What are the most common issues that your clients face in terms of tax preparation?

Common issues that our tax return clients face are varied. Tax codes are complicated and we are there to be able to make the complexity of preparing a return easier for our clients so that they do not incur needless penalties and interest. Issues that they face that can result in additional refunds of thousands of dollars are as follows: Do they qualify for child tax credits? If so, how much? What about earned income credits? In the case of divorce, separation or dependent of two non-married individuals, who gets to legally claim the dependents?  Tax professionals such as us are spending numerous hours preparing a return that is complete and accurate and will meet the IRS due diligence requirements. Other common issues that clients face are connected to deciding if the off-the-shelf tax software is right for them or if they’re better off using a tax professional, staying up-to-date with the timing and amounts of deposits allowed for IRA contributions, HSA contributions, estimated tax payments, business income, and deductions.

What are the advantages of using professional help?

There are many significant advantages to using a tax professional overusing online software. One of the most common myths is that using online software will save people a significant amount of money when compared to hiring a tax professional. While at times this can occur, often this is not the case. Completing a tax return with online software does not mean the return was “correct”. For the software to file someone’s return correctly, the person using the online software would have to have an understanding of taxation; then know that the questions the software asks during preparation are correct for their situation; and also know that the answers the person uses are correct for their situation. I would be retired by now if I was given a dollar for every time I took a phone call from a person asking me to tell them how to answer a question from the online software they are using to prepare their return because they have no idea of what the answer should be. Tax professionals are educated in knowing about deductions and credits that most people are not aware of, and because of this, the cost of preparing a tax return can often be paid for by claiming one or more of these deductions or credits. Another advantage of using a tax professional is the ever-changing tax laws. Tax professionals are required to stay up-to-date with new and changing tax laws and do so by completing continuing education requirements which the general public does not have access to. Thus by using professional help, people will save themselves the time and money they’d need to research these changes.

Mistakes on tax returns are costly. Penalties and interest that the IRS or the state charge because of mistakes on tax returns are usually higher than the sum you’d pay a tax professional to prepare your return. Having a ‘trusted’ tax professional will usually pay for the costs of having the tax return prepared.

An example that illustrates this happened to me recently. I interviewed a new client that had been using a different firm to prepare their business and personal taxes. After our interview and reviewing the tax returns that had been prepared prior, I realized that this client would qualify for a special tax credit known as the Research and Development Credit; a little known, but a very powerful credit. I was able to amend their tax returns for the past three years, which resulted in them receiving a refund of over $1,000,000 (yes, you read that right) from the state and Internal Revenue Service – money that they have the freedom to spend however they please. One could certainly assume that these clients see the significance of using a tax professional!

How do you help your clients mitigate their tax liability whilst remaining fully compliant with tax laws?

Mitigating tax liability for clients and remaining compliant with IRS rules and regulations can be challenging. The main thing to know regarding this is the difference between tax avoidance and tax evasion. Tax avoidance is legal; tax evasion is criminal. Tax avoidance is the process of knowing the rules and regulations and using them to properly reduce or possibly eliminate any tax burden and is completely legal and wise. The definition of tax evasion is ‘an attempt to reduce your tax liability by deceit, subterfuge, or concealment’, and it is a crime. It is a tax professional’s job to educate the client why they should not deliberately underreport income, claim false or overstated deductions on a return, claim personal expenses as business expenses or hide assets or income. Although I like my clients and I’m friends with many of them, I will not risk losing my license to practice by committing tax fraud for them. It is better to lose a client who wants to falsify the information on a tax return than keep them as a client. The tax professional needs to be able to educate the client on the consequences of doing things in a non-compliant manner and explain why being honest is the best policy.

A couple of years ago, a client shared a story with me about our firm and my father which had occurred 40 years ago. The client was starting a new manufacturing business and had a meeting with my father to interview him about becoming his accountant. During the interview, something the client said caused my father enough concern to stop the interview and say: “Listen, if you are asking me to bend the tax laws for you, then you better go on down the street.” The client said he was taken aback, but found the utmost respect for my father. He understood that my father and our firm will do things right, yet use our education and knowledge to make sure the client is afforded every deduction and credit that is allowed by law and as a result, the client will not pay a penny more in tax than they are supposed to. That same person has been a phenomenal client of our firm ever since. He explained to me that the reason he has stayed with our firm is that I am exactly like my father and therefore, he has the same respect for me. This is the type of client that every tax preparer should want in their firm.

Mitigating tax liability for clients and remaining compliant with IRS rules and regulations can be challenging.

What have been any recent changes in tax legislation in Indiana?

As of 1st January 2019, Indiana has adopted Wayfair nexus for income tax, meaning income derived from Indiana would be taxable to the fullest extent permitted by the Constitution of the United States and Federal Law, regardless of whether the taxpayer has a physical presence in Indiana. Please consult your tax adviser regarding how this could impact you.

If you could, what would be the one thing you would change about Indiana’s tax legislation?

If I could change one thing regarding Indiana’s tax legislation, it would be the tax add-back for certain deductions on a Federal Return. The tax add-back is an item that needs to be added back on your Indiana return to properly calculate your Indiana Adjusted Gross Income. This creates the need to keep separate records for federal and state depreciation, net operating losses, excess federal interest and out of state municipal obligations. This creates questions and uncertainty about the validity of their tax return, as most taxpayers do not understand the reasons behind the add-backs.

In what ways has the COVID-19 pandemic impacted tax preparation in Indiana?

The COVID-19 pandemic has impacted the preparation of tax returns for the 2019 tax year in a myriad of ways. It has created delays in refunds from the IRS for taxpayers and has caused confusion as to new tax deadlines. In Indiana, the deadlines for a timely filed return is now 15th July, rather than the 15th April deadline. However, as of 13th April, more than a third of states kept their original 15th April deadline. Taxpayers should check with their tax professional what the date of filing in their state is. Our offices adopted a policy of staying open and preparing returns, but we have cancelled all face-to-face client meetings. Clients were asked to either drop off their documents through our mail slot, mail documents to us or send them to us via our secure portal. We then called or emailed them to consult about their returns and request any information that was still outstanding.

The biggest challenge we faced was the number of phone calls we received with people asking questions about the ever-changing Payroll Protection Program and the stimulus checks that were to be distributed. Due to the proliferation of misinformation on the internet, we were receiving hundreds of calls every day.

What do you think will be the broader impact of COVID-19 on the economy, both in Indiana and US-wide?

This is an excellent question, but I don’t believe that anyone will have the answer to this for years to come. Speaking for myself and basing it on my clientele, (which covers clients in over 30 states), I feel that the economy will be negatively affected for at least a decade. It will take years to bring businesses back to where they were because supply chains will need to be reorganised and many businesses will not survive the economic downturn. I also believe that we will see a real decrease in businesses hiring human workers as they turn to more automated systems to help stem costs and ensure that they will be in a better position in the case of the pandemic causing mass closures again.

The COVID-19 pandemic has impacted the preparation of tax returns for the 2019 tax year in a myriad of ways.

While I would hope that the current pandemic would show the United States that it needs to bring back manufacturing inside our borders so we are not so reliant on China and other countries, I feel that this will not be the case. Indiana and the rest of the United States will certainly emerge from the COVID crisis, but the question is, will we be better off or not? I for one am sceptical that we will ever fully recover.

Tell us about your work for the not-for-profit tax sector.

The not-for-profit tax sector makes up a small part of our overall business, but with 3,500 clients we still have numerous clients in the not-for-profit sector. I make every attempt to provide the sector with many benefits, such as reduced pricing and attending board meetings to educate members about the finances of the business. Many board members are volunteers who have no real background in business and I believe that our job is to explain the workings of their finances so they can be better prepared to make wise financial decisions. Not-for-profits have different tax rules, and board members need to be aware of these rules to stop needless penalties or worse yet, have the state or IRS take away their not-for-profit privileges.

Does your practice get involved in other services such as retirement and wealth planning?

I’m actually surprised by how much we’ve always have been involved in this area. So many of our clients seek our advice before they call their investment adviser. Other times they will call us after they have received a recommendation from them and get our opinion as to whether they should proceed or not with the recommendation. We even had an instance in which the investment adviser called us to propose their recommendation for the client before the meeting because they said: “I know they will call you after I meet with them to get your opinion anyway.” Due to the volume of questions we were receiving, we brought on Cory Reckard a few years ago to help assist with these questions and help clients. He also brings an additional layer of knowledge from his experience and connections that can be of benefit to our clients. We feel that we don’t have to know everything, but more importantly, we need to be able to recognise opportunities and have the connections and resources available to provide value to our clients.

Can you give us some examples of a scenario where you feel you provided significant value to a client in relation to retirement and wealth planning?

One fascinating story was when we were able to provide great value to a 100-year-old’s family. The family called us with some crazy ideas because they were trying to reduce their future estate tax liability. Because we recognised an opportunity for the clients, we used our connections to get the correct people involved and were able to save over $2,000,000 in estate tax for the heirs. As a result of this, we then took an inventory of our entire client base to find out who else may benefit from the same opportunity. We feel we have a responsibility to our clients to present them with opportunities that we feel fit their circumstances, and it is then their decision whether they want to move forward or not.

From what we see, it seems that quite often the tax preparer, who is the trusted adviser of the client, is not proactive. I remember a question that was asked at a seminar of mainly investment advisers: "How many people in the room have been called by their tax professional with ideas and opportunities?”  Unfortunately, only a few were able to raise their hands. Because we understand that we are our clients’ trusted advisers, we need to take that role seriously and be more proactive for them.

Another example I can think of was from last fall when we recommended a strategy to a long-term client to save him and his family significant taxes on the assets in his C-Corporation. He liked the idea; however, he didn’t want to go forward with it at that time. This spring he called and apologised saying we were correct in what we presented to him and that he should have listened to us instead of taking the advice of someone else. Now we are working on getting the plan implemented, and we are pleased that we can offer him something of value that he appreciates and wants to do.

 About John & Cory

John Emshwiller is an Enrolled Agent and has been granted unlimited practice rights to represent taxpayers before the IRS. With this designation, he is authorised to advise, represent and prepare tax returns for individuals, partnerships, corporations, estates, trusts and any entities with tax-reporting requirements in all 50 states of America. His role within the firm is all-encompassing; he prepares business, personal, estate and trust tax returns as well as payroll and bookkeeping for clients, while also doing business consulting for clients with an emphasis on Research & Development Credits.

Cory Reckard has been a Certified Public Accountant for over 25 years, which enables him to create specialised tax-driven plans for clients. He has extensive training and licenses in many investment-related areas, including his Chartered Adviser in Philanthropy designation and is also a Registered Investment Adviser. The training and licensing in all of these various areas help Cory create customised plans for each client and also help him bridge the gap between clients and their other professional advisers by translating the technical language and complex strategies so the client can see the value of the strategy; thus allowing them to be more confident in their decisions, whether it be increasing retirement income, saving significant taxes, leaving more money to charity or heirs, or elevating profits of their business.