We have all been there. We have a car that we take to the dealer because the “check engine” light is on. The dealership tells us it will cost $1,000 to fix. You hear that voice in your head and decide to get another opinion. The other mechanic tells you that the part to fix the problem is $100 and labor will be $100, for a total of $200. Which mechanic are you going to trust?
I review a lot of returns. The financial planner that I use sends a lot of business my way, and this time he saw something that didn’t make sense. He had a 90-year old woman that had a gift tax return, a trust return, and a personal return, so he sent me copies of the last three years to review.
The gift tax return was filed because this woman gifted $16,000. A simple 10-minute call to her tax pro would have told her that she can only give $14,000, and if she wanted to gift more, she could have given to the giftee some of the stocks that she had in her portfolio. She could gift stocks at her basis of $14,000 and when sold by the giftee, if they were in the 10% or 15% tax bracket, there wouldn’t be any taxes paid, much less a gift tax return. There was obviously no open communication between the tax pro and the client, otherwise a gift tax return would never have been filed. The tax preparer charged $500 for the return.
The trust return was a family trust return that was with her and her late husband. When the husband passed away, the family trust, which had been revocable, became irrevocable. The only reason to keep an irrevocable trust is to protect the assets within the trust. The assets in the trust were limited partnership interests where the trust is a limited partner, so the asset was already protected. Why the advice was never given by the tax pro — to just form a revocable trust in the client’s name and transfer the assets — is beyond me. But we have another tax return that cost $700 with no reason for it to exist.
Then we have the personal return, which is all this client should have. For the most part, everything looked fine, until you got to the sale of a rental. The rental had been carrying passive losses for the three years I was looking at. However, when the rental was sold, none of the passive losses were taken on the sale. This cost of the return was $800.
So, we have a total of $2,000 in returns that we shouldn’t have, and the note I got was that the client was looking for a new tax preparer. I should hope so.
If it was me, when the husband died, I would have urged the client to form a revocable living trust to avoid having to file a trust return. After that, I would make sure that the lines of communication were open between myself and my client. That way, if they are going to make gifts, then I am informed and I can structure them properly. I realize that I just took $1,200 out of my pocket. But at the end of the day, do I want some other tax pro to tell this client all of this, or do I want to do it myself?
There are several times that I have told a client not to do something, knowing that it will take money out of my pocket. For instance, I’ve had a client as an S-Corporation. If they have lost money for the past couple of years, and you can tell if they are using the S-Corp or not, I’ll ask them what their plans are for the S-Corp. Usually, it is just sitting there doing nothing.
Most of these S-Corporations are LLCs. I explain to them that I am charging them more than what they are benefiting in tax savings. I explain to them that if they nullify the S-Election, that they cannot reelect an S-Corp for five years. Most clients don’t see operating their business to a net income of $15,000 in the next five years. I use $15,000 because after they have paid the LLC renewal fee and paid me for tax returns, the amount is less if they are an S-Corporation.
In 24 years I have gotten different reactions from clients, ranging from happiness to a couple of people telling me that I’m taking food off the table. I realize that I’m going to lose out on the money that I would be making. But at the same time, do I want someone else telling them that and possibly losing the client?
The bottom line is that we are all trying to make money, but there is a right way to do it and a wrong way to do it.