’m going to be held to a higher standard than the average taxpayer because I’m supposed to know the rules. The same was true for the petitioner:
The court ruled:
"Petitioner, a CPA and former IRS revenue agent, prepared the Form 1040 he filed for 2006 and the Form 1120S that the Company filed for the same year. Petitioner exercised a lack of care and reckless disregard for rules and regulations in reporting income and claiming deductions against income on the returns, resulting in the remaining underpayment. Petitioner failed to offer any persuasive evidence that he acted with reasonable cause and in good faith with respect to any portion of the remaining underpayment."
There isn’t much to add to what the Tax Court said. If you have expenses, document, document, and document some more. You will be happy you have done so. And if you’re a tax professional and you don’t, well, have your checkbook handy.