How to Navigate Overly Aggressive Tax Strategies as a Bookkeeper

for bookkeepers podcast Mar 28, 2022
aggressive tax strategies



In today’s post, I’m talking about how you can handle overly aggressive tax strategies, whether it’s your client’s decision or that your client is relying on you for advice. Many times, clients will learn online from someone who seems credible, whether they’re preparing their tax return for them or not. 

This is a very important topic, and I am going to explain what our role is as bookkeepers and how I approach this topic with my clients. It’s so vital to truly understand the risk involved so that you can speak to your clients accordingly and help them handle it if a client is using an overly aggressive “tax strategy” to the point where you’re uncomfortable. 

I know this topic may be controversial. I think some people will be grateful to have this resource, and that’s why I want to address it. But I want to be clear - I’m NOT talking about the normal things that business owners do or those gray areas that come up. I’m talking about the times when you know enough about what you’re doing and you’re being made to be uncomfortable.



My Client’s Taxes Seem Off: What Do I Do?

While the general rule of thumb is to give people the benefit of the doubt with taxes - especially if they’re a CPA - I want you to know what to do if you know something is off with a client’s taxes. As in, those times when you know things reported are not true and that your clients are being told by their CPA to do things that are not accurate. 

That leads me to the first question: what do you do when your client tells you that expenses that are running through their business are for their business, but it doesn’t seem like that’s the truth?

Specific items to flag here that seem to come up are meals and clothing. Business meals and travel are deductible, but - as bookkeepers - how can we verify that these things are really for business or if they’re personal?

In reality, we can’t. Our role is to educate our clients whose job it is to essentially sign off on the expenses and back them up. As bookkeepers, we need to go back to our engagement letter and read it (make SURE you have one of these with your clients). This denotes that, essentially, you’re entering transactions based on the information provided by your client. You’re NOT responsible for business decisions. You’re not doing any of the following activities:

  • Auditing your client
  • Signing their return
  • Acting as the tax preparer
  • Acting as the taxpayer

Nope, you’re there to categorize items based on what your client relays to you. Your engagement letter will spell this out. Our job is not to audit or make business decisions, but we will point it out if we strongly suspect fraud is occurring. 

But just because we’re not auditing our clients doesn’t mean we should turn a blind eye if they’re trying to deduct everything under the sun. Since we’re the closest person to them, I also believe we’re their first line of defense. It’s important to get your client to understand their responsibility and risk and how to help them determine who they can trust with their taxes. You can be the one to educate them on the risks.


Questions About Personal Expenses 

Now I want to talk about very aggressive tax advice clients hear online or even in paid workshops from people who say that they’re CPAs and might not be. A question I want to address that comes up a lot is: When my client asks me if they can categorize personal expenses as business expenses, sometimes even in those words, how do I respond?

I’ve received this question. When I did, I first stepped back and asked myself how I can get my client to understand why I care about this. I want them to know I care about their truth. I want to understand who is engaged as their tax preparer. This can give me insight into whether they signed up for a webinar with someone who is using their CPA exam as lout to tell people a bunch of things that are really pushing the envelope on the rules. Is the person hosting that workshop going to prepare and sign their returns? If not, the advice should really come from whoever is going to be preparing and signing the return - as simple as that.

Then when I go to the person preparing and signing the return, I want to get the energy of what they’re saying. When I left my corporate job in 2018, I really wanted to relay that you can do whatever you want with taxes, but with that, you need to understand the risk and who is liable if things go wrong. 

The risk is that your client gets audited. They could get away with writing everything off that isn’t truly deductible for a year, three years, or even indefinitely. But if the IRS decides to audit them, they have what’s called a statute of limitations. That’s a period of time that they can go back and audit and assess their tax penalty and any interest they should have paid. That period is at least three years. That means they can go back and find where they falsely deducted things that they don’t have support for or that are way too gray to stand up in an audit. 

They will then reassess them for the tax they should have paid back then, plus penalties and interest and the cost of representation by a CPA. On top of that, there will be a lot of stress and time involved, as they’ll be dealing with this all while trying to sustain their business and pay taxes times three from their past returns that are now under fire by the IRS. That’s painful - but it’s the risk that they run.

In the case that the worst-case scenario occurs and they’re audited and assessed for a big tax bill plus penalties and interest, the IRS isn’t going to care if they don’t have the money to pay them what they owe. Instead, they will garnish their wages for as long as it takes. 

But - truthfully, the IRS is probably unlikely to audit your client. But that doesn’t mean that anyone should have a free for all and take that risk. It’s not something I would do, which is what I tell my clients when the topic comes up. 



Working with a Competent CPA to Get the Right Results 

If your bookkeeping clients do decide to make a deduction that is not correct, then you know that you’re not the business owner and you’re not engaged to prepare and sign their return. I don’t make choices like this for myself in my business because I want to have a clear conscience and I believe that if you save money the right way and go about things according to the rules, you’ll create enough wealth as it is.

The part of this that bothers me is that I sometimes hear a CPA on Instagram or giving a webinar and they come off as more qualified than a bookkeeper. But these miracle-working CPAs claim they can take a $30k tax bill and turn it into a $5,000 refund. Let me tell you something: they can’t do that. There’s not that much room to play with the rules of the tax code. From one competent CPA to the next, a tax bill or refund amount should be the same, because that’s just the way it works.

You may have a CPA that can work with your client in advance and help guide them away from mistakes and get them in the right entity and pay on time to miss out on things like penalties. They may help them make different choices that make marginal differences. But, there’s not a CPA that will save someone $35k in taxes over another CPA while adhering to the same rules. It’s as simple as that.

Encourage your client to look at their tax return from last year and look at what they signed off on. The CPA signs too, saying that they’re filing the numbers they were provided by the client. They’re not an auditor, and they take the words of your client in faith that the numbers are true and accurate. Your client signing the document says that they gave them the numbers that are filed and that everything on the return is correct. 

If the IRS does decide to audit your client, they’re not going to go to the CPA. They’re going to the business owner because the CPA will not pay the bill with the IRS if they deem your return to be too aggressive. It’s up to your client - the taxpayer - to take care of it.

If a client asks me about bending the rules, this is what I tell them. Even though I know it’s not what they want to hear. And it’s not my job to stop them from doing it if that’s what they so choose. But I want them to know the risk they run.

And, the truth is that being associated with a CPA running these shady deals is even a risk. An auditor that gets ahold of a list of people registered for one of these webinars could easily pull all of those people’s returns and decide to audit them. 


Navigating Tax Advice from Unqualified Individuals

Now, I want to touch on what to do about tax advice from people who aren’t CPAs. I’ve seen this a lot lately. The only people that should be giving advice on taxes are tax preparers who have passed their CPA exam, enrolled agents, or experienced tax preparers. You don’t want to get your advice from an Instagram-proclaimed tax guru.

In 2018, my sister started selling Rodin and Fields. I thought network marketers would be a great market to tap into to educate these individuals about taxes because they were business owners and didn’t know much about it. I went down this road and ended up in a rabbit hole. I have - to this day - a YouTube link of a Rodan and Fields consultant giving tax advice.

It’s a hard video to watch. In essence, they claim that when you become a seller, you lose a lot of money by having expenses. You can write off personal expenses as a business and take a loss, deducting it from your day job. The point here is that you cannot listen to a Rodan and Fields network marketer with NO tax experience or accounting background for tax advice. 

At the end of the day, your client is the one signing their return and they’re subject to being audited. If they’re willing to take that risk, so be it. But if they make you uncomfortable, you have a choice to say for any reason that you’re not comfortable continuing your working relationship with them.



Operating with Values and Ethics: The Bottom Line

Our values and ethics are so important. We’re building our businesses and being clear on our values. I care about my clients and about everyone who enrolls in my courses and is building their own business. I want us to elevate the industry and not take advantage of the bad situation the IRS is in with a huge backlog of unprocessed returns.  

Let’s do things that make more sense than a petty, $200 deduction on clothing items. Start understanding your taxes so you can save for them in a good way. Taxes are complicated, constantly changing, and super nuanced. If you value true tax planning, working with a CPA on a quarterly - or even monthly - basis in combination with a bookkeeper that can help you keep accurate records is the way to go.

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If you're looking for more insight on how to become a bookkeeper, and how to say hello to a more confident business model, enroll in Become A Bookkeeper (BABs)

Or, if you’re confident in your skills as a bookkeeper and want to learn how to grow and scale your bookkeeping business, you can apply for Life By The Books™ (Libby).

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