IF A CPA SAYS, "YOU CAN'T DO THAT" - what they mean & what you can do

What CPAs say is NOT always exactly what they really mean is the gist of a 1996 Patrick Rice article, "What to do when your CPA says, you can't do that".

The takeaway was that CPAs, like many professionals, often say things that can mean something different to a lay person resulting in very costly misunderstandings.

As we embark upon the first year of the most sweeping reform of the U. S. tax code in more than 30 years, the Tax Cuts & Jobs Act of 2017, the article seems particularly prescient and prophetic for a new generation with a new tax code.

Reminiscent of Janus, the two faced Roman deity of change and new beginnings frequently found on their money - perhaps the past can tell us something about what to expect in the future.

Mr. Rice's observations and conclusions about the differences between what CPAs say and what they mean from over 20 years ago, seem to be just as relevant and insightful today.

When a CPA, financial advisor, broker, etc. says, "You can't do that," whatever "that" investment or project is you are trying to do, what they really mean is: "You can't do that - here with me".

Because:

1. "I've never heard of that,

2. I don't know anything about that,

3. I don't know how to do that, or

4. I can't make any money if you do that."

Therefore, since I can't do it, then no one else can do it either.

The more things change,

the more they seem to stay the same.

To quote Mr. Rice in relevant part:

"Investing IRAs in real estate has been available, legal and appropriate for decades. I'm surprised that IRA account holders are still falling for the line---"You can't do that". Of course you can.

For over a year now I have been writing in my column about the ins and outs of investing self-directed retirement plans in real estate, trust deeds, and limited partnerships and still I receive calls that start out with, "I didn't know you could do that."

At first I thought the lack of knowledge was a phenomena that was only indicative to the west coast. Maybe we were just out of touch with the laws the Congress has passed and what was allowed in Section 408 of the Internal Revenue Code. That theory was dispelled when I recently received two calls from the Washington, D.C. area.

Both who called had read articles of mine and immediately called their respective CPAs to verify that real estate and IRAs really were compatible.

One of the CPAs said he had never heard of such a thing.

The other advised that while he thought it could be done, he knew of no administrators that would accommodate real estate.

I have had numerous calls from readers in the Pacific Northwest who checked with their current administrators, (their banks and stock brokers) and were told flat out, "You can't do that".

Of course, if you ave been reading my columns you know that what they really meant was, "You can't do that here."

Rules that don't apply

Often CPAs, administrators, and financial advisors confuse rules that apply to qualified retirement plans with those that regulate IRAs".

(IRRs) between 46.5% and 84%

He then cites several examples and the real world economic consequences.

One such example is the confusion with qualified retirement plans and IRAs, where he explains:

"The rules that apply to qualified plans and are enforced by the Department of Labor do not apply to IRAs.

The IRA, on the other hand, does not have these limitations. It is not governed by the Department Of Labor. The account holders of the self-directed IRAs have complete and total control over the investments they choose.

The absence of this regulation on IRAs opens tremendous potential for profit-making for the self-directed pension."

Mr. Rice goes on to explain the details of a qualified investment opportunity: a 2 year fully secured real estate development project with guaranteed minimal returns and priority preferential return of capital and profit distributions that generated Internal Rates of Returns (IRRs) between 46.5% and 84% depending on exactly when during the two year period the investors were paid.

And "that" would have been tax deferred income in a retirement account.

Provided of course their CPA or other advisors knew they could even do "that".

Mr. Rice's findings seem to confirm recent research on wealth maximization. That one's tax strategy can have up to 10 times greater influence over long term wealth accumulation then one's actual asset allocation or investment portfolio. In fact, up to 10 times more impact on one's wealth, and it goes largely ignored - or accepted - by the most affluent.

The correct tax strategies are an essential element of the success of George Soros. It works for others like him. There's no reason the correct tax advisors with the correct tax strategies can't likewise work for you.

"The CPA was amazed!"

The Bradford Institute reports a very similar CPA encounter regarding Section 179 deductions in 2009.

One of our writer/researchers was sitting in a CPA’s office the other day and mentioned that the business taxpayer can write off Section 179 expenses against W-2 income when income from the business is exhausted.

The CPA told our writer/researcher that he was totally wrong. To prove it, he turned on his $8,000 tax preparation software and showed how this software said that the limit was business income.

Undaunted by this $8,000 tax preparation software, our writer/researcher told the CPA to simply go to the IRS instructions for line 11 of IRS Form 4562 to see that the Section 179 “business income limitation” means both business income and W-2 income. The CPA was amazed. (emphasis added)

Over burdened ill informed advisors -

no matter their credentials,

adversely affect your taxes and net worth.

Congress has estimated that well over half of all taxpayers overpay their taxes by not taking advantage of available tax provisions. This is especially disturbing because over 89% of taxpayers that overpay their taxes use “professional” fee paid tax preparers such as CPA’s and accountants.

U.S. Senator Charles Grassley, current Chairman of the Judiciary Committee, and former Chairman of the Committee on Finance, expressed his concern that thousands of taxpayers overpay their taxes because they are unaware of tax benefits Congress enacted to help them.

“The IRS is a lot better at finding underpayments than over payments, Grassley said. “That’s a real shame. Congress enacts a tax benefit with the intention of every eligible person taking advantage of that benefit. If the majority of eligible taxpayers don’t know about the benefit, then the IRS has to do a much better job of educating people. I’m very concerned that tens of thousands of taxpayers aren’t taking advantage of the available tax provisions. Even worse, a lot of paid tax preparers were in the dark. There’s no point in paying somebody to do your taxes if those folks don’t do you any good.”

Grassley’s comments are in response to a report from the Treasury Inspector General for Tax Administration showing that less than half of the eligible taxpayers are taking advantage of the specific income tax provisions. According to the report, Congress estimated well over one half of the taxpayers overpaid their taxes by not taking advantage of the provisions. The vast majority of their tax returns – 89 percent – were prepared by paid tax preparers.

The report said the paid preparers didn’t know about key changes in the tax code, didn’t think their clients would benefit, or used preparation software that led them to believe there would be no benefit.

CPA Confessions

But CPA errors can go both ways. It's not what they don't know, but what they do know - but just don't say.

More than one CPA has admitted they never recommend any new idea or strategy that could help their client - no matter how good it may be for their client- if the idea or strategy was initially suggested or introduced by someone else.

Now with the TCJA and the generous depreciation schedules, some CPAs are in cahoots with vendors trying to sell products under false or even fraudulent circumstances.

Consider for example, many of the the charter boat business offerings.

In these schemes, there are potential tax issues that NO yacht broker, promoter or charter yacht manager dares to bring up. But as one CPA working with these programs confided the lack of full disclosure was because, "I don't want to scare anyone off".

Conclusion

As we frequently point out. CPAs, attorneys, financial planners and other professional advisors and wealth managers have an almost impossible task of being an expert in every area that every client might demand or expect.

There is just too much change and volatility in every discipline. No one knows everything about everything, so obviously some things will take priority and others will fall by the wayside, be forgotten, or overlooked.

And, its not just what CPAs don't know about or forget, but also what they may know that you may not know to ask them about it.

And what we have confirmed is that this phenomenon is nothing new but probably getting worse as more bad information distorts the truth.

So what can you do?

Especially when starting something new - a new project - or a sweeping reform of the tax code - perhaps it would be wise like Janus - to look both ways, have another set of eyes with a different perspective take a look. To get a second professional opinion on your taxes just to make sure you and your CPA are not overlooking something.