The fact is, CPAs are terrible at helping in this situation.

We do a lot of tax returns, have sophisticated software, and a lot of experience on a full range of tax issues. Our strength is in taking someone’s financial information and preparing a complete tax return.  But, we are lousy at looking at one component of the tax return and reviewing just that isolated slice of information.

Why? Because CPA are cautious, and we want to make sure that there isn’t a odd limitation or gotcha that could apply to the bit you’ve asked us to review.

The tax law is insanely complex, and a lot of deductions and rules depend on other factors of a person’s financial life.  The answer to even a seemingly simple, “Can I deduct the cost of the MBA classses I took for work?” depends on a lot of other parts of your return and professional life.

CPA's Prepare Taxes but Are Bad at Helping

When the question becomes more complex such as “How do I record the income I received from what I think is an investment when the company sent me a 10-99 for what they paid me?”, it can be impossible to even think of a reasonable number of questions to ask to understand the situation enough to give an intelligent answer.  A CPA will want to know all the details of the transaction, see all contract documents, and know where all the taxpayer’s income for the year came from.

In fact, CPAs almost always want to know the total financial situation of a tax payer before they pass judgment on a return or part of one.  There are so many arcane rules and special qualifications that we are afraid that we’ll endorse a wrong solution for your situation.  Or worse, we sometimes can give a correct response to what you want looked at, but there’s a huge problem in what you’ve done because of something we don’t know about.

Here’s an example.  Suppose you want a CPA to look over the Schedule C of your tax return to make sure the items are correctly classified as business expenses.  They are.  But, it turns out that this year you incorporated the business and the business needs to file its own return.  A CPA could say the Schedule C looks good, but if you filed it with your personal return you could wind up paying the IRS interest and penalties for underpaying your personal taxes.

CPAs we know all avoid checking a part of a tax return or answering an isolated question about which line is supposed to record this bit of income or that expense.  99% of the time, the tax laws are too weird to allow us to give a simple answer.

So, please ask us to prepare your return.  But, please don’t ask us if you used the correct calculation for Line 27!

The answer is YES, we are still setting up appointments for new clients.  In fact, most years we continue to set up new client appointments until two or three days ahead of the tax deadline (April 17th this year).

At some point, last year is was April 3rd, we will tell potential clients that we will help them estimate their taxes, submit a request for extension to file to the IRS, and prepare their taxes as soon as we can.  We may be able to complete the returns for these clients by April 17th, but we are not able to commit to it.

We start telling new clients that they may go on extension when the partners, Charles and Geoffrey, are concerned that there isn’t enough time for back and forth exchanges that are frequently part of the tax preparation process.  Often there is “just one” piece of information that a client has to provide before we can finalize a return.  Or, we discover a deduction the client may qualify for if they provide an additional piece of information. Or, we see a reoccurring expense on a previous year’s return that the client didn’t give us any information about — we need to check to see if it should be claimed this year.

We’re fortunate that we’re a big enough firm (about 15 team members) that we don’t stop talking to potential clients even when the tax deadline is very near.  Even up to the day of the deadline I’ll talk with you about what to do to put yourself on extension, and I’ll set up an appointment for you soon after April 19th.

Yes, we are/and will continue to welcome clients!

Here’s an example of what we told someone with a fairly complex return when he’d asked us to help.  We’re not panicked, but we know audits are serious business.  See what you think…

Dear xxxxx:

The notice that you received from the IRS is likely the most skimpy one I have ever seen.  It’s overly vague!  While it sounds like a good thing, it leaves far too much open than I like.  For this reason, if I had handled this case, I would have pushed back a bit so as to limit the scope of the audit so that the scope does not “creep” too far out of control.  Right now EVERYTHING is connected to the items on the IRS notice.   Who wants the IRS to look at everything?  Right?

Here is how I would proceed if we worked together:

• We set an appointment to go over the return together
• Please bring your 2009 return with you
• Also, bring or send me the depreciation schedules to support the depreciation taken on the properties in your Schedule E’s.
• I would prepare a Power of Attorney (POA) one for each you and your wife to sign.  The IRS just changed their procedures and even though you filed a joint return, they need a separate Power of Attorney forms signed by each of you.  I don’t get this logic but…… oh well!
• After our meeting I would call the IRS auditor and provide him the POA and proceed to discuss your matters freely and specifically to narrow the scope of the audit as best I can.
• At some point, I would have you complete an information questionnaire as the auditor will want background about what you do.  More on this as we work together.
• I would provide you with an engagement letter and request a retainer of $4,000 and ask that this retainer be replenished once used.  During our phone call, I estimated that this matter would range from $5 – $10K and I still feel this way.  My some miracle it could be less than $5K  but at the same time, if the details are many, it could exceed $10K.  We would be in constant contact with one another so that there is no surprise as we work on the case.
• I would call you after my discussion with the Revenue Agent and provide you with a specific list of details needed.
• At the same time, I would introduce you to another team member in my office who would be in charge of organizing your material in a way that facilitates the work necessary to bring you matter to a close.
• Once the material is captured, I will meet with the auditor and present the information.  If this can be done in one meeting we would be lucky.  It is likely to take two – maybe more but two could do it.

The secret to success is preparation, preparation, preparation.

You may elect o be present at the examination by the IRS agent, but I recommend against it.  While your information looks stellar, you could innocently say something that could set off fireworks. That would not be good.

Finally, there is a benefit in closing an audit with no changes.   If you are successful in achieving this, it is less likely that there will be future audits.

We say, “Thank you!” for suggesting that your friends trust their accounting work to us!

Why do we like clients referrals so much?

• Clients already know our firm’s strengths and focus.  When they match us up with someone they know, they’ve already decided that we might be a good fit for what their friends need.
• Referred clients are more likely to be ready for accounting services.  They have had a chance to talk to our client about what services are available.  They’ve made a decision that what we do will help them achieve financial success.
• Referred clients are more likely to be active in their community and have successful businesses.  Just the fact that they knew someone to ask for a recommendation shows that they are engaged and involved.  That social interaction is good for business, and bodes well for the potential client.
• When clients refer people to us, we feel validated.  You don’t suggest that your friends use a bad service or product. So, when someone tells us that Sally Jones suggested that they call us, we are happy to know that Sally thinks highly of the work we do for her.  We like the external sign that we are doing a good job.

Although the push for individual income tax preparation has not even started for 2012, already people are calling into our office are asking if we’re “accepting” new clients.   We don’t often say, “Yes, please refer your friends to us.”  But,  if you know someone who needs business development, accounting, or tax help, please tell them about us.  We’re not just accepting new clients, we’re welcoming them!

Walking a Trail at Lake Tahoe

Our client bought a timeshare interest in snazzy new ski resort by Lake Tahoe a few years ago.  He had the right to use it 1/4 of the year, and enjoyed staying in his own place when he went to Tahoe for skiing, gambling, and the other activities of the area.  When he wasn’t able to use the condo himself, the onsite management company rented it out and he received some cash to help with the mortgage payments and management fees.

After the recession hit, the rentals slowed down, and our client also started spending more time in other activities.  He decided that the high monthly management fees and the ongoing mortgage payment just wasn’t worth it anymore.

Apparently he wasn’t the only owner with the same idea.  There’s lots of supply and little demand for the timeshares in his complex on the resale market.  His timeshare is worth tens of thousands of dollars less than he paid.

He came to us figuring that he’d be able to use the loss to offset gains in his other investments and maybe even some of his salary income.

He can’t. And, I hated to be the one to tell him the news.

Unfortunately, most timeshares are considered personal property, like your house or car.  When you have a loss from the sale of personal property, that loss doesn’t come off your taxes whether your sell immediately or after using the car for 15 years.

The fact that you sometimes rented out the timeshare to strangers, doesn’t move the IRS.

It’s possible if you never had used the property yourself, and can show that you bought the property only as investment or for a rental business, you could deduct a loss on the sale of the timeshare. But, the IRS is very suspicious of timeshare losses and you would want to make sure that your records are convincing!

Worse, for our client, if he client decided now to reclassify the timeshare now as rental property, stopped using it for personal vacations, and created a business (LLC or other entity), he couldn’t declare the previous decrease in value as a business loss.  The business would carry the property on its books at today’s fair market value, not at the high value our client paid for it years ago.

A loss from the sale of a timeshare just sounds like something that should be deductible from your taxes but isn’t.  It joins letting a charity auction off a week at your vacation lodge as an action that sounds and feels like it should trigger a nice tax break.  But, it doesn’t!

Well, it’s not just your accountant’s bill.  For many businesses and individuals it makes sense to pay as many bills as you can before the new year.

Most small businesses are on a cash basis. That means that you have to pay an invoice in order to count it as an expense against the business’ income.  And, most small businesses use the calendar year to record income and expenses.

Usually it makes sense to pay as many bills as you can this year so that the net income you report to the government is as low as possible.  A lower income results in lower taxes.

The same rule is also usually true for individuals.  If you can, you should pay property taxes, January’s home mortgage, and accelerate other tax-deductible payments into 2011.  The more deductions you accumulate in 2011, the less you will owe in April, 2012.

On the other hand, if you expect for you or your business to earn a lot more in 2012 than you did in 2011, you might want to push your tax-deductible expenses into 2012.  (You still should pay your CPA now, of course.)

The rules are somewhat complex, and you should contact a tax professional to see what the best course of action is for you. Everyone, though, should look at their tax situation THIS WEEK.

You need to act before New Year’s if you want most of the available deductions. Most people have until April 17, 2012 to fund their 2011 IRA retirement contribution, but all other options run out at midnight December 31st.

So, sit down.  Go over your business and personal bills. Make a pile of those invoices that have tax consequences, and decide whether you want to pay them now or next year.  Make your electronic bill payment, charge your credit card, or write the check and mail it.  Today!

For information on last-minute planning for your specific situation, please phone Sterck Kulik O’Neill at 415.433.4500.

Diamond Certified Reporter Chris Bjorklund

I was happy to be interviewed by Diamond Certified’s reporter Chris Bjorklund regarding  funding your Individual Retirement Account (IRA).

As I explained to Chris, you don’t have to wait until you’re about to file your taxes in April, 2012 to fund your 2011 contribution to your IRA. If you have the money available, you can put this year’s contribution into your IRA account now.

You might decide that you want to fund your 2011 IRA contribution as soon as possible, if you believe the markets will be going up. Or, you might want to start collecting interest if you’ve selected an investment that grows that way.

Chris’ Diamond Certified Report with my comments start running on the radio today.

Listen to the Diamond Certified Report on When to Fund Your IRA

Unfortunately, incorporating in Nevada isn’t going to make your business immune from paying California taxes. In fact, a steady trickle of people have come into our office this year who have been sent notices of delinquent taxes by the State of California.  These business owners have been in similar situations:  they have California addresses, the business is conducted in California, and their only connection to Nevada is that is where an online service — maybe even a lawyer — told them to incorporate.

There may be legitimate reasons for you to choose to incorporate in Nevada, but if you conduct business in the Golden State, completely escaping California’s taxes isn’t one of them.

California require out-of-state corporations who do business within the state to register with the state.  Registration requires the payment of a fee which is similar to the annual incorporation fee for a California corporation.

California require you to file corporate income taxes declaring the income earned from activities performed within the state.  In addition, if your business has a retail presence in California, the state will expect you to collect state sales taxes for items sold in the state, regardless of where the business is incorporated or from where the items are shipped.

An Example

Bob lives in San Francisco and has a brilliant idea to create combined iPhone4S  cases and coffee mugs which he will sell online.  He’s going to make the “Cases4mugS” in his basement which will also serve as his shipping and fulfillment center. Bob searched the Internet for incorporation services. He found a web site that let him incorporate in tax-free Nevada, and he established an LLC there.

Bob will be required to register his Nevada LLC with California. He’ll will have to file LLC returns for all income earned for his work in California.  In Bob’s case, that’s all of the corporation’s income. In addition, he will have to collect and forward to the state the sales tax for every Cases4mugS shipped to an address in California.  Bob will also have to obtain a San Francisco City business license and may have to pay city payroll taxes, too.

If Bob doesn’t register his foreign corporation and pay the income and sales tax, he will be violating California law.  If his business is successful it’s very likely that California will notice its existence and it will take steps to get its money plus penalties and interest.

In addition, we would urge Bob to check with a lawyer about the legal problems an unregistered corporation has.  I am not an attorney and cannot give legal advice. But, run an Internet search on the topic of unregistered corporations and you’ll see many articles on the topic of how unregistered corporations cannot sue or defend themselves against lawsuits in California courts.  In effect, it seems that unregistered corporations are sitting ducks in California courts.

Sure, the lure of “tax-free Nevada” or “corporate-friendly Delaware” is appealing. Your attorney may tell you legal reasons why those states — or others — are better places to incorporate than in California.  Just make sure that you also check with a CPA to understand the financial implications and tax effects of your out-of-state incorporation.

This time, though, there are no extensions. You MUST file your 2010 taxes by Monday or your return will be delinquent.

(You don’t want the IRS to consider you delinquent. When your tax filing status goes delinquent, the Feds will charge you penalties and interest, and payment deals you’ve made with them in the past may be thrown out. The IRS does not have a sense of humor about tax payers going delinquent.  They will suspect the worst of you, and they’ll act on their suspicions!)

Our firm is getting a flurry of last-minute calls from people panicked because they waited until now to file their return.  Some of the callers are still waiting for information from partnerships or other sources of income, but most of the folks just put filing taxes out of their mind.

If you haven’t filed your 2010 taxes yet, here are our suggestions on what to do to make the deadline:

1. If you have a simple situation file online, maybe for free.  If your return is simple, there are commerical and government sites that will do your taxes for free.  See the Consumer Reports article from earlier this year… the links in it that I checked today are still working.
    
   Most people who have waited until now to file, have more income and some complex things going on so that free filing is not available to them. The commerical services that offer free services to low-income filers, also have paid programs for people with complex returns.
    
   Check out the commerical sites, and let them walk you through the return.
2. If you have a more complex situation and need automated resources, find a DVD of commerical 2010 tax software, and prepare the taxes on your computer.We haven’t formally tested any of the major programs, but from what we’ve seen, they do an excellent job in getting the math right, and they also have interview-like Q&A’s that will suggest deductions and other tax-saving measure.
    
   The 2010 programs issued in the spring, still should be good.  Make sure that you check for update to download any fixes they’ve discovered over the months!
3. If you want to meet with someone face-to-face to go over issues, call a Certified Public Accountant local to you.  At this time, most CPA’s are offering most callers appointments after October 17th.  Fortunately, you can book an appointment with a CPA for later in the month and still avoid being delinquent.
    
   To avoid going delinquent, submit the best Form 1040 that you can by Monday.  If you are missing hard data for a line, make your best estimate.  You may find places to comment that what you’ve written down is your best estimate.
    
   File your best tax estimate with the Federal and state authorities by October 17th.  Then when you meet with the CPA, you will have them refile your completed taxes as an amended return.  Even if you were significantly mistaken in your initial tax filing, you’ll be much better off than if you didn’t file at all.

Whatever you do between now an Monday night, don’t panic!

The IRS isn’t going to come for your retirement fund Tuesday morning because you failed to submit your return on Monday.  You won’t need to run to a defense attorney or to Canada.

But, still… don’t go delinquent.  You don’t have to!

The answer is easy: don’t use a debit card from the Bank of America. In fact, don’t even get one.

Regardless of how much the BofA — or any bank — decides to charge for debit card use, I suggest that you don’t use ANY debit cards. Debit cards are not consumer-friendly cards. Sterck Kulik O’Neill wrote about the problem one of our team members had with a fraudulent charge on a debit card in a May newsletter (and see the gory details in his blog).  We also linked to news stories outlining how risky debit cards are.

Basically, debit cards don’t have the legal protection that credit cards do.  If you qualify for a credit card, then use the credit card instead of using a debit card, and pay the balance off every month.

Compounding the weakness of debit cards, the Bank of America wants to charge you for using this inferior payment tool.  Paying makes ZERO sense, especially since banks make a lot of money from merchant fees when their cards are used.  (A new Federal law limits how much banks can charge merchants for debit card use, but the charge is still way more that the bank’s cost per transaction.)

Just say NO.  No to using a debit card from Bank of America or from anyone else.

Fall back position:  if you are going to ignore the suggestion to abstain from debit card use and you don’t like BoA’s proposed charges, it’s probably time for you to sit down and figure out how much you’re willing to pay for convenient banking. Don’t stop at ATM fees.  Get all the information out on the table.

All of the major banks are on a fee binge.  Wells Fargo announced a $15/month fee on some previously free checking accounts, and Chase is piling on fees, too.

These institutions have ATMs on every city block and branches in your grocery store.   All of that infrastructure comes at a cost… to you! If you don’t like the fee options and decide you can live with less convenience, investigate using a smaller regional bank or else sign up with a credit union. A smaller bank or a credit union may not charge for your accounts or debit cards, but they don’t have the ATM network or so many branches.

Only you can decide if $5/month or $15/month is a reasonable charge for the large bank’s convenience.  Before you leap because of an ATM fee or other single charge, look at the whole picture of what your bank wants from you each month.  If you decide to switch, Consumers’ Report has online tips, including a PDF checklist of steps to follow when you move your account.