* Taxes…Science or Art?

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By John Wurts

Most people assume that all tax returns are done the same way. Nothing could be further from the truth. When Money magazine tried an experiment, they gave exactly the same tax return information to forty different tax preparers, CPAs, attorneys, and enrolled agents. They were astonished to find they got back forty different tax returns. Some showed thousands of dollars were owed in taxes and others showed refunds of thousands of dollars.

The shock was so great they tried the same experiment the following year with a whole different batch of tax preparers and the result was the same. That is because there are many choices to be made with each part of the return. Do I deduct a bad debt from years ago? Do I show an installment sale or declare all the proceeds at once? How long do I depreciate an item? Do I take actual expenses or a standard mileage rate? There are many questions a tax preparer can ask and there can be two or more answers using the same data. If there is a new tax law, the IRS may not have written the regulations yet.

This is why tax preparation is an art and not a science. The same item might be put in one place on the return and not another. For example, a home office expense could be put on a federal Schedule A (where it no longer counts) or on Schedule E as a deduction against an LLC or an S-Corporation, where it can be subtracted from taxable income. This is where tax planning comes in to take advantage of differing tax rates and also loopholes.

How a deduction is presented in a return can make the difference in being audited or not. If a return has too many numbers ending in zero or five, it can trigger an audit. People can take thousands of dollars of certain deductions and the IRS doesn’t notice. But fail to report ten dollars of interest income and it triggers an audit notice. There are IRS mine fields, so it is very important to know where they are.

Engineers can be the worst when it comes to doing their taxes because they challenge everything and do not take advice well. Doctors are the best because they tend to follow guidance almost without question and that is where an experienced preparer can save them the most money in taxes. Honesty is important. All income should always be reported. However, one little change in structuring the same input can save an incredible amount of taxes.

A waitress might tip out to busboys and bartenders, and never realize she could take that as adjustment to income and still take a standard deduction. A divorced person who was supposed to receive child support for the last fifteen years might not know to take it as a capital loss on this year’s tax return. There are so many more oddball things most people would never know on their own. So year after year they pay more tax than they really owe, never realizing that the right tax preparer could have saved them a lot of money. Every year.

We all should enjoy what we do for a living and be able to focus on being the best we can at that. There is really no reason for most people to waste their valuable time learning the ins and outs of constantly changing tax rules when there are tax professionals like me that love staying on top of this stuff.

John Wurts has an office in Woodland Hills and can be reached at 818-223-8288.

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