Tax practice in an environment of non-compliance

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Around noon yesterday I posted a short social media comment about how busy I was finishing up corporate tax returns. A guy who had previously asked about accounting services before saw the post and decided this would be a good time to call me and ask a series of questions about having me take over his small business tax accounting. We talk briefly about taxes, compliance and risks for his situation. Then he said “I understand what you are saying, but my old guy (his former CPA) just said to chop off about a hundred grand”.

It was perfectly clear to me in the context of the conversation that he had just casually stated that he colluded with the CPA to under report $100,000 of income per year and acted as if this was no big deal but is a standard and accepted practice.

How can a legitimate accountant possibly compete in a situation where this is the accepted norm by the client? And the fact is that he is right in that people (CPAs and clients) are doing it and are, for the most part, getting away with it.

The fact is that under the laws of the United States of America we have a voluntary tax compliance system. Some people do cheat and most of those cheaters do get away with it. While the IRS’s use of technology has improved detection and collection of under-reported income and improper deductions, it is still a HUGE issue. The last IRS estimate I read was that tax cheating adds up to 17% of the nation’s total tax liabilities. I vaguely understand that non-compliance is rising and that, moreover, the public attitude that it is OK to cheat on taxes is on the rise. These sociopolitical issues are far more complex that I plan to delve into here.

The single point of my blog post here today is that the problem of tax cheating is not only a big scale macro-economic problem for the government; it is also a huge problem for any little tax practitioner trying to make an honest living. We simply can’t compete and survive in an environment where tax cheating is perceived to be the norm.


Comments

6 responses to “Tax practice in an environment of non-compliance”

  1. I also often hear “but my last guy let me take that” or the like, when “that” is clearly in violation of the tax code. There are still many honest practitioners out there who are trying to aid taxpayers in being compliant in their tax obligations within the confines of the code. I find it absolutely offensive when a client seeks my expertise, only to turn around and try to shave off either income or taxes when they’re dissatisfied with the legal results. Im not willing to compromise either my license or my integrity by spinning a work of fiction for anyone, but I can show my clients how to best use the tax code in their favor going forward. Rewriting history won’t happen in my office or yours; we can only hope that more practitioners exercise common sense, personal integrity, and sound tax knowledge as they help their clients navigate through the complexities of the U.S. Tax code in legal and ethical manners.

  2. Right on, Amy. Although I don’t do tax work anymore but focus on fractional CFO services, I had a similar situation with a prospective client who was running a not-for-profit, a high-visibility statewide organization. He wanted better financial reporting for the Board but wanted to “fly under the radar” when it came to any kind of compliance reporting.

    I refused him as a client, reminded him that the Board members have the highest exposure, and wished him well.

  3. Amen! I recently had a new client take his tax information back from me in the middle of preparation because I wouldn’t do “what his old tax guy did for the last 10 years”…the client was “shocked” that his old accountant was doing it wrong, but wanted to keep doing it that way because it saved him taxes…I also refuse to give in to clients wanting to cheat on their taxes but unfortunately there are many practitioners out there that will do it for them…there are also a lot of clients that want it done the right way and will respect you for it, so stick to your guns!

  4. Thanks to all those who called or emailed me this week to offer words of advice, share stories or simply urge me to stay the course.

  5. As a result of all this discussion and consultation with my own advisers, I updated my tax service engagement agreement to deal with the increased perceived risk. http://tonynovak.com/cpa/updated-tax-services-engagement-agreement/

  6. […] in a direction of noncompliance in response to client matters under difficult practice conditions. I wrote about this last year. In contrast, Enrolled Agents seem to remain steadfastly compliant with the law. Maybe […]

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