Pronto Tax Class Blog
Beginner Tax Preparer Challenge of the Day: Maximize Your Client’s Work-Related Deductions without Exposing Your Client to Undue Risk
By Tim Frye
As a tax preparer, you must strive at all times to maximize your client's tax deductions—within the bounds of the tax laws administered by the IRS. The true measure of a tax preparer's utility really comes down to you accessing all the available and legitimate deductions a client may have.
Any shaky preparer can punch random, fat, questionable deduction numbers into a 1040 and reach a favorable conclusion for the client. However, this flippant approach will not leave the client comfortable and free from the IRS' ever-expanding eye of scrutiny. For the beginner tax preparer, striking this delicate balance can be challenging to say the least; that’s why we teach this balancing skill extensively in Pronto Tax Class.
In this article, we’ll give you a few tips for maximizing your client's work-related write-offs without sacrificing your integrity or exposing the client to undue scrutiny from our friends at the Internal Revenue Service.
Take a Big Picture View of Deductions Before Getting Into the Specifics
As you review the individual's documentation for the year, it is important to develop a unifying “big picture” perspective on what deductions may be available to the client.
If the client is self-employed, for example, any ordinary and necessary job expenses will not be subject to the 2 percent of Adjusted Gross Income (AGI) floor, and so these work-related deductions can carry a lot of weight in terms of tax savings for the client. In the case of a self-employed taxpayer, every deduction matters and you will want to spend time searching for every possible deduction.
Remember that if your client is an employee, by contrast, in order for a client to even be eligible to use any work-related expenses as write offs, the work-related expenses listed on Schedule A must (generally speaking) exceed 2 percent of the client’s Adjusted Gross Income (AGI).
If your client has an AGI of $100,000, then, and employee job expenses of approximately $500, searching for each and every work deduction is probably not worth anyone’s time because in order to be deductible, the work-related expenses must exceed $2,000…and if the client is sitting there saying he or she only spent about $500 on employee job expenses, you are probably not going to get to $2,000 no matter how hard you try. You are barking up the wrong tree so to speak.
Analyze your client's tax situation and see which deductions are likely to matter and how much they will matter.
Once you have a big picture view of what deductions will make an impact on the client’s bottom line, you will be ready to move on to the specific deductions available to that client.
Know Your Deductions Like the Back of Your Hand
If you don't know what deductions are available to a car salesperson, you won't be able to help as much as the preparer who has done hundreds of tax returns for car salespeople.
Likewise, if you don’t know what deductions an actor can claim, you won’t be as popular with actors as a tax preparer who can rattle off 20 deductions for actors instantaneously.
Real estate salespeople only want to work with tax preparers who know which deductions apply to real estate salespeople.
Deductions can vary widely based on the job of the taxpayer and a number of other factors, so it’s different strokes for different folks. Tax preparers who have studied up on deductions ahead of time are certainly in the best position to be viewed as an expert by their clients and potential clients.
Remember the five P’s: prior preparation prevents poor performance.
You can keep your client base stout, healthy, and ranging by possessing a voluminous and multifarious amount of knowledge of deductions and their applications.
Here is a free list of tax deductions categorized by profession just for you.
You may also consider taking a tax update course to discover any new deductions for the year.
Exercise Due Diligence When Claiming Large Deductions
Generally speaking, you will not earn a client's trust by inflating deduction amounts or listing itemizations that are dishonest and misleading. A taxpayer who wants to outright cheat will always be looking for a tax preparer to “cheat better,” and you are not likely to turn this type of taxpayer into a loyal client that is a true asset to your business. You may think you’re winning, but you’re probably not.
Claiming bogus deductions will, over time, lead to an increased chance of audit and also a possible removal of your tax preparer certification. Remember that when the IRS audits a taxpayer’s deductions and disallows them, it is not only the additional tax that is assessed but also penalties and interest. The “accuracy” penalty of 20 percent, in particular, can be quite devastating when a large deduction is disallowed—such as 20,000 miles taken with no mileage log to back it up.
There are many cases in which a taxpayer will lie about their deductions in order to receive a higher tax refund. It is NOT your responsibility if a taxpayer lies about his or her deductions. It IS your responsibility, though, if you know that the taxpayer is lying and you still claim those false deductions.
The bigger the deduction, the more due diligence you should exercise when claiming it.
Be sure to exercise a measure of due diligence in relation to your client's claims of deduction amounts, and be sure to convey to the taxpayer that it is the taxpayer, ultimately, who is responsible for the truthfulness, accuracy, and completeness of the tax return that is being submitted.