I often see things like this from other impersonal tv/radio-advertised firms, “We helped a client save $500,000 in taxes!”
But I want to be clear on this. I am not going to be like the over-promising firms you hear on TV and radio. Obviously, there is no person attached to these statements by the tax companies, because they do not want it to have an identity. They say they can save you all your taxes!
But they do not really explain the situations that happen, and it is not a common situation. It is possible, but it’s not a situation that happens all the time. I’m going to explain exactly how that is possible.
We had a client that was an entrepreneur and publicly known. That client had several businesses and under IRS audit. What we had to do was prepare all the accounting records for six years. The IRS had already filed substitute tax returns, meaning the IRS was already aware of this taxpayer’s vast amounts of money reported on multiple 1099s.
For example, this famous person had multiple 1099s, showing amounts of around $250,000 or more, for multiple years. If the client does not file their tax returns, the IRS can file a substitute return, in which the IRS files tax returns for the taxpayer with all income and no business expenses, then that person receives IRS notices owing enormous amounts of taxes.
The most time consuming and tedious part of a client situation like this is, for each year, recording all the accounting transactions according to GAAP (Generally Accepted Accounting Principles), performing bank reconciliations to prevent/deter books and bank errors, and creating annual income statements (aka. Profit & loss) and balance sheets. To achieve this task, we start from the earliest year of tax returns that need to be amended and work forward to future years.
This is because accounting amounts roll forward from one year to the next, such as shareholder distributions needing to be closed out into retained earnings. It was six years of accounting/financials statements that needed to be completed for their multiple businesses.
We asked the client to obtain all bank statements for six years back, because we needed to prepare/file amended business & personal tax returns for six years. This can be difficult as often those bank statements are hard to get from the bank and you must request them and wait, pay the bank fees for these old statements, and eventually they will give you all the bank statements in paper form. It would have been much easier if there were an Excel file of monthly deposits and withdrawals, but usually one cannot obtain the Excel file for that many years back. So, once we received the bank statements, we started with the earliest year, 2016 (example).
Using those bank statements, one of our highly skilled accountants starts keying in the information, making accounting entries for each month, from the bank statements. Eventually, with their knowledge and knowing GAAP reporting, we make a profit and loss and a balance sheet for each of the six years. Then we can prepare/file the business tax & personal returns.
Once prepared and reviewed by our CPA tax manager, we filed those tax returns directly with the IRS agent. By using an IRS power attorney form 2848, our CPA tax manager can communicate directly with the IRS and show that the returns were filed. We talk with the IRS about any questions they have.
What’s interesting about a famous person who engages in appearances where they need to wear high-fashion clothing or accessories is that those items are deductible. But those are business expenses/deductions we often have to defend and explain to the IRS. Often the IRS will push back just to see if they can gain more IRS revenue.
Being CPAs with CAF numbers, the IRS knows we know the tax laws and we can defend faster and close out IRS audits much quicker than the general public. The IRS knows they cannot take advantage of us; we often know the tax law better than the IRS representatives we deal with.
We also have an IRS hotline that CPAs can use. And again, the IRS power of attorney and CAF number, shows that we are credible and licensed to solve IRS issues.
After all is said and done, looking across six years of accounting and tax returns, the IRS accepted the tax returns we had amended. Overall, the client saved $500,000 in federal taxes over 6 years compared to what the IRS had filed as substitute returns.
Obviously, this is not a common situation, but it can happen. If you are in a comparable situation, please know that we can help! We are very skilled and experienced in defending your case against the IRS.
We work for you! Not, the IRS!
Thank you for reading this article.
At your service,
Josh Simpson, CPA
~The Veteran CPA~