The looming tax season calamity has been widely reported in the media. Expect delays in processing returns and refunds from the IRS, according to a statement issued by the tax agency.
Some taxpayers may decide that, given the current state of the IRS, this is the year to push the boundaries of what is legal — or ethical — when filing their federal taxes. This can put tax preparers and financial advisors in a difficult position.
Fiduciaries are obligated to put the interests of their clients first, and this is the case for many advisors.
What should they do if a client insists on pursuing a highly aggressive or questionable tax strategy despite their obligation to always act in the client’s best interest?
Wichita financial planner Don Grant says that “if it’s plainly unethical, I am going to sack the client,” he tells CNNMoney. “I’m not going to break the rules of the Internal Revenue Service.”
Even though Grant does not provide tax preparation services for clients, he may work with their accountant to resolve some tax issues. A tax preparer can help his clients make sure they’re on solid ground if they want to play it safe and interpret tax law in the most favourable terms for themselves.
Some of the rules are unclear, he explained. Involving an experienced and knowledgeable CPA aids his clients in making an informed decision on how to move forward.
Tax preparers are required to apply the “more likely than not” standard when evaluating tax shelters and certain other reportable transactions. As a result, they are required to have a reasonable expectation that the position will be upheld based on its own merits,
If they have to wade through the ambiguity to come to a conclusion about a reporting decision, the consequences can still be painful.
There is no guarantee that cheaters will come out on top because the IRS is understaffed and dealing with budgetary constraints and processing delays.
“You’re asking for trouble if you’re playing the audit lottery as a taxpayer,” said Huntington Beach, California, certified financial planner Mark Prendergast.
Financial planner Prendergast, who is also a CPA, used to provide his clients with tax preparation as well as financial planning advice. Today, he provides general advice, but he is not involved in the actual filing of tax returns. ‘
“Here is the correct way to do it” is how he might respond to clients who mention a questionable tax reporting strategy.
In the end, he says, it’s up to his clients to decide how they complete their returns and whether or not they pay attention to his advice.
Expenses for a business are a common target for fraudsters. Small business owners and self-employed individuals can define deductible business expenses however they see fit.
While working for one particular client, Prendergast recalled that “almost everything” was considered an “expense.”
Taxpayers may not break the law in their attempt to justify what they consider business expenses because there are often judgement calls and grey areas involved. As a result, advisors may be open to such behaviour if it can be justified.
Prendergast said, “People are going to do what they’re going to do.” If they’re going to cheat the government, they’re going to cheat me too.
Tax preparers should, at the very least, educate their clients about business expenses. Your accountant should ask, “Do you understand what documentation is required for this?” and “Do you have all the receipts?” for meals and entertainment expenses, for example.
Even as the IRS struggles to deal with growing operational challenges, many advisors warn clients about the dangers of pushing the envelope when it comes to tax reporting.
Clients who are being overly aggressive will be reminded of the financial and non-financial consequences by certified financial planner Doug Lynch, who practises in Dublin, Ohio.
“You could be hit with hefty fines and back taxes.” And you may have to pay hefty legal and accounting fees if you get into trouble with the law. That’s why it’s our goal to keep them out of dangerous situations.