Income tax has made more liars out of American people than golf has.
— Will Rogers
They’re known by various names in the accounting industry: “shoebox” clients, “answers on the ceiling” clients, high-maintenance clients, ideal clients. Your tax accountant has a label for you. And although you may not care what your accountant or enrolled agent thinks of you personally, being disorganized can cost you money, both in taxes and tax prep fees. Here’s what you can do to earn the label of the ideal, organized client.
Shoeboxes are for shoes
Deltona, Florida CPA Jan O’Herron calls a particular type of client “shoebox clients.” “These people keep all their records either in a shoebox or in the back floor of their vehicles,” she says. “Instead of adding them up, they’ll give me a 6-inch pile of prescriptions, doctors’ visits and co-pays and expect me to figure out how much it was, and if they can deduct it.”
Enrolled tax agent Kirt Flynn of Tyron, N.C., worked with one client who honored him with a folder. “He had a folder in his desk that said ‘Flynn,'” the accountant recalls. “Whatever he thought was pertinent to preparing his tax returns, he dropped into that folder. When I got that folder at tax time, I had to sort it all out.”
At a fee of $80 to $300 an hour, paying your tax accountant to sort your receipts gets expensive. “If someone comes to me and has a relatively complex tax return but has everything well-organized, I might charge $400 to $500,” says Eva Rosenberg, an enrolled agent in Northridge, Calif. “If someone has a simple return but is thoroughly disorganized, I might charge $1,000 because of all the time I have to spend organizing. That’s my baby-sitting fee.”
For charitable donations, you need not just a blank receipt, but also an itemized list of what you donated. “If you gave four T-shirts, four pairs of underwear — write every piece down,” O’Herron says. “There are sources that can help determine a fair market value of the donation, which is usually yard-sale value.”
The remedies: Organize and itemize those receipts. Then add them up for each category on your return. Fill out the tax organizer your accountant gave you.
Dancing on the ceiling
For some clients, a shoebox represents an improvement over their usual accounting method, which is essentially nothing. These people have no paper documentation at all. “Those are the clients who look at the ceiling when I ask, ‘How much was your mortgage for the year?'” Rosenberg says.
Those missing papers could be the key to getting money back from the IRS or more ominously, mean you owe more taxes and the accompanying penalties. “We have clients all the time who forget to bring us an item that could result in additional tax, and after filing, could result in penalties,” Flynn says.
Giving your best guess in April is a bad idea. For example, you can deduct miles driven for volunteer work but you need to keep a record every time, ideally in a notebook you keep in the car, O’Herron says. “If it looks like it was prepared long after the fact, the IRS could get nasty about it,” she says.
With no backup paperwork, it can be expensive and time-consuming to prove you don’t owe more taxes. For example, one of Rosenberg’s clients, a truck driver, was asked during an audit to provide a receipt for every single toll. “Another client had about $50,000 in expenses and no receipts because he paid cash for everything,” Rosenberg says. “He paid nothing in additional taxes, but it cost him a lot for that audit.”
The remedies: Get a shoebox. (Just kidding). Save your receipts and all those tax documents from your employer, the IRS, your retirement accounts and your stocks. Next, organize that paper into categories. If your volunteer work involves driving, get a notebook and keep it in the car to record mileage.
The paper trail
When documents are missing, some high-maintenance clients send them to their accountant … one sheet at a time. Other stubborn clients simply go AWOL. That costs you in late payment penalties and in your accountant’s time. Every time your accountant has to open your file, that’s another charge and another chance for an error, Rosenberg says.
Rosenberg estimates she has to file an IRS power of attorney to get missing W-2 statements and other information from the IRS for about 5 percent of her clients. But some documentation has to come from the client.
“I had one client that I didn’t get to finish her tax return for a year and a half because she didn’t get me her mortgage statement,” Rosenberg says. “That’s a high-maintenance person.”
The remedy: “If your accountant gives you a list of things to get together, put them all in one place and send them,” she says. Not eventually, but right away.
The problem here is simple. “Sleep-deprived people make mistakes,” Rosenberg says.
The remedy: Don’t wait until April to think about taxes.
“People find ways to do fraudulent things that we wouldn’t even imagine,” Rosenberg says. “Honest mistakes are fine and we’ll defend you. But we’re not going to be real nice when we find out you’ve been lying to us about significant things. The IRS has budgeted $80 million for tax preparer penalties and we don’t want to be the ones to pay that. We will not be defending you. We will be defending us.”
The remedy: Tell the truth.
“They never seem to get around to paying you,” Rosenberg says. “You’ll see the jewelry. You’ll see the trips they are taking. The resentment will flow into that work. The tax preparers won’t go out of the way to find the best credits. They won’t do planning with you to help you reduce your taxes by $5,000, $10,000 or $20,000 because you don’t have the respect to pay the bill.”
The remedy: Pay up.
The ideal client
The ideal client brings a copy of his or her return from last year to the first meeting with an accountant or enrolled agent. This client fills out the tax organizer and has neatly organized folders of all backup documents needed.
The ideal client calls his tax accountant before he makes a financial decision (such as selling stocks and taking capital gains) that could impact taxes. When your accountant or enrolled agent says ‘Keep in touch,’ he or she is not just making small talk.