Taxable Talk

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the eighth year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and while the IRS’s response has improved, that’s just an improvement from awful to mediocre.

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my mother, it might go in a straight line to her. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

Like almost all tax professionals, we use an Engagement Letter. The Engagement Letter has grown from one page to three pages. Some of this relates to items that my attorney wants on the document; some of the growth is from my insurance company. However, most of it is from IRS rules. One item that has been in every one of my Engagement Letters is the following:

You agree that you have provided us with and will provide us with all requested documents, that the information is and will be accurate and truthful, and that you will answer all of our questions fully so that we can properly prepare your returns.

Most tax professionals have similar language in their Engagement Letters. If we are to best prepare your tax returns, we have to know what’s going on. I’ve been told by my physician clients that their patients often don’t tell them the entire story. I can’t imagine doing that; how is my doctor going to do prescribe the best treatment if he only has half the picture? Tax professionals are no different; we can’t properly prepare your returns if we only have half the picture.

But if you want a tax return that’s inaccurate, and doesn’t have all the deductions and/or credits you’re entitled to, go ahead and deceive your tax professional. Don’t say I didn’t warn you!

Last week I spoke with one of my clients, Liz, who wanted to file her return immediately. She’s getting a large refund, and she’d like it now. The problem is she participates in ten partnerships, and one of those ten K-1’s hasn’t shown up. (Owners of partnerships and S-Corporations along with beneficiaries of trusts use the K-1s to report their share of the entity’s/trust’s income on their tax return.) She asked, “They sent an estimate of the income; can’t I use that?”

Perhaps she read the disclaimer on the estimate (more likely, she didn’t): “The actual amount of income could be more or less than what is shown on the estimate.” It’s good enough for an extension, but not good enough for a return.

“Well, I’d still like to file the return,” she said. I told her there were two problems. First, it’s a certainty you’d be amending the return and you want to extend rather than amend. Every amended return is looked at by a human–one who has the power to send your return to Examination (audit). Second, I can’t file a return that’s knowingly wrong and this return would be. The numbers are not final, and likely would change. I couldn’t sign tghe return.

I then mentioned, “Do you remember our conversation last year when you invested in these partnerships, that you would likely have to file extensions because some of the K-1s wouldn’t be received by the tax filing deadline?” There was a long pause…but she said, “I could really use that money.” I told her that there was one benefit of filing after the tax deadline: She would receive interest on her refund. Eventually she agreed to file an extension.

Investing in businesses can be a good way of making money, and I know Liz’s investment prowess is far greater than mine. But for her to file without all the K-1s in hand would be a very Bozo action.