Financial Planning

Tax accountants: cheats vs. variance vs. incompetence

Yesterday I attended an IRS webinar on the topic of avoiding tax trouble. The topic of being diligent in choosing a tax preparer was discussed. The IRS is focused on having us avoid preparers who promote illegal tax schemes. The service says that a taxpayer should be able to recognize that if it sounds to good to be true, it probably is.

Yet during this IRS presentation the results of studies repeated and publicized many years ago kept popping into my head. It turns out that if you hire six different accountants to do your tax return, you’ll have six different amounts for the tax due for a tax return of medium complexity. Does that mean some accountants were correct and competent while others are incorrect and incompetent? Actually, no; there are other factors (like interpretation and complex tax laws) that more likely explain the variation. Choosing the right accountant, as the IRS is suggesting, is not a matter of which one has the “right” amount of tax due. In contrast, the IRS is suggesting that some will have a proposal so far outside the norm that the taxpayer should have recognized the risk. The point is that IRS says that we should be able to recognize the difference in the first two categories: tax cheats vs. normal variance in preparing returns.

There may be a third unique category for taxpayers to consider. I was engaged in an online conversation this month on the topic of issuing W2s for self-employed people. Accountants should know that outside of a C corporation business structure, it should simply not be done. I would go as far as to say that this is a fundamental principle of tax accounting for self-employed people. I might take an additional step to say that the few occasions where I saw a deliberate violation of this rule were part of a deliberate attempt to fraudulently document income (usually for a mortgage loan). A tax preparer who does not have a grasp on this basic benchmark concept, IMO, should not be in practice.

Without getting sidetracked into a discussion of tax theory, I think it is fair to say that an accountant who fails to grasp this concept would likely make other sequential errors in tax return preparation that stem from the same underlying misunderstanding.

Yet the variance of accountants’ opinions expressed in this lengthy online conversation showed that given almost any minute point of the discussion, there are some accountants that will take a position for and others that will take a stand against it. In this situation, there was enough evidence (from the detail and length of the comments) to deduce that some accountants were simply wrong and incompetent on this single issue. The variance was not likely due to other factors as in my earlier example. I had to conclude that some of the accountants making comments were not equipped with basic knowledge of tax law with regard to this issue.

Having worked with dozens of accountants for decades, it does not surprise me that accountants make mistakes. At one point I had more than a dozen CPAs as financial planning clients and I worked in joint cases for small business employee benefit plans with many more. For a few years I also taught CPE courses for accountants, attorneys and financial planners. It was always a two-way learning experience. Yet despite this exposure, I simply did not recognize that basic and fundamental misunderstanding was so prevalent.

The message here should not be dismissed as an elitist opinion. Certainly there are plenty of accounting positions where I would express an incorrect understanding if pressed for an opinion. But there is a difference between having an incorrect understanding and stubbornly promoting the types of errors expressed by the accountants as revealed in this online discussion. Knowing what you don’t know is an important part of professional competency.

What does this all this mean to an average taxpayer? It simply says that while we should be able to recognize deliberate tax scheme cheats, we are not aware of ordinary variance in tax practice and that we may not recognize incompetence until well after the fact.

What does it mean to my practice? I’m still processing this new line of thinking and what it means to my work in the future.

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